Domenic Cirella v. Minister of National Revenue, [1976] CTC 2292, 76 DTC 1211

Delmer E Taylor:—This is an appeal from income tax reassessments for the years 1972 and 1973. The matter at issue for the year 1972 is the income tax on an amount of $17,935.54 added by the respondent to the reported taxable income of the appellant. This consists of one amount of $3,435.54 of unreported sales, and a second amount of $14,500 from insurance proceeds re loss of income. For the year 1973 the respondent added an amount of $11,105.58 to the income of the appellant representing largely unreported sales. Penalties have also been assesed by the Department of National Revenue with respect to the income tax calculated as payable on the amounts of $3,435.54 for 1972 and $11,105.58 for 1973. The appellant contended in the Notice of Appeal that with respect to the additional taxable amounts for the year 1973, $4,000 of the $11,105.58 came to him from his parents as a gift; that for the year 1972 the $14,500 referred to as insurance proceeds re loss of income does not constitute income under any provisions of the Income Tax Act; and that the “unreported income” of $3,435.54 and $11,105.58 added by the respondent to the appellant’s reported income for the years 1972 and 1973 respectively were not omitted knowingly by the appellant or under circumstances amounting to gross negligence. The respondent relies, inter alia, upon sections 3 and 9 and subsection 163(2) of the Income Tax Act, RSC 1952, c 148 as amended by SC 1970-71-72, c 63.

The appellant is 47 years old, and arrived in Canada in 1960. He is a skilled welder, and is currently, and was during the years in question, carrying on a business under the name of Hamilton Welding and Railing, in Hamilton, Ontario.

During the hearing evidence for the appellant was provided to the Board by the appellant himself; and for the respondent by Mr C Vander Beek, an assessor with the Department of National Revenue. The appellant presented and identified a judgment of the Supreme Court of Ontario by Lacourcière, J, dated April 25, 1972, providing details of the award to him for damages suffered as a result of a motor vehicle accident on November 19, 1968. In addition, he gave verbal evidence to support his claim that he had received certain amounts as gifts from his parents. The evidence provided by Mr Vander Beek consisted of summary sheets related to the reassessments, and explanations regarding the amounts involved.

Dealing first with the matter of the unreported income, the evidence of the appellant was that he deposited all his available cash—both business and personal (received from parents)—in one bank account during the year 1972; and for the year 1973 he maintained two bank accounts, one business and the other personal, but all his funds from the business went into his business bank account. He stated that he was not experienced in matters of bookkeeping and left his income tax matters up to his accountant, with whom he was not able to communicate too well, due to his own difficulty in speaking English, and the accountant’s inability to speak Italian. He estimated that during each of the years 1972 and 1973 his parents had given him about $2,000. No books, records, bank accounts or any other documents were filed with the Board in support of his case. Under cross-examination the appellant stated that he did not believe his parents expected to be repaid, nor did he expect to repay the amounts allegedly given to him.

The witness for the respondent gave a full report on his examination of the taxpayer’s records. For the year 1972 the original source documents, the sales invoices were examined, and compared with the bank deposits from which the appellant’s sales records were prepared. These sales invoices appeared to Mr Vander Beek to be adequate and normal, and there was provided to him no explanation for the shortage of deposits in the amount of $3,435.54, which resulted in an apparent understatement of the appellant’s reported sales. He also stated that, in contrast to evidence by the appellant, there were two bank accounts in 1972, and that the total originally reported as sales, was the total of bank deposits recorded in both of these bank accounts. For the year 1973 the procedure changed somewhat, in that although the two bank accounts continued, the amount reported as saies represented only ihe deposits in the so-called business bank account. For 1973 the assessor was not provided with the sales records (similar to those examined in 1972) and so took a different route to establishing the total income. This consisted of examining the expense vouchers paid by cash, not by cheque (and therefore having no relation to either bank account); adding up deposits made in the savings bank account for which no explanation was provided; and determining the amounts paid by cash for outside wages and subcontractors, which although not supported by invoices or vouchers were regarded as acceptable by the Department. The total of these three categories of expenses was $11,105.58 and was added to the reported income ‘which could be established from the business bank account. The evidence, both written and oral, provided by the assessor was satisfactory to the Board, and not minimized in any way under cross- examination by counsel for the appellant. The major points which the appellant or his counsel brought forward would seem to be his lack of knowledge of bookkeeping, and. the income tax laws; his difficulty in communication; that he did receive funds as gifts from his parents and deposited them in the bank accounts; and that whatever had transpired to indicate the -under-reporting of sales income had happened not as a result of any intent by the appellant to misrepresent the situation as the appellant at all times had shown good faith. The Board is not impressed by these protestations and finds no evidence on which to disturb the reassessments made by the Minister with respect to the amounts added to reported income, nor to take issue with the Minister regarding the imposition of penalties thereon. The appellant appears to have availed himself properly with legal and professional advice with regard to the settlement of the motor vehicle damage claim, and the Board cannot accept that he should have regarded his responsibilities regarding record-keeping and income tax liability any less seriously.

