Luprypa v. R., [1997] 3 C.T.C. 2363, 97 D.T.C. 1416

McArthur T.C.J.:

• a) His principal submission was that he made the sums of $16,000 in 1989, $20,000 in 1990 and $40,000 in 1991 from playing pool and that those amounts made from gambling, in his opinion, are not taxable. He relied on his accountant's advice, however, the accountant did not testify. Counsel for the Appellant advised that the accountant's whereabouts are unknown.

• b) He received substantial funds from his father including cheques totaling $20,000 and a cash gift of $15,000 which amounts were used to pay down a mortgage on Knowles Avenue, Winnipeg. This property had been his matrimonial home until 1986, when he acquired sole possession and in 1989, his father took a 50% interest in the property.

• c) He received $20,000 from his brother to complete a market research, which he never carried out. He admitted having deceived his brother who remains angry with him.

• d) He received $10,000 in cash from a friend, which friend has since moved to England.

• e) He received $10,000 in cash from a girlfriend and she did not testify.

• f) He received smaller amounts in cash from friends including $5,000 from a cousin and they did not testify.

Facts

2 The 43 year old Appellant is now a farmer, a sausage maker and proprietor of hot dog stands. He was engaged in playing pool from 1989 until he purchased a farm with his father in 1991. In June 1991 the Appellant filed T-1 income tax returns for 1989 and 1990 taxation years indicating his total income as nil. Because the Appellant had failed to do so, in December of 1992, an officer of Revenue Canada completed a T-1 tax return on his behalf for the 1991 taxation year using the net worth method. The officer indicated a total income of $62,496.98 which amount was later reduced to $57,696.00.

3 The Appellant testified that prior to 1989 he had been gainfully employed in various endeavors. After his separation and divorce in 1986, he entered a “mid-life crisis” and spent the three relevant years playing pool for money. He stated that every weekday Monday through Friday he would play snooker in the afternoon using this time as a practice session improving his skills. Each weekday evening, commencing after 11:00 p.m., he would attend a bar where he would play opponents who were inebriated. The Appellant would not drink alcoholic beverages during the week giving him an advantage. He indicated that from playing pool in this manner he made $16,000 in 1989, $20,000 in 1990 and $40,000 in 1991. He was a skillful player and won between $200 and $300 almost daily. Using the Appellant's approximation of daily earnings of $200, extended over a 48 week period, he would have earned $48,000 per year.

4 His income tax returns for 1989 and 1990 were prepared by an accountant who indicated in the returns that the Appellant's occupation was a gambler and that his proceeds from gambling were not taxable. The Appellant required income tax returns completed in his efforts to obtain a mortgage for Knowles Avenue. As stated, he owned the Knowles Avenue property jointly with his father, and they eventually sold the property. From mortgage proceeds and later from the sale proceeds of Knowles Avenue, the Appellant and his father jointly purchased the Gimsley farm property which the Appellant presently operates.

5 The Minister, in calculating the Appellant's net worth, appears to have overvalued Knowles Avenue by attributing to it a value of $120,000. It in fact sold for $75,000 after 1991.

6 The Appellant's accountant who prepared his income tax returns was not present nor were the friends and relatives who purportedly gave him money gifts. However, the Appellant's father testified on his behalf. In painstakingly obtaining information for the net worth assessments, an officer of the Minister obtained from a Bank a false T1 income tax return prepared by the Appellant's accountant. The return indicated that the Appellant, in 1990, had an income of $50,000. It was a falsehood and the document was used by the Appellant in his efforts to obtain mortgage financing from the Bank.

Position of the Appellant

7 The main focus of the Appellant's argument was that the proceeds from gambling are not taxable. Gambling winnings cannot be considered income from a source pursuant to subsection 3(a) of the Act. The Appellant's Counsel submitted that the Appellant received gifts of money from his father, brother, cousin, girlfriend and from others during the relevant years. He argued that the Minister's net worth calculations were inaccurate.

Position of the Respondent

8 The income of the Appellant during the 1989, 1990 and 1991 taxation years was understated by the amounts of $37,140.84, $16,300.68 and $57,696.00, respectively. These amounts were determined by the net worth method. In playing pool as he did, the Appellant was carrying on a business and, as such, he earned income from a source. The documentation and other evidence of gifts of money were insufficient and unacceptable. Penalties were properly assessed pursuant to subsection 163(2) of the Income Tax Act.

