Claude Piette v. Minister of National Revenue, [1979] CTC 2577

Guy Tremblay [TRANSLATION]:—This case was heard in Montreal, Quebec on May 16, 1978.

1. Point at Issue

The question is whether the respondent is justified in refusing to accept the statements of the appellant that in the space of 18 months, from the end of 1972 to June 1974, he won from $45,000 to $52,000 gambling in Las Vegas. In addition, the respondent imposed a penalty of 25% for misrepresentation of facts in the appellant’s tax return due to gross negligence or deliberate omission.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 Pursuant to an investigation by one of its officers, the respondent, using the capital differences method, taxed the appellant on $59,460.93, which is divided as follows for 1972, 1973 and 1974:

These amounts were admitted by the taxpayer at the beginning of the hearing; however, he did not admit that they were justified.

3.2 1972: $19,186.43

In 1972, the appellant was the principal shareholder of several companies, namely Claude Piette Inc, Constructeurs Associés de St-Hubert (CASH) and Habitations BCP. All of these companies operate in the construction sector.

3.3 Before going into business by means of these companies, the appellant worked for several years for CIP as manager of the marketing section. He also worked part-time as a real estate salesman for Rock Enterprises.

3.4 At the beginning of 1972, upon leaving this company, he bought a development of 6 new houses for $144,000, and he then resold these to various buyers for $169,000, thus earning a gross profit of $25,000 and a net profit of $15,653,57. As he believed this to be a capital gain and since he was not very familiar with the new Act in force, the appellant did not include this sum in computing his income. Later on, pursuant to the assessment which he has appealed and after having his accountant study the matter, he admitted this amount of $15,653.57.

3.5 With respect to 1972, the appellant maintained that the respondent incorrectly included the sum of $5,012.50 in his income as personal expenses under the item “travel”. This item in fact appears in the “List of Personal Expenses” filed by the respondent along with the “Reconciliation of Capital”, the “Balance Sheet” of the appellant, the “Sale of the Residence” of the appellant and a list headed “Miscellaneous”, all of which was filed as Exhibit 1-1.

3.6 This sum was allegedly a transfer which he made to the Hilton Hotel in Las Vegas, through the Bank of Montreal, as appears in bank form No 939-10505, filed as Exhibit A-6 and dated December 18, 1972. According to Exhibit A-5, this sum was an advance from Claude Piette Inc to the appellant.

3.7 This organized, five-day, so-called “junket” to Las Vegas (transportation, hotel and meals are paid by the hotel in Las Vegas on condition that the person guarantees that he will bring $5,000 with him) was made with his wife. At that time, he won $2,000 gambling and therefore returned to Canada with $7,000.

3.8 In the appellant’s balance sheet on December 31, 1972, prepared by the respondent (Exhibit 1-1), the sum of $7,012.50 appears as a debit under the item “Due to Claude Piette Inc”.

3.9 1973: $27,557.27

In Exhibit 1-1, the sum of $7,070.19 appears in the “List of Personal Expenses”, under the item “travel”. In accordance with Exhibit A-7 (similar to Exhibit A-6, described in paragraph 3.6) the appellant stated that this sum included another transfer of $5,027.50 to the Hilton Hotel in Las Vegas. The transfer (A-7) bears the stamp of the Bank of Montreal dated July 23, 1973.

3.10 In his testimony, the appellant maintained that he went to Las Vegas on a “junket” approximately ten times between December 1972 and June 1974. He was generally accompanied by his wife. These trips were organized every five weeks. He lost $2,000 to $3,000 on two or three trips, he said, and on others he won. Once he won $2,000 (December 1972), another time $22,000 (December 1973), $7,000 another time and $4,000 or $5,000 on the other occasions. After each trip, he mentally added his gains or subtracted his losses. After his last trip in June 1974, he stated that his net gains were between $45,000 and $50,000.

3.11 Most of the time in Las Vegas, he played blackjack at the $5 table. At this table, you cannot win less than $5 but you can win more. He also played “baccarat” although more rarely. His technique was to stop when he had won a few hundred dollars and then walk around a bit, change tables and begin again.

3.12 His wife was aware of his winnings but never spoke of them to other persons participating in the trip. When he returned to Canada, he disposed of the money in the following manner: he either deposited it in the bank in his personal account or in a safety deposit box, or he kept it at home in a small safe. According to him, the most he ever had in his safety deposit box at one time was $15,000. At the same time, he might have $2,000 or $3,000 at home, which he used for his personal or other needs.

