Heald, J:
1 The plaintiff, in this action, appeals from the decision of the Tax Appeal Board in so far as that decision upheld the income tax reassessments of plaintiff by the defendant as follows:
Taxation Year Amount of Tax Payable
1952 $ 585.56
1953 5,306.51
1954 616.38
1955 610.49
1956 1,031.61
1957 1,496.07
1958 2,577.73
1959 2,806.472 In his notice of appeal the plaintiff alleges that the defendant had no authority to make said reassessments since more than four years had elapsed from the date of the original assessment before said reassessments were made and that the defendant has not alleged any fraud or misrepresentation by the plaintiff at the time of the reassessment, nor at or before the Minister's notification under subsection 58(3) of the Income Tax Act.[FN1: <p>58. (3) Upon receipt of the notice of objection, the Minister shall withall due despatch reconsider the assessment and vacate, confirm or vary theassessment or re-assess and he shall thereupon notify the taxpayer of hisaction by registered mail.</p>]
3 The plaintiff further alleges that he has made no misrepresentation, or committed any fraud or concealment in filing his original returns for the years under review, or at the time of reassessment, or in supplying any information. The plaintiff further denies filing with the defendant any waiver. Plaintiff is in effect pleading the provisions of subsection 46(4) of the Income Tax Act which reads as follows:
46. (4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may
and submitting that subject reassessments are null and void because the defendant has not brought himself within the provisions of said subsection.4 The defendant's answer to this portion of the notice of appeal is that the plaintiff made a misrepresentation or committed a fraud in filing his income tax returns for the years 1952 to 1959 inclusive or in supplying information under the Income Tax Act which effectively entitled the defendant to reassess the plaintiff under the provisions of the said subsection 46(4) quoted (supra), notwithstanding that said reassessments were beyond the normal four-year period.
5 The amended statement of defence then proceeds to set out the alleged particulars of said misrepresentation or fraud entitling the defendant to reassess the plaintiff. Those particulars are as follows:
1952
(a) The Plaintiff reported income of $ 2,372.08
To the said reported income the Defendant
added:
(i) legal fees not reported by Plaintiff $ 506.87
(ii) farm income not reported by Plaintiff 2,127.75 2,634.62
-----------------------
Net income as re-assessed by Defendant $ 5,006.70
(b) In respect of the said net income as
re-assessed, the Defendant states that in
computing the said net income he should have
given the Plaintiff credit for the following:
(i) legal fees incorrectly treated by
Defendant as unreported $ 5.00 $ 5.00
-----------------------
Revised net income of Plaintiff $ 5,001.70
1953
(a) The Plaintiff reported income of $ 2,113.34
To the said reported income the Defendant
added:
(i) legal fees not reported by Plaintiff $ 452.82
(ii) farm income not reported by Plaintiff 400.05
(iii) farm expenses claimed but disallowed
by Defendant 937.60
(iv) store expenses claimed but disallowed
by Defendant 214.95
(v) real estate profit not reported by
Plaintiff $13,475.58 $15,481.00
-----------------------
$17,594.34
(b) The Defendant credited the Plaintiff with
legal fees reported by Plaintiff in 1953 but
not received by him in that year 1,200.00
----------
Net income as re-assessed by Defendant 16,394.34
(c) In respect of the said net income as
re-assessed, the Defendant states that in
computing the said net income he should have
given the Plaintiff credit for the following:
(i) store expenses incorrectly disallowed
by Defendant 214.95
(ii) legal fees incorrectly treated by
Defendant as unreported 2.00 216.95
-----------------------
Revised net income of Plaintiff $16,177.39
1954
(a) The Plaintiff reported income of $ 1,869.71
To the said reported income the Defendant
added:
(i) legal fees not reported by Plaintiff 2,108.66
(ii) farm expenses claimed but disallowed
by Defendant 1,417.66
(iii) store expenses claimed but disallowed
by Defendant 87.12 3,613.44
-----------------------
Net income as re-assessed by Defendant $ 5,483.15
(b) In respect of the said net income as
re-assessed, the Defendant states that in
computing the said net income he should
have given the Plaintiff credit for the
following:
(i) store expenses incorrectly disallowed
by Defendant $ 87.12 $ 87.12
----------
Revised net income of Plaintiff $ 5,396.03
1955
(a) The Plaintiff reported income of $ 2,607.08
To the said reported income the Defendant
added:
(i) legal fees not reported by the Plaintiff $ 1,957.39
(ii) farm expenses claimed but disallowed
by Defendant 942.17
(iii) store expenses claimed but disallowed
by Defendant 89.00 $ 2,988.56
-----------------------
Net income as re-assessed by Defendant $ 5,595.64
(b) In respect of the said net income as
re-assessed, the Defendant states that in
computing the said net income he should have
given the Plaintiff credit for the following:
(i) store expenses incorrectly disallowed
by Defendant 89.00 $ 89.00
-----------------------
Revised net income of Plaintiff $ 5,506.64
1956
(a) The Plaintiff reported income of $ 4,730.12
To the said reported income the Defendant
added:
(i) legal fees not reported by Plaintiff $ 1,386.32
(ii) office expenses claimed but disallowed
by Defendant 637.75
