Murray Lorentz v. Minister of National Revenue, [1979] CTC 2044, 79 DTC 83

M J Bonner:—This is an appeal from an assessment of income tax for the 1974 taxation year and from a penalty imposed pursuant to subsection 163(2) of the Income Tax Act.

The appellant, in his returns of income for the 1972 to 1975 taxation years, reported losses from farming as follows:

The appellant, in the years in question, reported small amounts of income from sources other than farming.

The respondent did not accept the position stated in the returns. The respondent found that for three of the years no tax was payable, but he did so on the basis of findings that:

(a) The appellant realized a farm profit in 1972 of $3,801.19.

(b) The appellant sustained a farm loss in 1973 in the amount of $2,148.81.

(c) The appellant sustained a farm loss in 1975 of $5,728.65.

Tax and penalty were assessed for 1974 on the basis that the appellant realized a profit from farming in that year of $5,195.06. The Minister’s assessment and findings were based upon a net worth assessment.

Evidence was given by Miss Merle Becker, a former assessor with Revenue Canada. Miss Becker was the auditor responsible for the assessment. She stated that before deciding to proceed on a net worth basis she attended at the offices of the appellant’s accountant, Mr R F Bott, at the appellant’s farm and at the appellant’s bank. The state of the records and other information available to her was such that a net worth approach was necessary to determine income. While preparing the statement of comparative net worth Miss Becker explained to the appellant the nature of the procedure she was adopting. In establishing the figures for liabilities and personal expenditures Miss Becker discussed the appellant’s financial affairs with him and with his wife. Questions raised by Miss Becker with the appellant were frequently referred by him to Mr Bott, the chartered accountant who acted for the appellant. Before the assessment in issue in this appeal was made net worth statements were mailed to the appellant who was given an opportunity to make representations. I have concluded that the appellant had ample opportunity before the assessment was made to raise any matter which would have a bearing on the assessment then proposed.

The appellant attacked the net worth assessment on three grounds:

(1) He asserted that the statement of comparative net worth did not take into account a loan made to him by his father-in-law in 1972.

(2) He asserted that a personal expenditure item reflecting cost of goods consumed was excessive.

(3) He asserted that another personal expenditure item covering food, clothing, gifts, memberships, etc, was excessive.

In support of his contention that the comparative statement of net worth improperly failed to reflect a liability to his father-in-law the appellant testified that in 1972 his father-in-law sold his house and, because he had no pressing need for all of the proceeds, he loaned the appellant $10,000. The appellant identified a deposit of $10,000 on May 24,1972, shown in the pass book for one of his bank accounts as being the proceeds of the loan in question. He stated that a few months later he paid back $5,000 and he identified a cheque dated March 27, 1975, drawn by his wife in favour of his brother-in-law, James Brearly, in the amount of $2,500 as a further installment on the loan. The appellant’s father-in-law stating the fact of the loan, that the loan was payable on demand without interest, and that there was no promissory note or other written record made.

The appellant’s evidence with respect to the liability on the loan was unsatisfactory. No reference to the alleged loan was made in the Notice of Appeal. The hearing of his appeal commenced in London on October 12,1978. At that time the appellant gave evidence and was cross-examined. During his evidence-in-chief he was referred to the outstanding liabilities shown on the statement of comparative net worth as at December 31,1972, and asked whether those were all of his liabilities at that time. His response was, “I would think there would be additional liabilities”. He was not asked any other question on this topic during the evidence-in-chief given at that time. On cross-examination he was asked whether he knew if there were any other liabilities during any of the years shown on the statement. His reply was, “Not off the top of my head. I would have to go through the records”. He did not volunteer to check his records. Miss Becker testified that Mr Lorentz had never mentioned any loan from his father-in-law.

The hearing was adjourned on October 12 at the request of Mr Bott, who then represented the appellant, to enable the appellant to retain counsel. The hearing resumed on November 27, 1978. The appellant was recalled to give further evidence and it was then that the appellant gave the evidence summarized in the sixth paragraph of these reasons.

I do not accept the appellant’s evidence in regard to the loan. Both the appellant and his representative, an experienced chartered accountant, had numerous opportunities before November 27 to assert that a liability existed to the appellant’s father-in-law on account of the loan. It was not mentioned. The statutory declaration of the father-in-law asserts that a loan was made, but does not say when it was repaid. The appellant’s father-in- law was not called as a witness. There was no suggestion that he was unavailable. In such circumstances evidence by way of statutory declaration does little to support the appellant’s case.

