R. v. McKay, [1975] C.T.C. 279, 75 D.T.C. 5178

Collier, J:

1 This is an appeal by the plaintiff from a decision, dated July 19, 1973, of the Tax Review Board. The case involves reassessments by the Minister of National Revenue in respect of the defendant's income and tax for the years 1964 to 1967 inclusive.

• (a) that these reasons for judgment may be more intelligible if this matter should proceed to higher courts;

• (b) to make more intelligible to the parties my later comments in respect of onus.

3 The defendant is now 74 years old. He has been in many businesses or occupations over the years. It is obvious the Minister of National Revenue holds the view that some, at least, of those businesses have been nefarious or criminal. The defendant testified he had been in hotel enterprises since 1941, having owned either alone or in partnership several hotels in British Columbia. His last hotel interest was the Eldorado in Vancouver. It was sold in 1961. He considers himself to have been retired since that time. The Minister in the pleadings apparently disagrees with that categorization of the defendant's status. The Minister has alleged, among other things, that before and since 1961 the defendant has been in the business of swindling, particularly a form called the “money machine” swindle. It is not necessary here to describe the details of that incredible fraudulent charade usually used to bilk avaricious businessmen.

4 For the years in question, the defendant filed returns reporting net income as follows:

1964    $16,129.58
                       1965    $15,418.31
                       1966    $10,972.33
                       1967    $ 8,239.90

5 Some time before 1968, in the course of an audit of a company known as Sears Construction Limited (controlled by one Hilton Whitworth), the Minister determined that $300,000 in cash had been withdrawn by Whitworth from the company. Whitworth was subsequently convicted of some kind of misappropriation. At one stage he told the Minister's officials that the company's money had been lost by him as a result of a money machine swindle. Certain names were given. The Minister then assessed, for his alleged share of the proceeds, one John L Morgan as a perpetrator of or participant in the swindle. On a further reassessment some unidentified bank deposits of US currency were added to Morgan's income. Morgan appealed that reassessment to the Exchequer Court. Eventually he consented to a judgment which brought into his income a one-quarter share of the dollars larcenously extracted from Whitworth. Morgan is alleged, during the settlement negotiations with tax department officials, to have named the defendant and others as his accomplices in the Whitworth swindles.[FN1: <p>These allegations are summarized from the reply to notice of appeal filedin the Tax Review Board (January 29, 1973), the statement of claim in thisCourt (filed November 16, 1973) and the amended statement of claim again inthis Court (filed March 6, 1975). Morgan and the other alleged swindlers arenow all dead, except for the defendant and two others. The latter two did notgive evidence before the Tax Review Board or this Court.</p>]

6 On June 10, 1969 the Minister issued reassessments. He added to reported income the following:

1964  $ 54,255.01 (bank deposits)
                     1965  $ 23,487.96 (bank deposits)
                           $ 10,000.00 (a mortgage payment)
                     1966  $ 47,738.34 (bank deposits)
                           $    143.76 (other income)
                     1967  $  9,226.54 (bank deposits)
                           -----------
                           $144,851.61

7 The taxpayer filed notices of objection. There followed an exchange of correspondence and information between the defendant, through his accountant Mr Foster, and the Tax Department (see Exhibit 5-B). The Department accepted or were satisfied with the explanations given for many of these deposits and reduced the above figures to the following:

1964  $51,021.55 (13 deposits)
                     1965  $17,207.96 (9 deposits)
                     1966  $ 4,205.00 (3 deposits)
                     1967  $ 2,700.00 (4 deposits)
                           ----------
                           $75,134.51

8 The defendant appealed to the Tax Review Board. At that stage, the Minister had not prepared a net worth statement for the period in question, nor did he rely on a form of net worth statement which had been submitted by Mr Foster, following a departmental request on March 19, 1970. The Tax Review Board heard the appeal on June 19, 1973. The Chairman said in part:

... The Minister, in my view, has taken an unusual approach in assessing this man in the manner in which he did.

At the outset, I had thought it was a net worth assessment, but it is not, and the matter has been treated simply as a failure to report the amounts deposited.

9 It appears that certain evidence was led before the Board in an attempt to prove participation by the defendant in the money machine swindle of Whitworth. The Chairman, for several reasons, ruled the evidence (which was basically hearsay) inadmissible. The Board went on to accept evidence given by the defendant or on his behalf as to substantial sources of capital funds from which the defendant could have obtained the moneys making up the so- called unexplained deposits. The Board directed the deposits be deleted from the defendant's taxable income.

