Albert Courtois v. Minister of National Revenue, [1979] CTC 2694, 79 DTC 506

Guy Tremblay [TRANSLATION]:—This case was heard at Montreal, Quebec on November 14, 1977. The pleadings were sent to the Tax Review Board in writing. As agreed at the hearing, the case was taken under advisement on April 10, 1978.

1. Point at Issue

The issue is whether the assessments issued by the respondent with respect to the 1970, 1971, 1972 and 1973 taxation years are correct. These assessments are based on net worth and increase the appellant’s reported income by $26,049.10 in 1970, $46,262.76 in 1971, $14,590.12 in 1972 and $16,125.15 in 1973. The dispute centres on the appellant’s net worth on December 31, 1969, which the respondent maintained was $35,970.89. The appellant, on the other hand, maintained that on that date his net worth was approximately $115,970, $80,000 of which was in cash. The respondent also imposed a 25% penalty for fraud or gross negligence.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results not from any particular provision of the Income Tax Act, but from several court decisions, including the judgment of the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

The respondent, on the other hand, in order to uphold the penalty, has the burden of proving that the appellant was grossly negligent in filing his own tax returns for the years in question erroneously. This burden results for subsection 163(2) and (3) of the new Act and 62(3) of the Income Tax Application Rules, 1971.

3. Facts

3.1 The respondent’s reassessments for 1970, 1971, 1972 and 1973 with respect to the appellant were supported by the following facts appearing in the financial statement filed by the respondent with the reply to the notice of appeal:

CAPITAL RECONCILIATION PERIOD FROM 1/1/70 to 31/12/1973

	1970	1971	1972	1973
Capital at end of year	$52,417.83	$102,727.48	$115,914.35	$122,202.32
Minus:
Capital at beginning
of year	$35,970.89 $ 52,417.83 $102,727.48 $115,914.35
Capital increase	$16,446.94 $ 50,309,65 $ 13,186.87 $ 6,287.97

Plus:
Personal expenses	$ 9,169.80		$	9,652.00	$	8,275.10	$	8,310.10
Federal tax— Albert	$ 4,163.95		$	1,663.13	$	134.16	$	743.00
Provincial tax—QPP—QHIP
—Albert	$ 3,990.83		$	478.74	$	229.77	$	869.56
Federal tax—Carmen		—	$	26.03	$	53.57	$	117.94
Capital loss on disposition
of cars: Mr and Mrs	$ 3,500.00		$	3,751.20	$	934.76		—
Capital loss—Granby Motel		—		—		—	$	3,700.00
Life insurance premium—
— Albert	$	764.30	$	1,581.84	$	1,581.84	$	1,581.84
Life insurance premium—
Carmen	$	667.32	$	667.32	$	667.32	$	662.47
Unexplained withdrawals	$14,900.00		$	5,600.00		Nil	$	2,000.00
	$37,156.20		$ 23,320.26		$ 11,876.52		$ 17,984.91
Revised total income	$53,603.14			73,629.91	$ 25,063.29		$ 24,272.88
Minus:
Capital gain—Sale of Cafe
Domino shares		—		1,680.00		—
								—
Capital gain—Sale of
property—100 Séville		—	$	7,576.00		—
								—
Cashing in of an insurance
policy		—	$	3,740.00		—		—
Family allowance	$	379.00	$	379.00	$	373.00	$	370.00
Reported income—Albert	$25,685.50		$ 12,216.81		$	8,044.74	$	5,251.37
Reported Income—Carmen	$ 1,490.04		$	1,775.34	$	2,055.53	$	2,526.36
Total explained income	$27,554.54		$ 27,367.15		$ 10,473.27		$	8,147.73
Additional income	$26,049.10		$ 46,262.76		$ 14,590.12		$ 16,125.15

3.2 During the hearing and in the pleadings admissions were made that alter the above figures as follows:

3.3 The appellant, who maintained that his net worth was not as low as $35,970.89 on January 1, 1969 but over $115,000, filed during the hearing as Exhibit A-1 a summary of capital gains and losses resulting from transactions made between 1951 and 1971. Changes were made to this summary during the hearing; it reads as follows:

In his pleadings, the appellant, alleging that there was an error in item 09-1962 stated that the initial disbursement for the purchase of the Seville property was $757, bringing the balance to $123,776 and making the following corrections for 1962 and 1963. The Board has incorporated these changes into the remainder of the data:

