Rigby Estate v. The Queen, docket 98-1752-IT-G

Date: 20000414

Dockets: 98-1752-IT-G; 98-1757-IT-G

BETWEEN:

JUDITH RIGBY AS EXECUTRIX

OF THE ESTATE OF WILLIAM RIGBY, WALTER LUNN,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent,

Reasons for Judgment

Beaubier, J.T.C.C.

[1] These appeals pursuant to the General Procedure were heard together on common evidence at Sydney, Nova Scotia on March 29, 30 and 31, 2000.

[2] At the opening of the hearing counsel advised the Court that Mr. Rigby died in 1999 and accordingly, the style of cause of his appeal was amended to be "Judith Rigby as Executrix of the Estate of William Rigby". The parties also filed a Partial Agreed Statement of Facts which reads:

98-1752(IT)G & 98-1757(IT)G

TAX COURT OF CANADA

BETWEEN:

WILLIAM RIGBY

- and –

WALTER LUNN

Appellants

- and –

HER MAJESTY THE QUEEN

Respondent.

PARTIAL STATEMENT OF AGREED FACTS

The Appellants William Rigby and Walter Lunn and the Respondent, Her Majesty the Queen, by her solicitor, agree to the following facts provided that:

1. Such admissions are made for the purpose of these proceedings only; and

2. The parties are permitted to adduce additional evidence which is not contrary to these facts.

a. That the Rigbys received as gifts, for their 25^th wedding anniversary, about $4,560.00.

b. Each of the Appellants incurred monthly phone charges of $25.00 per month.

c. That the amount of $35.00 for room and board, was paid each week by the Rigby's three daughters for that portion of time they resided with their parents.

d. Monique Rigby received an insurance settlement of $9,653.50 and gave the entire proceeds to her father.

e. The Appellant, the late Daniel William Rigby, won as a prize the amount of $6,908.00 in a loonie draw during the income tax year ending July 31^st, 1993.

f. In the year ending July 31^st, 1993 the Appellant, the late Daniel William Rigby, won $1,648.00 in a lottery sponsored by University College of Cape Breton.

g. The Appellants entered into a partnership (Easy Three) with Harold Head and as part of their entry into the partnership the Appellants agreed to contribute $31,000.00 cash and to assume the debt of $29,000.00 for a boat owned by Harold Head and the Appellants subsequently made payments of approximately $6,000.00 towards the boat.

h. In the spring of 1992, litigation arose as a result of the breakdown of the Easy Three partnership between the Appellants and Harold Head.

i. A settlement was reached in May 1992 between Harold Head and the Appellants with respect to the dissolution of the partnership whereby Harold Head would pay to the Appellants $49,700.00; $42,000.00 of which was paid in the 1992 taxation year.

j. Education expenses deducted from the income tax of the late Daniel William Rigby in the year ending July 31^st, 1991, in the amount of $3,550.00 and the year ending July 31^st, 1992, in the amount of $6,400.00 and the year ending July 31^st, 1993, in the amount of $2,850.00 were included as expenditures in the net worth, and were amounts in fact paid by his daughter who had incurred those expenses, though deducted from income tax by Mr. Rigby.

k. Legal fees included in a list of personal expenditures by Revenue Canada for the late Daniel William Rigby in the year ending July 31^st, 1992, were included in the amount of $2,047.00.

l. Legal fees included in a list of personal expenditures by Revenue Canada for Walter Lunn in the year ending July 31^st, 1992, were included in the amount of $2,047.00.

m. Shortly after the end of the net worth period of review ending July 31^st, 1993, the late Daniel William Rigby received payments by way of disability insurance benefits and Canada pension benefits, which, however, covered and paid benefits attributable to the tax year ending July 31^st, 1993.

n. In the year ending July 31^st, 1993, the Appellant, Walter Lunn, deducted from his income tax, an education expense of $1,480.00 with respect to university costs of his daughter, Janet Lunn, which was in fact paid by his daughter, Janet.

o. During the tax year ending July 31^st, 1993, Janet Lunn received a student loan in the amount of $350.00.

p. During the taxation years in question, Walter and Anne Lunn incurred personal expenditures as follows:

Walter and
Anne Lunn
PERSONAL EXPENDITURES
	1991	1992	1993
REPAIRS
Residence
HOUSEHOLD EXPENSES
Heat	$1,000.00	$1,000.00	$1,000.00
Power	$720.00	$720.00	$720.00
Cable TV	$250.00	$250.00	$250.00
Insurance (Building)	$150.00	$150.00	$150.00
Property Taxes	$500.00	$500.00	$500.00
MOTOR VEHICLES
Insurance	$930.00	$930.00	$930.00
MISCELLANEOUS EXPENSES
Donations	$280.00	$991.00	$639.00
Books, Magazines	$0.00	$0.00	$0.00
Life Insurance	$720.00	$720.00	$720.00
Dry Cleaning	$0.00	$0.00	$0.00
Barber/Hairdresser	$60.00	$60.00	$60.00
Clothing	$240.00	$240.00	$240.00
Household Cleaning	$0.00	$0.00	$0.00
Carpets	$0.00	$0.00	$0.00
Appliances	$0.00	$0.00	$0.00
Draperies
Bedding
Education	$0.00	$0.00	$1,480.00
Legal fees		$2,047.00
PERSONAL LOAN INTEREST
Bank
Vehicles	$0.00	$0.00	$0.00
Other	$0.00	$0.00	$0.00

o. During the taxation years in question, William and Judith Rigby incurred personal expenditures as follows:

