Orest Chorney v. Minister of National Revenue, [1977] CTC 2245, 77 DTC 168

The Chairman:—The appeals of Orest Chorney from income tax assessments in respect of the 1971, 1972 and 1973 taxation years were heard in Calgary on May 9, 1977.

The Issue

The issue in these appeals stems from arbitrary assessments made by the respondent of the taxpayer’s 1971, 1972 and 1973 tax returns because there existed in each of those years substantial bank deposits which exceeded the appellant’s earnings from his service station business and from his cattle business.

As a result of net worth assessments made of the appellant's affairs for 1971, 1972 and 1973 (see Schedules A, B and C attached to the Notice of Appeal), it was found that the appellant, in filing his returns for the pertinent years, had understated his taxable income by $17,468.23 in respect of the 1971 taxation year; by $15,191.88 in respect of the 1972 taxation year (which included unreported cattle sales in the amount of $8,300); and by $10,464.26 in respect of the 1973 taxation year; which amounts, on reassessment, were added to the appellant’s taxable income for those years.

The respondent also contends that, in failing to report the said incomes, the appellant did so under circumstances which amounted to gross negligence whereby the tax payable by the appellant was less than would otherwise be payable, and penalties for each of the years in question were imposed on the appellant pursuant to subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The appellant contends that the unexplained net worth discrepancies in the respondent’s net worth assessments were realized as gains made by the appellant from gambling in pursuit of a hobby, recreation or form of amusement, and not as a vocation, calling or business, or as part of an implematic scheme of betting with a view to making income, and concludes that such gains are not taxable.

Finding of Facts

It is clear from the evidence that the appellant and his partner Kenneth C Hodgson have owned and operated a service station in Calgary for some ten years. The service station was open from 7:00 am to 9:00 pm, during which period at least one of the partners was in attendance at the station. Although the day-to-day bookkeeping was done principally by Mr Hodgson, the appellant was usually at the service station on a full-time basis. In his testimony, Mr Wyllie, a chartered accountant who audited the books of the service station and prepared the appellant’s tax returns from information given to him by the appellant and by Mr Hodgson, stated that the business of the service station in question was more than usually successful.

The appellant admitted that in 1971 and 1972 he also had interest in a cattle feeding operation, but because of rising costs he sold all his cattle in 1972.

On the basis of the evidence which was corroborated by Mr Wyllie and by the appellant’s wife who was, for most of the past 23 years, employed as a bank cashier in Calgary, I am satisfied that the appellant had no other business from which income might be derived other than the service station and the cattle business, which as I understand it, ceased in 1972.

The principal and first point to be determined in this appeal, as I see it, is whether the amount of some $35,000, alleged to have been derived from gambling in the three-year period under review, is in the circumstances of this appeal, taxable.

The amount of the gambling gains in the three years, although somewhat surprising, cannot, of course, be used as a criterion in determining the taxability of the appellant’s gambling receipts, and the courts have, in my view, clearly determined which gambling receipts are taxable and which are not.

In the instant appeal there is corroborated evidence that the appellant’s gambling activities were, to a great extent, betting on horses, although he also bet on other sports to a lesser extent. It was established that there was horseracing in Calgary, either thoroughbreds or trotters, for ten months out of the year. The appellant claimed that he went to the races three or four times a week, most of the time with his wife who, in giving evidence, corroborated the appellant’s statement, as did the appellant’s partner Mr Hodgson. The evidence is that the appellant usually bet between $200 and $500 (but did go as high as $1,000), and that out of a nine race program, he would bet only on two or three races, and on horses whose performance he studied in the daily horseracing digest. When the appellant did not attend the races himself, Mr Hodgson stated that he was given amounts of money by the appellant to place on the horses. The appellant also alleges that he placed bets through bookmakers for races in Toronto and Vancouver.

Counsel for the appellant also called as a witness Mr Nathan Gross, a race horse trainer who had known the appellant for some ten years as a heavy better. Mr Archie MacKenzie and Mrs Dianna Stadnyk, both of whom were ticket sellers at the race track, also knew the appellant as one of the few heavy betters at the track and recalled that the appellant had, on one occasion, won over $7,000 on a race.

On the basis of the uncontradicted evidence before the Board, I am satisfied that the appellant, who was engaged in a service station business with his partner on a full-time basis from which he received a good and steady income, bet on horses for the thrill and pleasure he derived from such activities, and which was, for him, a form of recreation. There is no evidence that the appellant was in any way engaged in the business of gambling on horses or that he had any special scheme of betting which might assure him a steady income without the risk of losses. In my opinion, the appellant had successfully met the onus of establishing that his gambling was not a business.