The other matter, dealing with the. value of the award of $14,500 as a result of the motor vehicle accident is one which this Board approaches with all due temerity. As pointed out and most capably argued by both counsel for the appellant and counsel for the respondent, the general subject of damage awards has been rather exhaustively examined in available jurisprudence, but the particular point at issue here is one which may not fit precisely within any available parameters. In the light of the importance of the matter to both parties, the only document related to the award, made available to this Board, and therefore upon which a decision must be based, is reproduced totally:

SCO

	April 25, 1972
DOMENICO CIRELLA,	J L Agro, QC for the
Plaintiff;	Plaintiff.
	Plaintiff.
—and—
	- GA Swaye, for the
GABRIEL KRUL, JOHN
	Defendants Krul and	n.
WILLIAM OWEN and VICTOR
DROTAR,	P G Philp, QC for the
DROTAR,
Defendants.	Defendant Victor Drotar.
Defendants.
LACOURCIERE, J:

The plaintiff, Domenico Cirella, is a 43 year old Italian immigrant who arrived in Canada in 1960. He is a skilled tradesman, a welder. He suffered injuries in a motor vehicle accident on 19th November, 1968: liability has been admitted on behalf of the defendant Victor Drotar, and all parties consented to proceed without a jury for the assessment of damages.

His personal injuries are fully set out in the hospital and medical records filed, and for the purpose of this assessment need only be summarized:

(1) a head injury and mild cerebral concussion and lacerations to the left ear, cleared up without leaving any disability or cosmetic defect;

(2) a fracture of the left lateral. malleolus with. slight displacement (reduced), requiring application of a cast; associated swelling related to thrombo-phlebitis;

(3) a knee injury which produced continuous pain and swelling and resulted in two operations; the excision of the medial meniscus on February 5th, 1970, and of the lateral meniscus on September 13th, 1971. This has caused a limitation of movement as to flexion and extension. I accept Dr Henderson’s opinion as a qualified orthopaedic. surgeon that the plaintiff will in future be limited and restricted, unable to do the heavy work—squatting and bending—necessary in his trade and will probably be disabied by pain in his later years due to degenerative changes.

The plaintiff’s periods of hospitalization, convalescence, physiotherapy treatments are fully described in the documentary evidence filed. He is no longer able to function as efficiently as a welder: he must be compensated for his pain and suffering as well as a serious residual disability affecting his earning. capacity. I anticipate however that, in time, he should be able to. offset his loss of earnings in his light-welding business.

I assess the plaintiff’s out-of-pocket expenses at $3,400.00 and his loss of income at $14,500.00 after reducing the amount claimed by reason of the employment pattern and [future] contingencies and after including the income earned including the $297.00 from Wilson Engineering. Total special damages $17,900.00. The general damages are assessed at $16,500.00.

There will therefore be judgment for the plaintiff, Domenico Cirella, against the defendant, Victor Drotar, for $34,400.00 and costs to be taxed, unless this defendant’s counsel can persuade me that my discretion should be exercised differently. On consent, the action will be dismissed without costs against the other two defendants.

(Sgd) M N Lacourcière J J

Released: April 25th, 1972

398/69

IN THE SUPREME COURT OF ONTARIO

BETWEEN:

DOMENICO CIRELLA

Plaintiff

and

GABRIEL KRUL, JOHN WILLIAM

OWEN and VICTOR DROTAR

Defendants

LOSS OF INCOME

Oct 18, 1968 - Mar 10, 1969

20 weeks x $108.00	2,160.00
March 20, 1969 - July 1, 1969
14 weeks x $108.00	1,512.00
July 12, 1969 - August 12, 1970
13 months — estimated
	7,000.00
August 13, 1970 - Dec 31, 1971
16 months and 2 weeks — estimated	8,877.00
	19,549.00
Less earned income for the year ended
December 31, 1971	2,671.94
TOTAL LOSS OF INCOME	$16,877.06
In commencement I should like to note the following:

1. On page 3 of the judgment herein reproduced at page 2295, the word “future” has been crossed out.* It appears to me to have been done at the time of preparation of the document, and there was no evidence presented by either party that the document was to be read in any way other than by the deletion of this word “future”. When one refers to “contingencies”, there may be some anticipatory connotation, and perhaps the adjective “future” might be redundant, but lacking any evidence to the contrary, the fact that it is struck out in the copy provided to the Board is taken as significant.

2. The appendix attached to the judgment gives details of the “Total Loss of Income”, and this is shown as $16,877.06, a somewhat larger amount than the award of $14,500, the matter at issue. The nature of the calculations involved relates without question to earning periods which were in the past, at the date of the judgment.