William and
Judith Rigby
PERSONAL EXPENDITURES
	1991	1992	1993
REPAIRS
Residence
HOUSEHOLD EXPENSES
Heat	1,000.00	1,000.00	1,000.00
Power	720.00	720.00	720.00
Cable TV	250.00	250.00	250.00
Insurance (Building)	150.00	150.00	150.00
Property Taxes	500.00	500.00	500.00

MOTOR VEHICLES
Insurance	632.00	632.00	632.00
MISCELLANEOUS EXPENSES
Donations	10.00	10.00	10.00
Books, Magazines	00.00	00.00	00.00
Life Insurance	720.00	720.00	720.00
Dry Cleaning
Barber/Hairdresser	00.00	00.00	00.00
Clothing
Household Cleaning
Carpets
Appliances			500.00
Draperies
Bedding
Education	3,550.00	6,400.00	2,850.00
Legal fees		2,047.00
PERSONAL LOAN INTEREST
Royal Bank
Cottage		1,500.00	2,000.00
Other	210.00	210.00	210.00

Dated at Sydney, Nova Scotia this 28^th day of March, 2000.

Morris Rosenberg

Deputy Attorney General of Canada

Solicitor for the Respondent

"signature"    Per: "signature"

RALPH W. RIPLEY JOHN SMITHERS

Counsel for the Appellants Counsel for the Respondents

[3] The following witnesses testified for the Appellants: Walter Lunn; Judith Rigby; Harold Head; Stephen Daix; Ann Gillis; Alma Rigby York and John Anderson, C.A., the Appellants' chartered accountant. The Respondent's witnesses were Aleen MacIsaac, C.G.A. and Reg Martin, C.A., both officers of Revenue Canada who dealt with the audits in question. Mr. Rigby was sometimes described as "Billy" or "William" or "Daniel" during the hearing.

[4] The Appellants have appealed net worth assessments for 1991, 1992 and 1993. Paragraphs 6, 7 and 8 of the Reply to Walter Lunn's Notice of Appeal read:

6. By Notices of Reassessment dated January 4, 1996 the Minister advised the Appellant, by Notices dated January 4, 1996, that his income tax liability for the 1991, 1992 and 1993 taxation years had been reassessed as a result of the Minister's increasing the Appellant's total income by the following amounts:

Taxation Year	Increase to Total Income
1991	$35,051
1992	$29,934
1993	$11,157

The Appellant was also advised that penalties had been assessed.

The Appellant filed valid Notices of Objection in response to which Notices of Reassessment dated April 22, 1998 were issued advising the Appellant that his income tax liability for the 1991, 1992 and 1993 taxation years had been reassessed by adjusting the previous increases to the Appellant's total income to the following amounts:

Taxation Year	Increase to Total Income
1991	$32,676
1992	$19,987
1993	$6,075

The Appellant was also advised that penalties had been assessed.

7. In so reassessing the Appellant, the Minister relied on, inter alia, the following assumptions:

a) in 1985, the Appellant and William Rigby, operating in partnership, (hereinafter the "partners") began operation of a convenience store and in 1989 they purchased a second store;

b) In 1992 they constructed a new store on the site of the second one acquired and closed the first two stores;

c) throughout the taxation years under appeal the partners operated 8 to 10 video gambling terminals from their store(s);

d) the partners failed to keep proper books and records of income from the video gambling machines;

e) in reporting income for the 1991, 1992 and 1993 taxation years the Appellant did not include all of the income received in those years;

f) the incomes of the Appellant during the 1991, 1992 and 1993 taxation years were understated by the amounts of $32,676, $19,987 and $6,075, respectively;

g) the understated amounts were determined by the net worth method (a copy of the Statement of Personal Net Worth is attached as Schedule "A");

h) all of the above income discrepancies are attributable to the Appellant's share of unreported income from the video gambling machines and unreported sales from the convenience store;

i) the Appellant knowingly, or under circumstances amounting to gross negligence, in carrying out a duty or obligation imposed under the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.), as amended (the "Act"), made or participated in, assented to or acquiesced in the making of false statements or omissions in the income tax returns filed for the 1991, 1992 and 1993 taxation years, as a result of which the tax that would have been payable assessed on the information provided in the Appellant's income tax returns filed for those years, was less than the tax in fact payable by the amounts of $9,358, $4,229 and $1,064; and

j) as a consequence of the said understatement of income, the Minister assessed the Appellant penalties under subsection 163(2) of the Act for the 1991, 1992 and 1993 taxation years in the amounts of $4,680, $2,114 and $532, respectively.

