Carl G Wilson, Murray Wilson v. Minister of National Revenue, [1976] CTC 2245, 76 DTC 1187

Delmer E Taylor:—These are appeals from reassessments of the taxpayers’ income tax returns for the years 1966 through 1971. It should be noted that an appeal had also been filed by the appellants against a reassessment for the year 1965, but at the hearing counsel for the respondent withdrew the Minister’s reassessment for 1965, and that year is uncontested by either party. The reassessments also included penalties in that the Department of National Revenue held the appellants to have been grossly negligent with regard to their responsibilities under the Income Tax Act. The appellants claim that the reassessments should have been done on a net worth basis, rather than having been done on the basis of factual evidence. The respondent relies, inter alia, upon sections 3 and 4, paragraph 6(1 )(b) and subsection 56(2) of the Income Tax Act, RSC 1952, c 148 as amended.

The appellants are brothers and, during the taxation years in question, carried on in partnership a farming operation in the Province of Alberta. In carrying out an audit, the assessors of the Department of National Revenue concluded that the appellants had failed to include in taxable income certain amounts of revenue, and had shown as deductible expenses certain other amounts greater than could be substantiated from the records. The combined result was that the following amounts were added to taxable income for the years under review, divided equally between the two appellants:

The appellants were represented by Mr D J Grier, BA, a public accountant. Mr James Murray Wilson, one of the appellants, was called as a witness by Mr Grier, and both appeals were heard on common evidence.

In his opening statement the agent for the appellants stated the position of the taxpayers and referred to a document entitled “Wilson Brothers, Calculation of Estimated Net Income for the period January 1, 1965 to December 31, 1971”. Mr Grier also made note of an earlier net worth assessment on the appellants, performed by the Department of National Revenue for a period ending December 31, 1964 and contended that the new document he wished to submit merely maintained this procedure commencing with the opening balance sheet January 1, 1965 as per the records of the Department and followed the assets and liabilities up to December 31, 1971, producing a more accurate and substantial record of the appellants’ income. The unreported income to be added for the years under review, according to Mr Grier, would be $37,268.36, rather than the much greater amount determined by the departmental audit. Although there was no evidence which could be presented through the witness regarding Mr Grier’s document, since the point he wished to make with it was in his opinion vital to the case of the appellants, the Board agreed the document could be admitted as an exhibit, thereby allowing both the Board and counsel for the respondent to examine it in detail, and to hear comments regarding it. The basic point which Mr Grier wished to make was that there were certain amounts totalling $50,300 on the December 31, 1964 balance sheet for the appellants prepared by the Department which he believed were in error, and when followed through to December 31, 1971 would indicate that the appellants had been charged tax in that earlier assessment (up to December 31, 1964) which was excessive, and should now be allowed a reverse. benefit. It was pointed out by the Board that this was not a matter for this hearing, but in an effort to bring a resolution to the question, counsel for the respondent requested permission to call as a witness the assessor who had performed the net worth assessment up to December 31, 1964. Mr David Cook, an assessor with the Department of National Revenue, then gave evidence related to the specific amounts in question, and completely satisfied the Board that the understanding of this amount as portrayed b^Mr Grier was not accurate, and to follow his reasoning to its logical conclusion would probably not be beneficial to the appellants. The Board determined that the matter at issue would not be dealt with on a net worth assessment basis but the hearing would be continued dealing with the factual evidence, in contradiction of or in support of the reassessments prepared by the Department from the physical accounting records and documents available.

Mr Grier agreed that a net worth assessment is usually only a last desperate attempt to provide some basis for assessment, and in this case there were books, records, and other documents which, however inadequate, would be the usual source of information required. It was also noted by the Board that it might not be considered the normal responsibility of the Department to do net worth assessments on a taxpayer more than once, and then only under extreme circumstances. The responsibility rested with the taxpayer to provide accurate and adequate records, not with the Department of National Revenue. Mr Cook also gave evidence related to the basis of determination of several of the amounts in the current reassessments.