Analysis (Gambling as income)

9 The dominant issue is whether the proceeds from the Appellant's pool playing are taxable. In his able argument, Counsel for the Appellant presented that nowhere in his search for relevant jurisprudence could he find a case where gambling gains were held to be taxable. He referred the Court to several cases.

10 In Balanko v. Minister of National Revenue (1981), 81 D.T.C. 887 (T.R.B.)the taxpayer freely and frequently waged on horse races, sporting activities and card games with a view to profit. The Tax Review Board held that it was not an established business so as to characterize the taxpayer as a professional gambler. M.J. Bonner, Member of the Board (as he then was), stated at page 888:

...There is a total absence of any evidence here which indicates the presence of any organized system for the minimization or management of risk. This lack of system distinguishes the Appellant, an intemperate gambler, from the professional gambler.

11 In Minister of National Revenue v. Morden (1962), 61 D.T.C. 1266 (Can. Ex. Ct.)at page 1267 Cameron J. of the Exchequer Court decided that:

The respondent's gambling gains were not income subject to tax. He was addicted to gambling -- it was his hobby and it provided him with the excitement he craved. Although his bets were high at times and his gains substantial, it could not be found that, during the years in question, he had conducted an enterprise of a commercial character in relation to his betting activities or had so organized these activities as to make them a business, calling or vocation.

12 Respondent's counsel referred the Court to the following quotations from the same cases. In Balanko v. Minister of National Revenue (1981), 81 D.T.C. 887 (T.R.B.), the Court stated at page 888:

While risk-taking is necessary ... it is management or minimization of risk which is the characteristic of business activity.... There is a total absence of any evidence here which indicates the presence of any organized system for the minimization or management of risk. This lack of system distinguishes the Appellant, an intemperate gambler, from the professional gambler.

13 In Morden (supra) the Exchequer Court stated the following at page 1269:

To be taxable, a gambling gain must be derived from carrying on a “business” as that term has been defined in s. 127(1)(e) (supra). Casual winnings from bets made in a friendly game of bridge or poker or from bets occasionally placed at the race track are, in my view, clearly not subject to tax. As stated by Hyndman, D.J. in the Walker case, each case must depend on its own particular facts. A reasonable test in such matters seems to be that stated in Lala Indra Sen, [1940] 8 I.T.R. (Ind.) 187, where Braund, J. said at p. 218:

• If there is one test which is, as I think, more valuable than another, it is to try to see what is the man's own dominant object -- whether it was to conduct an enterprise of a commercial character or whether it was primarily to entertain himself.

• ...I find no evidence that the respondent during the years in question in relation to his betting activities conducted an enterprise of a commercial character or had so organized these activities as to make them a business calling or vocation.

• a) He carefully managed the risks.

• b) He was a skilled player.

• c) He played Monday through to Friday each week.

• d) He spent his afternoons playing snooker to perfect his skills.

• e) He played inebriated opponents after 11:00 p.m. to minimize his risk.

• f) He won most of the time earning, approximately $200.00 daily.

• g) He drank alcoholic beverages only on weekends when not playing pool to give him a sober advantage over his inebriated opponents.

• h) He was calculating and disciplined.

• i) It was his primary source of income and he relied on this steady income.

This is a fact-driven case. Considering the facts, there is no doubt that pool playing was not a hobby for the Appellant. It was his livelihood and his business. He had income from a source as required in section 3 of the Act.

15 The focus now is the amount of income he earned from his pool business. The Appellant has an extraordinary task in challenging the assessments. He filed returns for 1989 and 1990 after the required time limits indicating no income and describing himself as a gambler. He filed no return for 1991 and the Minister filed on his behalf. However, his accountant had prepared a completely false return for 1991 indicating an income of $50,000 from a non-existent source. This return was completed for the purposes of obtaining mortgage financing. His evidence was unconvincing and he kept no records.

16 The Act requires that a taxpayer keep records of the business he or she carries on. The failure to keep records is not fatal if the income and expenses can be proved otherwise. (Weinberger v. Minister of National Revenue (1964), 64 D.T.C. 5060 (Can. Ex. Ct.)). The Appellant placed himself in a position in which he cannot establish his income and is the author of his own misfortune. This position is supported by Christie A.C.J. in Kay v. R. (1994), 95 D.T.C. 1 (T.C.C.).

