Bernardin Baril v. Minister of National Revenue, [1976] CTC 2383, 76 DTC 1276

Guy Tremblay:—This case was heard at Montreal, Quebec, on April 6, 1976.

1. Summary

The Board must decide whether the income, as it was assessed and taxed by the respondent in accordance with the net worth method, in respect of the years 1959 to 1971, and also the penalties of 25% required under the Income Tax Act, are justified. The Board must further decide whether the respondent was entitled to make a reassessment with respect to the years 1966 and 1967, in view of the fact that the notices of reassessment were made after the expiration of four years from the day of mailing of the original assessments.

2. Burden of Proof

The meaning of burden of proof, as it applies to each party, is particularly complex in this case, and its scope should therefore be immediately explained.

2.1. Burden of Proof of the Appellant

In this case, the appellant has the double burden of showing that the assessments are in error and that the penalties imposed for the years 1959 to 1965 are unlawful.

2.1.1. Assessment in Error

The appellant must show that the notices of reassessment are in error with respect to the income added in the years 1959 to 1971 and that therefore the respondent is not entitled to claim taxes. This onus on the appellant derives not from one particular section of the Act, but from a number of judicial decisions, one of which is the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182. Rand, J stated, in fact, on page 202 [1183]:

Notwithstanding that it is spoken of in section 63(2) as an action ready for trial or hearing, the proceeding is an appeal from the taxation; and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless. questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested.

This onus rests on the appellant even though the assessments were made‘ in accordance with the net worth method (MNR v O D Eldridge, [1964] CTC 545; 64 DTC 5338).

2.1.2. Penalties: 1959-1965

The penalties of 25% imposed on the appellant for the years 1959 to 1965 (when no tax return was originally filed by the appellant) are prescribed by subsection 56(1) of the Income Tax Act, RSC 1952, c 148, as amended. It should be noted that subsection 163(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, relating to failure to file a return of income cannot be applicable because of subsection 62(3) of the Income Tax Application Rules, 1971 subsequently referred to as the transitional rules (ITAR). Subsection 163(1) is applicable only to a return of income filed after 1971.

The penalty prescribed by subsection 56(1) of the former Act cannot, therefore, be subject to subsection 163(3) of the new Act, which places the burden of proof on the respondent. In this case, the burden of proof is determined by the former Act. This burden rests on the appellant, not under a section of the former Act but rather because of precedents, including the judgment delivered in Alex Pashovitz v MNR, [1961] CTC 288; 61 DTC 1167. In that case, Thurlow, J of the former Exchequer Court stated, at page 295 [1170]:

In my opinion, a taxpayer upon whom an assessment of penalty is made is entitled as a matter of course to particulars of what the Minister has assumed as facts giving rise to the taxpayer’s liability for the penalty assessed, but I can see no sufficient reason for making any distinction as to the onus of proof, and the reasoning of Rand and Kellock, JJ in the passages quoted appears to me to apply in the case of an assessment of a penalty just as forcibly as in the case of an assessment of tax. I am therefore, of the opinion that it falls on the taxpayer appealing such an assessment to “demolish the basic fact’’ on which his liability for the penalty rests.

2.2. Burden of Proof of the Respondent

On two points, the respondent also has the burden of proof.

2.2.1. Misrepresentation in the Returns for the years 1966 and 1967

As is subsequently explained, the reassessments for the years 1966 and 1967 do not come within the limits of the four years provided for by subsection 152(4) of the new Act and 62(1) of the transitional rules (ITAR). In accordance with well-established precedents, one of the most important of which is MNR v M Taylor, [1961] CTC 211: 61 DTC 1139, the respondent must show that the appellant has made a misrepresentation that it attributable to neglect, carelessness or wilful default, or has committed some fraud, in filing his returns. Cameron, J, in the aforementioned case, stated at page 214 [1141]:

After giving the matter the most careful consideration, I have come to the conclusion that in every appeal, whether to the Tax Appeal Board or to this Court, regarding a reassessment made after the statutory period of limitation has expired and which is based on fraud or misrepresentation, the burden of proof lies on the Minister to first establish to the satisfaction of the Court that the taxpayer (or person filing the return) has “made any misrepresentation or committed any fraud in filing the return or in supplying any information under this Act” unless the taxpayer in the pleadings or in his Notice of Appeal (or, if if he be a a respondent in this Court, in his reply to the Notice of Appeal) or at the hearing of the appeal has admitted such misrepresentation or fraud. In reassessing after the lapse of the statutory period for so doing, the Minister must be taken to have alleged misrepresentation or fraud and, if so, he must prove it.