B. ISSUES TO BE DECIDED

8. The issues are:

a) whether the Appellant's income for the 1991, 1992 and 1993 taxation years as reported were understated;

b) whether the amounts determined by the Minister were reasonable in the circumstances; and

c) whether the Minister properly assessed penalties pursuant to subsection 163(2) of the Act in those years.

SCHEDULE A

Walter and Anne Lunn
Glace Bay, N.S.
Comparative Statement of Assets, Liabilities and Net Worth
For the Period August 1, 1990 to July 31, 1993
	July 1/90	July 31/91	July 31/92	July 31/93
ASSETS
Personal Assets
Cash on Hand	$100.00	$100.00	$100.00	$100.00
Savings account	326.18	581.43	1064.18	612.46
residence-Walsh Lane, Glace Bay	$50,000.00	$50,000.00	$50,000.00	$50,000.00
Land- Walsh Lane	$5,000.00	$5,000.00	$5,000.00	$5,000.00
Land 141 Coldbrook Dr. Syd.River	$8,000.00	$8,000.00	$8,000.00	$8,000.00
1989 Chev. Cavalier 4 Door	$0.00	$0.00	$0.00	$5,000.00
1980 Chev 4Door	$0.00	$0.00	$350.00	$350.00
1989 Chev 4Door	$10,000.00	$10,000.00	$10,000.00	$10,000.00
Investment in Easy Three Fish	$0.00	$30,000.00	$0.00	$0.00
Cash advanced to B & W Enterprises	$0.00	$0.00	$31,000.00	$31,000.00
Balance of Easy Three Fish receipt	$0.00	$0.00	$3,850.00	$2,850.00
Rental Assets
None	$0.00	$0.00	$0.00	$0.00
Business Assets
Partnership Capital Account	$27,517.00	$42,630.00	$46,706.00	$50,859.00
TOTAL ASSETS	$100,943.18	$146,311.43	$156,070.18	$163,771.46
	July 1/90	July 31/91	July 31/92	July 31/93
LIABILITIES
Personal Liabilities
None	$0.00	$0.00	$0.00	$0.00
Business Liabilities
See Partnership Account	$0.00	$0.00	$0.00	$0.00
TOTAL LIABILITIES	$0.00	$0.00	$0.00	$0.00
NET WORTH	$100,943.18	$146,311.43	$156,070.18	$163,771.46
Closing Net Worth of Previous Year		$100,943.18	$146,311.43	$156,070.18
Increase or (Decrease) in Net Worth		$45,368.25	$9,758.75	$7,701.28
		July 31/91	July 31/92	July 31/93
Increase or (Decrease) in Net Worth		$45,368.25	$9,758.75	$7,701.28
ADJUSTMENTS
Additions
Personal Expenditures		$18,700.00	$21,458.00	$20,539.00
Income Tax, CPP, U.I., etc., self		$1,372.00	$5,566.00	1,287.00
Income Tax, CPP, U.I., etc., spouse		($899.00)	($962.00)	($1,202.00)
TOTAL ADJUSTMENTS TO ADD		19,173.00	$26,062.00	$20,624.00
Deductions
Spouse's income		$7,056.00	$0.00	$0.00
TOTAL ADJUSTMENTS TO DEDUCT		$7,056.00	$0.00	$0.00
Total Income per Net Worth		$57,485.25	$35,820.75	$28,325.28
Less: Total Income Reported		$24,809.00	$15,834.00	$22,250.00
Discrepancy per Net Worth		$32,676.25	$19,986.75	$6,075.28	$58,738.28

[Based upon the evidence, the July 1, 1990 headings of the first column should read July 31, 1990]

Walter and
Anne Lunn
PERSONAL EXPENDITURES
	1991	1992	1993
FOOD	$7,000.00	$7,000.00	$7,000.00
REPAIRS
Residence	$500.00	$500.00	$500.00
HOUSEHOLD EXPENSES
Heat	$1,000.00	$1,000.00	$1,000.00
Power	$720.00	$720.00	$720.00
Cable TV	$250.00	$250.00	$250.00
Telephone	$900.00	$900.00	$900.00
Insurance (Building)	$150.00	$150.00	$150.00
Property Taxes	$500.00	$500.00	$500.00
RECREATION
Sports/Entertainment	$3,200.00	$3,200.00	$3,200.00
MOTOR VEHICLES
Gas and Oil	$1,200.00	$1,200.00	$1,200.00
Repairs and Tires	$500.00	$500.00	$500.00
Insurance	$930.00	$930.00	$930.00
MISCELLANEOUS EXPENSES
Donations	$280.00	$991.00	$639.00
Books, Magazines	$0.00	$0.00	$0.00
Life Insurance	$720.00	$720.00	$720.00
Dry Cleaning	$0.00	$0.00	$0.00
Barber/Hairdresser	$60.00	$60.00	$60.00
Clothing	$240.00	$240.00	$240.00
Household Cleaning	$0.00	$0.00	$0.00
Furniture	$500.00	$500.00	$500.00
Carpets	$0.00	$0.00	$0.00
Appliances	$0.00	$0.00	$0.00
Draperies	$25.00	$25.00	$25.00
Bedding	$25.00	$25.00	$25.00
Education	$0.00	$0.00	$1,480.00
Legal fees		$2,047.00
PERSONAL LOAN INTEREST
Bank
Vehicles	$0.00	$0.00	$0.00
Other	$0.00	$0.00	$0.00
TOTAL EXPENDITURES	$18,700.00	$21,458.00	$20,539.00

