Jacques-André Roy v. Minister of National Revenue, [1979] CTC 2977, 79 DTC 778

Delmer E Taylor [TRANSLATION]:—This appeal, which was heard in Montreal, Quebec on February 8, 1979, was brought as a result of assessments in which the Minister of National Revenue added certain amounts to the income reported by the appellant for the 1972, 1973 and 1974 taxation years. In addition the Minister imposed penalties. In his reply to the notice of appeal the respondent relied, inter alia, on sections 3, 9, paragraph 78(1)(a) and subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

The appellant operated a scrap iron business in the vicinity of Montreal. He reported no income from hisoperations for 1972, but for 1973 and 1974 he reported net amounts of $3,317.02 and $3,687.27 respectively. In 1972 the major part of his income came from unemployment insurance benefits.

Arguments

In his notice of appeal the appellant stated the following:

1972— In the audit by Mr Yves Laforest I found that the total of the revised amounts for the sale of scrap iron, $24,533.65, was listed under the names of Roy Batteries and J Roy. I hereby state that I have never operated as Roy Batteries, always operating under my own name of J Roy. Furthermore, the receipts amount comes in large part from W I Sandys Inc, 10370 Armand Lavergne. During the year I sold $1,000 at most to this company. At the same time I sold about $4,000 to Consumers Metal Corp, 4000 St Patrick. As it was the first year I operated this business, I did not report this total receipt ($5,000), as I felt certain I had made no profit for the short operating period from October to December 1972. I am prepared to accept an assessment on $5,000 income less 60% expenses, that is, net income of $2,000.

1973— As for 1972, the amount of additional assessed income of $12,746.51 comes from the same source, that is, W I Sandys Inc. Once again, I hereby state that I had no dealing with this company. My only customer was Consumers Metal Corporation, and the income from that operation was reported in total, namely $28,353.69.

1974— My only customer was Consumers Metal Corp (still the same), making a gross income of $61,529.73. I object to the new additional amount of $16,192.14.

In summary, for the foregoing reasons, I ask that the assessments be increased and returned to their original state, apart from 1972, in which I accept additional income of $2,000.

If the Department is convinced of the merits of its claim, I would like to see invoices or copies of invoices from W I Sandys Inc on which my signature appears, indicating that I received the sums of money mentioned.

I am prepared to swear to any statement to the effect that I did not receive in any manner the additional amounts for which I am being assessed.

In his reply to the notice of appeal, the respondent maintained the following:

the appellant operated a scrap iron business from 1972 onwards;

in his 1972 taxation year, the appellant realized unreported sales amounting to $24,533.65;

the respondent allowed 60% of the amount of these sales as deductible expenses, namely $14,720.19;

in his 1973 taxation year, the appellant realized unreported sales amounting to $12,757.51;

the respondent allowed 60% of the amount of these sales as deductible expenses, namely $7,654.51;

in his 1974 taxation year, the appellant realized unreported sales amounting to $16,192.14;

the respondent allowed 60% of the amount of these sales as deductible expenses, namely $9,715.28;

the respondent accordingly duly added to the appellant’s income the following amounts:

1972	1973	1974
$9,813.46	$5,103	$6,476.86

the appellant wilfully or in circumstances amounting to gross negligence omitted to report the said income.

Depositions

The following persons testified for the respondent regarding certain information relating to purchases in the books of W I Sandys Inc (hereinafter referred to as “Sandys”):

Mr Raymond Tremlay—auditor, Revenue Canada;

Mr Ernest Lutterman—secretary-treasurer of “Sandys”;

Mr Michel Nichols—special investigator, Revenue Canada;

Mrs Juliette Lessard—employee in the Sandys office.

Audits of the books of “Sandys” by the Department of National Revenue established that there were purchase receipts in the names of “Roy Battery”, “Roy”, “Roy Scrap”, “J Roy”, “J A Roy” and so on from 1972 onwards, and that these were much higher than what the appellant stated that he had sold to “Sandys”. Mr Lutterman and Miss Lessard stated that they knew the appellant very well and that the latter sometimes came to their place of business more than once a day. He followed the same routine as the other suppliers, namely, that he was given cash from the till kept by Miss Lassard, on presentation of a slip indicating the weight of material supplied, for scrap iron as well as for batteries. It was not the custom of “Sandys” to require receipts or signatures for payments made in cash.

