Jet Metal Products Limited v. Minister of National Revenue, [1979] CTC 2738, 79 DTC 624

Delmer E Taylor:—This is an appeal heard in the City of Toronto on May 8, 9, 10 and 11, 1979, against income tax reassessments dated November 22, 1977 for the years 1969, 1970 and 1971. The above reassessments followed reassessments issued earlier for the same years, dated September 19, 1974, to which at that time the taxpayer had objected, with the reassessments now in question being the result. The amounts in question in the reassessments are for material purchases, personal entertainment and travel expenses, and adjustments to capital cost allowance (cca). The respondent relied, inter alia, upon paragraphs 12(1)(a), 12(1)(d), 12(1)(h), 11(1)(a) and subsections 56(2) and 46(4) of the Income Tax Act, RSC 1952, chapter 148.

Background

The appellant (hereinafter referred to as the “Company” or “Jet”) is incorporated under the laws of the Province of Ontario, with its office in the Borough of North York. It is in the business of manufacturing metal products, with a fiscal period ending June 30 of each year. During all times material it was controlled by one Keith Alexander (referred to as “Alexander”). The date of mailing the original assessment for the year 1969 was Jaunuary 23, 1970.

It was noted from the documentation filed with the Board that the financial statements of the Company contained a certificate from “Appleby and Sprackman, Chartered Accountants”, and it was the Board’s understanding that counsel for the appellant, Morris S Appleby, in addition to being a lawyer, was also a chartered accountant.

Contentions

In the notice of appeal, the appellant contended that the reassessment for the year 1969 was statute-barred; that there had been no gross negligence warranting the penalties which had been imposed; that the expenses disallowed as personal had been made for the purpose of gaining or producing income; that the property upon which cca had been charged but disallowed had been acquired in 1969; and that the amounts disallowed for material purchases should be reinstated as allowable deductions.

For the respondent, the situation was as follows:

—The appellant, in computing its taxable income for the 1969 taxation year, sought to deduct expenses for the purchase of inventory in the amount of $70,000 (hereinafter called the “bank purchase”).

—The respondent disallowed expenses for the purchase of inventory in the amount of $70,000 for the appellant’s 1969 taxation year but in calculating the appellant’s taxable income for the 1970 taxation year allowed an expense of $55,000 for purchase of inventory (bank purchase).

—The appellant, in computing its taxable income for the 1969 taxation year, sought to deduct expenses for the purchase of merchandise in the amount of $82,002 (hereinafter called “Astlett Purchase”).

—The respondent, in calculating the appellant’s taxable income for the 1969 taxation year, allowed expenses for the purchase of inventory in the amount of $28,501.28 (Astlett purchase).

—The appellant, in computing its taxable income for the 1969 taxation year, sought to augment its Class VIII capital property in the amount of $18,000.

—The appellant, in computing its taxable income for the 1969, 1970 and 1971 taxation years, sought to deduct expenses for business travel as set out below:

—The respondent, in calculating the appellant’s taxable income for the 1969, 1970 and 1971 taxation years, allowed expenses for business travel as set out below:

and the respondent applied penalties for the taxation years 1969 and 1971.

—The appellant, in computing its taxable income for the 1971 taxation year, sought to deduct expenses for a retroactive price increase for goods sold in the amount of $39,648 (hereinafter called the “Pomp Industries’’ purchase).

—The respondent, in calculating the appellant’s taxable income for the 1971 taxation year, disallowed expenses relating to a retroactive price increase for goods sold in the amount of $39,648 (Pomp Industries).

—The respondent acted upon the following assumptions or findings of fact:

(a) the appellant incurred the expense of “bank purchase” on September 9, 1969 in its 1970 fiscal year;

(b) the appellant, in the taxation year 1969 pursuant to an agreement dated May 20, 1969 with an insolvent associated company Norsofco Group Limited (hereinafter referred to as “Norsofco”) paid for and ac- quried stock ordered by Norsofco from H A Astlett & Co (Canada) (hereinafter referred to as “Astlett”) to the extent of $28,501.28, an amount equal to the indebtedness of Norsofco with the supplier, Astlett.

(c) the appellant, in its 1969 taxation year, made loans to an associated company, Norsofco, which acquired capital property in Class VIII in the amount of $18,000 but did not itself become the owner of the property during the 1969 taxation year;

(d) the appellant, in its 1969, 1970 and 1971 taxation years, deducted from its taxable income for those years expenses incurred for the personal travel of Alexander;

(e) the appellant, in its 1970 taxation year, in respect of a transaction whereby Pomp Industries Limited (hereinafter referred to as “Pomp”) billed the appellant for a retroactive price increase on goods sold to the appellant, was not dealing with Pomp at arm’s length insofar as the principal shareholder of the appellant was, at all material times, in control of Pomp.

—The appellant, Knowingly or through neglect or carelessness, accrued a liability of $70,000 in its accounting records for the 1969 taxation year which did not exist and penalties therefore were properly applied (bank purchase).

— The appellant, knowingly or through neglect or carelessness, accepted the reinvoicing in its favour of stock purchased by an associated company, Norsofco, from Astlett in the 1969 taxation year after the associated company, Norsofco, has become insolvent, and penalties therefore were properly applied (Astlett purchase).

—The appellant, knowingly or through neglect or carelessness, augmented its capital property in Class VIII in its 1970 taxation year knowing that the capital asset was that of its associated company, Norsofco.

—The appellant was not operating at arm’s length when, during its 1971 taxation year, it accepted a retroactive price increase in goods from Pomp with respect to goods already sold.

—The appellant, knowingly or through neglect or carelessness, deducted personal and living expenses incurred by Alexander for trips made during its 1969, 1970 and 1971 taxation years.

