Alojz Jarc v. Minister of National Revenue, [1979] CTC 2865

M J Bonner:—These are appeals from assessments of income tax for the appellant’s 1972 to 1975 taxation years inclusive. During that period the appellant operated, as a sole proprietor, a small butcher shop and grocery store.

The appellant did not maintain elaborate financial records relating to his business. He did record gross revenues from sales by means of weekly entries in a scribbler and he kept boxes containing receipts for both personal and business expenditures. Because of the absence of records of drawings, gasoline expenses and what were described as “back-up” records of sales, the respondent decided to use an indirect method of verifying income, the bank deposit method.

Donald Beamish, the assessor responsible for the assessments in issue, gave evidence at the hearing. His evidence was that in applying the bank deposit method for each of the taxation years in question he first analyzed the bank accounts of the appellant and his wife. He determined the total amount of deposits made in the accounts in the year, exclusive of deposits which appeared to be unrelated to monies received from the grocery store business. He then deducted the deposits from the total income reported to arrive at the amount of money available for cash drawings and business expenses paid in cash. Next he determined from the profit and loss statement attached to the appellant’s return the total expenses of the business (exclusive of capital cost allowance). He then identified the expenses which were paid by cheque and by subtraction calculated the total of business expenses which must have been paid in cash. He then determined the amount of personal expenditures made by the appellant in cash. He compared the cash expenditures (both business and personal) with the money determined to be available for cash payments during the year and he concluded that because the former exceeded the latter the amount of the excess was unreported income.

This method is, of course, a very crude tool for the determination of unreported sales, but the use of some indirect method appears to have been justified by the appellant’s chaotic records.

The appellant gave evidence at the hearing and conducted his appeal without the benefit of professional assistance. He was, and I say this with no disrespect, an unsophisticated man evidently not wholly familiar with the English language. During the course of the hearing I formed the impression that the appellant made every attempt to be truthful. I have concluded, however, from the manner in which he tried to establish that the assessments were too high, that he had at best only partially grasped the premises underlying the assessments. As a result, his attacks on the assessments were in large part ineffective. It is apparent too that initial assessments and reassessments were made after the respondent’s officials had met many times with the appellant in an attempt to achieve the most accurate results possible in the circumstances.

The appellant’s first complaint was that the respondent overestimated his personal expenses. Save for general allegations indicating that the appellant and his wife lived frugally, there was no evidence adduced which substantiated this point. I cannot find error in this aspect of the assessments.

Next the appellant argued that insufficient inclusion was made by the respondent in the “non-taxable receipt” category for board received by the appellant from his daughter. The evidence established that the appellant received $780 in 1974 and that the assessment proceeded on the basis that $700 was received. Thus, I find that the appellant is entitled to a reduction of $80 in the computation of income for 1974.

Next, still in the “non-taxable receipt” category, the appellant asserted that he received a $270 rebate on the purchase in 1975 of a new car. Cross- examination established that this fact was not raised by the appellant during previous discussions with the respondent’s officials. The appellant’s understanding of the process involved in the respondent’s calculations ap- peared to be limited. Thus, I can quite understand the appellant’s failure to previously raise the matter and I accept the appellant’s evidence. It follows that adjustment in the computation of the appellant’s income for 1975 is required. The sum of $270 must therefore be regarded as a receipt from a source other than the appellant’s business. However, because the receipt was a rebate on part of the cost of the car purchased by the appellant in 1975, and because the car was required in part for the purpose of gaining or producing income and capital cost allowance was claimed, it follows that on assessment the rebate must be taken into account as a reduction of capital cost.

The appellant claimed that he received the sum of $160 when furnishings contained in a rented flat were destroyed by fire. Part of that amount was, he said, the proceeds of fire insurance, and the remainder compensation paid to him by the tenant. The evidence did not establish when the property was destroyed. The appellant stated he did not know. I cannot therefore find that the transaction is relevant to the computation of the appellant’s income for any of the years in issue.

Next, the appellant claimed that the respondent had failed to take into account three further amounts which fell into the “non-taxable receipt” category: (a) the sum of $125 received in 1975 from the sale of a space heater and fan; (b) the sum of $350 received in 1972 from the sale, while on holiday in Yugoslavia, of a camera; and (c) the sums of $100 and $80 received in 1974 and 1975 respectively as interest on money loaned to his brother-in-law. I have commented previously on the quality of the evidence of the appellant. I accept it. As to the second item, it appears from the evidence that the respondent’s calculation of the cost of the appellant’s holiday trip to Yugoslavia was very low. The evidence did not show that the respondent failed to take the $350 into account as an offset in his calculation of the cost of the trip. Thus, the appellant is entitled to no relief. As to the interest which the appellant claimed he received, it appears the appellant was not dealing with his brother-in-law at arm’s length, and thus the amounts do not enter into the computation of exempt income by reason of paragraph 110.1(2)(g) of the Income Tax Act. No entitlement to relief has thus been established with respect to the interest. I can therefore find only that the appellant has shown that he is entitled to a reduction of $125 in the computation of his income for 1975.

The appellant argued that the sum of $144 in family allowances was received by him in each of the years 1972 and 1973 and that this would fall into the “non-taxable receipt” category. It was not shown that this amount was not taken into account by the respondent in assessing and thus the appellant is entitled to no relief.

The appellant claimed next that he was entitled to additional capital cost allowance on a refrigerator and stove. These goods had been initially used by the appellant in his own home and, I gather, were later installed in a flat let by the appellant to tenants. The appellant did not establish the value of the goods, nor did he indicate when he commenced to use them for the purpose of gaining or producing income. Thus, the assessment has not been shown to be wrong in this respect.

Next, the appellant claimed a deduction of $400 for medical expenses for 1974. It appears that on assessment the appellant was allowed the optional standard deduction. At the hearing the appellant produced receipts for payments to dentists in 1974 of $375. To the extent that the total exceeds 3% of the appellant’s income as determined pursuant to the reassessment directed by this decision, the appellant is to be allowed the deduction authorized by paragraph 110(1)(c) of the Act. A charitable donation claimed was not shown to have been made to an organization described in subparagraph 110(1)(a)(i).

The appellant further argued that certain amounts totaling $425 had been included as part of the capital cost of an automobile purchased by him in 1975 and that they should have been allowed as current expenses. It was not established that the proper proportions of the amounts in question had not already been allowed by the respondent in calculating the amount of the automobile expenses incurred by the appellant in carrying on his business. The appellant is therefore entitled to no relief in this regard. I have carefully considered the evidence relating to a number of other areas in which the appellant claimed that the respondent erred. There was no lucid evidence which established the error except in the limited instances set out above. The appeals for the 1974 and 1975 taxation years will therefore be allowed and the assessments referred back to the respondent for reconsideration and reassessment in accordance with these reasons. The appeals for 1972 and 1973 are dismissed.

Appeal allowed in part.