• 1. In 1989, the Appellant claimed he made a non-taxable sum of $16,000 playing pool plus money gifts. He filed a late return indicating no taxable income. The Respondent added $37,140 to his income.

• 2. In 1990, the Appellant claimed he made a non-taxable sum of $20,000 from playing pool plus money gifts. He filed a late return indicating no taxable income. The Respondent added $16,300 to his income.

• 3. In 1991, the Appellant claimed he made a non-taxable sum of $40,000 from playing pool plus gifts. He filed no return with the Department of National Revenue. The Respondent added $57,696 to his taxable income.

Further Analysis

18 The Appellant's testimony was not impressive. His motivation in filing nil returns in 1989 and 1990 was to obtain an institutional mortgage for Knowles Avenue. His motivation for having a false, unfiled return was to mislead a bank in order to obtain mortgage financing. Other than the Appellant's testimony, there was no evidence to support his having received monetary gifts from anyone, save his father. His father presented cancelled cheques totaling $20,000 made from him to the Appellant. The cheques from the Appellant's father are dated May 15, 1991, May 20, 1991 and May 25, 1991 in the amounts of $8,000, $8,000 and $4,000, respectively. It appears the proceeds were used to pay down the Knowles Avenue mortgage to permit the purchase of the farm. The Appellant's father had a 50% interest in both properties.

19 The Appellant was assessed by the net worth method. This method involves measurement of the excess of assets over liabilities at both the beginning and end of a period and the assumption that any increase over the period is income, except to the extent that some other source of the increase can be identified and eliminated. To the amounts thus determined there is added amounts calculated to have been expended for day-to-day personal expenses over the period. It is apparent that the net worth method leads to a result which is much less precise than that obtained by direct measurement, that is to say, the ascertainment of total revenues and the deduction of the costs of earning them.

20 The onus is on the Appellant to demonstrate that the Minister's assessments are wrong. Much of his evidence was directed toward demonstrating that he had non-taxable winnings derived from his pool playing. The only evidence with respect to the amounts made from playing pool was the testimony of the Appellant. It was not supported by any documentary or oral evidence.

21 The evidence with respect to the gifts of cash was unconvincing. It was presented by the Appellant without supporting documents or corroborating witnesses other than his father. I accept that his father gave him $20,000 as evidenced by cheques totalling that amount in 1991. I am prepared to credit the Appellant with one-half of this amount being $10,000 in 1991, reducing the 1991 assessment from $57,696 to $47,696.

22 The Appellant had the burden of proving that he received cash gifts of $15,000 from his father, $20,000 from his brother, $10,000 from a friend who now lives in England, $5,000 from this cousin and $5,000 or $10,000 from his girlfriend. He failed to meet this burden. Mere statements are not enough. Cogent evidence is required to disprove a net worth assessment. Please refer to Courtois v. R. (1979), 80 D.T.C. 6175 (Fed. T.D.). Uncorroborated statements of pool earnings and vague memories of cash gifts are not sufficient to set aside the net worth assessments.

23 The following statement of Reed J. in Patricio v. R. (1984), 84 D.T.C. 6413 (Fed. T.D.)at page 6415 applies to the present situation:

...the plaintiff appeared to me to be a person who will make statements, and give answers, to produce the most convenient result for himself at the time, rather than attempting to be as accurate and truthful as possible. This characteristic renders most of his evidence of dubious value.

24 On the subject of penalties assessed under subsection 163(2) I refer to the following statement of Strayer J. in Venne v. R., [1984] C.T.C. 223 (Fed. T.D.)at page 236:

The subsection obviously does not seek to impose absolute liability but instead only authorizes penalties where there is a high degree of blameworthiness involving knowing or reckless misconduct. The section has in the past been applied subjectively to taxpayers, taking into account their intelligence, education, experience, etc. and I believe this implies that an ignorance of the law which is not unreasonable for the particular taxpayer in question and the particular circumstances may be acceptable as a defence to the application of penalties. On this basis, and having regard to the fact that the onus is on the Minister to prove that the penalty should be applied, I find the evidence ambiguous and therefore conclude that the penalty should not be applied even in respect of the unreported income from interest.

25 In conclusion the appeal is allowed to reduce the 1991 assessment from $57,000 to $47,000 and no penalties shall be applied. The appeals for the 1989 and 1990 taxation years are dismissed. The Respondent has been substantially successful and costs are awarded to the Respondent.