2.2.2. Penalty—Gross Negligence: 1966 to 1971

To succeed in maintaining the penalties of 25% for the years 1966 to 1971, as prescribed by subsection 56(2) of the old Act, the respondent, because of subsection 163(2) of the new Act and subsection 62(3) of the transitional rules (ITAR), has the burden of proof. He must show that the appellant, in filing his tax returns, has made knowingly, or under circumstances amounting to gross negligence, a statement or omission, or has participated in, assented to or acquiesced thereto. He must also prove that such negligence has resulted in the tax that would have been payable by him for the years 1966 to 1971 being more than the tax that he has in fact paid for the said years.

In accordance with the view expressed by K Flanigan, J in Morgan et al v MNR, [1973] CTC 2192; 73 DTC 145, the Board does not consider that proof beyond reasonable doubt should be required. A preponderance of the evidence is sufficient. The same is true of the rebuttal evidence to be presented by the appellant.

3. Facts as Submitted by the Parties

The facts as submitted by the parties are important for an understanding of the case. The facts described in the notice of appeal of the appellant and in the reply of the respondent to the notice of appeal could not better express these claims.

3.1. Appellant’s Submission

1. Pursuant to an audit carried out by the Department of National Revenue. notices of assessment dated March 15, 1973 were issued for the taxation years 1959 to 1971 inclusive.

2. On June 12, 1973 notices of objection were lodged against the notices of assessment dated March 15, 1973, for the taxation years 1959 to 1971 inclusive.

3. The notice of acknowledgement of the notices of objection dated June 12, 1973, was received on June 12, 1975 (sic).

4. Withdrawal of the notices of objection dated June 12, 1973, by a letter dated July 30, 1973.

5. Issue of notices of reassessment dated January 18, 1974, vacating the notices of assessment dated March 15, 1973, for the taxation years 1959 to 1965 inclusive.

6. On March 11, 1974, reimbursement by the Department of National Revenue of the taxes paid for the years 1959 to 1965 inclusive.

7. On May 21, 1975 Issue of notices of reassessment vacating the notices of reassessment dated March 15, 1973, for the years 1959 to 1965 inclusive.

8. On July 25, 1975 notices of objection were lodged against the notices of reassessment dated May 21, 1975, for the years 1959 to 1965 inclusive.

9. On September 10, 1975 the Department of National Revenue ratified all the notices of assessment and the notices of reassessment for the years 1959 to 1971 inclusive, and therefore the notices of reassessment, dated January 18, 1974, for the years 1959 to 1965 inclusive.

3.2. Respondent’s Submission

1. He admits paragraphs one and two of the notice of appeal of the appellant.

2. He denies the allegations contained in the other paragraphs of the notice of appeal and does not admit them.

3. The respondent based the appellant’s assessment for the taxation years 1959 to 1971 on the following facts:

(a) during the years under appeal the appellant conducted business as an “electrical contractor”;

(b) the gross income declared since 1967 is as follows:

1967	$53,985.34
1968	37,112.71
1969	35,307.02
1970	40,613.03
1971	55,534.61

(c) between the taxation years 1959 to 1965 no tax return was filed by the appellant;

(d) for the following years, the net income declared was as follows:

1966	$ 4,845.81
1967	8,070.40
1968	4,108.30
1969	5,503.75
1970	7,193.31
1971	8,214.56
	Total $37,936.11

(e) on inquiry, it was determined that the capital of the appellant increased from $6,586.07 on December 31, 1958 to $53,556.23 on December 31, 1971, that is to say it increased by $46,970.16;