3.13 He maintained that he won $22,000 in December 1973 and that he deposited it in his personal account at the Bank of Montreal at the end of December and the beginning of January 1974.

3.14 He gave his money, which he had in cash in American bills, to the manager who made the deposits.

According to Exhibits A-1 and A-2 (Bank of Montreal deposit slips), he deposited the following amounts on December 31, 1973.

$2,685 A-1: Three $5 bills, 85 $10 bills and 91 $20 bills. Next to the word “exch” for “exchange” appears the amount of $14.77, which is subtracted from the total deposit. The appellant recognized his signature on the slip.

$12,480.98 A-2: This consists of one amount written in the “cheques and coupons” column. The appellant did not recognize his signature on the Slip. However, the cashier’s initials are the same as in Exhibit A-1. The appellant maintained that he did not deposit this money at the same time as the two other deposits. Undoubtedly, this is the net amount.

$5,050.00 The appellant maintained that he also deposited this amount on December 31,1973 but did not find the slip in his records. However, he filed as Exhibit A-8 a letter from Mr J H S Boucher, manager of the Bank of Montreal branch in Place Desormeaux, Chemin Chambly, Longueuil. This letter, dated March 4, 1976 and addressed to the appellant, reads as follows:

Dear Sir:

We have looked into the matter concerning your deposits in American funds as requested. We are confirming that in fact on December 31, 1973 some US $20,285 were converted at this date in three parts, namely $5,000, $12,550 and $2,685. A total commission of $83.79 was deducted from these amounts.

We hope that this information will be to your complete satisfaction, and we remain . . .

Counsel for the respondent objected to the filing of this exhibit because he found that prima facie it seemed likely to have been dictated by the appellant. According to counsel, Mr Boucher himself should have testified. The Board then took objection under reserve. It is disposed of in paragraph 4.3.

3.15 It also appeared from Exhibit A-4 that two deposits were made. One, dated September 13, 1973, was made with 13 $100 bills and the notation “US exchange $5.20”, which this time was added to the total, giving $1,305.20. Another deposit was made on October 9, 1973 with 30 $100 bills. However, there was no “US exchange” notation with this amount. According to the appellant, this money could have been changed into Canadian currency beforehand.

3.16 All of these deposits, including the sum of $5,050 for which the deposit slip was not produced, totalled $24,590.

3.17 1974: $12,717.23

It appeared from Exhibit A-3(1) that on January 4, 1974, a deposit of $2,976 was made, consisting of the following funds: four $50 bills; four $100 bills; and $2,376 under the item ‘‘coin’’. “US money” is written on the exhibit.

3.18 As for the balance of $12,717.23 - $2,976 = $9,741.23, the appellant maintained that it can only be explained by his winnings in Las Vegas.

3.19 The appellant’s accountant, Mr Romain Audet, CA, of the accounting firm of Audet, Gosselin, Lapointe, Moreau et Associés Inc of Montreal, stated that he went to Las Vegas himself once on a “junket”, and that he also was required to transfer $5,000 to the hotel where he was going to be Staying in Las Vegas.

3.20 Mr Audet maintained that the appellant never revealed the amount of his gambling winnings to him during the 1973-1974 period. However, he did tell him that “he was lucky” and that he had “won some money”.

4. Act, Case Law and Comments

4.1 Act

In assessing the taxpayer the respondent used the powers conferred by subsection 152(7) of the new Act, namely that the Minister is not bound by the taxpayer’s returns.

In addition, the respondent imposed a penalty of 25% of the unreported income, relying on subsection 163(2) of the new Act which provides for such a penalty in the event of fraud or gross negligence.