[5] Paragraphs 7, 8 and 9 of the Reply to William Rigby's Notice of Appeal contained corresponding provisions in Mr. Lunn's Reply in paragraphs 6, 7 and 8. The only differences are in paragraph 7 and the assumption in subparagraph 8(g). They read:

7. The Appellant filed valid Notices of Objection in Response to which Notices of Reassessment dated April 22, 1998 were issued advising the Appellant that his income tax liability for the 1991, 1992 and 1993 taxation years had been reassessed by adjusting the previous increases to the Appellant's total income to the following amounts:

Taxation Year	Increase to Total Income
1991	$37,878
1992	$29,961
1993	$27,129

The Appellant was also advised that penalties had been assessed.

8. In so reassessing the Appellant, the Minister relied on, inter alia, the following assumptions:

...

g) the understated amounts were determined by the net worth method (a copy of the Statement of Personal Net Worth is attached as Schedule "A");

...

SCHEDULE A

William and Judith Rigby
Lingan, N.S.
Comparative Statement of Assets, Liabilities and Net Worth
For the Period August 1, 1990 to July 31, 1993
	July 1/90	July 31/91	July 31/92	July 31/93
ASSETS
Personal Assets
Cash on Hand	$100.00	$100.00	$100.00	$100.00
Cash on hand from Loonie Draw	$0.00	$0.00	$0.00	$6,908.00
Cash on hand from UCCB lottery	$0.00	$0.00	$0.00	$1,648.00
Savings account – Royal Bank	$11,883.94	$13,202.83	$44.95	$13,782.47
Residence-Lingan Road	$35,000.00	$35,000.00	$35,000.00	$35,000.00
Residence – Shore Road	$60,000.00	$60,000.00	$60,000.00	$60,000.00
Summer Residence – Mira	$0.00	$0.00	$52,000.00	$52,000.00
1984 Food 2Door	$3,000.00	$3,000.00	$3,000.00	$3,000.00
1979 Mercury 4Door	$1,000.00	$1,000.00	$1,000.00	$1,000.00
1978 GMC	$1,000.00	$1,000.00	$1,000.00	$1,000.00
Accounts Receivable Billy & Walter Enterprises Ltd.	$0.00	$0.00	$0.00	$11,544.00
1988 Chrysler Daytona	$0.00	$0.00	$7,000.00	$7,000.00
Investment in Easy Three Fish	$0.00	$30,000.00	$0.00	$0.00
Cash advanced - B & W Enterprises	$0.00	$0.00	$30,000.00	$30,000.00
Renovations – summer residence	$0.00	$0.00	$1,000.00	$1,000.00
Balance Easy Three	$0.00	$0.00	$3,850.00	$2,850.00
Cash from Stephen Daix	$0.00	$0.00	$30,000.00	$30,000.00
Rental Assets
3475 Ross Ave., New Waterford	$30,000.00	$30,000.00	$30,000.00	$30,000.00
Business Assets
Partnership Capital Account	$27,517.00	$42,630.00	$46,706.00	$54,467.00
TOTAL ASSETS	$169,500.94	$215,932.83	$300,700.95	$341,299.47
LIABILITIES
Personal Liabilities
Royal Bank – Mira property	$0.00	$0.00	$29,600.00	$23,600.00
Loan from Stephen Daix	$0.00	$0.00	$30,000.00	$30,000.00
Business Liabilities
TOTAL LIABILITIES	$0.00	$0.00	$59,600.00	$53,600.00
NET WORTH	$169,500.94	$215,932.83	$241,100.95	$287,699.47
Closing Net Worth of Previous Year		$169,500.94	$215,932.83	$241,100.95
Increase or (Decrease) in Net Worth		$46,431.89	$25,168.12	$46,598.52
		July 31/91	July 31/92	July 31/93
Increase or (Decrease) in Net Worth		$46,431.89	$25,168.12	$46,598.52
ADJUSTMENTS
Additions
Personal Expenditures		$21,562.00	$28,459.00	$23,862.00
Income Tax, CPP, U.I, etc., self		$47.00	3,324.00	$606.00
		$0.00	$0.00	$0.00
		$0.00		$0.00
TOTAL ADJUSTMENTS TO ADD		$21,609.00	$31,783.00	$24,468.00
Deductions
Spouse's income		$0.00	$0.00	$0.00
UCCB lottery win		$0.00	$0.00	$1,648.00
Youth Bound Limited lottery win		$0.00	$0.00	$6,908.00
Contribution from Monique				$9,653.50
Room & Board paid by Children		5,460.00	3,920.00	3,640.00
Deposit from Alma Rigby			7,000.00
TOTAL ADJUSTMENTS TO DEDUCT		$5,460.00	$10,920.00	$21,849.50
Total Income per Net Worth		$62,580.89	$46,031.12	$49,217.02
Less: Total Income Reported		$24,703.00	$16,070.00	$22,088.00
Discrepancy per Net Worth		$37,877.89	$29,961.12	$27,129.02	$94,968.03