10 The original statement of claim in this Court is substantially the same as the reply filed by the Minister in the Tax Review Board. It begins by stating that the Minister included in the defendant's income certain bank deposits totalling the amount earlier set out. I then quote paragraph two:

2. The above amount represents some or all of the Defendant's share of the proceeds of various frauds and other criminal acts perpetrated by the Defendant and others on a number of individuals through the medium of a confidence game known as the “money machine” swindle, including two swindles perpetrated against one, Hilton Whitworth, of Vancouver, British Columbia.

11 I also quote a portion of paragraph three, which has 20 subparagraphs:

3. in re-assessing the Defendant for his 1964 to 1967 taxation years, the Minister of National Revenue assumed, inter alia, that:

• (a) for a number of years up to and including 1964, and subsequent years, the Defendant had been engaged with others in the practice of defrauding persons through the operation of the “money machine” swindle. Associated with the Defendant were:

  John Chmelyk            Deceased August 29, 1961
                  John Polonich           Deceased November 5, 1964
                  F.red Collins            Deceased March 13, 1965
                  James Gray              Deceased June 10, 1965
                  Joseph Eror             Deceased December 20, 1966
                  John L. Morgan          Deceased 1972
                  Raymond Outtrim         Still alive
                                          (see #528-58 DTC 395)
                  L. Ackerman             Unknown

• (b) during his 1964 taxation year the Defendant and his criminal associates defrauded the said Hilton Whitworth, of $298,000.00 by means of the money machine swindle.;

12 Subparagraphs 3(o) and (p) indicate the extent to which Her Majesty was prepared to go in attempting to prove liability for additional tax and penalties. I quote:

3.

• (o) the Defendant has also had a number of financial transactions with the aforementioned Gray and Polonich, details of which will be led at the hearing of this appeal;

• (p) the Defendant has for many years been suspected by various police authorities as being involved in money machine swindles. He was arrested and held overnight for questioning by the Vancouver City Police in 1950 with respect to a money machine swindle, but no charges were laid. He was an associate and friend of Joseph Eror, who, along with Raymond Outtrim and Fred Collins, were arrested and charged, in 1967, with fraud in connection with a money machine swindle in Richmond, British Columbia. Eror was convicted. He died shortly after his release from the British Columbia Penitentiary. Before his death, Eror named the Defendant as his co-conspirator and accomplice in a number of money machine swindles;

13 The trial commenced, on those pleadings, before me on December 5, 1974. Before any evidence was led counsel for the taxpayer stated what he thought the issues to be. In his view the major dispute was as to the accuracy of a net worth statement prepared by the Minister, an answering net worth statement prepared on behalf of the taxpayer, and the inferences to be drawn from the evidence in respect of net worth. Counsel for the plaintiff, during the pre-evidence discussion, indicated the Minister's net worth statement had been prepared by the revenue department after the Tax Review Board decision

... in order to justify the assessment, and our position will be that those net worth statements will in fact show an income discrepancy of some $83,000. which the taxpayer failed to include in his income for the 64 to 67 taxation years.

MR HYNES: Now to that extent, my lord, the case before you is different than that from the Tax Review Board, we are simply not asking you to affirm or disaffirm the decision of the Board based on the same evidence.

We will be calling, as well my lord, other evidence, including the evidence of Sergeant Steenson who is referred to in the Tax Review Board decision to attempt to associate the taxpayer with other people whose activities were in the nature of money machine swindles.

Now, my lord, there are a couple of statements in the Minister's Statement of claim which I would like to draw your attention to and I think that—

THE COURT: Can I ask this, are you throwing out all the assumptions stated by the Minister in the pleadings?

MR HYNES: No, my lord.

THE COURT: I see. You are still saying that the source of these deposits came from a share in money machine swindles?

Mr HYNES: Yes, my lord, I am glad you mentioned that because it isn't really a necessary part of the Crown's case to show the source of unexplained funds, it is sufficient simply for the Crown to say these funds are here, you haven't' been able to show that they came from a capital source, therefore we have assumed them to be income and that's the end of that.

THE COURT: There is such a thing as fairness and in two courts, the Crown has pleaded at length the assumptions, I know the Minister is not bound by the assumptions but if the Crown is saying well really we don't have to go on this, I think something formally should be put on the record to that effect and something should have been formally put on the record before we got into this courtroom. I think it's unfair to say well, I have got four pages of assumptions which allege criminal acts and then say, well now, when we get into the federal court, we really don't have to prove all that, all we have to do is file net worth statements and if we can establish them, that is it. In other words, the taxpayer is being called upon to meet a different case than he had to meet in the Tax Appeal Board and what is presently on the pleading. Now I know the onus of proof, I know all that.

Mr HYNES: My lord, the taxpayer has been well aware for some considerable time of the case that he is going to be called upon to meet.