The balance of the evidence then presented by Mr James Murray Wilson, and his answers to cross-examination, did clarify certain points. In particular, additional vouchers and receipts and explanations regarding income were presented. These were accepted as valid by counsel for the respondent, which resulted in the following:

(1) Additional taxable income for the partnership as set forth in the reassessment for the 1971 taxation year would be reduced by $1,391.58, consisting of a reduction of income of $972.80 and an increase of $418.78 as expenses.

(2) Additional taxable income for the partnership as set forth in the reassessment for the 1966 taxation year would be reduced by $16.05.

This is not a matter in which the information provided by the appellants or their agent has been of great assistance to the Board in determining the merits of the case. There is no question of the laxity of the appellants in matters related to their record-keeping and the preparation and filing of their income tax returns. Neither is there any question that a real effort has been made by the appellants, admittedly inadequate, to keep records, receipts and books in some condition which did lend some assistance to the Department of National Revenue in its audit. Nevertheless, in full recognition of the difficult task the Department has been called upon to perform in this matter, there are certain aspects of the reassessments which warrant further review. Clearly the fact that a few receipts were found by the witness, Mr James Murray Wilson, dealing with two years as widely separated as 1966 and 1971, and when examined proved to be acceptable to the Department lends some credence to the strong view expressed by Mr Wilson that only those expense items for which there were available definite provable receipts were allowed by the Department, whether or not other items for which receipts were not available were recorded in the books of the taxpayers. Further, the efforts at identifying the nature of the estimated portion of personal expenses charged against each appellant leaves some room for further consideration. The impact of these two major items on the reassess- ments and consequently on the adidtional income tax payable is a very substantial portion of the amount involved, as can be seen by the following:

Therefore, $76,198.46 of the $117,741.80 upon which additional income tax has been assessed arises from these two amounts. As stated earlier the Board rejected the appellants’ request that the matter be dealt with on a net worth assessment basis. This had not been the approach used by the Department of National Revenue, and the Board is bound to examine the evidence presented related to the calculations of the Department. However, it does seem somewhat unreasonable that in the preparation of the reassessments, having decided not to do a net worth assessment and use the available physical data, the bookkeeping records of the appellants, again admittedly inadequate, have been virtually ignored. The sworn statements of the witness, Mr Wilson, that he did purchase much of his supplies and pay for many expenses in cash when these were relatively small amounts, seems eminently reasonable. Some points were also made by the witness regarding certain items of income which he felt were improperly added to his reported income. His further statements that the drawings of his brother and himself were very modest also appear to be acceptable. The explanations provided by the witness with regard to why certain amounts of income were not recorded in his books again appear to the Board to be factual.

The explanation that the appellants did spend some funds in cash and that these funds could have averaged $50 to $100 per week appears to me to be supported. For many of these amounts receipts were either not requested, or they were lost. The alternative explanation that the taxpayers purposely recorded in their own bookkeeping records completely fictitious amounts totalling some $45,448.46 over a 6-year period does not appear to me to be reasonable. The estimated amounts which have been charged by the Department of National Revenue for drawings of the appellants probably should not be regarded as excessive, but they would seem to provide very adequately for the personal requirements of the taxpayers. I cannot reach the conclusion that the appellants have been grossly negligent, but to whatever degree they have been negligent, it might be argued on the basis of the income tax reassessments made against them that this could be very costly to them.

Based on the evidence available and the testimony given, the Board recommends that an amount of $2,500 be allowed to the partnership during each of the taxation years 1966 through 1971, for additional farm expenses, to be considered as having been paid in cash by the appellants, for which receipts are unavailable, and that the assessments be referred back to the Minister for reconsideration and reassessment.

For the years 1971 and 1966, the $2,500 amounts are to be inclusive of the expense amounts referred to earlier of $418.78 and $16.05 respectively. The taxable income of the partnership for the year 1971 will remain further reduced by the income amount of $972.80 earlier referred to as deleted during the course of the hearing. The additional taxable income therefore to be added to the reported partnership income for the years under review, and to be divided equally between the appellants, will be as follows:

Further, the portion of the appeals dealing with the penalties imposed is allowed, and the reassessments recommended are not to include any such penalties.

Appeals allowed in part.