[Based upon the evidence, the July 1, 1990 headings of the first column should read July 31, 1990]

William and
Judith Rigby
PERSONAL EXPENDITURES
	1991	1992	1993
FOOD	$7,000.00	$7,000.00	$7,000.00
REPAIRS
Residence	500.00	500.00	500.00
HOUSEHOLD EXPENSES
Heat	1,000.00	1,000.00	1,000.00
Power	720.00	720.00	720.00
Cable TV	250.00	250.00	250.00
Telephone	900.00	900.00	900.00
Insurance (Building)	150.00	150.00	150.00
Property Taxes	500.00	500.00	500.00
RECREATION
Sports/Entertainment	3,200.00	3,200.00	3,200.00
MOTOR VEHICLES
Gas and Oil	1,200.00	1,200.00	1,200.00
Repairs and Tires	500.00	500.00	500.00
Insurance	632.00	632.00	632.00
MISCELLANEOUS EXPENSES
Donations	10.00	10.00	10.00
Books, Magazines	120.00	120.00	120.00
Life Insurance	720.00	720.00	720.00
Dry Cleaning	50.00	50.00	50.00
Barber/Hairdresser	60.00	60.00	60.00
Clothing	240.00	240.00	240.00
Household Cleaning
Furniture		500.00	500.00
Carpets
Appliances			500.00
Draperies	25.00	25.00	25.00
Bedding	25.00	25.00	25.00
Education	3,550.00	6,400.00	2,850.00
Legal fees		$2,047.00
PERSONAL LOAN INTEREST
Royal Bank
Cottage		1,500.00	2,000.00
Other	210.00	210.00	210.00
TOTAL EXPENDITURES	$21,562.00	$28,459.00	$23,862.00

[6] Assumptions (a), (b) and (d) are correct. The maximum number of video terminals ("poker machines") which the Appellants owned during 1991, 1992 and 1993 was 8. The partnership's fiscal years ended July 31 in each year. The audits were for these fiscal periods. Mr. Lunn testified that they received 50% of the money from the poker machines which were installed out of sight in the stores during these years. He testified that he and a representative of the owners of the machines would open the machines every two weeks, record the numbers, remove the money, adjust the winnings (which had been paid from the partnership's cash) and divide the proceeds equally. No records of these actions were made available to Revenue Canada by the partnership or the machines' owners. Litigation is ongoing between Revenue Canada and one owner (Mr. Xidos or his corporation) to obtain the records which the owner has respecting these and other Cape Breton poker machines.

[7] The poker machines were illegal. Various crimes were committed respecting them. Once a thief walked out of the store with one, in front of an employee on duty. A form of fraudulent usage occurred with an insertion of a flexible wand with which counts were falsely increased to obtain winnings. In addition, keys from stolen machines could be used to remove coins from operating machines. None of these activities could be complained about because the machines were illegal. If the R.C.M.P. had discovered the machines, they would have been confiscated.

[8] Both Mr. Lunn and Mr. Rigby are meat cutters by trade. They first met when they were employed by Allen's Grocery in New Waterford on Cape Breton in Nova Scotia. Mr. Lunn came from mainland Nova Scotia but Mr. Rigby was a native of Cape Breton. By 1974 they were both qualified meat cutters. Mr. Lunn testified that in 1978 they began pickling eggs and making polish sausages; in addition Mrs. Rigby made submarine sandwiches. Mr. Lunn stated that Messrs. Lunn and Rigby sold these to bars and similar establishments on Cape Breton and kept the money from this under the table. He said that they kept this up for 10 years and that they each made about $5,000 per year from this which they kept at home. He stated that by the years in question they each had $50,000 cash in their homes. Mrs. Rigby stated that she knew nothing about money. In 1985 Allen's closed and Messrs. Lunn and Rigby opened "B & W Meat Market", their own convenience store, as equal partners in Scotstown on the county side of Emerald Street. The county was policed by the R.C.M.P. which was enforcing the law against poker machines. In 1989 they were raided and they had poker machines in their store. The R.C.M.P. confiscated the poker machines (which were then owned by Mr. Firth) from the store. They then purchased the "Blue Store" on the New Waterford side of Emerald Street which was policed by the New Waterford police which were not enforcing the law against poker machines. They operated both stores.