THE COURT: On the pleadings?

Mr HYNES: No, my lord, but in practice here, the discoveries and that, all of these statements have been—

THE COURT: Why isn't it on the pleadings?

MR HYNES: Well my lord, I think that's fair comment, the Minister could perhaps—should have amended the pleadings to allege net worth statements would be relied upon.

THE COURT: Well let's go ahead but I think it's a very bad practice.

14 As a result of that and further discussion, the trial was adjourned after evidence was heard from three witnesses. The understanding was that the statement of claim would be amended. On December 16, 1974, the resumption of the trial was fixed for April 15, 1975. An amended statement of claim was filed on March 6, 1975. I again think it desirable to quote certain paragraphs:

1. On May 18, 1971, the Minister of National Revenue (hereinafter referred to as “the Minister”) re-assessed the Defendant's tax for the 1964, 1965, 1966 and 1967 taxation years to include in the Defendant's income for those years certain bank deposits which the Defendant claimed to be unable to identify, totalling over the said taxation years, $75,134.51. Upon assessing the Defendant, the Minister levied penalties by virtue of the appropriate provisions of the Income Tax Act and of the British Columbia Income Tax Act.

2. The Defendant, in filing his Notice of Objection and Notice of Appeal to the Tax Review Board, continued to maintain that he was unable to identify the source of these deposits. At a subsequent hearing before the Tax Review Board, he alleged that the deposits were gambling winnings and re-deposits of money taken to the United States for the purpose of gambling.

3. The above amount in fact represents a portion of the Defendant's share of the proceeds of various frauds and other criminal acts perpetrated by the Defendant and others on a number of individuals through the medium of a confidence game known as the “money machine” swindle, including two swindles perpetrated against one Hilton Whitworth of Vancouver, British Columbia.[FN2: <p>I point out that these wide and vague allegations were retained in thisamended statement of claim and no particulars were given of the“various frauds”, “criminal acts”, or of the allegedvictims.</p>]

4. In re-assessing the Defendant for his 1964 to 1967 taxation years, the Minister of National Revenue assumed, inter alia, that:

• (a) From 1930 up to and including 1964 and subsequent years, the Defendant was associated with some or all of the following individuals, who were engaged in the practice of defrauding persons through the various swindles or other confidence games, including the “money machine” swindle:

  John Chmelyk            Deceased August 29, 1961
                  John Polonich           Deceased November 5, 1964
                  F.red Collins            Deceased March 13, 1965
                  James Gray              Deceased June 10, 1965
                  Joseph Eror             Deceased December 20, 1966
                  John L. Morgan          Deceased 1972
                  Raymond Outtrim         Still alive
                                          (see #528-58 DTC 395)
                  Louis Ackerman          Unknown

The Defendant also has a personal history of involvement in confidence games.[FN3: <p>I point out that this subparagraph alleges (for the first time in thislitigation) association with others alleged to be swindlers using“various swindles” including the money machine swindle. Again noparticulars are given.</p>]

• (b) During 1964 the Defendant and Morgan, Polonich and Gray defrauded the said Hilton Whitworth, of $298,000.00 by means of the money machine swindle.

6. The presiding member of the Tax Review Board, in his Reasons for Judgment, stated that since the Defendant had sold interests in a number of businesses during the years under appeal and during prior years, there was a potential source of funds available to the Defendant which might have been available to provide for the deposits in issue, and which the Minister of National Revenue had not accounted for. Since that decision was handed down, the Minister of National Revenue, through his officials, has prepared net worth statements for the Defendant which demonstrate, inter alia, that the funds received by the Defendant from the sale of his business interests have been accounted for, and were therefore not available to the Defendant to provide a possible explanation for the bank deposits. These statements also confirm, by the net worth accounting technique, that the Defendant received approximately $75,000.00 in cash from unexplained sources.

15 In my opinion, the pleadings throughout (in this Court and in the Tax Review Board) indicated to the taxpayer the case he had to meet was that during the years 1964 to 1967 he made bank deposits of funds (income) which had been derived from the alleged swindles perpetrated on Whitworth. It is true that the technical wording in amended paragraph three includes an allegation that the unexplained funds originated from

... various frauds and other criminal acts perpetrated ... through the medium of a confidence game known as the “money machine swindle” ...

