Fernand Renaud v. Minister of National Revenue, [1976] CTC 2233, 76 DTC 1179

Guy Tremblay:—This appeal was heard in Ottawa on February 11, 1976.

1. Summary

This appeal was brought by Mr Fernand Renaud of Farrelton, Quebec on April 1, 1975 against the reassessments made by respondent for income tax payable by appellant for the 1967, 1968, 1969 and 1970 taxation years. The assessments include penalties under subsection 56(2) of the Income Tax Act, RSC 1952, c 148, as amended. The total net income added by respondent to the income originally reported by appellant amounts to $20,243.60. The total tax added is $3,050.51, including $762.64 in penalties. Respondent used the so-called net worth method to establish appellant’s additional income.

2. Burden of Proof

For this appeal to be allowed, appellant must show

(a) that the assessment is erroneous and that respondent is therefore not entitled to claim either taxes or penalties;

(b) if the assessment is correct, he must refute respondent’s evidence, if any, that he committed gross negligence in filing his own tax returns for 1967 to 1970.

For the penalties to be upheld, respondent must show that appellant committed gross negligence in filing his own tax returns for the years in question.

Appellant’s onus of proof as stated in subparagraph (a) above results from the judgment of the Supreme Court of Canada in Johnson V MNR, [1948] CTC 195; 3 DTC 1182. Appellant has this obligation even if the assessment was arrived at by the net worth method (MNR v O D Eldridge, [1964] CTC 545; 64 DTC 5338).

The obligation of respondent and that of appellant as stated in subparagraph (b) above result from subsection 56(2) of the old Act, subsections 163(2) and (3) of the new Act and subsection 62(3) of the Income Tax Application Rules, 1971.

3. Facts

3.1 Between 1967 and 1970 appellant ran a general store (hardware, groceries, gasoline, dry goods, tobacco, and so on) in Farrelton, Quebec.

3.2 Appellant filed his tax returns for the years 1967 to 1970 within the time periods prescribed by the Act, reporting his net income as follows:

3.3 Each year, after the returns were filed, respondent issued assessments on the basis of appellant’s figures.

3.4 On December 15, 1971 respondent issued reassessments for each of the years in question, alleging the following additional, unreported income:

3.5 On March 5, 1972 Mr F Renaud filed a Notice of Objection.

3.6 On January 13,1975 the Minister advised Mr Renaud of his decision to confirm the reassessments made on December 15, 1971.

3.7 The additional income, which was the basis for the reassessments, was established by respondent using the net worth method. Respondent produced two balances, one as of January 1, 1967, the other as of December 31, 1970, showing the following net worth:

3.8 Respondent claims that, in addition to the above increase, $23,712.52 should be added for personal expenses and $4,151.29 for gifts, giving a total income of $48,845.53 for the four years. After subtracting a capital gain of $2,000, there remains $46,845.53 of income within the meaning of the Act.

3.9 By subtracting from this total the reported income of $26,601.93 detailed in paragraph 3.2 above, respondent arrives at a total unreported income of $20,243.60 for the four years, as detailed in paragraph 3.4 above.

3.10 Appellant contends that

(a) some of his wife’s money has been included in his income;

(b) respondent’s figures cannot be accepted because they show a gross profit of 30 to 33% for the business in question, whereas the gross profit of such a business barely exceeds 23%.

4. Points at Issue

It is necessary to determine from the evidence

(1) whether appellant has refuted the figures used by respondent to support the reassessments;

(2) depending on (1) above, whether respondent has proven gross negligence on the part of appellant in not reporting all his income;

(3) depending on (2) above, whether appellant can refute the evidence of gross negligence.

5. Appellant’s Arguments

Appellant, who chose not to appear and testify, produced only one witness, accountant Edgar Levasseur, CA, who had prepared appellant’s tax returns for the years 1967 to 1970. The witness admitted that the figures in the balance sheet of December 31, 1970 were correct, except for two bank accounts. He also challenged the unreported income of $20,243.60.

5.1 The Bank Accounts: According to Mr Levasseur, two bank accounts appearing in the balance sheet of December 31, 1970 and totalling $1,071.38 belonged to appellant’s wife. These were Toronto- Dominion Bank Account No 5804 in the amount of $615.63 and Guaranty Trust Account No 52955 in the amount of $455.75. According to Mr Levasseur, these accounts are in Mrs Renaud’s name and the money concerned comes from accumulated family allowances and gifts. Under cross-examination, however, Mr Levasseur admitted having no personal knowledge of these facts. He had learned them from the appellant. Mr Levasseur further testified that the youngest child in the family was 19 years old in 1967, which casts serious doubt on the amount of family allowances that could have accumulated in the accounts in question by December 31, 1970.

With regard to these accounts, appellant did not fulfil the requirements of a preponderance of proof by establishing that respondent’s figures were incorrect. Furthermore, the witness for respondent, investigator Jean-Marc Charron, showed to the Board’s satisfaction that the Guaranty Trust account had been opened on July 6, 1970 by Mr Renaud. The Toronto-Dominion account was opened in 1967. Between 1967 and 1970 there were two pages of credits and debits, showing that the account had been used regularly. This account was also opened by Mr Renaud.