[9] In 1992 they built a new store. They moved in on Labour Day and closed the other two stores. The new store had a separate room designed for eight poker machines which were leased from Mr. Firth's successor, John Xidos, and placed in the store.

[10] Mr. Martin, Revenue Canada's auditor on this file, learned of the Appellants' poker machine furniture from another file and learned of their machines from a liaison arrangement with the R.C.M.P. He visited the premises in 1990 and saw the poker machine chairs. But he did not see the poker machines. Mr. Martin subsequently commenced this audit as part of a Revenue Canada programme respecting poker machines as a criminal activity on Cape Breton Island. When he commenced the audit, he was aware of the possibility that a net worth audit would result. Once he was into the audit itself he found that:

(1) There was no record of the number of games on the Appellants' poker machines. Once the owner and the Appellants had checked the machines and taken their cash, the machine count was backed up to zero so the count would start again.

(2) The Appellants had no written record of the readings to back up their gross counts which they alleged were taken every two weeks. Mr. Lunn stated that he had recorded these at one time, but he had destroyed these records out of fear of seizure by the R.C.M.P.

(3) Mr. Xidos, owner of the poker machines at the time of the audit would not give his records to Revenue Canada and that remained a matter in litigation at the time of the hearing. Since the reason for the audit in the first place was the poker machines, and no verification of the Appellants' numbers could be had, a net worth had to be undertaken. Assumption (d) respecting each Appellant is an assumption of a failure to report machine income. Thereupon (h) also refers to a failure to report the sales of goods in their convenience stores.

For these same reasons, the Court finds that the net worth audits were the appropriate course in this case.

[11] Mr. Lunn was the bookkeeper in all of their enterprises and Mr. Rigby was essentially the outside man. But they manned their stores in alternating shifts and at various times their daughters all worked in the stores. The stores were located in poorer neighbourhoods and break-ins and thefts were common.

[12] Mr. Lunn testified that the funding to build a new store in 1992 came from the following sources:

A loan from Mr. Rigby's "stepfather", Mr. Daix to Mr. Rigby	$30,000.00
(Mr. Daix testified that he did loan Mr. Rigby $30,000.)
Money recovered by Messrs. Lunn and Rigby through a lawsuit against Mr. Head as stated in the Agreed Facts	$31,000.00
A loan from John Xidos in return for creating the private room for poker machines in the new store	$25,000.00

(Exhibit R-2, Tab 14 establishes that Mr. Xidos made this loan on June 13, 1992 to Billy and Walter Enterprises Limited without interest; it was guaranteed by the Appellants. It was forgiven on June 21, 1993.)
Mr. Martin testified that the partners also obtained a loan from the bank of	$33,000.00
TOTAL	$119,000.00

[13] Mr. Lunn testified that Messrs. Lunn and Rigby originally invested $31,000 into the fishing enterprise with Mr. Head ("Easy Three") from $15,500 which each of them kept in cash at home as a result of their pickled egg, sausage and submarine enterprise. This occurred on October 15, 1990 (Exhibit R-1, Tab 59). The first fishing (of lobsters) began on May 15, 1991 and by June 15 the partners had separated physically; a lawsuit followed. It was settled on May 21, 1992 with the payment to the Appellants of $42,000 and the rest of the $49,700 total settlement was paid in the following four years.

[14] However, Mr. Lunn originally told Mr. Martin that $30,000 was acquired by a loan from Mr. Lunn's brother-in-law, Findlay McKillop. In cross-examination Mr. Lunn admitted that the McKillop story was a lie.

[15] Mr. Daix and Mrs. Rigby testified that $30,000 was borrowed by Mr. Rigby from Mr. Daix, and referred to a release to Mr. Daix's estate for $80,000 that Mr. Rigby signed in July 1994 (Exhibit A-1, Tab 23). But that release makes no specific mention of the $30,000. This $30,000 is also part of the net worth that the Respondent assumes came from the poker machines.

[16] There are a number of discrepancies in the evidence concerning the Daix loan of $30,000 to Mr. Rigby:

(1) Mrs. Rigby could only testify to hearsay from her husband respecting any money matters. Even that was limited because he did not tell her anything in detail about money. Mr. Daix said that the $30,000 loan consisted of about 6 - $50 bills and all the rest was in $20 bills. All of the money had been stored for years and had a horrible smell. It was delivered to Mr. Rigby in April or May, 1992. Mr. Martin could find no record of a deposit of all of these $20.00 bills which would be easily remembered due to their intense foul odour. Other money from the same source (packages secreted in a chimney) was remembered by credit union officials who dealt with Mr. Daix because of its condition and odour. As a result, the Court believes that Mr. Daix gave this cash to Mr. Rigby, but does not believe that it was used for construction of the store.