16 The addition of paragraph 6 merely indicates, to my mind, that the plaintiff proposed to rely on net worth statements to confirm or verify the main substance of the case. The basis of the amended statement of claim, as I see it, is still a claim advanced against the taxpayer founded on “unexplained” deposits, the source of which is said to be two criminal swindles. The inference the plaintiff seeks to be drawn is that the deposits represent income rather than capital receipts. The amendments do not really meet the objection I made when the case first came on for hearing; if net worth comparisons were to be the essence of the matter, then that should be so indicated in the pleadings; the taxpayer is entitled to know the case he has to meet. This point came up again for discussion during the resumed hearing. Counsel for the taxpayer understandably elected to proceed as if in fact a net worth case had been pleaded rather than undergo further adjournments in order for additional amendments to be made.

17 I shall now comment on the manner in which the trial then proceeded. Counsel for the taxpayer in December had, without discussion, accepted the traditional position and view that, because this was a trial de novo and “the onus being on the taxpayer”, the defendant should put his case in first.[FN4: <p>This practice that a respondent taxpayer (in a tax appeal case in thisCourt) should “go first” stems, as I understand it, from theremarks of Rand, J in<em>R W S Johnston</em>v<em>Minister of National Revenue</em>, [1948] S.C.R. 486 at 489–90;[1948] C.T.C. 195 at 202–3;3 D.T.C. 1182:<blockquote><p>“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.</p><p>Instead, the taxpayer abstained from making that allegation. As fact it was not raised by the defence although involved in the reference to the rule of the schedule applied by the assessor, but in the reply it was denied as fact. There, then, appeared the first reference to an allegation that should have been in the claim; and on principle I should call it an indulgence to the taxpayer, assuming that he desired to raise that point in appeal, to be permitted so to cure a defective declaration. The language of the statute is somewhat inapt to these technical considerations but its purpose is clear: and it is incumbent on the Court to see that the substance of a dispute is regarded and not its form.</p><p>I am consequently unable to accede to the view that the proceeding takes on a basic change where pleadings are directed. The allegations necessary to the appeal depend upon the construction of the statute and its application to the facts and the pleadings are to facilitate the determination of the issues. It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of fact and rulings of law which have given rise to the controversy. But unless the Crown is to be placed in the position of a plaintiff or appellant, I cannot see how pleadings shift the burden from what it would be without them. Since the taxpayer in this case must establish something, it seems to me that that something is the existence of facts or law showing an error in relation to the taxation imposed on him.”</p></blockquote>and of Kellock, J at page 492 [205]:<blockquote><p>“As I read the provisions of the statute commencing with section 58, a person who objects to an assessment is obliged to place before the Minister on his appeal the evidence and the reasons which support his objection. It is for him to substantiate the objection. If he does not do so he would, in my opinion, fail in his appeal. That is not to say, of course that if he places before the Minister facts which entitle him to succeed, the Minister may arbitrarily dismiss the appeal. No question of that sort arises here, and I am deciding nothing with respect to it.</p><p>I further think that that situation persists right down to the time when the matter is in the Exchequer Court under the provisions of section 63. I regard the pleadings, which may be directed to be filed under subsection 2 of that section, as merely defining the issues which arise on the documents required to be filed in the court without changing the onus existing before any such order is made. In my opinion therefore the learned judge below was right in his view that the onus lay upon the appellant.”</p></blockquote></p><p>In the<em>Johnston</em>case, the sections of the statute referred to by Rand, J were from the<em>Income War Tax Act</em>, RSC 1927, c 97 and amendments. Thurlow, J in<em>Pashovitz</em>v<em>Minister of National Revenue</em>, [1961] Ex. C.R. 365, [1961] C.T.C. 288, 61 D.T.C. 1167, said, at page 371 [294, 1170], in respect of the 1948 statute:<blockquote><p>“When assessments of tax are made, they are made pursuant to Section 42 (now Section 46), and it has been held under similar provisions contained in the<em>Income War Tax Act</em>that, on an appeal to this Court from such an assessment, the onus of proof that there is error in it falls on the taxpayer.”</p></blockquote>He then cited substantially the same portions of the reasons in the<em>Johnston</em>case as I have set out above.</p><p>I observe that subsection 175(3) of the “new” Act provides:<blockquote><p>“175. (3 An appeal instituted under this section shall be deemed to be an action in the Federal Court to which the<em>Federal Court Act</em>and the Federal Court Rules applicable to an ordinary action apply, ...”</p></blockquote>(See also Rule 800 of the Federal Court Rules.)</p><p>Rule 494(2) provides, generally speaking, that the order of presentation of evidence shall be the plaintiff first and then the defendant (... shall be entitled to adduce evidence ... in the following order ...).</p><p>It may be the dissenting reasons of Locke, J in the<em>Johnston</em>case (pp 495–7, 206) are now germane to the procedure and the “onus” in appeals governed by subsection 175(3). I express no opinion on this point. In the present case it was, throughout, accepted by both sides that the “onus” was on the taxpayer. The<em>Johnston</em>case dealt with the statute applicable for the 1944 taxation year. No reference was made to section 69 of the<em>Income War Tax Act</em>. It had no application, because notices of appeal and dissatisfaction had been filed within the required times. Subsection 69A(4) was added in 1946. I have not overlooked the difference in wording and probable effect of subsection 42(6) of the 1948 Act (later subsection 46(7)), and subsection 152(8) of the “new” Act. I express no opinion on the meaning to be given to “... be deemed to be valid ...” or as to how it may affect an “onus” to demonstrate error in an assessment. I suggest subsection 152(8) is of no great assistance in determining who should “go first”. It can be argued the present practice (in a case such as McKay) means the plaintiff has waived her right to adduce evidence in chief, and is limited to matters in reply only.</p>] A chartered accountant (Mr Foster) gave evidence in which, on various grounds, he disagreed with a number of items which the Minister's representatives had included or excluded in net worth statements prepared by them on July 4, 1974 (Exhibit 18) and September 20, 1974 (Exhibit 5). Those two statements also included source and application of funds computations for the 4-year period. In the former, the total unexplained source of funds was calculated as $77,449.26 and in the latter as $84,324.26. I shall return later to the various net worth statements.