Decision on Principal Issue

The facts in the instant appeal are applicable a fortiori to the principles set out in the decision of the Exchequer Court of Canada in MNR v Harry Edgar Morden, [1961] CTC 484; 61 DTC 1266, cited by counsel for the appellant. The courts have consistently held that the receipts or gain derived from gambling as a hobby, or as a form of recreation, are not taxable.

I conclude therefore, that the gains made by the appellant from gambling on horses in the taxation years 1971, 1972 and 1973 are not taxable.

Decision on Secondary Issues

The amount of $15,191.88, added to the appellant’s 1972 income, included an amount of $8,300 of unreported cattle sales in that year. Counsel for the appellant, at the hearing, admitted that the sale had taken place; that the appellant’s auditor had not been advised of that sale; and, that the amount of $8,300 had been properly included in the appellant’s 1972 income.

On cross-examination of Mr Wyllie, the appellant’s chartered accountant, counsel for the respondent referred to an amount of $2,256.44 which, as I understand it, had, in 1973, been debited to sales of the partnership and credited to cash because of a year-end cash shortage. Mr Wyllie, in his evidence, stated that he had assumed that the sales had been overstated and that the said adjustments in the partnership book were necessary. To questions asked by counsel for the respondent, Mr Wyllie stated that such adjustments were not frequently used, and admitted that the cash shortage could be the result of drawings by the partners. Mr Wyllie further stated that he could not point to any overstatement of sales and did not really know how the cash shortage came about.

The Minister included in the appellant’s net worth assessment of 1973 an amount of $1,128.22 as Mr Chorney’s share of income. The onus of proving that the amount of $1,128.22 was not income to the appellant in 1973 rests clearly on the appellant and, in my opinion, he did not satisfy that onus. I conclude, therefore, that the amount of $1,128.22 was properly included in the appellant’s 1973 income.

Penalties

In reassessing the appellant’s 1971 returns the Minister imposed a federal penalty of $1,177.52 pursuant to subsection 56(2) of the Income Tax Act, RSC 1952, c 148, as amended, and a Province of Alberta penalty of $526.15; in 1972 a federal penalty of $1,340.96 was imposed pursuant to subsection 163(2) of the new Income Tax Act and a provincial penalty of $497.67 was imposed; and a federal penalty of $760.41 and a provincial penalty of $288.16 were imposed for the 1973 taxation year.

Having come to the conclusion that the unreported income in 1971 was not from a business, but from gambling as a hobby, and that the appellant did not Knowingly, or under circumstances amounting to gross negligence, omit to report income, the penalty so imposed is not warranted.

In 1972, other than the gains made from gambling as a hobby, the appellant omitted to report cattle sales in the amount of $8,300. The appellant claims that he does not read the returns prepared for him by his accountant; he merely signs them. That, of course, is the appellant’s very questionable privilege since it is the appellant’s responsibility, and not the accountant’s, to give accurate information in his tax returns. In this instance, Mr Wyllie stated under oath that the appellant did not mention the $8,300 cattle sale, but was given by the appellant cattle sales in the amount of some $6,700, which he reported. I simply cannot believe that a person in the circumstances of the appellant, having realized some $15,000 from the sale of cattle in one year, could have forgotten to inform his accountant of over half of the amount he actually received from the sales. If it is not gross negligence for the appellant not to read his tax returns before signing them, it is, in my opinion, gross negligence for him not to provide to his accountant and to report in his returns as substantial an amount of income.

I conclude, therefore, that a penalty on the basis of the appellant’s unreported income in the amount of $8,300 in the 1972 taxation year should be imposed pursuant to subsection 163(2) of the new Act.

In the 1973 taxation year, on the basis of the evidence adduced, I am not satisfied that the method of dealing with the cash shortage of $2,256.44 in the books of the partnership, and the omission of $1,128.22 in the appellant’s income statement for 1973, can be considered as coming within the meaning and intent of subsection 163(2) of the new Income Tax Act and, in my opinion, the penalties imposed for the 1973 taxation year in that respect are not warranted.

For these reasons the appeal in respect of the 1971 taxation year is allowed and the appeals in respect of the 1972 and 1973 taxation years ‘are allowed in part and the matter referred back to the respondent for reconsideration and reassessment so as to take into account that the discrepancies in the appellant’s net worth assessments are due principally to non-taxable gains from gambling as a hobby in each of the years 1971, 1972 and 1973. However, the unreported cattle sales in the amount of $8,300 were properly included in the appellant’s 1972 income, and the amount of $1,128.22, not having been proven as being other than income, was properly included in the appellant’s 1973 income. The penalties imposed in the 1971 and 1973 taxation years are, in the circumstances, not justified. However, the penalties for not reporting taxable income in the amount of $8,300 should be calculated on that basis and imposed for the appellant’s 1972 taxation year.

Appeal allowed in part.