(2) The Daix loan was made to Mr. Rigby alone and not to the partnership.

(3) There is no allegation that Mr. Lunn made a matching advance of $30,000 to the partnership construction account.

(4) Mr. Lunn told Mr. Martin two stories about sources of $30,000. The first story was that Mr. McKillop lent the money. Mr. Lunn admitted this was a lie. Mr. Lunn and Mr. Rigby also came up with the Daix loan as a source.

For the foregoing reasons, the Court does not believe the $30,000 which was alleged to be Daix loan was in fact the Daix money. Rather, it was money from the poker machines.

[17] John Anderson, C.A., the partners’ accountant, testified as to the cost of the new building, refrigeration equipment and parking paving being, in round numbers:

Construction	$77,000.
Equipment	20,000.
Paving	12,000.
Total	$109,000.

[18] Mr. Anderson understood from the partners that the sources of this money were the following:

Royal Bank	$33,000.
Xidos	25,000.
McKillop	30,000.
Daix	30,000.
Total	$118,000.

However, Mr. Anderson admitted that the partners:

(1) Never told him about the polish sausage, pickled egg and submarine sandwich transactions until after this audit began.

(2) Never told him about the Head "Easy Three" fishing partnership until after this audit began.

(3) Misled him on the "McKillop" source of funds.

(4) Never told him about Mr. Rigby's "3475 Ross" rental property.

[19] Moreover, Mr. Anderson treated the Xidos loan of $25,000 as being to the partnership. In fact it was made to Billy and Walter Enterprises Limited (the "Corporation") secured by a charge on its land and guaranteed by Messrs. Lunn and Rigby (Exhibit R-2, Tab 14) on June 13, 1992. The Appellants deposited the Xidos money in their personal construction account on June 15, 1992 (Exhibit R-1, Tab 19, page 8) in cash consisting of $20 and $50 bills. A year later (in the partnership 1993 fiscal year), Mr. Xidos forgave this loan and Mr. Anderson treated the loan as forgiven in the partnership's financial statement. An affidavit of Mr. Rigby attached to the loan agreement attests that the sole shareholders and directors of the Corporation are the two Appellants. Therefore, the Court finds that the Corporation forgave its loan of $25,000 to the partnership and that the Appellants each received a benefit from the Corporation pursuant to Section 15 of the Income Tax Act in the partnership's fiscal year ending July 31, 1993. The Corporation has never filed income tax returns. The benefit each partner received on June 21, 1993 was $12,500, consisting of ½ of the $25,000.

[20] In preparing the net worth Mr. Martin did not inquire of the Appellants' cash on hand on August 1, 1990, the first day of the first fiscal year of the partnership under audit. He was not told of the polish sausage, pickled egg, submarine sandwich activity and the alleged $50,000. This was related by the Appellants at a much later date and the Crown counsel argued that this is a concocted story.

[21] No doubt part of the reason for Mr. Martin's failure to learn of cash on hand, was that the Appellant's solicitor did not answer certain of the audit questions and in a letter dated July 7, 1995 raised the possibility of an "inquiry" under the Income Tax Act (Exhibit R-2, Tab 42). At that point the audit was wound up and these assessments were made.

[22] However, the facts which Mr. Martin knew were sufficient for his assumption that each Appellant had cash on hand of $100 at the beginning of each fiscal year. They included these facts:

Each Appellant reported a draw of $200 per month plus household food and supplies from the store as his income.

During the assessment periods Mr. Rigby had a wife and three daughters at home, although one daughter was away at school for part of one year; and Mr. Lunn had a wife and two children at home. The only evidence that any other members of the families worked outside of the homes is the various testimony respecting their work in the convenience store.

Their houses and vehicles were paid for except for the cottage which Mr. Rigby purchased in 1993 and mortgaged at monthly payments starting in June or July 1993 during his last fiscal year.

By then the Appellants had admitted to him that they had lied about the source of $30,000 they had alleged to be borrowed from Mr. McKillop.

Mr. Martin knew that the Appellants admitted to $3,200 per month revenue (just over $40,000 per year) to them from what he calculated to be eight poker machines based upon the electrical outlets placed for them.

[23] On Mr. Martin's calculation, with the poker machine income taken out of the convenience store earnings, its net earning appeared to average about 11% per annum. Mr. Martin testified that it was loo low. Mr. Anderson confirmed that 16% was at the low end for a convenience store and below 16% was a cause for concern. Mr. Anderson calculated the margin at 20% and used that figure to discount the purchase of goods by the Appellants from their store. This act by Mr. Anderson confirms that he was referring to the margin for goods, as distinct from grossing in the poker machine earnings, when he discussed the margins.