3.4 Following the change made by counsel for the appellant in his pleadings, the Board noted the accuracy of the $757 purchase in item 09-1962. However, even though counsel for the respondent did not rectify the error in item 10-1963 (expropriation of a property), the Board must do so. Counsel for the appellant added a capital gain of $7,000 under this item. Having checked Exhibit A-12, the Board notes that the property in question was purchased for $4,000 in 1963 and resold for $5,000 in 1968; this is therefore a gain of only $1,000, and not $7,000. It appears from this item and others checked by the Board (item 16-1971, Motel Floride transaction: purchased for $33,700 in 1971 and resold for $30,000 for a loss of $3,700 in 1973, but entered in 1971) that the capital gain or loss appears in table A-1 in the year of purchase and not the year of sale. This fact is of little consequence, however, where the contract of sale was made before January 1, 1970, the date on which the audit period begins.

The Board also notes that the gift to the second wife by marriage contract in the amount of $10,000 in item 12-1969 is not in the correct place. According to Exhibit A-14, this gift by cheque was made on September 9,1970.

With these corrections, the evidence indicates that the figures should read as follows:

3.5 Cash: $85,000

This $85,000 in cash, kept partly in a safety deposit box in the Vimont shopping centre Royal Bank and partly at home, came, according to the appellant, from capital gains and an inheritance, as appears from Exhibit A-1 reproduced in paragraph 3.3 of the facts.

According to the appellant, he kept this money in cash rather than investing it with interest in order to protect himself against his first wife. She had apparently said to him “You will never benefit from your money. I will throw you out on the street.” Appellant was apparently struck by these words. He filed as Exhibit A-28 a newspaper clipping entitled “Husbands beware! The threat is reappearing.’’ The article mentioned the alimony of $800 a month a husband had to pay in accordance with a judgment of Francis Hannen, J of Montreal, which supposedly created a precedent, according to the article. The husband had obtained a divorce from the Canadian Senate in 1957. It was following the introduction of the Divorce Act that the wife obtained the $800 alimony.

The appellant even maintained that in 1953 he refused an offer of $125,000 for the Casino français because the bidder could not pay cash. He was afraid of a seizure by his wife. He agreed instead to sell it for $87,500, $40,000 of which was in cash. His wife did in fact have the balance of $47,500 seized.

In 1957 there was a division of the communal property as provided for in a notarized deed dated February 25 (Exhibit A-7). The appellant gave his wife the sum of $13,000. The appellant obtained his divorce by Bill SD-176, passed by the Canadian Senate on September 29, 1961.

3.6 Owing to this fear of his former wife, the appellant thus hoarded sums of money in cash. He maintained (this testimony is confirmed by his second wife) that all the cash was counted on July 28, 1969. It totalled $87,000, $7,000 of which was in American money. Thirty-seven thousand dollars ($37,000) came from the safety deposit box and $50,000 from his home. The immediate reason for this counting was a telephone call from his first wife’s daughter. She was crying over her brother’s troubles: the “Mafia” were claiming $12,000 from him for gambling loans and debts. The father and the woman who was to become his second wife in 1970 then counted the cash. The father dealt with the son’s problem personally, dealing directly with the creditors. He settled everything for $2,000. There thus remained $85,000 in cash, if we are to believe the testimony of the appellant and his second wife.

3.7 How much credence should these two people be given with respect to this matter of cash? The answer to this question is extremely important; in fact the entire dispute hinges on it.

Since no testimony was present in rebuttal to these two witnesses, the answer to the above question must be found in the likelihood of the facts and on the basis of the image these people projected during their testimony. The likelihood of the facts, evidence by presumption, must meet certain requirements, however. Counsel for the respondent referred to André Nadeau and André Ducharme’s Traité de droit civil du Québec, volume 9, paragraph 591:

(TRANSLATION)

591. Weighty, precise and consistent presumptions— Unlike the French civil code, our code does not order the courts to admit only weighty, precise and consistent presumptions. Left to their own devices, however, our courts have retained this requirement of their own accord. Our decisions have reflected this, [26] especially in civil liability trials, [27] which provide fertile ground for the development of a system of evidence based on presumptions of fact.

The question of whether the presumptions are sufficiently weighty, clear and uniform is one of fact and not of law, [28] leaving much up to the trial judge’s assessment.