(iii) farm expenses claimed but disallowed
by Defendant 1,194.53
(iv) store expenses claimed but disallowed
by Defendant 36.00 $ 3,254.60
-----------------------
$ 7,984.72
(b) The Defendant credited the Plaintiff with
other office expense adjustments 46.66
----------
Net income as re-assessed by Defendant $ 7,938.06
(c) In respect of the said net income as
re-assessed, the Defendant states that in
computing the said net income he should have
given the Plaintiff credit for the following:
(i) legal fees incorrectly treated by
Defendant as unreported 8.69
(ii) store expenses incorrectly disallowed
by Defendant 36.00
(iii) error in addition by Defendant .20 44.89
-----------------------
Revised net income of Plaintiff $ 7,893.17
1957
(a) The Plaintiff reported income of $ 4,206.93
To the said reported income the Defendant
added:
(i) legal fees not reported by Plaintiff $ 1,717.37
(ii) office expenses claimed but disallowed
by Defendant 567.79
(iii) farm income not reported by Plaintiff 107.49
(iv) farm expenses claimed but disallowed
by Defendant 503.07
(v) store expenses claimed but disallowed
by Defendant 52.00
(vi) real estate profit not reported by
Plaintiff $ 3,000.00 $ 5,947.72
-----------------------
$10,154.65
(b) The Defendant credited the Plaintiff with
other office expense adjustments 21.00
----------
Net income as re-assessed by Defendant $10,133.65
(c) In respect of the said net income as
re-assessed, the Defendant states that in
computing the said net income he should have
given the Plaintiff credit for the following:
(i) legal fees incorrectly treated by
Defendant as unreported $ 81.68
(ii) store expenses incorrectly disallowed
by Defendant 52.00
(iii) Real estate profit 3,000.00 $ 3,133.68
-----------------------
Revised net income of Plaintiff $ 6,999.97
1958
(a) The Plaintiff reported income of $ 8,524.31
To the said reported income the Defendant
added:
(i) legal fees not reported by Plaintiff $ 4,086.33
(ii) office expenses claimed but disallowed
by Defendant 628.94
(iii) farm expenses claimed but disallowed
by Defendant 997.50 $ 5,712.77
-----------------------
$14,237.08
(b) The Defendant credited the Plaintiff with
other office expense adjustments 159.10
----------
Net income as re-assessed by Defendant $14,077.08
(c) In respect of the said net income as
re-assessed, the Defendant states that in
computing the said net income he should have
given the Plaintiff credit for the following:
(i) legal fees incorrectly treated by
Defendant as unreported $ 5.00 5.00
-----------------------
Revised net income of Plaintiff $14,072.98
1959
(a) The Plaintiff reported income of $ 9,946.99
To the said reported income the Defendant
added:
(i) legal fees not reported by Plaintiff $ 3,275.97
(ii) office expenses claimed but disallowed
by Defendant 649.73
(iii) other office expense adjustments by
Defendant 892.58 $ 4,818.28
-----------------------
Net income as re-assessed by Defendant $14,765.27
(b) In respect of the said net income as re-
assessed, the Defendant states that in
computing the said net income he should have
given the Plaintiff credit for the following:
(i) legal fees incorrectly treated by
Defendant as unreported $ 34.20
(ii) deletion of unidentified addition 505.00 $ 539.20
-----------------------
Revised net income of Plaintiff $14,226.07
6 The defendant further states that such misrepresentation or fraud was alleged by notices of re-assessment mailed to the plaintiff on September 9, 1964 for the 1955 taxation year and on July 13, 1964 for all of the other years here under review.
7 In answer to the particulars of re-assessment as above set out, the plaintiff, in his notice of appeal deals with said particulars in a number of categories which may be summarized as follows:
8 1. Real Estate Profit ($13,475.58)— 1953.—With reference to this item, the plaintiff pleads that said amount was a capital increment arising out of the realization of the sale of capital assets and denies that he ever embarked on an adventure or concern in the nature of a trade as the same is defined in paragraph 139(1)(e) of the Income Tax Act.
9 2. Alleged unreported farm income ($2,127.75 in 1952; $400.05 in 1953 and $107.49 in 1957).—Concerning the item of $2,127.75 in 1952, the plaintiff alleges that said item was income in 1951 and was reported as such. Alternatively, the plaintiff pleads that if said item was income for the year 1951 “which is not admitted but denied, then the appellant is entitled to an Election to Average of this year”. With respect to the two other items in this category, the plaintiff pleads as follows:
The amounts of $400.05 in 1953 and $107.49 in 1957, to the best of the appellant's knowledge, information, and belief, were reported as income, or equivalent amounts were reported as income if they were deemed to be income. If the amounts were not deemed to be income, same were not reported as income.
10 3. Disallowance of farm expenses claimed: $937.60 for 1953; $1,417.66 for 1954; $942.17 for 1955; $1,194.53 for 1956; $563.07 for 1957; and $997.50 for 1958.—With reference to these items, the plaintiff alleges them to be proper expenses incurred in the plaintiff's farming operations and as such properly allowable. The plaintiff pleads further that:
... the Respondent cannot change the Capital Cost Allowance for the taxation years in question when having allowed the Appellant to use Part XVII of the Income Tax Regulations, and he has not reverted to the other Part with the Consent of the Minister.