18 The taxpayer was then called. He gave evidence supporting the assumptions made by Mr Foster in the net worth statement that witness had prepared (Exhibit 4). That document purports to show there were no unexplained sources of funds, but in fact an amount of $20,175.74 over the application of funds. Mr McKay, in chief, categorically denied ever having participated in any money machine swindle.

19 In cross-examination, the plaintiff sought to question the taxpayer in respect of other alleged money machine swindles and other frauds suggested to have been perpetrated by the defendant prior to 1963. Some of the questions put had reference to criminal activities going back to the 1930's. It was urged this line of cross-examination was admissible under the so-called evidentiary principle of “similar acts”. A number of oral legal skirmishes took place. I think it fair to say most of them occurred between counsel for the plaintiff and the Court. I think it right to say they were largely instigated by myself. Counsel for the Minister candidly stated he had, a very short time before the resumption of the trial, unearthed a large volume of potential evidence relating to the taxpayer's allegedly criminal and fraudulent activities going back many years. He stated, and I accept, that all the documentary evidence relevant to those matters (not necessarily money machine swindles) had been made available to the taxpayer's counsel as soon as possible. The pleadings were, however, not amended to set out these new matters (either by way of specific allegation or by way of particulars) nor was the additional documentary material dealt with as provided by Rule 461.

20 As I see it, Her Majesty whether represented by the Minister of National Revenue or any other Crown officer should be meticulous in pleading fully the case proposed to be made in support of the impugned assessment, and in complying with the rules as to discovery and production of documents so the taxpayer can apply for adjournment or further examinations for discovery. There is, in my view, neither compliance with the rules of court nor the general principles of fairness when a large volume of documentary and potentially very prejudicial evidence is delivered to opposing counsel's doorstep on the eve of trial. This is particularly so in a case such as this where serious allegations of criminal misconduct are being made.

21 After considerable argument and discussion, counsel for the Minister rightly assumed the Court was going to rule most of the “similar acts” evidence inadmissible for a number of reasons.[FN5: <p>If this trial had been heard with a jury, I would have had no hesitationin immediately rejecting all of this evidence on the grounds its obviouspotential prejudice far outweighed whatever probative value the evidencemight otherwise have had. It has been many times said that evidence of“similar acts” is not admissible to prove general propensity or(to relate the problem to this case) because the defendant had perhaps at onetime been involved in money machine swindles, he probably was involved in theWhitworth swindle. The whole problem of the use of “similar acts”evidence in civil cases has been reviewed at length in two decisions of theBritish Columbia Court of Appeal:<em>McDonald et al</em>v<em>Canada Kelp Co Ltd et al</em>(1974), 39 D.L.R. (3d) 617, and<em>Contini</em>v<em>Canarim Investment Corpn Ltd et al</em>, [1974] 5 W.W.R. 709.</p>] He advised that the Minister did not propose to proceed further with that type of evidence or questioning either in support of proof of the Whitworth swindle, or to attack the defendant's credibility.[FN6: <p>I indicated, at one stage, that some of the disputed evidence might berelevant to the general question of credibility, or perhaps relevant to someother allegations in the pleadings. Paragraph 4(k) of the amended statementof claim alleged the bank deposits were income to the defendant “fromthe aforementioned criminal activities”. Paragraph 4(1) alleged:“... the above amounts are income from the defendant's business”.The Minister elected not to try and have the evidence admitted with referenceto other allegations, or in respect of credibility.</p>]

22 The case then continued on the basis the onus was on the defendant to establish the assessments in question were wrong; that there was evidence of cash deposits in the years in question adding up to the amounts earlier set out; that the defendant's explanations were either not to be accepted or were insufficient. Both parties relied on their respective net worth statements. The Minister asserted his net worth statement showed an unexplained source of funds of at least $84,000; that this confirmed the unexplained cash deposits of approximately $75,000 came from sources other than those testified to in evidence by the defendant.