The presumptions are of probative force where the relationship between the facts proved and the fact to be proved is such that the existence of the latter cannot fail to be deduced from those that are known. [29] If the hearing discloses facts that point strongly to the existence of unknown facts that are incompatible with those relied on by way of presumption, the action based on this sole means of proof cannot be allowed. [30]

Presumptions are weighty where they are serious, supported by specific facts, well established [31] and not purely conjectural in nature, [32] without it being necessary, however, for them to be numerous: a single fact may sometimes suffice. [33]

They are precise when they lead directly and necessarily to proof of the unknown fact. [34]

Finally, they are consistent when they do not contradict one another but on the contrary form a coherent group, [35] with the weaker ones serving to reinforce the stronger ones. [36]

This amounts, in short, to the application of the principle res ipsa loquitur. This principle would apply even if the taxpayer were a resident of a province other than Quebec. According to Albert Mayrand, J the common law has derived from this maxim rules similar to the presumptions of fact in the Civil Code: National Trust Co Ltd v Wong Aviation Ltd, [1969] SCR 481 (Dictionnaire de maximes et locutions latines utilisées en droit québécois, page 168).

Can the existence of $85,000 in cash be confirmed or contradicted by the existence of certain facts? The evidence of a series of transactions resulting in capital gains or losses leaving a balance of $121,306 (table in paragraph 3.4 of the facts) on December 31, 1969 is serious evidence that makes $85,000 in cash possible but is not sufficiently precise evidence to “lead directly and necessarily” to the actual existence of this cash sum in the hands of the appellant.

Apart from the appellant’s testimony, is there a precise fact that would make it possible to confirm the arising of a presumption from the capital gains resulting from the transactions? The appellant’s fear of his first wife may make his decision to accumulate cash in this manner plausible, but this is still not a sufficiently precise fact that would lead directly and necessarily to this conclusion.

The Board is well aware, moreover, that the existence of a sum of this size in cash is kept in the greatest secrecy and that very few facts, apart from the testimony of those concerned, can confirm such a fact.

Before examining the probative value of the testimony of the appellant and his second wife, we should ask ourselves whether the arising of a presumption is at least consistent, that is, whether there are not certain facts that contradict it.

The respondent filed as Exhibit I-2 a balance sheet dated December 31, 1972. On that date, on the basis of Exhibit A-1 and the appellant’s testimony, the appellant had stopped working for good in July 1972, had been living since then in large part from his cash and on January 1, 1974 had approximately $10,000 (according to the lowest figure given) left. Moreover, since according to the statements provided (Exhibit 1-1), he had personal expenses in 1973 of $8,310 (without counting the life insurance premiums of $2,200, and so on), it must be concluded that he had at least $18,000 in cash on December 31, 1972.

This cash amount does not appear on the balance sheet of December 31, 1972. There is only a bank account (Royal Bank, Vimont shopping centre) of $2,606.81. This balance sheet was submitted to the Department of Revenue on July 19, 1974, that is, almost a year before the assessment issued on June 27, 1975. This was probably during the period of negotiations following the audit of the appellant carried out by the respondent’s officers.

Was this sum of $18,000 in cash so small it was overlooked? The Board doubts it. Perhaps it was an error by the accountant? The document is signed by both the accountant Antoine Deschênes and the appellant.

If this was an oversight, is there an explanation for it? The evidence did not provide one. This document (I-2) contradicts the testimony.

3.8 We must now consider the probative value of the testimony of the appellant and of his second wife with respect to the counting of the $87,000 cash on July 29, 1969.

The Board must say that the image the appellant and his second wife presented at the hearing of the case was not necessarily one of lying and invention, far from it.

The Board remains sceptical, however, owing to the fact firstly that the balance sheet of December 31, 1972 does not mention the cash on hand.

Moreover, this balance sheet was filed with the Department of Revenue on July 19, 1974, that is, almost a year before the assessment of June 27, 1975 was issued. It was not until September 15, 1975, in the notice of objection, that this question of cash appeared for the first time (according to the evidence, at least).

Whereas the burden of proof falls on the appellant, and the above- mentioned facts concerning the balance sheet of December 31, 1972 contradict their testimony, the Board does not think that it has any other choice but to reject the testimony. Was there perhaps an omission in the appellant’s evidence? Did the appellant perhaps underestimate the importance of filing the balance sheet for December 31, 1972? In any event, the Board cannot make up for it.

Moreover, since this $85,000 in cash on December 31, 1969 formed the very basis of all the appellant’s arguments, the Board can only come to the conclusion that it should dismiss his appeal, except with respect to the admissions made and described above.

The penalty must therefore also be upheld.

4. Conclusion

The appeal is allowed with respect to the respondent’s admissions set out in the above reasons for judgment and is dismissed with respect to the rest, and the whole is referred back to the respondent for reassessment.

Appeal allowed in part.