At the outset of the hearing Mr Appleby, among other items, brought two specific matters to the attention of the Board. First, that in his opinion the reply to notice of appeal filed by the Minister was inadequate to the degree that it did not indicate any charge of “misrepresentation” for the year 1969 which would be fundamental to the Minister’s position, nor did it give adequate reasons for “gross negligence” in support of the penalties added. Second, that due to the changes in the “New” Act, the Minister not only had the responsibility of proving misrepresentation, but was required to show that something more serious than “innocent misrepresentation” had occurred. On this last point, Mr Appleby contended that the Minister had to prove “fraudulent misrepresentation”, and indeed to prove so for every item reassessed for the statute-barred year (1969). In summary, Mr Appleby’s position was that the Minister had the burden of proof in the appeal before the Board.

The Minister’s counsel accepted the responsibilty as he saw it under the Act (to prove that there had indeed been misrepresentation) but rejected Mr Appleby’s assertions that proof of fraudulent misrepresentation was required, or proof of each item by the Minister. Counsel nevertheless agreed to proceed to present the Minister’s case since he felt assured that the evidence would establish that misrepresentation, to whatever level demanded by the Board, had occurred. Further, counsel for the respondent had prepared and was ready to file with the Board an amended reply to notice of appeal in order to clear up any problems Mr Appleby might have with the present one. Mr Appleby objected to any change at this late date, and the Board decided to hear the case based on the information already presented. It was evident to the Board that in certain items in the reassessments for the years 1970 and 1971, the onus of displacing the Minister’s position rested clearly with the taxpayer, not the respondent. Since both parties stated that they had witnesses and evidence to present, it was agreed that the Minister would proceed to present all the evidence for the three years, the Board would then hear the evidence from the appellant, reserve all decisions relevant to the case, and deal in the written judgment with both the issue of the onus and nature of the evidence required from the Minister to open a statute-barred year, and the determination of the specific question or questions which resulted therefrom when related to the evidence brought forward. Some selected comments (not in any particular sequence) from this part of the hearing might be helpful:

Mr Appleby

Now, the cases under the old Act stated that misrepresentation could be an innocent misrepresentation. It did not have to be a fraudulent misrepresentation. . . .

Now, under 152(4) there is a great difference. It says:

The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act,

And now we have 152(5), exclusions from assessments. This section was not in the previous Act and shall I read it?

The Chairman: I would appreciate it if you would read it for the record, Mr Appleby.

Mr Appleby

(5) Notwithstanding subsection (4), there shall not be included in computing the income of a taxpayer, for the purposes of any reassessment, additional assessment or assessment of tax, interest or penalties under this Part that is made after the expiration of 4 years from the day referred to in subparagraph 4(a)(ii), any amount

(a) that was not included in computing his income for the purposes of an assessment of tax under this Part made before the expiration of 4 years from that day,

(b) in respect of which the taxpayer establishes that the failure so to include it did not result from any misrepresentation that is attributable to negligence, carelessness or wilful default or from any fraud in filing a return of his income or supplying any information under this Act,

Mr MacGregor

There are three taxation years involved. 1969 is statute-barred, 1970 and 1971 are not. Now, I suppose, technically speaking, the assessments with respect to 1970 and 1971 are normal assessments and I am excluding the penalty provisions and therefore the onus is upon my friend. The onus as to opening the statute- barred year is on ourselves.

The Chairman:

I have very great difficulty, Mr Appleby, in arriving at the same conclusion that you have arrived at, but there was some differentiation between 46(4) and 152(4) _.. My initial reaction is that I do not follow as easily as you appear to do that innocent misrepresentation has been eliminated in any of the qualifications put in 152(4), as an acceptable process by which the Minister can open up a taxation year.

Mr Appleby

In other words, in subsection 46(4) (Old Act) you have any misrepresentation without any conditions attached to it, so therefore the Courts interpret it to mean that it is fraudulent or innocent, but now we have in 152(4) it qualifies the kind of misrepresentation. It must be attributable to neglect. carelessness and that is a great difference. It is much more severe. It requires a greater degree of misrepresentation than just any misrepresentation to be able to open up.

Mr MacGregor

It is the Minister’s position that innocent misrepresentation would still apply in subsection 152(4).

Evidence

During the course of four days of the hearing, counsel for the respondent adduced evidence from Mr Daniel Hobson, the assessor with the Department of National Revenue responsible for the taxpayer’s file when the departmental audit was carried out during the years 1972, 1973 and 1974, leading up to the reassessment in that last year; Mr Robert Bevan, an officer with the section of the Department of National Revenue dealing with formal objections to assessments from taxpayers, who was responsible for this file and the 1977 reassessment which ensued; Mr William Treleaven, during the year 1969, President of Astlett; and Mr George Brand, during the years 1969 and 1970 manager of the bank at which the appellant did business.

The enormity of the task undertaken by the respondent to ensure that the rights of the appellant were protected and that all reasonable evidence was presented in support of the Minister’s case, could entail in recital a very lengthy description. Counsel for the Minister ensured that to the fullest extent possible, he had provided testimony that: (a) there had been misrepresentation in 1969; (b) it had been of a substantial nature; (c) support for the regular (non-statute-barred) portion of the reassessments was introduced, and (d) support for the gross negligence (for penalties) was developed. Counsel for the appellant was permitted the widest latitude in cross-examination of the witnesses on their testimony. At the conclusion of the Minister’s presentation (on the fourth day), Mr Appleby declined to present any evidence on behalf of his client, and the following exchange of views took place:

Mr Appleby

It is my submission, Mr Chairman, that I request a ruling or decision by the Board as to the interpretation of subsections 152(4) and (5) and, most important, I request a ruling as to the admissibility of the evidence with respect to the Hobson position and it is my submission that these matters are so vital to the proceedings that I am unable to carry on further until those rulings or decisions are given.

And I make a motion, Mr Chairman, that the hearing be adjourned so that those rulings and decisions may come forth in order to clarify my position in this appeal. Thank you, Mr Chairman.

Mr Chairman

Mr MacGregor, we have a motion for an adjournment on the grounds as indicated by Mr Appleby.