The appellant, on the other hand, stated that he was not in the “Sandys” office as often during the day or during a month as the invoices seemed to indicate. He could make only one trip a day with the old truck which he had, sometimes going to “Sandys”, and sometimes to Consumers Metal Corporation, which was located at the other end of town. Moreover, he did not usually sell scrap iron to “Sandys”, as he ordinarily sold them batteries. His Statement was: “The fellow on the scale, I don’t know what his name is . .. he did not give me any invoice”. The appellant always operated as “J Roy”, and never under any other name.

Pleading

The following extracts from the pleading serve to clarify the point at issue:

By counsel for the appellant

All these invoices prove nothing, your Lordship; everything that is stated there is in documents originating with employees of Sandys, namely Mr Lutterman or Mrs Lessard, and it states below Mr Roy sold to us for so much—so, it states below “Mr Roy sold to us for so much”, and then it states “paid”, or there is a sign that you can see there, signed most of the time by Mrs Lessard.

On none of the invoices there does the signature of Mr Roy appear, indicating that he received the money or that he sold this material.

Cash was always paid, so that there was no paper which can show us that Mr Roy really sold these items, to the Sandys company, or for these amounts.

It seems to me that if someone had wanted to show that Mr Roy in fact received income of $60,000 and over for three years—perhaps not income but sales of $60,00 and over—much more detailed evidence than that could have been presented.

What it comes down to is a question of credibility: who should you believe?

By counsel for the respondent

If I have correctly understood the argument of my learned colleague, the matter should be approached in two ways, and I am quite in agreement with him on this point, except that I think his approach is wrong.

Now, Mr Chairman, in a tax matter, it is now well-established law that the appellant has the burden of showing that the assessment which he disputes is incorrect, and to do this he must present or justify before you, must bring before the Board sufficient facts to rebut the facts on which the Minister relied, and what these facts are.

Finally, for the appellant

This will not be a long reply . . .

I just want to say that it is quite clear that, under the Income Tax Act, it is for us to shift the burden of proof, but there must nonetheless be something to shift,

I say that there is nothing to be shifted becaue there is absolutely nothing to justify the additional income which Mr Roy is alleged to have made.

So, we may have been prepared to shift something, but there was nothing to be shifted.

Conclusions

When a penalty is added to an income tax assessment, the justification for such a penalty may be closely related to the reasons for the income tax assessment itself. In the case at bar, however, the imposition of the penalty and the income tax assessment are not only totally in correlation, they are based on the same contention by the Minister: that the appellant did not report certain amounts of his income. The Minister submitted that the following two points in support of his contention: the existence in the ‘‘San- dys” files of invoices for purchases paid for in cash and claimed in expenses; statements by two of the “Sandys” employees (Lutterman and Lessard) to the effect that Mr Roy had received money. The appellant’s testimony contradicts that of Lutterman and Lessard, and I cannot find valid grounds for accepting the testimony and rejecting that of Roy. He denied receiving these amounts and in my opinion, in the present circumstances it is then for the Minister to shift the burden of proof, since the latter cannot justify the penalty without justifying the tax. Thus, the income tax assessment by the Minister is based on invoices from “Sandys”, and in my view the company’s decision not to require receipts or signatures for payments in cash should not operate to the detriment of the alleged recipient. One taxpayer cannot be required to disapprove the documents of another taxpayer in order to release himself from the burden of proof in his own notice of appeal.

The offer made by the appellant in his notice of appeal that he was willing to be assessed on an additional amount of $2,000 for 1972 was not accepted by the Department of National Revenue. However, in my opinion his financial statements for the other taxation years support his claim that he made no profit in 1972.

Decision

The appeal is allowed for the three years on appeal, with regard to the in- come tax assessments as well as to the imposition of penalties. The matter is referred back to the respondent for reassessment accordingly.

Appeal allowed.