23 That concludes (unfortunately at some length) the review I referred to in the second paragraph of these reasons.

24 I propose now to deal in some detail with the “deposits”. Of the 13 deposits in 1964, 10 were made to the Canadian Imperial Bank of Commerce and 3 to the Royal Bank of Canada. All of the deposits were in cash except one (November 9, 1964) which was a transfer from a bank account in San Francisco. The amount transferred was $11,500 US. Premium of $819.37 was credited. I am satisfied on the evidence given by the taxpayer and supported by documents that the substantial portion of the November 9 amount was the repayment to the taxpayer in cash of moneys owing to him on a mortgage (for $13,000 originally) on a vessel (the North Coaster No 1). The defendant's recollection is that in that month at San Francisco he was repaid $10,000 by Morgan of Skeena Towing Ltd. He put this sum plus some gambling winnings made at Las Vegas or Reno into his San Francisco bank account, then had the funds transferred to Vancouver. I accept the defendant's explanation of this particular deposit including his statement that the balance ($1,500) of the deposit was in all likelihood obtained by gambling. As will appear later in these reasons, I am unable to accept the defendant's general evidence as to gambling winnings and losses because of its vagueness. In respect of this particular deposit, I find his testimony to be reliable. He was able to recall depositing some winnings along with the cash repayment. The plaintiff is, therefore, directed to deduct the amount of $12,319.37 from the defendant's income as computed by the Minister for 1964.

• (a) gambling winnings;

• (b) the remains of cash taken by him on trips to the US to visit relatives and to gamble;

• (c) cash from persons who from time to time owed or paid him money.

26 I am unable to accept the defendant's explanations. I do not say they are clearly false. They are, I find, too vague both as to the nature and sources of the receipts and as to the times of receipt. In coming to that conclusion I have tried, in fairness to the defendant, to make considerable allowance for the fact he has been called upon through the medium of initially concurring assessments, then arbitrary reassessments in 1969, further reassessment in 1971 and the subsequent litigation to try and come up with satisfactory explanations of banking transactions which go back many years and for which he has no records. His evidence as to his gambling winnings and losses was, however, contradictory and to my mind insufficient to displace the assumptions of the Minister or, to put it another way, the onus upon the taxpayer.[FN8: <p>I have already commented at some length on this problem of onus (seefootnote at p 286). As this case was originally pleaded and as the plaintiffat first attempted to prove by evidence, the deposits allegedly came fromserious criminal acts. If those same allegations had been made (as well theymight) in a criminal charge against the defendant, the well-known onus ofproof beyond a reasonable doubt would have applied as well as the presumptionof innocence. Her Majesty would have been prosecutor (plaintiff). Thedefendant, in the hypothetical criminal case, would not have been compelled(for practical purposes) to go into the witness box (as he was in this“civil” case) nor would he have been compelled to (perhaps) giveevidence against himself in pre-criminal trial interrogation under oath. Herethe defendant was examined for discovery. (I know only those portions of hisdiscovery put to him at trial.)</p><p>I am not overlooking the practical factual situation in most tax cases. The facts are usually within the full knowledge of the taxpayer. Sometimes the revenue department, when assessing, does not have all those facts or knowledge of where to obtain them. The use of assumptions in the pleadings is therefore understandable, particularly when Her Majesty is the defendant. I am not convinced, however, the so-called “onus on the taxpayer” is a rigid rule, capable of no exceptions. I incline to the view that, in cases where her Majesty is the plaintiff, there should be no hard-and-fast rule. Each action should be looked at on its own issues and in its own circumstances. In this particular case, and in analogous cases, where serious allegations charging crime are made by Her Majesty, as plaintiff, the onus of proving them and of leading evidence should be on the party who raises them. It is not sufficient, in my view, to say that “tax cases” are somehow different from other civil cases tried in this Court.</p>]

27 The defendant said he has or had a number of relatives in California. There is no doubt he enjoys gambling. He has gambled at Las Vegas and Reno over the years. I find nothing illegal, immoral, or sinister in that. He testified on examination for discovery that between 1960 and the date of his examination for discovery (in March of 1974) he had lost between $25,000 and $50,000 gambling. At the same time, he endeavoured to say that he had won approximately $27,000 in 1964; that this explained many of the cash deposits in that year including a large one on February 12 of some $15,000 US funds. In his net worth statements, it was the defendant's position that no portion of his overall gambling losses should be taken into account. Yet, for the purpose of explaining the deposits in 1964, he insists the alleged winnings in that year ought to be taken into account and accepted as the source of the deposits. His testimony on this whole subject matter is, I repeat, too vague and inconsistent to be relied upon. Those comments apply also to the other explanations that these funds may have been the remains of sums taken to the US for expenses and for gambling purposes, or moneys paid to him by others (loan repayments).

