Elphege Lahaie v. Minister of National Revenue, [1979] CTC 2893, 79 DTC 743

Guy Tremblay [TRANSLATION]:—This case was heard at Rouyn, Quebec on June 5, 1979.

1. Point at Issue

The question is whether the Department of National Revenue was correct in imposing on the appellant penalties of $476.62 (1973), $1,069.30 (1974) and $375.35 (1975) pursuant to subsection 163(2) of the new Income Tax Act. During these years the appellant was the operator of a gasoline service station.

2. Burden of Proof

Under subsection 163(3) of the new Act, the respondent has the burden of proof.

In order to have the penalties upheld, he has the burden of showing that the appellant committed gross negligence by improperly filing his own tax return for the years in question.

3. Facts

3.01 In 1971 the appellant, as the result of the death of a close relative who ran a garage in Val d’Or, acquired the said garage, the primary and almost exclusive service of which was the sale of gasoline.

3.02 The said garage is located near Amos, Quebec on the Matagami road.

3.03 For the years 1973, 1974, and 1975 the appellant, according to the financial statements prepared by his accountant, Mr Hubert Gauthier, reported sales, gross profits, operating expenses and net income:

3.04 The testimony of the accountant Gauthier confirmed the indication at the bottom of the operating income statements to the effect that the latter were prepared ‘‘on the basis of information supplied to us without further verification on our part”. Mr Gauthier was not the appellant’s auditor or adviser.

3.05 Mrs Marie Fernande Lahaie, the appellant’s wife, testified that she was a pump attendant and secretary and kept the books. The business was in operation from 7 am to midnight. In the evenings, after a day’s work, she did not have the time or the strength to do the accounts.

3.06 She stated that when they bought the business in 1971, the accounting system was almost non-existent and had not improved since that time. The documents relating to the system were the following: (1) bank cheques and deposit slips; (2) bank statement; (3) daily summary of cash sales; (4) bills for various suppliers.

3.07 In 1973, 1974 and 1975 there was no cash register and thus no cash tape which could be checked.

3.08 For tax return purposes, she gave these documents to the accountant.

3.09 However, she did not give him bills relating to accounts receivable: $2,062 (1973), $4,137 (1974) and $10,100 (1975). These figures were taken from the balance sheet prepared by the respondent’s accountant and admitted by the appellant’s accountant.

3.10 During 1977 the respondent’s auditors, as the result of a net worth audit, established the following additional income:

3.11 These additional amounts of income were admitted by the appellant.

3.12 Evidence was further presented that, during the years in question the appellant purchased bank certificates and reduced mortgages in the following amounts:

4. Act— Case Law—Comments

4.1 Act

The legal provisions concerned in the case at bar are subsections 163(2) and 163(3) of the new Income Tax Act, and they read as follows:

163.(2) Statements or omissions in return.

Every person who knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made, or has participated in, assented to or acquiesced in the making of, a statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

163.(3) Burden of proof in respect of penalties.

Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

4.2 Case Law

The case law cited by the parties is the following:

1. G Le Roux v MNR, [1977] CTC 2538; 77 DTC 393;

2. J P Bigras v MNR, [1977] CTC 256; 77 DTC 195;

3. C Shimizu v MNR, [1972] CTC 2019; 72 DTC 1020;

4. F Renaud v MNR, [1976] CTC 2233; 76 DTC 1179;

5. P E Gagné v MNR, [1978] CTC 2458; 78 DTC 1336;

6. B Roberge v MNR, [1978] CTC 2551; 78 DTC 1401;

7. S Thibault v MNR, [1978] CTC 2876; 78 DTC 1641;

8. M S Mark v MNR, [1978] CTC 2262; 78 DTC 1205;

9. J V Decore v MNR, [1974] CTC 48; 74 DTC 6051;

10. M Lorentz v MNR, [1979] CTC 2044; 79 DTC 83.

4.3 Comments

The respondent’s evidence clearly demonstrated that the failure to report income ($12,166.33 in 1973, $17,043.61 in 1974 and $7,830.27 in 1975) resulted from a weakness in the appellant’s accounting system, such that his accountant in preparing the financial statement had no choice but to overlook income. No cash register for sales existed in the years in question.

The Board assumes that the appellant and his wife were in good faith and that they did not commit fraud within the meaning of the Act.

However, it considers that there was negligence. Was there gross negligence or ordinary negligence? That is the question to be determined.

If unreported income is compared with sales, the percentage of unreported income is not that high:

The unreported income represented more than $200 a week ($30 a day) in 1973, more than $300 a week ($42 a day) in 1974, and more than $120 a week ($13 a day) in 1975.

In the Board’s opinion, there may be slight negligence in overlooking even a substantial single amount; however, the circumstances may explain an oversight, which can easily happen.

A constant series of oversights is less excusable, even if it is due to a deficient accounting system.

The Board further notes that as compared with net reported income the omitted amounts constitute 250% in 1973, 78% in 1974 and 48% in 1975.

It is true that the respondent did not present clear evidence that all the sales made in a year were not reported except for credit sales. (However, this involves application of the cash-receipts accounting system, rather than the accrual system.) Such clear evidence of a failure to report sales would have been much stronger proof in the respondent’s favour. As the unreported income was detected by application of the so-called net worth (or capital difference) auditing method, it is difficult to know exactly and directly where the shortfall is. However, there is no doubt, and this fact is admitted, that significant amounts of income were not reported.

The respondent’s evidence regarding penalties must not be evidence beyond all doubt, merely evidence on a balance of probabilities. In the Board’s opinion this burden was discharged by the respondent, at least with regard to gross negligence.

In accordance with established precedent the appellant’s rebuttal evidence, that of a lack of knowledge, inexperience and an inadequate accounting system, cannot be a valid excuse, especially when the unreported amounts are substantial as in the case at bar.

5. Conclusion

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

Appeal dismissed.