Mr MacGregor

Mr Chairman, the Minister’s position is quite simple. We have now presented all our evidence as to what was agreed to prior to this hearing, I believe. The Minister has gone forward, presented evidence concerning all three taxation years at the outset. It now seems certainly inopportune for Mr Appelby at this stage to ask for a ruling and an adjournment on these matters. The Minister opposes such a request. Mr Appleby wants a ruling on subsection 152(4). It seems to the Minister that misrepresentation has to be shown. I think that is clear. The Minister has attempted to do so.

It seems to me that 152(5), and I am speaking in very general terms, places the onus upon the taxpayer. The Minister has also presented evidence that would tend to support the assessment on the basis of penalties which were levied under the pertinent subsection of the Act.

I might also add that the evidence that has been introduced to date has only been introduced pursuant to the agreement we entered into earlier that the Minister would present its totality of evidence. I also feel that the evidence is completely admissible, as before the 1969 taxation year can be opened up the Minister must show misrepresentation.

Thank you, Mr Chairman.

The Chairman

Mr Appleby, any further statements before we deal with your motion”? Mr Appleby:

No, sir.

The Chairman

In the matter of Jet Metal Products Limited, the Board has been requested by counsel for the appellant to agree to an adjournment. The fundamental reasons advanced by counsel, as I see them, are that he requests a ruling from the Board on the definition and characteristics to be attributed to section 152(4) of the Act and secondly, that he requires a ruling from the Board on the admissibility of certain evidence, particularly as he defines it, the Hobson evidence, which has been put before this hearing.

This has been an extremely complex matter, three years of assessments under review. One of these is statute-barred, according to the Income Tax Act, the year 1969. There are, therefore, three issues before the Board. One is the appropriateness of the Minister reassessing 1969; the second is the income tax assessed, and the third concerns the penalties imposed by the Minister for the years 1969 and 1971.

At the outset of this hearing, the Board met with counsel and discussed the conduct of the matter because there was a certain difference of view as to the location of the responsibility for the conduct of the case, certainly with respect to certain aspects of it—whether it was that of the appellant or of the respondent.

Further, there was considerable difference of view on how the Board could or should interpret section 152(4). At least in part, that difference of opinion related to whether the term misrepresentation should, under the new Act, be considered as innocent misrepresentation or whether something of the nature of wilfulness (misrepresentation on a level in the scale higher than that which was required of the Minister) before reopening a statute-barred year.

There was another dispute, and that was whether or not the Minister, on the proof of one item of either innocent or wilful misrepresentation (as that point may be decided), was then entitled to deal with the entire year. In an effort to bring the matter forward, both counsel agreed with the Board that it would proceed and the Board would take under advisement, at the completion of the hearing, all of the three issues reiterated:

(a) the appropriate nature of the Minister reopening the 1969 statute-barrred year,

(b) the assessment of tax involved, and

(c) the penalties assessed.

It was understood that the Minister would be required to present considerable evidence in support of at least his right to reopen the 1969 year and counsel for the Minister agreed under those circumstances, rather than repeating all over again all of the evidence which might apply only to the tax or the penalties, to introduce all of the Minister’s evidence and assume the conduct of the case, at least in its primary stage. This meant that the Minister’s counsel was assuming the responsibility for putting forward the Minister’s reasons in detail for the assessments

themselves in advance of the appellant providing information which would conflict with the assessments themselves—clearly a responsibility which should rest with the appellant under usual circumstances.

Also, the Minister was, in his own view, taking on the added task of establishing a level of misrepresentation or higher in the scale of 152(4), which the Minister’s counsel indicated he did not necessarily agree was the responsibility of the Minister. All of this entailed a submission of considerable evidence and the Minister agreed with counsel for the appellant that all of the Minister’s evidence and supporting documentation and information would be made available in an effort to minimize the task facing the Board.

Counsel for the respondent has proceeded to do so, having informed the Board at the outset that he would have at least two witnesses (in fact, he presented four witnesses). Counsel for the appellant informed the Board that he would have one witness at the conclusion of the Minister’s evidence, Mr Alexander, who was vitally involved with the affairs of the appellant company. Mr Alexander has been present at the hearing right from the start, and he is here today.

The hearing so far has taken more than three full days, including evidence from one witness which took two and one-half days. There have been approximately fifty exhibits entered for the Board’s review. Yesterday, the Board agreed with counsel that one more full day at least was required for the introduction of evidence, including the introduction of the appellant’s evidence. This is being done today. The Board further agreed with counsel that probably one more day, at some time in the future, would be required for argument on this subject.

All of the Minister’s information has been provided according to the agreement between counsel, and counsel for the Minister has lived up to his responsibility for the conduct of the case, including the presentation of evidence which, it might be argued, was not required from him. In other words, at this moment, the appellant is now fully aware of the Minister’s entire case and now requests an adjournment before proceeding.

I am not prepared at this point in the hearing to acquiesce to that request since it would appear that this would breach the agreement between counsel upon which the Board undertook this matter four days ago, and it would leave the Board, at the minimum, at risk of criticism from the Minister in the event that any of the decisions on the points raised by counsel for the appellant went against him (the Minister) and, conversely, in my opinion, it would prejudice the case of the appellant if the Board made such a determination now before a full opportunity of presenting any available information has been provided to the appellant.

The motion is rejected, the hearing is to continue, and counsel for the appellant is requested to proceed with the evidence he has, as agreed at the outset of the hearing.

Mr Appleby?

Mr Appleby: I am not prepared to proceed at present, Mr Chairman.

The Chairman: Are you going to produce any evidence now?

Mr Appleby: I have evidence, but I am not prepared to produce it now.

I asked for an adjournment.

The Chairman: And it was refused. I am asking you, it is your opportunity to bring forth evidence and if you have any, to bring it forward now.

Mr Appleby: I have evidence, but I am not prepared to bring it forward now.

The Chairman:

Fine. Mr MacGregor, we are now at the point where I can see no alternative other than the summary of your position and the summary of Mr Appleby’s position as he sees it, in agrument.. .