28 I must, however, record some sympathy for the taxpayer and some criticism of the Minister in respect of three deposits in 1967: $500 (a cheque), $100 (cash) and $200 (cash) respectively. Those amounts are almost miniscule in comparison with many of the other amounts disclosed and investigated in connection with this taxpayer's affairs over the years in question. I suspect the tax gatherer, as well as the particular assessor, or the particular investigator in this case, might well have equal difficulty (three, four or five years later) in endeavouring to explain to suspicious officialdom the source of a $100 deposit.

29 I now deal with this case on the basis of the net worth statements. I observe, at the outset, that these statements must be accepted with caution. The basic premises of the statements filed by the Minister and criticized by the defendant are founded on the defendant's recollection (some years later) of his net worth as of January 1, 1964, and the changes in it up to and including December 31, 1967. According to the net worth statement filed by the Minister (Exhibit 5) the total unexplained source of funds amounted (as I have earlier set out) to some $84,000. It was conceded in argument that the mortgage repayment in respect of the vessel, the North Coaster No 1, probably should have been included. I am prepared, as well, to accept the defendant's evidence that, as of January 1, 1964, he owned shares in MacLeod-Cockshutt valued at $1,000. There is a dispute as to the amount to the credit of the defendant in a San Francisco bank account as of December 31, 1967. The difference between the parties is $9,000. The Department used second-hand information obtained from a Canadian bank. This indicated the defendant had a balance of approximately $15,000. That was not in fact the case. That mistake indicates the care one must exercise in using and giving weight to net worth statements based on the frailties of human recollection and second-hand evidence. It did however, come out at trial that, during the years in question, there had been large deposits totalling approximately $9,000 made to the San Francisco bank account. The Minister is fortunately able to say that, while it appears the $15,000 bank balance figure was an error, it turns out there were additional unexplained deposits of approximately $9,000. The defendant's explanation of these particular deposits was similar to the explanations I have previously characterized as unacceptable.

30 The Minister included in his net worth calculations two unexplained cheques drawn by the defendant, totalling $9,500. Mr Foster excludes them. I find no good reason supporting one view or the other.

31 The Minister, in endeavouring to trace the source and application of funds, includes in his calculations gambling losses for the four years in question estimated at $25,000. The basis for that figure comes from the examination for discovery which I have earlier referred to. Mr Foster would delete any amount for gambling losses because he accepts Mr McKay's statement that, over the years, the defendant had overall losses. He argues there is no sound reason to attribute half of the highest estimate of losses to the years in question. I agree that the treatment by the department is arbitrary. So is the exclusion of any losses by the defendant. Both net worth statements are therefore suspect.

32 The defendant testified he had been repaid approximately $9,000 by one James. He (McKay) had loaned moneys to a company called Maui Holdings Ltd. He had also guaranteed a bank loan. James in some way had become liable to McKay through default by the company in these loan transactions. The defendant testified that James had paid him the $9,000 in “dribs and drabs”, always in cash. The defendant's evidence was unclear as to the years in which these moneys had been repaid. He appeared to suggest a good deal of it had been paid between 1964 and 1967. He said he gave James receipts. James was called to testify on the defendant's behalf. He did not, in my view, inspire confidence by his recollection of the facts. He guessed he had personally paid back $5,000 to $10,000; that his secretary seemed to think it was around 1964 or 1965. He did not produce or volunteer the receipts. I am unable to attach sufficient weight to the evidence of James and the defendant as to this transaction in order to find on a balance of probabilities that the defendant was repaid $9,000 during the period in question.