(f) the personal expenses of the appellant were assessed as follows:

1959	$ 1,700.00
1960	1,900.00
1961	2,100.00
1962	2,300.00
1963	2,500.00
1964	2,700.00
1965	2,900.00
1966	3,100.00
1967	3,300.00
1968	3,468.71
1969	3,844.65
1970	4,406.59
1971	4,252.56
	Total $38,472.51

(g) after taking into account bequests, gifts and other non-taxable sources of an increase in capital, the additional undeclared income was assessed at $43,841.61 for the period:

(h) this undeclared income was added to the income for which returns were filed by distributing the sum over the thirteen years under appeal, that Is to say $43,841.61 -:- 13 = $3,372.43;

(i) during the years 1959 to 1965 the appellant wilfully attempted to evade in some manner payment of the debt payable by him under Part I of the Act;

(j) for the years 1959 to 1971, the appellant made a misrepresentation that is attributable to neglect, carelessness or wilful default, and/or committed a fraud in filing the returns, and/or supplying or failing to supply information required under the Act;

(k) the appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or an omission in returns required under the Act.

4. Point at issue

The Board must decide from the evidence

4.1. if the appellant has refuted in whole or in part the income calculated by the respondent on which the notices of reassessment were based;

4.2. if the appellant has shown that the penalties for the years 1959 to 1965 were unjustified;

4.3. if the respondent has shown, with respect to the years 1966 and 1967, that the appellant had made a misrepresentation that is attributable to neglect, carelessness or wilful default in filing the return, these being the only circumstances justifying the issue of reassessments;

4.4. if the respondent has shown, with respect to the penalties for the years 1965 to 1971, at least by a preponderance of the evidence, that the appellant knowingly, or under circumstances amounting to gross negligence, made a statement or omission in a return as a result of which the tax that would have been payable by him is less than the amount due.

5. Evidence and Arguments Submitted by the Appellant

5.1. Tax Due

5.1.1. Legality of Assessments for the Years 1959 to 1965

Firstly, the Board does not accept the initial argument of the appellant that the Minister had ample time to require that tax returns be filed by the appellant for the years 1959 to 1965 and that he was not authorized to issue an assessment for those years in 1973. The appellant alleges that the Minister did not act with sufficient speed. As no assessment was issued for the years 1959 to 1965, the respondent had the right to issue the first notice of assessment dated March 15, 1973. In so far as the time limit is concerned, the first notices of reassessment, dated January 18, 1974, and the second notices of reassessment, dated May 21, 1975, do not pose any problem. Furthermore, there is no abuse of authority with respect to either the first notice of assessment or the two subsequent notices.

5.1.2. Legality of the Reassessments for the Years 1966 to 1967

The notices of reassessment were issued on March 15, 1973: the respondent did not have the authority to make an assessment more than four years after the first assessment unless he could show that the appellant made a misrepresentation that is attributable to neglect, carelessness or wilful default, or committed any fraud in filing the return, as stipulated under subsection 152(4) of the new Act and 62(1) of the transitional rules (ITAR).

It can be seen from the exhibits in the file of the Board that the earliest year which could be reassessed on March 15, 1973 is 1969. In fact, the first notice of assessment was issued on July 10, 1969. Therefore, the notices of reassessment for the years 1968, 1969, 1970 and 1971 were issued within the legal time limit. The first notices of assessment for the years 1966 and 1967 were issued on July 10, 1967 and June 18, 1968 respectively. The Minister did not, therefore, have the authority to issue notices of reassessment for the years in question unless the requirements stipulated under the aforementioned subsection 152(4) were met. The years 1966 and 1967 will be discussed later.

5.1.3. Net Worth Method—Accounts Receivable and Inventory on

December 31, 1958

In accordance with subsection 152(7) of the new Act the Minister may, notwithstanding a return, or if no return has been filed by the taxpayer, assess the tax payable. Basing his actions on this section, the respondent has used the net worth method to assess the undeclared income, that is to say, the difference in the appellant's capital as shown on his balance sheets at December 31, 1958 and at December 31, 1971. The appellant challenges the non-inclusion in the assets, on the balance sheet drawn up as of December 31, 1958, of an account receivable of $10,000, an inventory of $3,000, rolling stock of $3,000, and office furniture and fittings valued at $200.