11 4. Unreported legal fees: $506.87 in 1952; $452.82 in 1953; $2,108.66 in 1954; $1,957.39 in 1955; $1,386.32 in 1956; $1,717.37 in 1957; $4,086.33 in 1958; and $3,275.97 in 1959.—Concerning these items, the plaintiff pleads that all of these amounts excepting one (the sum of $2,208.39 for the month of August, 1959) were “... either Trust funds, funds for future legal work, disbursements, and/or reported fees in other years when the case had been completed, and, therefore, should not have been added”. Dealing with the item of $2,208.39 referred to supra, the plaintiff pleads that it was an innocent and unintentional omission and was inadvertently not added to income for 1959 and was discovered only after subject reassessment.
12 5. Disallowed office expenses: $637.75 in 1956; $567.79 in 1957; $628.94 in 1958; and $649.73 in 1959.—Regarding these items, the plaintiff pleads that they were proper expenses in the carrying out of his business and as such were properly deductible. The plaintiff pleads further that since subject reassessments, he has discovered additional expenses which he incurred in the operation of his law practice which additional expenses were disallowed by the Tax Appeal Board.
13 The defendant has also filed a counterclaim in which he asserts his right to assess penalties with respect to plaintiff's tax returns for the years 1952 to 1959 inclusive on the basis that the plaintiff did wilfully evade payment of a part of his tax on his income. The defendant relies on the provisions of subsection 56(1) of the Act in this regard.[FN2: <p>56.(1) Every person who has wilfully, in any manner, evaded or attemptedto evade payment of the tax payable by him under this Part for a taxationyear or any part thereof is liable to a penalty, to be fixed by the Minister,of not less than 25% and not more than 50% of the amount of the tax evaded orsought to be evaded.</p>]
14 Particulars of the alleged wilful evasion are as follows:
1952
Unreported legal fees -- $506.87
1953
Unreported legal fees -- $452.82
Farm income not reported -- $400.05
Disallowed farm expenses -- $1,382.55
1954
Unreported legal fees -- $2,108.66
Disallowed farm expenses -- $1,042.68
1955
Unreported legal fees -- $1,957.39
Disallowed farm expenses -- $1,002.17
1956
Unreported legal fees -- $1,377.45
Disallowed office expenses -- $637.75
Disallowed farm expenses -- $1,272.53
1957
Unreported legal fees -- $1,635.69
Disallowed office expenses -- $567.79
Disallowed farm expenses -- $503.07
Farm income not reported -- $107.49
1958
Unreported legal fees -- $4,081.33
Disallowed office expenses -- $628.94
Disallowed farm expenses -- $997.50
1959
Unreported legal fees -- $527.38
Disallowed office expenses -- $649.73
15 Pursuant to the above noted particulars, the defendant alleges that the plaintiff has wilfully evaded a total of $4,490.23 in tax during the years 1952–1959 inclusive and submits that under the provisions of said subsection 56(1) quoted supra, he is entitled to assess penalties of 50% of the amount so evaded and thus claims to be entitled to assess penalties in the sum of $2,241. The plaintiff denies said wilful evasion and the defendant's right to impose penalties pursuant to said subsection 56(1).
16 Dealing initially with the applicability of subsection 46(4) of the Act (supra), the legal principles to be followed were established by the case of MNR v Maurice Taylor, [1961] C.T.C. 211, 61 D.T.C. 1139.[FN3: <p>This case was followed by Dumoulin, J in<em>MNR</em>v<em>Foot</em>, [1964] C.T.C. 317, 64 D.T.C. 5196, and<em>MNR</em>v<em>Appleby</em>, [1964] C.T.C. 323, 64 D.T.C. 5199.</p>] In that case, Cameron, J decided that in every appeal regarding a reassessment made after the statutory period of limitation is expired and which is based on fraud or misrepresentation, the burden of proof lies on the Minister to prove said fraud or misrepresentation. He also decided that, in considering the evidence as to whether fraud is committed or misrepresentation made, the standard to be applied is not that applicable in criminal proceedings but that applicable in civil proceedings, namely the standard of balance of probability. The Taylor case (supra) is also authority for the following additional propositions:1. That when the Minister has satisfied the Court that any fraud has been committed or any misrepresentation made, he has done all that he is then required to do and thereafter the onus of proof that there is error in fact or in law in the reassessment falls on the taxpayer.
2. That the words “fraud” or “misrepresentation” in the Income Tax Act are to be given their ordinary meaning.
3. That misrepresentations may be fraudulent or innocent and an innocent misrepresentation is a false statement made in the honest belief that it is true.
4. That the words “any misrepresentation” as used in the relevant sections must be construed to mean any representation which was false in substance and in fact at the material date and it includes both innocent and fraudulent representations.
17 At the commencement of the trail, counsel for the plaintiff, on behalf of the plaintiff, waived the necessity of the defendant's proving the right to tax beyond the four-year period set out in subsection 46(4) (supra). Such waiver was given “subject to and without prejudice to the right to object to the assessment of penalty and any admissions that the appellant may have falsely, fraudulently or wilfully made in or in reporting his income, as is alleged by the Respondent”.