As a result of the above turn of events, the Board only considers it necessary to summarize the major significant evidence brought out. It was clear that the reassessments issued in 1977 (based upon the “Bevan” examination) included some changes for the reassessments issued in 1974, based upon the departmental audit (generally called the “Hobson” evidence). It was also just as evident that a great deal of the data upon which Hobson prepared his own report and the resultant reassessments in 1974 came from conversations with, or information supplied by Alexander or Mr Appleby, now counsel for the appellant. Further, the supporting documentation made available was often incomplete, and often only minimum explanations were provided. It was fundamental to the analysis made by Hobson that Jet was not in a business which generally used major quantities of “burlap” as a raw material, and therefore acquisition of the burlap involved in the Astlett purchase and the bank purchase should be traceable either in direct sales or in fiscal year-end inventory.

The “Hobson” reassessment details for the year 1969 are as follows:

The “Bevan” reassessment for the same year contained this information:

In examining the particulars of the “Hobson reassessment” (which is not the one under appeal), his testimony shows that the additions made to income resulted from the following comprehension and evaluation of the Situation by him:

A similar review of the “Bevan reassessment” shows certain ad- justments to the “Hobson reassessment”, based both on additional information provided or available, and on a different perspective of the appropriate accounting treatment (for income tax purposes) of the transactions under review:

The testimony of Mr Treleavan and Mr Brand provided no assistance to the appellant but did establish without question the dominant role played by Mr Keith Alexander in this appellant corporation.

Without going into what the Board considers unnecessary detail, it should be noted for the record that the adjustments made by Bevan to the Hobson reassessments for the years 1970 and 1971 were technical and interpretative, and were generally to the benefit of the appellant. Each officer noted and highlighted substantive discrepancies in the income reported by the appellant, and the differences were in the emphasis to be placed on the information available in order that the reported results should conform with the operating realities.

Testimony had been provided through Hobson regarding the major addition to income in the year 1971 described as: “Pricing Adjustment—Toronto Chair Furniture—Pomp Industries Limited—$39,648”, and this was supported by Bevan. The documentary evidence available, and the explanations and information provided by Mr Appleby and Mr Alexander during the departmental examination, had led both Hobson and Bevan to conclude that at the date of purchases by Jet from Pomp, the two parties had been dealing at arm’s length, and that the proper price had been charged and paid for such purchases at that time. At or about the time of the “retroactive price adjustment”, Alexander was no longer dealing at arm’s length with Pomp, and arrangements were made for the charges which appeared to have beneficial income tax implication to both companies, according to these tax officials.

Argument

Counsel for the respondent, in keeping with his undertaking to present the entire case, proceeded with argument. Certain specific quotations from the argument are helpful:

... As I understand it, there are three issues that you would care to have addressed. The first issue deals with subsections 152(4) and 152(5). The second issue deals with the assessment itself and the third issue deals with the application of penalties.

It is the Minister’s position as mentioned that any misrepresentation means a misrepresentation. I think that is clear from the Act. In other words, if the Minister can show that there has been a misrepresentation, the assessment with respect to the taxation year is on the surface correct. The misrepresentation is qualified as it must be attributable to neglect, carelessness or wilful default. Neglect, if one looks up that word in the dictionary, is very closely aligned to negligence and it is the Minister’s position that neglect would include an innocent misrepresentation within the meaning of the Taylor case, [1961] CTC 211; 61 DTC 1139, ‘an innocent misrepresentation (and I am paraphrasing because I do not have the Taylor case immediately before me) is any statement made in the belief it is true, the statement of course must be in fact a false statement.’

Now, I must point out that the Federal Court Trial Division in 1972 in the Bisson decision, [1972] CTC 446; 72 DTC 6374, qualified or appeared to qualify the Taylor comment. Both these cases dealt with subsection 46(4) of the former Act. The Bisson case stated that if the taxpayer made a misrepresentation in the complete belief that it was true, that (alone) would not satisfy 152(4).

It seems to me, however, that accepting the Bisson case, the misrepresentation now that was attributable to neglect and carelessness at its very highest must only require some carelessness or sloppiness or failure to give proper attention to the filing of the income tax return or the supplying of any information under the Act. (Italics by the Board)

With that in mind, viewing the evidence in the matter that is before the Board, it is the Minister’s submission that there have been several misrepresentations attributable to the taxpayer. These will be discussed more fully later when dealing with the gross penalties matter, but I would like to comment that perhaps the most obvious misrepresentation is setting up in the 1969 taxation year, the liability of purchases for $70,000 when, in fact, as admitted by the appellant, the liability did not arise until the 1970 taxation year.

Now, I suppose on the surface it is possible to argue that that is simply a mere bookkeeping error, but it is a little difficult to do so when one checks the records, and I am referring specifically to the purchases journal, the accounts payable ledger sheet where there are strokes through entries set up pertaining to this amount of $70,000 and comments written in that would indicate that such is set up at June 30, 1969. In other words, it appears as if there was an active mind turned towards characterizing such events as appropriate costs for the 1969 taxation year. It is also interesting to note that there appears to be no corresponding part to that entry of $70,000—1 mean that to suggest there was no corresponding inventory and there is no corresponding sales which relate to that amount. Now, if indeed one turned his attention towards the setting up of the $70,000 worth of purchases in 1969, that in itself I suggest is misrepresenting the point. When one considers that the corresponding portion of that, if you will, be it to sales or inventory as it works itself through the system, was not set up and I submit that supports the earlier expressed position.

In the Minister’s view, another example of misrepresentation is with the Astlett purchase matter, and this is a situation where I believe the evidence to date is very clear in showing that the goods that were sold by H A Astlett were originally contracted for, originally invoiced to Norsotco Group Company. We have an agreement dated May 20,1969 that speaks specifically to the fact that those goods have been sold and delivered to Norsofco Group.