However, when the appellant was questioned, his memory was not good enough to corroborate information concerning these items or the balance sheet to December 31, 1958 which had been drawn up by his accountant. He made only general statements, clearly implying that everything had been drawn up by his accountant and that he knew nothing. However, he did provide details concerning the office furniture and fittings valued at $200 which the Board accepts as true.

During cross-examination, however, counsel for the respondent was able to refresh the appellant’s memory sufficiently to satisfy the Board that on December 31, 1958 the following items, with the value given, were among the assets of the appellant:

The rolling stock comprised one used truck purchased in 1957 for approximately $2,500. With respect to the inventory, the appellant maintains that its value was at that time and in the other years between $3,000 and $3,500. These statements are confirmed by the balance sheets subsequently filed. On the basis of the evidence submitted by the respondent’s auditor, the Board concludes that there were accounts receivable of at least $4,000 on December 31, 1958.

Furthermore, in view of the nature of the appellant’s business, namely, an electrical contracting firm, which he had conducted since 1946, these various figures seem reasonable to the Board.

5.1.4. Personal Expenses or Cost of Living

The appellant claims that the personal expenses assessed by the respondent for the years in question are exaggerated. These expenses are given in subparagraph (f) of paragraph 3 of the respondent’s reply quoted above.

Appellant has not discharged the burden of proof which lies on him. Although the appellant, by his own testimony, did not drink, did not smoke, did not “go out”, the Board accepts the figures submitted by the respondent as reasonable. The figures of $1,700 and $4,252 submitted as an assessment of his cost of living for the years 1959 and 1971 respectively seem far from exaggerated. In this respect, the appellant included, under the heading “food”, figures which were higher than those given in the respondent’s assessment.

As a result of the disagreements between the appellant’s and the respondent’s accountants, the first notices of assessment for the years 1959 to 1965 were revoked, and notices of reassessment with the same content as the previously revoked notices of assessment were issued. From the evidence submitted, these facts do not demonstrate the invalidity of the first notices of assessment, as maintained by the appellant.

5.1.5. Force of the Balance Sheet to December 31, 1971

The information submitted by the respondent in the balance sheet drawn up to December 31, 1971 has not been validly refuted by the appellant. These figures are accordingly accepted by the Board.

5.1.8. Conclusion concerning the Taxes Payable

in accordance with previous decisions, therefore, the Board rules that the difference of $43,841.61 assessed by the respondent, between the balance sheets of December 31, 1958 and December 31, 1971, should be reduced by $9,200, to take the following items into account: Office furniture and fittings $ 200

Total $9,200

The balance of $34,641.61 must therefore be divided between the years 1959 to 1971, giving a figure of $2,664.73 a year.

If the appellant had submitted evidence to satisfy the Board, the overall undeclared income might have been divided differently. In the absence of such evidence, the Board has no choice but to divide the overall income equally over thirteen years.

5.2. Legality of the Notices of Reassessment for the Years 1966 to 1967

As explained above, the burden of proof is on the respondent. After examining the evidence submitted, the Board must conclude that he has not discharged this burden. There is no evidence to show, with respect to these two years, that there was neglect, carelessness or wilful default, let alone fraud, on the part of the appellant.

The respondent, who bears the burden of proof, has not shown, inter alia, that the balance sheet drawn up to December 31, 1965 or the income for the years 1966 and 1967 are false.

By using the information in the balance sheet drawn up as of December 31, 1965 by the appellant’s accountant, and the balance sheet as of December 31, 1971 drawn up by the respondent, as well as the figures provided by the respondent’s accountant, the Board conciudes that, with respect to the years 1966 to 1971, the appellant had undeclared income of $8,674.75. If this amount is divided over a period of six years, in accordance with the method used by the respondent, we must conclude, inter alia, that the appellant omitted, for each of the years 1966 and 1967, income of $1,445.80. In view of the gross income and the net income for the years 1966 and 1967, we can [not] conclude that the amount involved is sufficiently substantial to show wilful default or fraud, as maintained by counsel for the respondent.