4.2 Case Law

Counsel for the respondent cited the following case law:

1. Vahan Tashdjian v MNR, 5 Tax ABC 171; 51 DTC 404;

2. No 146 v MNR, 10 Tax ABC 99; 54 DTC 117;

3. No 566 v MNR, 20 Tax ABC 289; 58 DTC 597;

4. MNR v William S Walker, [1951] CTC 334; 51 DTC 1001;

5. George Basha v MNR, 31 Tax ABC 417; 63 DTC 375;

6. William Henry Phillips v MNR, 3 Tax ABC 177; 51 DTC 12;

7. Joseph Philliponi Jr v MNR, [1951] CTC 255; 51 DTC 528;

8. Jack Ying v MNR, 19 Tax ABC 449; 58 DTC 430;

9. Alex Markowitz v MNR, 35 Tax ABC 348; 64 DTC 397;

10. Jack Di Cosimo v MNR, 5 Tax ABC 95; 51 DTC 372.

4.3 Comments

It was pointed out earlier in this judgment that the burden of proof is on the appellant. The Board is aware of the fact that when the appellant alleges winnings in gambling as in this case, it is very difficult to provide proof. This point was stressed in all the above-mentioned cases.

The presumption which acts in favour of the assessment’s validity cannot, according to the comments of various tribunals, be rebutted by general statements. The statements must be corroborated by specific documents or facts which are related to the amount declared as gambling winnings.

There is also always the question of the credibility of the witness or witnesses.

What evidence did the appellant give in the matter of corroboration? Two documents (A-6 and A-7) show that money transfers of $5,000 each were made to the Hilton Hotel in Las Vegas. The specific evidence on this point is that the appellant went to Las Vegas at least twice.

Are the bank deposits in American currency specific direct evidence that this money comes from gambling winnings in Las Vegas? Objectively speaking, the answer to this question is no.

The corroboration of the accountant, that the appellant told him in talking about his visits to Las Vegas that “he was lucky” and that he had “won some money” (paragraph 3.20 of the Facts), is quite general. The Board accepts the letter from the bank manager as evidence (Exhibit A-8) owing to the powers conferred on the Board under subsection 9(2) of the Tax Review Board Act, which reads as follows:

Notwithstanding the provisions of the Act under which an appeal is made, the Board is not bound by any legal or technical rules of evidence in conducting a hearing for the purposes of that Act, and all appeals shall be dealt with by the Board as informally and expeditiously as the circumstances and considerations of fairness will permit.

The Board believes that the manager would at least confirm the contents of the letter. However, what would this prove, in actual fact, if it was only bank notes in American currency that were deposited? The manager’s testimony could perhaps have clarified where these bank notes came from.

The appellant’s wife, who accompanied him on almost all his trips, was not called as a witness. From explanations given by the applicant, the Board understood that marital problems prevented her presence.

The Board is not prepared to question the credibility of the appellant. The witness spoke candidly. When he was not sure on certain points, he said so, and when he did not know the answer, he did likewise. Everything he said was plausible.

However, viewing the matter as a whole, the Board reached the conclusion that the evidence of corroboration was not sufficient. Since the appellant is the principal shareholder of several companies and an experienced businessman, could he not have foreseen that sooner or later he would have to explain where such amounts came from? To allow such an appeal without solid and specific evidence of corroboration would open wide the door to fraud. This comment was made in several judgments in the aforementioned cases.

The Board must therefore uphold the assessment relating to the amounts included in the appellant’s income.

With respect to the penalties, in the case at bar they are so closely connected to the principal question that one leads to the other. If the Board arrives at the conclusion that the appellant did not commit fraud or gross negligence, this is because it has concluded that, in view of the evidence given, the amount of $45,000 was won gambling. However, the evidence did not actually convince the Board of this. From a logical point of view, it cannot annul the penalty. In the case at bar, once again, the Board does not feel it can separate the two.

However, one point remains regarding the penalty imposed pursuant to the inclusion of the sum of $15,653.75 in the 1972 income (paragraph 3.4 of the Facts).

The appellant believed that the profit from the sale of six houses was a non-taxable capital gain. He was not very familiar with the new Act in force.

The Board would give the appellant the benefit of the doubt if he had not had past experience as manager of the CIP marketing section for several years. Thus, in 1972, he was already an experienced businessman, since he was the principal shareholder of three (3) companies operating mainly in the construction sector. It is difficult to believe that the appellant did not know that the buying and reselling of six (6) houses, especially when the sales were not to one buyer but to different buyers, would produce a taxable income.

Furthermore, if he believed it to be a capital gain, he should have declared it in any case. If he was not very familiar with the new Act in 1972, he at least must have known what everyone knew then, namely that starting January 1, 1972 capital gains became taxable. It is very possible that he was not aware of the technicalities, but the Board feels that failure to declare these gains constitutes gross negligence at least. The penalty is also upheld on this point.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.