We then have re-invoicing to the appellant and according to Mr Treleaven, he was not certain of this, but suggested that this was pursuant to I believe it is Exhibit R-42 that was introduced. which was a message taken down as a result of what appears to be a phone call from Mr Alexander. These goods were clearly sold to Norsofco, not Jet.

I submit as well that other misrepresentations have been shown. For example, relating to the CCA Class 8 allowance where originally, as was the case of the Astlett purchase, an advance had been made to Norsofco and recorded as such in the loan account. Subsequently, on or about June 30, the appellant contends that such amount was taken off the loan account and set up as machinery and equipment. Well, not only do we have no documentary evidence indicating that there was (not) any machinery acquired by Jet and I might add this was after Mr Bevan’s request for such, but we also have strong indications of an IDB loan that was presently outstanding and that the IDB had a lien on all goods of Norsofco at the pertinent time. That is, how could Jet acquire machinery and equipment from Norsofco?

Other misrepresentations I believe occurred with respect to the personal expenses. I submit when you look at the personal expenses in the 1969 taxation year, they very clearly or at least a few of them on the surface without question indicate that they are of a personal nature and refer specifically to the landscaping charge for the personal residence of Mr Alexander.

I might add at this point that this is the direction of the Minister’s evidence, that indeed one had to show that there was a misrepresentation. This was the point of Mr Hobson’s evidence that was supported and commented upon by Mr Bevan.

I submit that the Minister has shown several misrepresentations attributable to at the very least neglect, carelessness or wilful default and, accordingly, the assessment is proper. Now, subsection 152(5) then operates to preclude the Minister from including any amount of income in respect of which the taxpayer establishes that the failure to so include was attributable to negligence, carelessness or wilful default. And again, I submit that once the Minister has established, and I submit the test is established on a balance of probabilities, that any misrepresentation has occurred, the ball then goes over the net to the taxpayer’s court, and he must establish to avoid for any amount or, to put it better, for each and every amount that in respect of each and every amount the failure to so include was not attributable to negligence, carelessness or wilful default.

I submit it is quite apparent that because the taxpayer has so chosen—that is his perfect right not to adduce any evidence at the hearing—that the onus clearly that Parliament places upon the taxpayer has not been discharged.

Having dealt with all the items relevant to the 1969 reassessment, counsel then gave his views on why the reassessments for the years 1970 and 1971 should be sustained, keeping in mind the fact that the responsibility for dislodging the Minister for the matters at issue, at least in 1970 (where no penalty had been assessed) rested with the appellant, and that this also held true substantially for 1971 since the Minister had assessed penalties on only certain amounts of the disallowed Alexander expenses, and had not charged a penalty on the “Pomp” retroactive purchase charge of $39,648.

Turning to the third matter—the penalties, it was noted again by counsel that the Minister had been highly selective in assessing penalties, taking into account not only the difficulties of recollection and providing documentation from a period so long age, but also giving the utmost credence to the explanations given by either Mr Appleby or Mr Alexander. The net effect had been to assess penalties (after two serious and detailed audits by the department), not just when the documentation failed to support the records and tax returns of the Company, but only when the explanations provided were totally inadequate:

The final matter is the penalty issue. This is an issue that relates to the 1969 and 1971 taxation years. Penalties were applied to certain of these amounts and they are listed on Exhibit R-40, I believe. Yes, R-40.

Now, these expenses claimed by the appellant were disallowed on the basis that they were personal, purely and simply, and I submit when one views the expenses in virtually every case it appears that they are indeed personal. We have a great number of trips overseas or certainly outside of Canada. The only evidence to date is that Jet Metal does no business outside of Canada and so I think it is a very easy conclusion to reach that these are personal. In certain cases they involve other people than Mr Alexander. His wife, for one. We have trips to Latin America, Clara, Columbia, pertinent dining club cards and charges, a landscaping at his residence. What could be clearer? That is a non-personal, non-business expense. We have flowers to be delivered to Mrs Alexander when she was in the hospital, trips to Israel, Iran. We have lavender napkins, Chapman’s Fine Foods, both of these going to the personal residence of Mr Alexander. Trips to Venezuela, a gambling junket to Las Vegas, a Jamaica trip and what is interesting is that we have a repetition of these amounts from 1969 through to 1971. Again and again they crop up.

Counsel for the appellant based his objection regarding the 1969 year on two essential criteria: First, that although the expression “has made any misrepresentation’’ is consistent in both subparagraphs 46(4)(a)(i) of the old Act and 152(4)(a)(i) of the new Act, in the new Act it is followed by the qualification “that is attributable to neglect, carelessness or wilful default. ..’, which struck down, in his view, the applicability of the decision in MNR v Maurice Taylor, [1961] CTC 211; 61 DTC 1139, which judgment allowed the acceptability of “innocent misrepresentation” as the basis for such reopening of a statute-barred year. According to Mr Appleby, this change severely restricted the scope of the charge which could be advanced and must be supported by the Minister. And second, counsel contended that the cases of Michael S Mark v MNR, [1978] CTC 2262; 78 DTC 1205, and Michael J W Penn v MNR, [1971] Tax ABC 33; 71 DTC 71, stood for the proposition that all items in the reassessment, not just one, required proof from the Minister before negligence could be supported. From Penn (supra), he quoted from 40 and 76 respectively:

thirdly, the consistency of the taxpayer’s story with all the other evidentiary facts before the Board, and fourthly, the answer to this question—had anything occurred such as a previous investigation by the Minister’s local officials,

Reference was also made to the case of MNR v Louis Bisson, [1972] CTC 446; 72 DTC 6374, (dealing with misrepresenation), which case was decided by the Federal Court—Trial Division in favour of the taxpayer.