3. The total sentence dealing with the award of $14,500 should be repeated (the italics are mine):

I assess the plaintiff’s out-of-pocket expenses at $3,400.00 and his loss of income at $14,500.00 after reducing the amount claimed by reason of

“Ed: Shown in square brackets.

the employment pattern and [future] contingencies and after including the income earned including the $297.00 from Wilson Engineering.

The conclusion I reach from this information is that the learned Justice intended the award of $14,500 and referred to as “his loss of income” to represent income already lost, not a loss of incomeearning capacity. I regard the general damages awarded by the learned Justice in the amount of $16,500 as representing the fulfilment of the separate paragraph in the judgment:

The plaintiff’s periods of hospitalization, convalescence, physiotherapy treatments are fully described in the documentary evidence filed. He is no longer able to function as efficiently as a welder: he must be compensated for his pain and suffering as well as a serious residual disability affecting his earning capacity. I anticipate however that, in time, he should be able to offset his loss of earnings in his light-welding business.

In this regard, the question of the capital or income nature of the $16,500 award has not been raised, but it would probably be in order to comment, for purposes of contrast, that to the extent the amount covered ‘a serious residual disability affecting his earning capacity”, this would by definition be a loss of future earning capacity. At the same time it appears the learned Justice took into consideration in determining the quantum of the award for general damages, his opinion as stated: “I anticipate however that, in time, he should be able to offset his loss of earnings in his light-welding business.”

Accordingly, the question before the Board resolves itself to a simple one. Should an award such as the one in this case, in substitution for earnings already lost, be regarded as taxable in the hands of the recipient? The determination in this matter will deal only with that point, without reference to its applicability to a situation involving loss of earning capacity, in which the result might be different.

Considerable assistance was provided to the Board by both counsel in the form of reference to legislation dealing with both income tax and damage claims. In addition, specific cases and jurisprudence were quoted in support of the opinions presented. With respect, it is suggested that, to whatever degree the matter may have been addressed in the past, the major thrust of such review dealt with the propriety of minimizing the award, presupposing the amount of the award to be non-taxable in the hands of the plaintiff, by giving consideration to the fact that the defendant should not be assessed an amount which could be regarded as excessive since it would be inclusive of income tax. There is no reference to any such consideration in the judgment of the Supreme Court of Ontario forming the basis of this case. The appellant was the main asset, as well as the main beneficiary, of his welding business. As a result of the automobile accident in 1968 the business income, and consequently his own income, suffered. The amount of this loss was calculated in the award of damages, and the plaintiff in that matter (now the appellant) received compensation for it.

There is no indication in the judgment that the learned Justice made any provisiion or allowance for the impact of income tax on the award made to the appellant. Indeed, I am unaware of any procedure by which such a consideration could be given appropriate weight in view of the uncertainty of the various factors which would bear upon it. It would appear to me that the award could have been based on a reasonabie assessment of the doilar value in income erning denied to the appellant’s business during this period, or alternatively denied to the appellant from wages or salaries earned outside his business. The learned Justice is clear in stating that the final award amount is “after reducing the amount claimed by reason of the employment patern and contingencies and after including the income earned including the $297.00 from Wilson Engineering”. It appears to have been calculated to restore the appellant's total earnings to the level which they might have attained had he not been injured. From this perspective I reach the conclusion that the amount of $14,500 falls quite properly within the ambit of section 3 of the Income Tax Act, as income of the taxpayer. To reach the opposite conclusion and agree with the appellant it would be necessary for me to deny that the amount has the characteristics of income from office, employment, business or property, as defined in that section. There is no requirement in that section that only “earned” income is to be taken into account; there is only one exclusion “a taxable gain from the disposition of a property”; and the phrase “without restricting the generality of the foregoing” seems to me to be all inclusive. It is a replacement or substitution, in a single lump sum, of the income either from the appellant’s business, or from an office or employment from which by activity or service he would have derived on a periodic basis an equivalent amount over the time involved. The question was not raised at the hearing that the amount of the award itself was not satisfactory, and indeed it appears to have been based upon the claim presented by the appellant to the Supreme Court of Ontario.

Counsel for the appellant raised the alternate point that if the award of $14,500 was held to be taxable, it should be taxable in the years for which it was awarded, 1969, 1970 and 1971, not in the year 1972 in which it was received. This argument is based on the proposition that to tax the amount in the year of receipt would impose on. the appellant an undue hardship because of income tax rates in that year and because of other income of the appellant. The evidence indicates that the appellant operated his business on a cash basis, and there does not appear to be any reason to conclude the receipt of this amount in 1972 should be treated any differently than other income for that year. It might just as effectively be argued that the appellant had. benefited materially from an income tax liability viewpoint because of alleged reduced income during the years 1969, 1970 and 1971. There were no calculations presented to the Board to support either position.

All matters involved in this appeal are therefore dismissed.

Appeal dismissed.