Stephen Sam v. Her Majesty the Queen, [1974] CTC 634, 74 DTC 6493

Kerr, J:—This is an appeal from a judgment of the Tax Review Board dismissing the plaintiff’s appeal with respect to reassessments made by the Minister of National Revenue on March 30, 1971 for the plaintiff’s 1966, 1967, 1968 and 1969 taxation years. The Minister made a net worth assessment by virtue of subsection 46(6) of the Income Tax Act in respect of each of those years and in so doing re-computed the plaintiff’s income to include $8,410.90 in 1966; $8,847.12 in 1967; $7,442.38 in 1968 and $13,833.29 in 1969 as additions to the income the plaintiff had reported. The reassessments included: penalties.

The defence filed herein says that in so reassessing the plaintiff the Minister acted upon the assumptions that the said amounts constituted income of the plaintiff deriving from his business activities.

The plaintiff’s statement of claim says that throughout the said taxation years he derived his only business income from a dry cleaning business of which he was the proprietor, and that he reported all his income therefrom and all other income when filing his income tax returns; also that the net worth assessment made by the Minister takes into account certain sums which the plaintiff received as gifts from his father.

The figures in the plaintiff’s income tax returns are not disputed. The issue is where the money came from and whether the assessed income included gifts received from the plaintiff’s father.

The figures in the net worth assessment (Exhibit P-3) show computations of net worth of $37,579.71 as at December 31, 1965, and increases in the years 1966 to 1969 bringing the net worth to $97,583.34 as at December 31, 1969.

The plaintiff and his wife testified on the appeal to this Court, as did two relatives of him and his wife, Harry Wong and Foon Sam. An income tax auditor, David A Zuest, gave evidence for the Crown.

The claimant testified principally to the effect that he was born in China in 1932 and came to Canada in 1952; he first worked in a laundry and at other jobs, and then went back to dry cleaning and bought Tide Cleaners in 1956 for $156, getting little else than an old counter in rented premises in Vancouver; he was then not married and he lived in a room in the back of the premises; he got married in 1958 and moved into another rented house, then bought a house in 1959 for $12,000, on a mortgage; he bought additional used dry cleaning equipment for $4,000 in 1961; his wife gave birth to a baby in that year and quit her job as a practical nurse in a hospital and after that she helped in the dry cleaning business; he sold the house he had bought and in 1964 or 1965 purchased the premises on Joyce Road in which his dry cleaning business was being conducted, for $21,000 with a down payment of $9,000 and a mortgage for the balance; he went to live there in an upstairs apartment; he bought a vacant lot in 1965 for $7,400 on Kingsway Street and put a 2-storey frame building on it in 1968, getting the money partly from his savings and partly from a loan of $8,000 from his uncle Foon Sam; he rented those premises for $630 per month.

The plaintiff said that his father had worked in a sawmill on Vancouver Island until he retired in 1961 and came to Vancouver; he lived with the plaintiff for about two years, 1961 and 1962, but found it too far from Chinatown where he was doing a lot of gambling, so he moved to a room in a small hotel on Pender Street; his father was successful in his gambling and bought things for the plaintiff’s family, such as children’s clothing, a baby crib, a lawnmower and tools, and made gifts of money, cash bills, to the plaintiff and the plaintiff’s wife in the relevant years; these gifts were made every week or two at times when the father was visiting the plaintiff, they were never less than $100 at one time and sometimes were in much larger amounts: his wife would make out deposit slips for the money and the father or one of them would deposit the money in the bank; his father never asked for a return of any of the money and none was ever given back to him; no account or record of any of the gifts was made; the father died in late 1970 at age 75, having 5 years previously bought a casket and made arrangements for his funeral; when he died he left $2,000 or $2,200 in cash in his hotel room and $200 in his pocket, and he had two savings accounts each with a few hundred dollars; he was a widower when he died and the plaintiff was his only child in the years in question; the plaintiff claimed his father as a dependant in his income tax returns. The father had an Old Age Security Pension. The plaintiff had an agency doing his bookkeeping, but in 1970, after the income tax auditor had commenced to investigate his affairs, he engaged an accountant, Wei Yip.

The plaintiff’s wife corroborated generally the evidence given by her husband, particularly in respect of the frequent money gifts from his father. She said he had no dependants and didn’t trust banks and she thought that he felt he might as well give the money to his son and family. The money gifts were every one or two weeks, always in cash paper money.

Foon Sam, an uncle of the plaintiff, confirmed that he lent $8,000 to the plaintiff in 1968 to build a house. He said he often saw the father giving money in bills to the plaintiff at the latter’s house, and that the father used to say it was lucky winnings.