In summarizing, Mr Appleby reemphasized the differences in the perspectives on certain amounts taken by Hobson and Bevan, and contended that the Minister should be required to provide much more in the way of documentation and evidence to substantiate his charge of misrepresentation. Mr Appleby dealt first with the “Astlett purchase” of $82,001 and noted that it had been accepted finally by Bevan that Jet might have acquired some burlap from this transaction, and therefore there was no reason to suggest that the entire amount recorded as purchases in the books of Jet had not been so acquired. The approach taken by Jet had been that the goods (burlap) was on consignment to Norsofco, and always belonged to Jet. A set of mathematical calculations was provided by counsel for the appellant and intended to show that there was some discrepancy in the Minister’s figures dealing with purchases, sales and inventory of burlap. Considerable reference was also made to accounting entries in the records of Jet, showing first, consignment sales of some $47,000 to Norsofco, and later a reversal of this entry out of the sales account:

What follows from the transactions is that Jet Metal paid the $82,000 and Jet Metal showed it in its records as an advance to Norsofco. Jet Metal shows the pur- chases from Astlett and then transferred the payments which it showed as an advance to Norsofco to Astlett’s accounts payable, showing the purchase, showing the accounts payable to be paid. And from the evidence that is shown, it is shown that goods were actually received from Astlett and used in the operations of Jet.

I would suggest, Mr Chairman, that it would follow from all the evidence that there is no carelessness or neglect or wilful default from the appellant. All transactions were clearly shown. They were not attempted to be hidden and from a business point of view, it would appear, using hindsight, that it was a very good decision by Jet Metal to take over the Astlett goods.

On the “bank purchase’’ item, the specifics of Mr Appleby’s argument are quoted:

... the bank transaction is a matter in which the appellant admits that there is a mistake and the mistake would have to be a result of negligence or neglect or carelessness or wilful default. But we have to first characterize that item ($70,000 and $55,000), that it was not unreported income. It was not a deduction that was improperly taken, but it was a deduction taken in the wrong year. I also pointed out in my evidence the type of transaction, and I stated that there was not the usual type of transaction. There was no purchase order, no delivery, and none of this usual goods checked, the delivery slip, purchase invoice, these are the various documents and entries that are made, dated in the records to account for a purchase of goods. There is nothing like that. All there was was a letter from the bank, dated September 9, stating these are the goods. You bought these goods.

Now another point—the statement prepared for the year ended June 30, 1969 was dated December 18, 1969. So it was prepared close to five and a half months after June 30. It was prepared a little more than three months after the date of the letter from the bank, and you also note that the letter was for $78,000 and the amount shown as a liability was $70,000. So, therefore, I think it could be established that the amount that was set up as $70,000 was done by memory because if it had been done with the letter stating $78,000, $78,000 would have been shown. If the Minister is stating that what the taxpayer, what the appellant has done, is to try and build up his liabilities as much as he can at June 30, 1969, why wouldn’t he use the $78,000? He would still have the expense of $8,000. So, it would seem to me it follows that the time of the preparation of the statement at June 30, December 18, from memory, information was given to the accountant who prepared the statement that there was a purchase of $70,000 of stock from the bank and the accountant, who I must say made the error, the accountant is responsible for the error in this case in that he did not check it any further. He accepted that statement from his client without asking for some substantiation. So I would say that the accountant was in error in that case, not the appellant.

So far as the amount itself, the $70,000, if my submission is accepted that the mistake is an honest accidental mistake, then there is no misrepresentation that was careless through neglect or wilful default and therefore, there should not be any assessment because the year is not open and it follows that definitely there should not be any penalties because, I have repeated it before, gross negligence, as is well accepted in may of the cases, is much more severe than negligence.

The purchase of equipment in the amount of $18,000 was dealt with in this way:

I must say it is quite obvious that the burden is on the Minister to prove that no equipment was purchased. He has not brought in any evidence, acceptable evidence, to prove that there was no equipment purchased. He has a Schedule A which he referred to. Now we said in Schedule A, to refer to within the mortgage, and he brings this Schedule A into evidence because he makes the statement that the equipment is not on the Schedule A. Well, as I have explained, if the equipment was on Schedule A within the mortgage, definitely it could not have been sold. The equipment was not on the schedule and that’s why it could not be sold. And then he has another piece of evidence—unsigned minutes. Now (under rules of evidence this would be ridiculous—unsigned minutes in the assessor’s handwriting. He refers to a chattel mortgage. Primary evidence is to copy the chattel mortgage, he just refers to a chattel mortgage.

Now, on the other hand, the assessor, by his own presentation, by his analysis of the sales of Jet Metal, in his own handwriting and in his examination of Jet Metal’s sales invoices, he lists on a schedule pertaining to Norsofco goods, machinery, which I would infer from his own admission, the assessor’s admission, is the machines that were purchased from Norsofco, or machines were obtained from Norsofco. The question would be that if it is established, which it is, that machines were obtained from Norsofco and the burden is on the Minister, the Minister would have to prove that all the equipment mentioned in the Notice of Objection was not acquired.

The assessor admits that Mr Alexander offered to take him down to the back and show him the physical machines and he refused to look at the evidence, a very substantial physical evidence.

As to whether the penalties should be applied, if the Minister is not willing to look at the physical evidence, the Minister also states in his evidence that there were machines purchased, it is my submission, Mr Chairman, that there certainly was not any carelessness or neglect or wilful default if the appellant is ready to provide the evidence and the Minister does not wish to follow through and establish this evidence and if there is not carelessness or neglect or wilful default, it certainly follows there is no gross negligence and there should not be any penalties.

The expenses for travel and entertainment did not receive much detailed attention from Mr Appleby:

As to the expenses, well, I must say that that is essentially a matter of my examining Mr Alexander, which I did not do, so there isn’t very much I can say about that. . .

The “Pomp Industries” charge was related by counsel to certain earlier judgments but he pointed out:

Re Pomp Industries’ problems, I agree that the burden is on the appellant for the taxation year 1971. I agree that it’s up to the appellant to prove that the price adjustment is proper.

... the Minister in his evidence relied on the fact that the companies, Pomp Industries and Jet Metal were associated or related, and in law they were not . . .

Even if they were not dealing at arm’s length, the deduction should be allowed.