I was not favourably impressed by the appellant’s demeanor as a witness. His manner was truculent. His answers seemed to be based on the assumption that vague criticisms of the assessor’s computations would suffice. Although he frequently stated that he disagreed with figures in the statement of comparative net worth, at no time did he state particulars of any basis of disagreement except in relation to the alleged loan.

With respect to the cost of goods consumed, Miss Becker’s evidence was that this item was intended to reflect the cost of cattle, pigs and chickens raised on the farm and slaughtered for consumption by the appellant and his family. The number of animals slaughtered in any one year depended in part on the size of the appellant’s family and in part on the weight of the animal. There was no evidence led as to the value of the animals consumed. The item was also intended to reflect the cost of feeding and stabling horses which were used in part for pleasure and in part in connection with the cattle-raising operation. There was evidence that the number of horses kept by the appellant varied through the years. There was no evidence as to the degree or extent to which the horses were used for personal purposes and for purposes of the farming operation except the suggestion that use for purposes of the farming business predominated. The evidence did not indicate whether the horse boarding costs were allocated in part to business and in part to pleasure. In the absence of some clear evidence that the figures used by Miss Becker were excessive I cannot find that the appellant is entitled to any relief.

Turning next to the last item of the comparative statement of net worth attacked, “food, clothing, gifts, memberships, etc”, there was, as in the case of the last item, a suggestion that the amounts were too high. Miss Becker’s evidence was that the amounts were arrived at in consultation with the appellant and his wife and after a review of the appellant’s cancelled cheques. In these circumstances, given no evidence on which I can find that the figures used by Miss Becker were excessive, I cannot find that the appellant is entitled to any relief.

The proper approach in a case such as this is to be found in the following passage from the reasons of Cameron, J in Chernenkoff v MNR, [1949] CTC 369; 49 DTC 680, a passage cited with aproval by Jackett, P (as he then was) in Elchuk v MNR, [1970] CTC 326; 70 DTC 6235:

In effect, the appellant agrees that the “net worth” computation of her income is a satisfactory basis for arriving at her taxable income, but that some of the items—those which I have indicated—are wrong. When these are corrected in accordance with the evidence adduced—so she states—the result is that there is no taxable income for any of the years in question.

My opinion is that the appellant must do far more than she has attempted to do here if her appeal is to be successful. There can be no question that the onus lies on the appellant and that, in my view, means that she must establish affirmatively that her taxable income was not that for each of the years for which she was assessed. Two courses were open to her, the first being to establish her income with proper deductions and allowances, and that course could quite readily have been followed.

In the absence of records, the alternative course open to the appellant was to prove that even on a proper and complete ‘net worth’ basis the assessments were wrong. But that also she has failed to do.

In respect of both personal expense items I note that the amounts were established some time ago by Miss Becker in consultation with the appellant and his wife. At that time the appellant’s recollection of facts and figures must have been much clearer than it was at the hearing. Miss Becker’s evidence has led me to conclude that she made a conscious effort to resolve any doubt, so far as she could do so, in favour of the appellant.

Finally the appellant challenged his liability to penalty. Onus on this branch of the appeal was on the respondent. As I understood the appellant’s submission, it was that the appellant may well be said to have been negligent, but that it could not be said on the evidence that the appellant was grossly negligent. It was suggested that the appellant kept adequate financial records which he forwarded to his accountant. That suggestion was negatived by the evidence. The appellant’s counsel declined to suggest that the mis-statement of income in 1974 resulted from errors on the part of the accountant.

It should be observed that the net worth computation was only attacked in respect of the three items mentioned earlier. Even if the computation was in error in failing to take into account the alleged liability to the appellant’s father-in-law, and if the other two items were eliminated, a vast gap would remain between the financial results as reported for 1974 and those as determined by the Minister. The only evidence before me by way of explanation for that gap was the conclusion reached by Miss Becker that it resulted from one or the other or a combination of understatement of revenues and overstatement of expenses. In these circumstances I cannot infer that the admitted negligence was less than gross. The failure to record revenues and the overstatement of expenses to the extent that occurred here can only be attributed to a level of negligence so high that the epithet “gross” applies.

The appeal for the 1974 taxation year is therefore dismissed. No appeal lies from the notifications that no tax was payable for the 1972, 1973 and 1975 taxation years. It does not appear that the respondent, in notifying the appellant that no tax was payable for those three years, exercised the power to “determine” conferred on him by subsection 152(1.1) as enacted by SC 1976-77, c 4, section 61. The appeal for those three years must also be dismissed.

Appeal dismissed.