33 The final transaction relied upon by the defendant as a capital source of cash funds relates to the alleged sale of certain shares in a private company called Fire Valley Land and Cattle Co Ltd (Fire Valley). The controlling shareholder at one time was Lloyd Jordan. He, too, gave evidence on behalf of the defendant. He, too, as was the defendant (in many matters) and the witness James, devoid of any records or documents of probative assistance. What evidence was adduced did prove to my satisfaction that the defendant had at one time loaned Fire Valley $50,000 and another company in which Jordan had an interest an equal sum of $50,000. It appears that at some stage the $50,000 loan to Fire Valley (originally secured by a mortgage) transformed itself into a personal loan to Jordan. As security, Jordan handed to McKay share certificates 3 to 6 inclusive representing all the issued and outstanding shares of the company. It was agreed that if Jordan defaulted in payments, McKay, after reasonable notice to Jordan, could sell the shares (see Exhibit 3). Both the defendant and Jordan testified that default was made in repayment. McKay said he sold the shares to one Cloutier for $40,000 in cash, $10,000 of which was in US funds. The defendant relies on receipt of this large sum of cash as a source for the unexplained funds. I point out the only amount (deposits) in issue for the year 1967 is the relatively small sum of $2700. If the assessments in question were based purely on net worth comparisons covering 1963 to 1967, then I assume it could be argued this $40,000 amount, if in fact it was received, could be applied over the four years. The assessments here, however, are in respect of particular deposits in particular years. I fail to see, therefore, how an alleged receipt of $40,000 in 1967 can explain deposits going back to 1964.

34 In any event, I find the evidence adduced by the defendant in respect of this particular transaction does not meet the usual civil onus, ie, a balance of probabilities. The taxpayer himself kept no written records of these matters. A record of the Canadian Imperial Bank of Commerce (Exhibit 9) indicates the Fire Valley shares were handed to the bank in 1966 for safekeeping and not released to the defendant until August of 1968. The defendant's evidence in chief was that the Cloutier purchase was in 1967. The clear inference I draw from his testimony was that the shares had been given to Cloutier at the time the $40,000 was paid. On being confronted in cross-examination with Exhibit 9 the defendant agilely shifted his ground. He then purported to recall there had been some problem at the time about transferring the shares into Cloutier's name; he had not in fact delivered them to Cloutier until some time later, after the latter had threatened legal action.

35 The defendant also testified he had, at the request of Cloutier, given him a receipt for $50,000 even though only $40,000 had been paid. It seemed to be assumed at trial that the Cloutier in question was one Joseph Omer Cloutier who died on December 13, 1970. The son of that deceased gave evidence. He was a good reliable witness. I accept his testimony. His father had been an accountant for many years. He had retired in 1965, although he still kept up an interest in mining companies. His son, upon the father's death, went through all his father's affairs. He found no documents or records relating to Jordan, the defendant, or Fire Valley. His father had never told him about a transaction of that kind. It was his father's habit usually to discuss any business matters of that sort with him. Mr Cloutier, Jr stated his father was meticulous in the matter of keeping records. I am not persuaded this deceased Cloutier was necessarily the alleged purchaser of the Fire Valley shares. If it was in fact another person with the same name, it seems to me the defendant should have produced that person to corroborate his and Jordan's evidence, or explained the failure to produce the real purchaser. In any event, the whole transaction as recounted by the defendant, Jordan, and another witness, Bettin (none of whom impressed me on this particular matter) is so vague that I cannot accept it as establishing, on a balance of probabilities, the defendant received $40,000 in cash in 1967.

36 That concludes my views on the submissions made on behalf of the defendant in respect of the net worth statements. To my mind, the evidence and arguments put forward do not destroy or topple the assumptions (that the deposits were income), nor demonstrate error in the assessments.

37 There remains the validity of the penalties imposed by the Minister pursuant to subsection 56(2) of the Income Tax Act and section 19 of the BC statute. The Minister has alleged the defendant knowingly or under circumstances amounting to gross negligence made statements or omissions having the tax result contemplated by the subsection. As I translate that to the pleadings, the Minister says the defendant knowingly failed to disclose, as income, the deposits in question or was grossly negligent in not so doing. If the onus is on the defendant to destroy that allegation, I find that he has met it. If the onus is on the Minister to prove the allegation, then the Minister has not satisfied it. My basic conclusion in this case is that the defendant has not discharged the overall onus of showing the assessments (insofar as they added the deposits into income) were incorrect. That does not mean, nor does it imply, there has been intent or negligence of any kind on the part of the defendant in making statements or omissions in the returns for the years in question.

38 To sum up. The defendant's appeal in respect of the 1964 taxation year is allowed in part. The reassessment, dated May 18, 1971, for that year is referred back to the Minister with a direction that there be deducted from his calculation of income the sum of $12,319.37. The assessment of penalties for each of the years in question is vacated or set aside. The reassessments, all dated May 18, 1971, are referred back to the Minister with that direction, as well as for reassessment in respect of interest. The appeals are otherwise dismissed. As the plaintiff succeeded on the major issues, she is entitled to full costs against the defendant.