Findings

The Board will address itself to the facts relating to matters at issue, generally within the three categories identified by counsel for the respondent. Before doing so, however, the Board would make the following observations of a more general note.

Mr Appleby’s objections relating to the fact that the Bevan reassessment accepted certain perspectives and assertions, which had been rejected in the Hobson reassessement, are not considered substantive. It is clear from departmental audit policy that Bevan had the authority to review and change the Hobson reassessment, and it is understandable that in so doing he took a generous view of some matters. The difficulty with the protestations of Mr Appleby on this point is simply that if he did not have to meet the problems detailed in the Bevan reassessment, he would be required to meet the conclusions reached in the Hobson reassessment-conclusions which are probably just as supportable as those of Bevan, and equally damaging to the posture of the appellant company. The simple admission by counsel for the appellant at this point in time that errors were made does not absolve the appellant.

In addition, reference is made to the fact that copies of the duplicate invoices issued by Astlett to Jet (all dated May 20, 1969) were entered as Exhibits R-3, R-4 and R-5, and totalled $82,001.58. Similar invoices dated during February, March and April of the same year from Astlett directly to Nor- sofco were also submitted as Exhibits R-9, R-10, and R-11. The purchase contract between Norsofco and Astlett, dated September 3, 1968, was submitted as Exhibit R-12. Exhibit R-8 is reproduced below to show the connection between these transactions and the basis of the reassessment on this point. By the date of May 20, 1969, an amount of $53,500 had been paid on account of the purchases from Astlett, leaving the balance of $28,501.58 referenced in Exhibit R-8.

Exhibit R-8

THIS AGREEMENT made in duplicate this 20th day of May, 1969.

BETWEEN:

JET METAL PRODUCTS LIMITED,

hereinafter referred to as the Party of the

FIRST PART

— and —

H A ASTLETT & CO (CANADA) LTD,

hereinafter referred to as the Party of the

SECOND PART

Whereas the Party of the Second Part has sold and delivered to Norsofco Group Limited, certain merchandise more particularly described in invoices addressed to the said Norsofco Group Limited.

And Whereras there is now owing by Norsofco Group Limited to the Party of the Second Part, the sum of $28,501.58 being the balance of the price of the said merchandise (and interest) referred to above.

And Whereas the Party of the First Part has agreed to assume the indebtedness of Norsofco Group Limited in respect of the above balance.

NOW THIS AGREEMENT WITNESSETH that in consideration of the Party of the Second Part releasing Norsofco Group Limited from liability with respect to the balance of the account mentioned above, and other valuable consideration, the Parties hereto agree as follows:

1. The Party of the First Part guarantees and agrees to pay and discharge the liability of Norsofco Group Limited to the Party of the Second Part for the merchandise mentioned above to the extent of $28,501.58.

2. The Party of the Second Part shall not be bound to exhaust it’s (s/c) recourse against the said Norsofco Group Limited or any securities it may hold before requiring payment from the Party of the First Part.

3. The Party of the Second Part may release and discharge Norsofco Group Limited without prejudice to it’s (sic) rights against the Party of the First Part.

IN WITNESS WHEREOF the Parties hereto have hereunto affixed their respective corporate seals duly attested by their proper officers in that behalf.

The question of the responsibility under subsection 152(4) of the Act which rests upon the Minister in reopening a “statute-barred” taxation year was examined at great length during the course of the hearing. Put simply, counsel for the appellant says the Minister must prove not merely innocent misrepresentation, but fraudulent misrepresentation, and for each item reassessed in the statute-barred year. I would refer to the general comments of counsel for the respondent on this matter, given at the outset of the hearing and quoted in this decision. They are consistent with the judgment in Bisson (supra) and are supported by the Board. In the Bisson judgment (supra), it was noted that “innocent misrepresentation’’ must include “negligence” to be regarded as misrepresentation for purposes of subsection 46(4) of the old Act. That situation appears to me to be quite unchanged in the wording of the new Act, and I do not see that the specific qualification in the new Act—“attributable to neglect, carelessness, or wilful default . . does more than confirm the Bisson decision (supra). Innocent misrepresentation attributable to negligence still constitutes misrepresentation.

Turning to the second of Mr Appleby’s points based on Mark (supra) and Penn (supra), I confess I am unable to perceive in either of these decisions the viewpoint he espouses—that they stand for the proposition that the Minister must not simply prove that the taxpayer “has made any misrepresentation” in order to reopen a statute-barred taxation year, but rather that he (the Minister) must prove that there has been misrepresentation for every item so reassessed. In my view, that is a completely untenable position for this appellant, not only because the Act clearly states “any misrepresentation”, but because the only purpose for the inclusion in the Act of subsection 152(5) would have been to provide an opportunity to the taxpayer

after the legitimacy of reopening the statute-barred year had been established by the Minister, to resist the inclusion in that same reassessment of any items which did not meet the same test—misrepresentation. The responsibility so to do, however, at that level of the proceedings, rests with the taxpayer. The Minister simply cannot bring into the reassessment for a statute-barred year items which are based upon any thing other than the misrepresentation or fraud outlined in subsection 152(4) of the Act—but he only is required to prove one such item. In summary, therefore, as I see the relative responsibilities outlined in subsections 152(4) and (2), they necessitate that the Minister first reassess the statute-barred year, and by so doing he demonstrates that he is prepared to prove at least misrepresentation. If challenged by the taxpayer, the Minister must prove at a minimum that any (one) error has been made by the taxpayer, and while it may have been made in good faith, that it was nevertheless not one which a normally wise and cautious taxpayer could have committed. (See Bisson (supra)).

Some passing reference was made at the hearing to a distinction which might be seen between the words “neglect” and “negligence” as they are found in otherwise almost identical phrases in subparagraph 152(4)(a)(1) and paragraph 152(5)(b) of the Act. The Board points out that the Frenchlanguage version of the same two sections uses the identical French word “négligence”, and therefore, for purposes of this decision, the Board holds that the legislators did not intend any distinction to be made, and the word “neglect” is to be considered as synonymous with “negligence” under subsections 152(4) and (5) of the Act.