18 Accordingly, it is unnecessary for me to consider, on the evidence adduced, in the light of the principles established by the Taylor case (supra), whether the Crown has satisfied the onus cast upon it to prove its right to reassess beyond the four-year period since that right has been conceded by the plaintiff.
19 I will therefore proceed to a consideration of the reassessments on the basis of the categories set out by the plaintiff in the statement of claim and referred to supra:
20 Category 1— Real Estate Profit ($13,475.58— 1953)
21 The plaintiff is 63 years of age and was born at Fish Creek, Saskatchewan on his parents' farm. He initially left school after Grade 8 and engaged in farming with his parents. In 1936, when he was 25 years old, he sustained a fracture of his leg and hip. He continued to farm until 1941 when he developed osteomyelitis in the leg which had been injured earlier. He said that it then became evident to him that he would not be able to continue his farming activities because of the condition of his leg. By 1941 he had acquired 71/2quarter sections of land at Fish Creek and a number of cattle. He described the Fish Creek farm as a mixed farming operation. As a result, he decided to continue his education, his aim being to become a lawyer. He proceeded to take his high school courses by correspondence and then entered the University of Saskatchewan Law School, graduating with a law degree in 1948, thereafter articling with a Saskatoon law firm and being admitted to the bar in February of 1951.
22 During his years of articling, he kept on with his farming activities to some extent. He disposed of the Fish Creek farm, trading 61/2quarter sections for a store and selling the remaining quarter section for cash, these transactions taking place in 1952 and 1953. Meanwhile, the plaintiff continued to practise law in Saskatoon. He said that it had always been his intention to buy another farm preferably a “grain growing” farm, rather than a mixed farm.
23 The real estate profit of $13,475.58 in respect of which the defendant seeks to tax the plaintiff arises from two transactions. The first of such transactions involved land purchased by the plaintiff from the Moscrip Estate. The plaintiff gave lengthy evidence-in-chief and in cross-examination about this transaction. Reduced to its essentials, it is clear that the plaintiff purchased this land on Monday, March 30, 1953 and, the same day, arranged for an advertisement to be placed in the Western Producer advertising the very same land for sale. Plaintiff bought the land for $7,500 and advertised it for sale the same day at $12,500, or $5,000 more than he paid for it. Plaintiff gave a lengthy and unconvincing explanation as to why he decided to sell the land so soon (his sudden discovery that the land was stony). I do not propose to detail his explanation in this regard except to say that I do not find it credible. The objective facts and circumstances surrounding the transaction make it clear to me that plaintiff's intention, at the time of acquisition, was to resell the land for a quick profit. If this was not his primary intention, it was most certainly his secondary intention within the rules set forth in Racine, Demers and Nolin v Minister of National Revenue, [1965] C.T.C. 150 at 158and 159;65 D.T.C. 5098 at 5103. The plaintiff's evidence concerning this transaction, particularly in cross-examination, was confusing, evasive and particularly unworthy of belief.
24 I make the same comments with respect to the other farming transaction, the Potratz transaction. The Potratz land was purchased in June of 1953 and sold in October of 1953 at a substantial profit. His explanation for selling this land so soon after purchasing it was twofold: firstly, he said that a portion of the land was valley land suitable for stock farming only and the remainder was arable farm land suitable for wheat farming and that his first wish was to sell the valley land only. However, the purchaser insisted on buying all of the land as a unit and he finally acceded to the purchaser's wishes. This circumstance must surely have been foreseeable to the plaintiff when he purchased the land because the vendor of the land to the plaintiff made the same stipulation. I am satisfied that the plaintiff's secondary intention at the time of purchase was to sell all of the land as a unit, if this was necessary for him to make an attractive profit. Plaintiff's second reason for selling so soon was the occurrence of heavy rainfall on the land in 1953. I find this explanation for an almost immediate sale rather strange, dealing as it does with the sale of farm land in the Province of Saskatchewan where, over the years, lack of rain presents more of a problem than does excessive rainfall. The plaintiff's answers (or, more accurately, his lack of answers) to questions put to him by defendant's counsel, left me with no confidence whatsoever in his statements as to his intention at the time of purchase. As in the Moscrip transaction, I am satisfied that plaintiff's intention, as inferred from all the objective facts and circumstances surrounding the transaction, was to purchase said land for resale at a profit. It is not without significance that, contrary to plaintiff's expressed intention to acquire a “grain-growing” farm, he apparently did nothing about it for a good many years after 1953 (at least not before 1960) other than the two rather precipitous “buy-sell” transactions herein referred to.
25 On the evidence, I have no hesitation in finding that both of subject farming transactions were trading transactions and that the defendant correctly added them to the plaintiff's 1953 income.
26 Category 2—Alleged Unreported Farm Income ($2,127.75 in 1952; $400.05 in 1953 and $107.49 in 1957)
27 So far as the 1952 items are concerned, the plaintiff admitted in evidence that these items were rye grain, stored in the elevator in the fall of 1951 but sold in January of 1952 and that the income was properly allocated by the defendant to plaintiff's 1952 taxation year (see transcript, volume 3, pages 329 and 330).