[24] The financial responsibilities which existed for the Appellants to support their families, maintain and operate their vehicles and properties and to pay the capital costs of these items required more than the "food" taken from the store, draws of $200 per month and $5,000 per year each from the illicit sale of sausages, eggs and sandwiches. Mr. Rigby's home is on the water and Mr. Lunn's home is comfortable with a very high fence around it. Both men required far more money to maintain even the modest lifestyle that they have admitted to.

[25] Because of these factors, Mr. Martin's assumption of cash on hand at the opening of each year is accepted by the Court. The Appellants' evidence to refute that was not to provide personal bank account or similar information. Rather it was the "story" about the $50,000 cash on hand from the pickled eggs, the polish sausage and the submarine sandwiches.

[26] This "story" of the Appellants' cash on hand is rejected. It may be that they sold the pickled eggs, polish sausage and submarine sandwiches, although none of their alleged customers testified. But the Court does not believe that they had any cash on hand from these activities. This is not believed because of facts (1), (2) and (3) described in paragraph [22] above. In addition, they admitted to the McKillop lie and the alleged egg, sausage, sandwich enterprise, if it existed, was admitted to be under the table and was not reported to the taxing authorities when it is alleged to have happened. Given all of these factors, what could the auditor believe?

[27] Based upon all of the foregoing facts, the Court finds that the original $31,000 placed in Easy Three by the Appellants came from the poker machines as did the alleged Daix $30,000. In addition, the $25,000 forgiven by Xidos in fiscal 1993 became theirs pursuant to Section 15 of the Income Tax Act. Finally, the payments over the $31,000 by Mr. Head represented a refund of other poker machine money which the Appellants invested in the Easy Three partnership since, once again, that is the only credible source for these funds.

[28] The ultimate result of these findings is that the testimony of Mr. Lunn is not believed. The documents and other testimony concerning his allegations do not confirm what he said and his admitted lie about McKillop and the admitted illicit activities of Messrs. Rigby and Lunn combined with their failures to inform their chartered accountant remove any vestige of credibility from his account of these transactions. Mrs. Rigby's testimony respecting money spent is not accepted. She also testified that she knew nothing about money matters and that Mr. Rigby handled family money. This is verified by the fact that his daughters handed their money over to Mr. Rigby.

[29] As a result, where changes in the assumed personal expenditures of each Appellant are not contained in the Partial Statement of Agreed Facts, the assumptions of the Respondent are accepted, subject to the following changes:

(1) The "Investment in Easy Three Fish" in fiscal 1991 of $31,000 is found to be income from poker machines in 1991 in the amounts of $15,500 for each Appellant in substitution for the $30,000 listed under these headings as "assets" in each Appellant's Schedule "A".

(2) The "cash advanced to B & W Enterprises" (being the partnership's construction bank account) of $31,000 for Mr. Lunn in 1992 and 1993 and of $30,000 for Mr. Rigby in 1992 and 1993 and listed under "assets" in each Appellant's Schedule "A" is found to be –

(a) for 1992 $15,000 each consisting of income from poker machines; and

(b) for 1993 $12,500 each being the loan forgiven to the Corporation by Mr. Xidos and in turn forgiven by the Corporation to each Appellant, as so treated by their accountant, Mr. Anderson, and by them, resulting in income to them in 1993 pursuant to Section 15 of the Income Tax Act.

(3) The remaining receipts of funds from Mr. Head ("Easy Three") during the fiscal years are found to be income to the Appellants in the amount of ½ to each of them, as described in paragraph [27].

[30] It is clear from the evidence that both Appellants knowingly and consistently made false statements in respect of the fiscal years in question and in their income tax returns for those years. The Appellants were competent and successful businessmen who admittedly engaged in subterfuge, in illegal activities and in lies in relation to their various enterprises and their sources of funds. The Court finds that they continued to do this when filing their income tax returns relating to the fiscal years in question. Each Appellant admittedly kept substantial sums of money in a safe at home. During each fiscal period in question that money consisted of poker machine money which was not reported, and no record of which is in evidence, but which was earned in that fiscal year. The moneys which the Court has found to be unreported are substantial in relation to the amounts that each Appellant reported for income tax purposes. Moreover, the Appellants' failures to report were clearly deliberate. For these reasons, the appeals of the penalties levied are allowed to the extent of any change in the amounts upon which they are assessed pursuant to the findings already made in these Reasons for Judgment; in all other respects they are confirmed.

[31] The assessments of tax, interest and penalties are therefore referred to the Minister of National Revenue for reconsideration and reassessment pursuant to these Reasons for Judgment.

[32] The Respondent is awarded party and party costs in respect to each appeal, but only one set of costs is to be taxed for the actual hearing since it was conducted on common evidence, but the hearing costs are to be borne by them jointly.

Signed at Edmonton, Alberta this 14^th day of April 2000.

"D.W. Beaubier"

J.T.C.C.