Turning to subsection 163(2) for a moment and its relationship to subsection 152(4), it is noted that it contains no reference to “fraud”, requiring only that the person acted “knowingly” or that the circumstances amounted to “gross negligence”. In my view, misrepresentation is fundamentally a false statement made, or a true statement omitted, and to whatever degree a scale of offences can be seen in subsections 152(4) and 163(2), it might be shown as follows:

Using this scale as a general guideline, it will be the basis of the conclusions reached in this decision that to reach a level of “gross negligence”, something greater than “carelessness” or “negligence” is required, and that ‘‘wilful default” may be equated with “knowingly”.

Applying the above general principles to the instant case, the Board’s comments are as follows:

“Bank Purchase’’— $70,000—The factual evidence is minimal indeed that would support acquisition, utilization, disposal or retention by Jet of any material represented by the accounting entries in question. Nevertheless, by allowing the net amount of $55,000 as an expense deduction for the year 1970, the Minister has accepted in principle that some purchase did take place. It only remains therefore to determine if the inclusion of the amount (originally $70,000) by the taxpayer as an expense for the year 1969 rather than for 1970, warrants the charge of misrepresentation under subsection 152(4). The first indication of interest in the inventory was in July 1969 in a letter from Alexander to the Canadian Imperial Bank of Commerce entered as Exhibit R-26 (not reproduced). Clearly at that date, after the 1969 fiscal year of Jet was completed, the stock belonged to the Bank or was under its control. It did not belong to Jet. The next references are Exhibits R-27, R-28 and R-29, all in September 1969 (not reproduced). The first two exhibits dealt with a method for payment on account and the last, dated the 9th day of that month, was confirmation from the bank to the appellant of the sale of the inventory to Jet Metals. By a bookkeeping machine accounting entry dated November 17, 1969 (clearly in the 1970 fiscal year), an amount of $70,000, apparently representing this “bank purchase”, was charged to material purchases and credited to an account simply called ‘‘Canadian Imperial Bank of Commerce” in the records of Jet. By hand entry, the November 17, 1969 date above was changed to read June 30,1969 and the amount thereby expensed into the 1969 fiscal accounting year, thence into the financial statements, and finally used as an integral part of the corporate tax return filing. It would be difficult indeed to conclude that even in isolation the change of date in this manner and under these circumstances, resulting as it did in a substantial reduction in payment of corporate income tax for the 1969 fiscal year, was the result of a simple bookkeeping error. When viewed against the backdrop of all the evidence brought out at the hearing, one would be more inclined to regard it as wilful default rather than the mere negligence of the taxpayer.

The “Astlett’ Purchases—The evidence is clear—all the goods ($82,001.58) were ordered by Norsofco and had been delivered to that company. Jet, according to its own records, had loaned funds to Norsof- co (up to the amount of $53,500 by May 15, 1969), with the cheques for such loans made directly to Astlett by Jet, for reasons not detailed by the appellant at the hearing. There is no real evidence that even the sum of $28,501.58 which was apparently owed to Astlett on May 20,1969 (Exhibit R-8) and which Bevan eventually allowed the taxpayer as a material purchase deduction, represented material ever owned by, or under the control of Jet. There were duplicate invoices provided from Astlett to Jet at the request of Alexander, and the accounting records of Jet reflect that the loans to Norsofco were converted by journal entries to represent purchases of materials totalling these duplicate invoices after the goods had all been delivered to Norsofco. There was even an aborted attempt to use the accounting records to show that some portion of the Astlett goods had been all along on some form of consignment to Norsofco. For this particular misrepresentation, the attendant circumstances could not in any way mitigate at least the charge of negligence, and they risk breaching into or beyond the level of wilful default.

The Minister has clearly proven on this point his right to reopen the year 1969.

Virtually the same comments can be made with respect to the matters of the expense accounts and the overcharged capital cost allowance. The disallowed amounts, which are flagrant and persistent, are recorded as an integral part of the accounting, financial and corporate tax records. On the “expense accounts’’ matter alone, the Minister’s right to reassess might well be upheld. All the evidence indicates that there was no equipment received by Jet for the $18,000 amount set up as an asset in 1969.

Ultimately therefore, for the taxation year 1969, the Board determines that the Minister has established his right to reassess on at least the evidence presented in connection with the “Astlett purchase’’. The negligence, carelessness or wilful default evidenced by the treatment accorded the transactions relative to this event, or conversely, the absence of any event which should have been reflected in Jet’s records at all as a deductible expenditure warrants the charge of misrepresentation required under subsection 152(4) of the Act. Evidence for similar negligence, carelessness or wilful default has been highlighted by the Minister for the “Bank purchase”, “Alexander expense accounts” and ‘capital cost allowance” items in the 1969 reassessment, and the appellant has not shown that the logical conclusion to be reached from the Minister’s evidence—misrepresentation—is not valid and should not be accepted by the Board.

With respect to the penalties assessed for the year 1969, they are to be sustained whether or not the offences are characterized as attributable to negligence or wilful default. If negligence, than it was gross negligence of the appellant company through the dereliction of duty on each and every count by the controlling shareholder Alexander. If wilful default, then it was knowingly made, participated in, assented to or acquiesced in by Alexander. The conditions precedent for the Minister’s use of both subsections 152(4) and 163(2) of the Act are present for the year 1969.

With respect to the year 1970, it was not a statute-barred year, no penalties were assessed and since the appellant provided no defence, the reassessment for that year is sustained.

For the year 1971, the reassessment of tax is sustained in all aspects, including the Pomp Industries matter, and since penalties were assessed only on a basis consistent with their application to similar items for the year 1969, such penalty application is also sustained.

Decision

The appeal is dismissed and the Minister’s reassessments are held to be proper for all year involved.

Appeal dismissed.