28 So far as the 1957 item is concerned, the plaintiff also conceded in his evidence that this item was properly added to his income for the 1957 taxation year (see transcript, volume 3, pages 334 and 335).
29 Concerning the remaining item of $400.05 (1953) in this category, plaintiff conceded in evidence (see transcript, volume 3, page 333) that this was income from the sale of his grain. He attempted to challenge the item however by a very confusing story having to do with some rye belonging to a Mr Peters which he claims to have reported on his return for 1953 in the sum of $389.07. Plaintiff seemed to take the view that the one offset the other. I do not accept his view of this transaction and hold that on his own admission referred to supra, said item of $400.05 was properly added to his 1953 income. I do not accept his explanation in this regard. The defendant's assessor, Mr Hardy, made some comments concerning the plaintiff's explanation at pages 526 and 527 of the transcript, volume 8 which I accept. Accordingly I reject the plaintiff's account of this transaction.
30 Category 3—Disallowance of Farm Expenses Claimed: $937.60—1953; $1,417.66—1954; $942.17—1955; $1,194.33—1956; $563.07—1957; $997.50—1958
31 The defendant's assessor, Mr Hardy, gave evidence in respect of the reasons why the defendant disallowed subject expenditures. The details of said disallowances are contained in Exhibit R-45 and on Schedules D-1 to D-6 attached thereto. Mr Hardy's explanation of said analysis is contained in pages 520 to 526 and pages 530 to 532 of volume 8 of the transcript. I do not propose to discuss this evidence in detail other than to say that I found Mr Hardy to be a credible witness and I accept the correctness of his disallowance of subject expenditures. Where there is any conflict on the facts between his evidence and the plaintiff's evidence, I accept the evidence of Mr Hardy. I have the further view that the plaintiff's own evidence in volume 5 of the transcript, pages 42 to 53 inclusive, substantiates the correctness of the disallowance of subject farm expenses. The plaintiff has not satisfied the onus upon him of showing that the defendant's assessments are wrong in respect of any items in this category.
32 Category 4—Unreported Legal Fees: 1952—$506.87; 1953—$452.82; 1954—$2,108.66; $1955—$1,957.39; 1956—$1,386.32; 1957—$1,717.37; 1958—$4,086.33; 1959—$3,275.97
33 At the trial, defendant's counsel conceded that the amounts set out above should be reduced as follows:1955 —$47 (previously shown as unreported legal fees—established in evidence to be a trust fund item re a payment on Crawford Truck—see Exhibit R-69)
1956 —Nieman—$6 (established in evidence that said amount was already reported under the name of Romanchuk—see Exhibit R-69)
Kozak—$30 (established in evidence as a disbursement—see Exhibit R-69)
1957 —Bilewich—$10 (previously shown as unreported legal fees—established in evidence to be a trust fund item—see Exhibit R-69)
34 The defendant's assessor, Mr John Lotochinski, gave detailed evidence in respect of this category and his explanations and reasons for adding said items to the plaintiff's income are contained in pages 262 to 296 of volume 6 of the transcript. In this evidence, Mr Lotochinski explained fully Exhibit R-64 which is a detailed breakdown for each year of the unreported legal fees. He impressed me as being a very fair, competent and reliable witness. Given the very unsatisfactory state of plaintiff's records, he did a remarkable job of auditing same and I am satisfied that Exhibit R-64 is as accurate as it is possible to be in the circumstances of this case. In any event, the onus is on the plaintiff to establish that the assessment is wrong and this he has failed to do. It is not without significance that for the first two years of the period under review, the plaintiff's records were in more detail and easier to audit than for the latter years. However, thereafter, the details of each transaction as recorded in the plaintiff's books became meagre indeed.
35 Many of the fee items in this category were fees earned by the plaintiff for estates handled by him. The plaintiff tried to persuade the Court that in estate matters, he would not consider that he had earned the money held in his bank account until absolutely every bit of work in connection with the estate had been completed. There were many instances of estates being practically completed in one taxation year, nothing happening on the file for several years, then perhaps one letter being written several years later, with the plaintiff taking the position that his fees for the estate work amounting to several hundred dollars had not been earned in the year when the work was done, but rather was entirely earned in the year when perhaps one letter was written. I reject categorically this explanation and find it to be completely beyond belief. Furthermore, his bank account contradicts his testimony. If the plaintiff was correct in his statement that he retained his fees in his trust account, he should have had an amount of over $3,000 in his bank trust account in December of 1957 whereas, in reality, at that time, his bank trust account contained only $89.86 (see evidence of Lotochinski at pages 297 to 300 inclusive of volume 7 of the transcript). I am satisfied, on the evidence, that the plaintiff utilized the fees for services rendered during the years under review and that they have been properly added to his income for the years under review. I am supported in this conclusion by numerous entries in the plaintiff's trust ledger where, on numerous occasions during the years in question, he has entered the words “to my fees”. Plaintiff did not give any credible explanation for these entries.
36 For the foregoing reasons, I have concluded that the unreported legal fees in Category 4 excepting the three small items referred to supra were properly added to the plaintiff's income for the years in question.