The figure of $8,674.75 representing the undeclared income for the period 1966 to 1971 has been arrived at by the following calculation:

The Board therefore vacates the notices of reassessment for the years 1966 and 1967, including of course the penalties of 25% and 5%.

One fact, which might appear at first sight to indicate inconsistency on the part of the Board, should be explained. In the first part of this judgment the Board ruled on the taxation of undeclared income of $2,664.73 for each of the thirteen years, including the years 1966 and 1967. Moreover, the Board subsequently assessed the undeclared income for the years 1966 to 1971 at $1,445.80. There is no real inconsistency here, for the fundamental explanation lies in the concept of burden of proof.

In the first case, the appellant did not discharge the burden of proof in full, and therefore the undeclared income assessed by the respondent, minus the sum of $9,200 accepted by the Board, was judged to be taxable. The appellant did not substantiate, inter alia, the information contained in his balance sheet of December 31, 1965. The Board must, therefore, divide the undeclared income over the thirteen years, giving a figure of $2,664.73 for each year.

In the second case, the burden of proof was on the respondent to show neglect or wilful default on the part of the appellant. In theory, the respondent has to substantiate his case before the burden of proof is on the appellant to show that the additional income taxed by the respondent is in error. The balance sheet as of December 31, 1975, which the appellant filed with his tax returns had therefore to be refuted by the respondent if he really wished to conclude, as he did, that substantial amounts of undeclared income indicated neglect or wilful default. In the absence of such evidence and in the context of the matter at issue, namely, the legality of the notices of reassessment for the years 1966 and 1967, the Board must assume the validity of this balance sheet in order to calculate the undeclared income for the years in question, which is found to amount to $1,445.80 for each year. Once again, this figure may be used only within the context of the matter at issue, namely, the neglect or wilful default of the appellant, on which the validity of the notices of reassessment for the years 1966 and 1967 may be based.

5.3. Penalties for the Years 1959 to 1965

As explained above, the appellant had the burden of proof of showing that the penalties for the years 1959 to 1965 should not be imposed. He did not originally even file tax returns for those years. From the evidence submitted, the Board is not satisfied that the penalty should not have been imposed. The sum of $2,664.73, representing the amount of undeclared income, was lawfully assessed on the basis of reasonable data. Moreover, there was absolutely no bookkeeping system for this period. As the appellant had been in business since 1946, he must have known that it was necessary to have an adequate system of bookkeeping and to file tax returns for taxable income. If penalties are imposed on him, he has only himself to blame.

5.4. Penalties for the Years 1968 to 1971

As explained above, the respondent had the burden of showing at least that the taxpayer had, with respect to each of the years 1968 to 1971, made omissions in circumstances amounting to gross negligence. Such proof was not established. First, the single entry bookkeeping sysiem, as explained by the appellant’s accountant, was, in the view of the Board, adequate. second, on comparing the undeclared income, which amounted to $10,658.92 ($2,667.73 x 4), with the gross sales Of $168,567.37, the Board cannot conclude that omission of the former constitutes gross negligence or that the penalties should be maintained.

5.5. The Penalty of 5%

The Board does not have the authority to revoke the penalty of 5% required under subsection 55(1) of the former Act and 162(1) of the new Act. It is obvious, moreover, that this penalty cannot apply for the years 1966 and 1967, since the notices of reassessment are vacated by this judgment.

6. Conclusion

The Board allows in part the petition of the appellant and refers the matter back to the respondent for reassessment, to take into account the following points:

— additional income of $2,664.73 is added for each of the years 1959 to 1965 and 1968 to 1971;

— penalties of 25% are imposed for the years 1959 to 1965:

— the notices of reassessment issued for the years 1966 and 1967, together with the penalties pertaining to them, are vacated:

— the penalties of 25% for the years 1968 to 1971 are vacated:

— the penalty of 5% for the years 1959 to 1965 and 1968 to 1971 is upheld.

Appeal allowed in part.