5.2 The Allegedly Unreported Income of $20,243.60:

(a) According to the accountant Levasseur, this figure can easily be explained on general principles, by an increase in assets, by a decrease in liabilities or by withdrawals or personal expenditures. Aside from this general statement, no direct evidence was presented to contradict the figure of $20,243.60.

(b) The witness for appellant produced a series of percentages related both to the revised net profits for the years in question and to the average gross profits from the various articles sold by appellant (gasoline 5%, hardware 19%, dry goods 30%, milk 5%, and so on), and concluded from this that the average gross profit for a business of this type is between 20 and 25%. Mr Levasseur contended that, according to the figures supplied by respondent, the gross profit was between 30 and 33%, which is impossible. The witness concluded that respondent’s figures were absurd, without giving any further direct evidence.

The witness’s accounting conclusions cannot be accepted, since the average percentage of profit must take into account the sales volume for each article and not just the percentage of profit for each type of article sold. The evidence does not show the sales volume for each article.

Mr Levasseur admitted in his testimony that he had filed the tax returns for the years in question on the basis of the entries in appellant’s books, without doing any further auditing.

The Board concludes that appellant has not discharged the burden of proof regarding the allegedly unreported income and that it must accordingly find respondent’s assessments well-founded.

The testimony of Mr Jean-Marc Charron, an: auditor for respondent, confirms this conclusion, and provides evidence to support the exaction of the penalty provided in subsection 56(2) of the old Act (and subsections 163(2) and (3) of the new Act).

6. Gross Negligence and/or Knowledge of the Omission

6.1 Burden and Degree of Proof: With respect to the penalty of 25% provided for in subsection 56(2) of the old Act and subsection 163(2) of the new Act (amounting in this case to $762.64), respondent has “the burden of establishing the facts justifying the assessment of the penalty” (subsection 163(3) of the new Act and subsection 62(3) ITAR).

Respondent thus has the burden of proving that appellant, in filing his tax returns for the years 1967 to 1970, “knowingly, or under circumstances amounting to gross negligence” (subsec 56(2) of the old Act) made omissions resulting in a reduction in the tax payable. The wording of the legislation regarding negligence was amended, so that subsection 163(2) of the new Act now speaks of “circumstances amounting to gross negligence”. However, this new wording in no way changes the substance. In any event, this case must be decided on the earlier wording because of the years in question.

The burden of proof is itself rather heavy. Respondent cannot content himself with merely proving that appellant may have known omission or that there was ordinary negligence. Actual knowledge of the omission of income at the time the returns were filed must be proven. Similarly, it must be proven that negligence beyond ordinary, everyday negligence was committed.

I agree with the opinion expressed by Mr K Flanigan in Morgan et al v MNR, [1973] CTC 2192; 73 DTC 146, and do not believe that respondent’s evidence need be beyond all reasonable doubt. A preponderance of evidence is sufficient. The same is true for the evidence brought by appellant to rebut respondent’s allegations. A preponderance of evidence that there has not been gross negligence, or that there has been only ordinary negligence, is sufficient to rebut the preponderance of evidence previously established by respondent.

6.2 Gross Negligence: In cases of this sort, the chief problem lies in drawing the line between ordinary negligence and gross negligence. The solution to this problem is not always simple. Each case comes down to a question of fact.

In order to determine the reality of the situation and draw the proper conclusions, it is necessary to answer the following questions:

(a) According to respondent’s evidence, were the errors and/or omissions the result of negligence?

(b) If so, was it a case of gross negligence?

The fact that appellant’s account books were not properly kept, as was clearly shown by respondent’s auditor, in itself constitutes negligence. Purchases, like sales, could not be verified. Sales were indicated by twelve figures on a sheet, each figure representing the sales for one month, the whole being the sales for one year. There were no account books or documents detailing these sales.

On the other hand, is respondent’s evidence strong enough to prove gross negligence?

Here again the Board must answer in the affirmative, basing itself, inter alia, on the following facts:

(a) the complete absence of cash register tapes (such documents are essential in a business of this kind);

(b) the substantial size of the unreported income: this unreported income, of $20,243.60, amounts to 75% of the previously reported $26,601.93; appellant could not possibly have failed to notice that these amounts had been omitted.

Appellant brought no evidence to refute this preponderance of evidence of gross negligence.

6.3 Knowledge of the Omission: Respondent’s witness testified that appellant had admitted to him that the unreported income came from unreported gross sales. Apparently this admission was made after Mr Charron had caluclated the amount of the alleged unreported income.

In view of appellant’s poor bookkeeping and the size of the amount unreported, it would be naïve of the Board not to believe that this admission was also an admission that appellant knew about the unreported income at the time the returns were filed. It would have been preferable to hear appellant himself regarding this admission, but he chose not to be present at the hearing of his own case. The Board, moreover, has no reason to doubt the credibility of the witness Charron.

7. Appeal Dismissed

In view of the evidence presented, and in light of the Act and previous decisions, the Board must dismiss the appeal and uphold the reassessments made by respondent on December 15, 1971, including the penalties.

Appeal dismissed.