37 Category 5—Disallowed Office Expenses: 1956—$637.75; 1957—$567.79; 1958—$628.94; 1959—649.73
38 At the trial, defendant's counsel conceded that vouchers had been located showing that expenses for the Biggar law office in 1956 in the sum of $13.24 which was previously disallowed as being unvouchered should now properly be allowed as an expense in 1956.
39 The defendant's evidence in support of Category 5 was given by Mr Lotochinski on pages 303 to 314 of volume 7 of the transcript where Mr Lotochinski explains Exhibit R-55, the supplementary schedule of disallowed and adjusted office expenses. However, the figures established on Exhibit R- 55 through Mr Lotochinski's evidence are not the same as those contained in the pleadings as set out above. Therefore, there will have to be a reassessment on the disallowed office expenses for the years 1956 to 1958 inclusive as follows:
1956 -- $591.09
1957 -- 546.79
1958 -- 469.8440 So far as 1959 is concerned, the figure shown on Exhibit R-55 is $1,542.31, an amount far in excess of the amount pleaded. The amount pleaded only will be allowed, that is $649.73.
41 In my opinion, the evidence adduced by the plaintiff to attack this category falls far short of meeting the onus upon him of proving that the defendant's assessment is incorrect. Once again I do not accept the plaintiff's evidence concerning this category in so far as any allegations of fact made by him are concerned.
Counterclaim
42 I turn now to defendant's counterclaim in which the defendant claims penalties on the basis that the plaintiff wilfully evaded payment of a part of his tax on his income under subsection 56(1). The Tax Appeal Board held that subsection 56(1) only applies to action taken to evade collection of tax, following previous decisions of that Board[FN4: <p><em>Légaré Foundry Ltd v. MNR</em>, 36 Tax A.B.C. 351, 64 D.T.C. 696;<em>No 632 v. MNR</em>, 22 Tax A.B.C. 120, 59 D.T.C. 289.</p>] and thus refused to impose penalties in the circumstances of this case.
43 However, these decisions of the Tax Appeal Board were overruled by the Exchequer Court in the case of Elchuk v Minister of National Revenue, [1970] C.T.C. 326, 70 D.T.C. 6235. At page 329 [6237] of the judgment, President Jackett (as he then was) stated:
I cannot agree with the view expressed in this passage that the penalty provision only applies to action taken to evade collection of tax. In my view, one can evade payment of income tax by concealing the existence of income just as effectively as by concealing one's assets so that the tax cannot be collected.
The learned President went on to say that, in his view, subsection 56(1) was applicable in respect of what has happened before the assessment as well as after.44 Defendant alleges wilful evasion in respect of four categories:(a) unreported legal fees for each of the years 1952–1959 inclusive;
(b) farm income not reported for the year 1953;
(c) disallowed farm expenses for each of the years 1953–1958 inclusive; and
(d) disallowed office expenses for each of the years 1956–1959 inclusive.
45 I will deal firstly with the unreported legal fees. Certain facts were established in evidence which are, in my view, germane to a consideration of this category. Firstly, it was established that a substantial portion of the plaintiff's law practice consisted of preparing and filing income tax returns for many of his clients. He readily agreed that he had acquired considerable expertise in this field, as evidenced by his success in a number of cases which he argued before the Tax Appeal Board and the Exchequer Court. Knowledgeable as he was in income tax matters, it strikes me as rather curious, to say the least, that he would be so careless and negligent in the maintaining of records and filing of tax returns in so far as his own business was concerned. The plaintiff's own accounting witness, Mr Ackerman, said “... that the accounting action taken by Mr Hawrish was not of a good grade” (transcript, volume 1, page 8). Mr Ackerman also said that the plaintiff did not maintain a separate trust account at the bank. He had only one bank account, an office account, which was used for both office and trust transactions (see transcript, volume 1, pages 8 and 9). There was a complete commingling of his office expenses, his personal drawings, etc, with moneys received in trust for clients. Quite apart from possible infractions of The Legal Profession Act of Saskatchewan and the Rules, Regulations and Code of Ethics of the Law Society of Saskatchewan, it astounds and outrages me that the plaintiff would conduct the practice of law in such a slipshod fashion.
46 Against this background, I propose to consider in detail only a few of the transactions covered by this category as being characteristic of the plaintiff's method of operation. The first such transaction I will refer to as the Campbell transaction. The plaintiff had been retained by a Vancouver law firm to make collections for three clients of theirs from a Mr E B Campbell of Biggar, Saskatchewan. The Vancouver solicitors instructed the plaintiff on October 4, 1957 to discontinue further efforts to collect from Campbell. Notwithstanding said instructions, the plaintiff continued to collect from Campbell for a number of years thereafter. Plaintiff admitted that he has not accounted to his principals for this money even as yet (see transcript, volume 6, page 160). The evidence is clear that in respect of this transaction the plaintiff has retained the sum of $122.80, has not remitted to the client his proper share thereof and has not reported any of said moneys as income in any year.
47 The trial transcript, pages 152 to 177, volume 6, describes this transaction. It is indicative of the evasiveness and lack of responsiveness of the plaintiff when being cross-examined and is characteristic of his attitude throughout his entire cross-examination.