Harry Wong, who works on the Canadian National Railway, said that he does some gambling in Chinatown and often saw the plaintiff’s father gambling, there and winning; he was an old man and had no place to go to spend his time; he was in hospital before he died and he told Wong that he had $2,000 under his pillow in his room and $200 in his pocket and he asked Wong to get the money on his death and to give it to the plaintiff, and Wong found the money and gave it to the plaintiff. Wong also said that he often saw the father giving money to the plaintiff and the plaintiff’s wife at their house.

David Zuest, an Income Tax Department auditor, testified that as a result of the build-up of the plaintiff’s assets being noticed he commenced to examine the plaintiff’s financial affairs in September 1970, and thereafter he had various meetings with the plaintiff at his place of business and examined his books and accounts there and also on September 15 examined records at the office of the plaintiff’s bookkeeper; there were no cash register tapes, and he could not find adequate accounts and book records; on September 30 he again questioned the plaintiff as to his source of funds and spending, and the plaintiff told him he had obtained a loan of $8,000 from his uncle and that his wife’s mother had given certain moneys from time to time in trust for the mother, which were recorded in a book, which the plaintiff showed, and the book was exhibited at the trial as Exhibit P-6, and the plaintiff told him then that there were no other gifts or inheritances; Zuest explained to the plaintiff what he was seeking; he prepared a draft net worth statement of assets and liabilities, which indicated as much as $35,000 of unexplained income; on November 5 he had another meeting with the plaintiff and his wife and showed them the draft statement and explained it to them and left a copy with the plaintiff to take to his accountant; the accountant, Wei Yip, then came into the picture and for the first time mentioned that the plaintiff had received gifts from his father, and he, Yip, was looking for corroborative evidence; Zuest contacted Yip several times thereafter and Yio said he had been unable to find any documentary evidence to show that such gifts had been made or that the father had means to make them; on November 22 Zuest had another meeting with the plaintiff and his wife and Yip, and they then produced applications signed by the plaintiff’s father for five $500 Canada Savings Bonds for the plaintiff’s children (Exhibit P-4) (and the bonds so applied for plus a $100 Canada Savings Bond in the plaintiff’s name were produced as Exhibit P-5 at the trial) and a $1,000 Canada Savings Bond, in the plaintiff’s Chinese name, which replaced a like bond that the plaintiff said his father had given to him (Exhibit P-7); the plaintiff couldn’t say just how much money his father had given to him, but it would be upwards of $30,000 (which would average nearly $8,000 per year for the years in question). Zuest then prepared a net worth statement (Exhibit P-3), showing unreported income and the plaintiff was reassessed accordingly in respect of the years concerned.

The said net worth statement gives credit for and deducts the $1,000 bond given by the father, the $8,000 loan from the uncle Foon Sam, and the money given by the mother-in-law in trust, and it also shows certain other deductions, including $750 in each of the years as gambling gains. It shows, inter alia, the following:

Exhibit R-1, prepared by Zuest, gives details of entries in the bank accounts of the plaintiff in the years 1961 to 1970 inclusive.

The plaintiff testified that when Zuest asked for his records, etc he didn’t understand very. well what was wanted and told Zuest to get in touch with his bookkeeper; when Zuest showed him the draft net worth statement he told Zuest that his father had made money gifts, but Zuest was unwilling to believe that such was the case.

Zuest said that the plaintiff gave free access to his books and accounts and was quite cooperative; also that the dry cleaning business was in medium-size good-looking premises in a good location, and was being conducted by the plaintiff and his wife and two helpers.

The Minister’s reassessments were made under subsection 46(6) of the Income Tax Act. In MNR v Eldridge, [1964] CTC 545 at 561; 64 DTC 5338 at 5347, my brother Cattanach said:

Section 46 is explicit that the Minister is not bound by a return or information supplied by or on behalf of a taxpayer and may make what has been termed an “arbitrary” assessment. If the Minister elects to do so then the onus is on the taxpayer to show that the amount determined by the Minister is erroneous.

Although the plaintiff and his wife testified that the plaintiff’s father had given them gifts of money in cash in the years concerned, and the uncle and another close friend testified that they had seen money gifts passing but couldn’t say in what amounts, I am far from satisfied that any gifts so made account for the large amounts of unreported income which the Minister has included and added in the reassessments as income from the plaintiff’s business. I think it is not unlikely that the father sometimes gave money to the plaintiff and his wife when visiting them, but I think that I would be unduly credulous if I were to accept that the father, in his circumstances, consistently gave them, throughout the four years concerned, hundreds of dollars in cash every two weeks or so on the average, or amounts aggregating about $8,410 in 1966, $8,847 in 1967, $7,442 in 1968, and $13,833 in 1969. The only other probable source of the unreported income is the plaintiff’s dry cleaning business. In my opinion the plaintiff has not satisfied the onus of showing that the reassessments were erroneous.

I also find that the Minister has satisfied the burden of establishing the facts justifying the assessment of the penalties in issue herein.

The statement of claim is therefore dismissed with costs.