48 The second transaction to which I will refer is the Pashovitz transaction. The evidence establishes that Nick and Alex Pashovitz had joint problems with the Department of National Revenue and that they retained the plaintiff to act for them in this transaction. The plaintiff's trust ledger (Exhibit R-3) shows that on December 16, 1955 the plaintiff received in trust from the Pashovitzes the sum of $1,500 and the same day paid out, on their behalf, to the Receiver General of Canada the sum of $1,040.70. That left a balance in the trust ledger of $459.30. The same date, December 16, 1955 the trust ledger had this entry: “Paid Hawrish fees—$459.30” However, the plaintiff did not report said fees in his 1955 tax return or at any time thereafter. Plaintiff attempted to cover up this failure to report income by writing a receipt dated August 6, 1956 in the sum of $500 to Pashovitz while at the same time admitting that he did not receive any additional $500 from Pashovitz. Mr Alex Pashovitz, in his evidence, denied paying the plaintiff any additional $500 in 1956. When I asked the plaintiff for an explanation as to why he issued receipts totalling $2,000 when he only received $1,500, he was not able to give any satisfactory explanation therefor. The transcript, volume 5, pages 7 to 22 describes this transaction and again demonstrates the way in which the plaintiff has deliberately confused and distorted in order to conceal income.
49 The third transaction to which I will refer is the Victor Yuzak transaction. It is a small transaction involving only the sum of $10 but it does, in my view, reveal a great deal about the plaintiff's course of conduct in concealing income. Under date of December 1, 1961 Mr Yuzak signed a statutory declaration in which he said that the plaintiff had collected $10 on his behalf from a third person in 1955 in full settlement of damage done to his car. He went on to say in the declaration: “That I did not receive this $10 from Mr Hawrish but left it with him to pay for legal fees for work which Mr Hawrish had done for me.” The plaintiff did not report the $10 as income and to account for same, called Mr Yuzak as a witness at the trial who, in effect, repudiated the declaration referred to supra, and said that the $10 was trust moneys held by the plaintiff for him until 1961. Mr Yuzak's testimony is found in volume 1, at pages 70 to 90 of the transcript. I do not accept Mr Yuzak's testimony given at the trial. This is another example of the plaintiff's evidence about moneys being held “in trust” being contradicted by his own records prepared at the time. It is yet another ex post facto attempt by the plaintiff to account, in 1961, six years later, for income received in 1955.
50 Another example of the very careless way in which the plaintiff treated and recorded trust moneys occurs in volume 5, pages 32 to 34 inclusive of the transcript. In that evidence, he said that, on occasion, he would receive trust moneys, and put the moneys in his pocket, rather than depositing same in his bank account. Such a careless and loose practice has contributed to the almost impossible task imposed on the tax department in attempting to trace the very large volume of transactions over the years in question and has added, immeasurably to the confusion and uncertainty apparent in the plaintiff's records.
51 It was also established in evidence (volume 5, pages 138 to 141 inclusive) that, on some occasions, the plaintiff issued receipts (other than those from his receipt book containing copies) for fees received by him and that said fees were not reported by him as income. Exhibit R-68 is an example of such a receipt issued to Joseph Roslinski for $15 which was never reported as income. Such a receipt, since there was no duplicate copy thereof in plaintiff's records, would never have been discovered by defendant's auditors excepting that the original receipt was obtained through an interview with the client.
52 There was also a rather curious transaction dealing with 1956 fees as recorded in the cash ledger (Exhibit R-44). A figure of $600 has been changed to $100. When the plaintiff was asked about this change resulting in a reduction of income, he was unable to give any explanation as to why the change was made in his records (see transcript, volume 6, pages 194 to 199 inclusive).
53 The plaintiff also admitted in cross-examination (see transcript, volume 6, pages 210 and 211) that some 24 items in 1955 were omitted from income (see Exhibit A-48). The plaintiff's only explanation was that “... inadvertently my trust ledger for 1955 was not posted”. He said that he “forgot” to post the trust ledger. I do not accept this explanation. Having regard to the pattern established by plaintiff's course of conduct throughout the period under review, the evidence establishes that said omission was deliberate and wilful on the part of the plaintiff.
54 Additionally, the plaintiff was not able to swear positively that he issued receipts for all cash and cheques received (see transcript, volume 6, pages 218 to 221 inclusive).
55 Moreover, it is clear that his books and records do not contain a full report of every transaction. An example of this is the way in which he recorded a number of transactions concerning the Gelderbloom estate but failed to account for several cash items which should have been accounted for to balance the transaction out in his ledgers (see transcript, volume 6, pages 226 to 231 inclusive). Plaintiff was also unable to explain the omission of a $200 income item re the Gelderbloom estate (see transcript, volume 6, pages 237 to 240 inclusive).
56 Because of plaintiff's course of conduct as above set out, I am satisfied that he was guilty of wilful evasion in respect of the unreported legal fees and that the Minister properly assessed the penalty under subsection 56(1) in respect thereof.
57 Dealing now with category (b), the unreported farm income for 1953, I agree, that here also plaintiff's course of conduct was such as to indicate wilful evasion. He admitted that he had sold this grain in 1953 but attempted to cover this income up with some kind of cross entry which had nothing to do with the sale of his own grain. I therefore agree that the Minister properly assessed the penalty in respect of this item in the sum of $400.05.
58 Coming now to category (c), the defendant also alleges wilful evasion in respect of the disallowed farm expenses for each of the years 1953–1958 inclusive. While I have concluded that the defendant correctly disallowed these expenses, I am not satisfied that there was wilful evasion in respect thereof. Some of the items disallowed had to do with repairs, licences, gas and oil for the plaintiff's car. I think that even if the plaintiff made these expenditures, they were not allowable as farm operating expenses because the tenant (Frerichs) farmed the land on a two-third crop basis, using his equipment and paying all fuel and repair expenses. This also forms the basis for disallowing the plaintiff his claim for depreciation on his own farm machinery because, on his own admissions, it is clear that his own farm machinery was not used to farm the land for the years under review. However, I do not see, in the evidence concerning this category, the same deliberate and wilful evasion as in category 1, for example. I think this category results rather from a difference of opinion as to what can and cannot be claimed. I have accordingly concluded that the defendant has not established his right to assess penalty under subsection 56(1) in respect of the disallowed farm expenses.
59 Coming now to category (d), the disallowed office expenses for each of the years 1956–1959 inclusive. I have the view that this category is somewhat similar to category (c) since I am not satisfied, on the evidence adduced, that there was wilful evasion in respect of these expenses. Accordingly, the defendant will not be allowed to assess penalty under subsection 56(1) in respect of the disallowed office expenses.
60 The plaintiff, in his oral evidence, and in documentary evidence submitted by him, endeavoured to introduce a very large number of new items for which he sought to obtain credit on the assessments under review. He says these are credits which he discovered, some before and some after trial before the Tax Appeal Board. I raised this matter at the trial (see transcript, volume 3, pages 293, 294 and 295) indicating at that time that I was not disposed to allow such items and that the Court was not going to do what amounted to a reassessment. The plaintiff was allowed to introduce new items on the basis that they were relevant only to the issue of wilful evasion. I have taken these items into consideration for that limited purpose.
61 I now summarize hereunder the disposition which I propose to make of the main action and the counterclaim.
Main Action
62 1. Plaintiff's appeal is dismissed in respect of the real estate profit in the sum of $13,475.58 in 1953.
63 2. Plaintiff's appeal is dismissed in respect of the unreported farm income as follows:
1952 -- $2,127.75
1953 -- 400.05
1957 -- 107.49
64 3. Plaintiff's appeal is dismissed in respect of the following disallowed farm expenses:
1953 -- $ 937.60
1954 -- 1,417.66
1955 -- 942.17
1956 -- 1,194.53
1957 -- 563.07
1958 -- 997.50
65 4. Plaintiff's appeal in respect of unreported legal fees is allowed to the extent that there be a reassessment by the Minister on the basis that the following items be deleted from the plaintiff's income:
1955 -- $47.00
1956 -- 36.00
1957 -- 10.00
In all other respects, plaintiff's appeal in respect of unreported legal fees is dismissed.66 5. Plaintiff's appeal in respect of disallowed office expenses is allowed to the extent that there be a reassessment by the Minister on the basis that the disallowed office expenses for the years 1956 to 1959 inclusive shall be as follows:
1956 -- $591.09 less $13.24 $577.85
1957 -- 546.79
1958 -- 469.84
1959 -- 649.73
In all other respects, the plaintiff's appeal in respect of disallowed office expenses is dismissed.Counterclaim
67 1. In respect of unreported legal fees, the counterclaim is allowed and the assessments are referred back to the Minister for reassessment on the basis that he is entitled to assess penalties under subsection 56(1) of the Act in respect of the following items of unreported legal fees:
1952 -- $ 506.87
1953 -- 452.82
1954 -- 2,108.66
1955 -- $1,157.39 less $47.00 1,910.39
1956 -- $1,377.45 less $36.00 1,341.45
1957 -- $1,635.69 less $10.00 1,625.69
1958 -- 4,081.33
1959 -- 527.38
68 2. In respect of unreported farm income, the counterclaim is allowed and the assessment is referred back to the Minister for reassessment on the basis that he is entitled to assess a penalty under subsection 56(1) of the Act in respect of the following item of unreported farm income:
1953 -- $400.05
69 3. The counterclaim is dismissed with respect to all other items referred to therein.
70 So far as costs are concerned, the defendant is entitled to his costs in respect of the main action since this judgment sustains his assessments almost completely with a few minor exceptions. So far as the counterclaim is concerned, while success thereon is divided, I have, in my discretion, decided that the defendant is also entitled to his costs on the counterclaim. On the evidence I have found substantial wilful evasion by the plaintiff. Because of the plaintiff's course of conduct, the defendant's assessors and auditors have been required to devote literally thousands of man-hours in this investigation and audit, due in large measure to the plaintiff's faulty records, accounting methods, and course of conduct. This has resulted in a very considerable unnecessary cost to the taxpayers of Canada. Accordingly, the plaintiff is not entitled to any consideration on the question of costs.
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