Jean-Luc Duval, Gaétan Duval, Jean-Luc Duval in His Capacity as Executor of the Estate of the Late Aimé Duval, Clément Duval, Clermont Duval and Regis Duval v. Her Majesty the Queen, [1994] 2 CTC 226

Pinard J.:—The plaintiff's action constitutes an appeal from the decision of the Tax Court of Canada dated September 7, 1984, substantially dismissing his appeal from the assessments made by the Minister of National Revenue in determining his taxable income for the 1974, 1975, 1976, 1977 and 1978 taxation years. The defendant has, by counter-claim, appealed the portion of that judgment that removed certain sums from the statement of the plaintiff's net worth.

The plaintiff filed income tax returns for the taxation years in question reporting total annual income as follows:

In assessing the plaintiff for these taxation years, the Minister added the following amounts to the income reported:

The Minister found that the plaintiff had failed to include all the income received in the taxation years in question, that the unreported income amounted to $71,492.22 and that the plaintiff had knowingly failed to report that income, and therefore decided to assess him according to the “net worth" method. Accordingly, the plaintiff's income was determined by adding the additional amounts set out above for each of the years in question, which amounts were established using the net worth statement attached to these reasons. Finally, in view of the circumstances, the Minister also imposed penalties for each of the years in issue, under subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). With the exception of the 1974 taxation year, all of the assessments were issued within the four-year limitation period set out in subsection 152(4) of the Act.

The plaintiff objected to the assessments and the Minister reassessed him for the same taxation years under subsection 165(3) of the Act. The plaintiff appealed from these reassessments to the Tax Court of Canada, and the appeal was allowed in part by judgment dated September 7, 1984, which simply removed the sums of $12,987.73 (for interest income of his wife and children), $409.96 (for interest income of his wife) and $4,055 (for a deposit of his wife’s personal savings) from the statement of the plaintiff’s net worth.

This is a trial de novo and it is important to reproduce the relevant provisions of the Act:

152(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within four years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within four years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

163(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a statement or omission (in this section referred to as a “false statement”) in a return, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of 25 per cent of the amount, if any, by which

(a) the tax for the year that would be payable by him under this Act if his taxable income for the year were computed by adding to the taxable income reported by him in his return for the year that portion of his understatement of income for the year that is reasonably attributable to the false statement

exceeds

(b) the tax for the year that would have been payable by him under this Act had his tax payable for the year been assessed on the basis of the information provided in his return for the year.

(3) Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

165(3) Upon receipt of a notice of objection under this section, the Minister shall,

(a) with all due dispatch reconsider the assessment and vacate, confirm or vary the assessment or reassess, or

(b) where the taxpayer indicates in the notice of objection that he wishes to appeal immediately either to the Tax Review Board or to the Federal Court and that he waives reconsideration of the assessment and the Minister consents, file a copy of the notice of objection with the Registrar of the Tax Review Board or in the Registry of the Federal Court, as the case may be,

and he shall thereupon notify the taxpayer of his action by registered mail.

(5) A reassessment made by the Minister pursuant to subsection (3) is not invalid by reason only of not having been made within four years from the day of mailing of a notice of an original assessment or of a notification described in subsection 152(4).

While, on the one hand, subsection 163(3) of the Act clearly provides that the burden of establishing the facts justifying the assessment of a penalty is on the Minister, it has been recognized, on the other hand, since the decision of the Supreme Court in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182, that the burden of proving that a net worth assessment made under subsection 152(4) is incorrect, inter alia, rests squarely on the shoulders of the taxpayer.

The evidence in the other files that are connected with this case, nos. T-2-85, T-3-85, T-4-85, T-5-85, T-6-85, was placed in the record in this case on consent, and applies to this case in so far as it is relevant.

The issue essentially involves the amount of cash the plaintiff had on hand on December 31, 1973. The Minister established this amount nominally as being $100. The plaintiff explained that at that time he had cash in his personal safe, where he had earlier, in 1956, deposited $60,000 cash that his father had given him on his sixteenth birthday. The plaintiff then kept no track of the amounts of money that he occasionally took out of or deposited in the safe. He has always been extremely reluctant to provide the Department of National Revenue investigators with any information as to the amount of money that was actually in his safe on December 31, 1973. The weight of the evidence establishes that he was questioned on this subject on August 30, 1979, at which time he first gave a figure of $10,000, with the approval of his wife Judy. A few days later, on September 27, 1979, he simply refused to answer the same uestion. Only when he filed his notices of objection on about April 26, 1980, did the plaintiff state the figure of $52,671. In the circumstances, I cannot conclude, with respect to the cash he had on hand on December 31, 1973, that the plaintiff has properly discharged the burden of establishing that the Minister’s assessments were incorrect. It is clear that the plaintiff simply intended, at the end of the line, to state that on December 31, 1973, he had on hand the exact amount of money that was necessary in order not to have to pay the tax established by the Minister under subsection 152(4) of the Act. All of the plaintiff’s omissions, his unwillingness to disclose information, his inconsistencies and his manoeuvring lead me to conclude, on the balance of probabilities, that he knowingly made a misrepresentation in respect of his income tax returns for the 1974 to 1978 taxation years, inclusive, so that the four- year limitation period set out in subsection 152(4) of the Act does not apply to this case and the defendant is entitled to the penalties imposed under subsection 163(2) of that Act.

With respect to the sums that the Tax Court of Canada removed from the statement of the plaintiff’s net worth, we shall first consider the sums of $409.96 and $12,987.73, on which the plaintiff's uncontradicted evidence appears to me to be sufficient to establish that they were comprised in part of interest on family allowances deposited in his children’s names, and in part of interest on monies that he lent to his wife. In the circumstances, I am of the opinion that it would not be appropriate, in this respect, to apply sections 74 and 75 of the Act. With respect to the sum of $4,055, the plaintiff's wife testified to explain that this was personal savings, which she broke down as follows:

(a) $2,840 received in cash as wedding presents;

(b) $975 for the sale of a coin collection to her brother-in-law Clément Duval on December 1, 1973; and

(c) $240 income from employment in 1969.

The evidence establishes that all of these sums were in term deposits during 1977 only. The plaintiff’s wife could provide no explanation as to the long delay of several years before these sums were invested. It therefore seems unlikely to me that she had not spent or otherwise disposed of his money before 1977. I am therefore not satisfied that these sums should not appear in the statement of the plaintiff's net worth.

Finally, at the beginning of the hearing before me, the defendant's counsel filed Exhibit D-2, a document setting out the following sums of money, which the defendant agreed to have removed from the plaintiff's net worth:

Accordingly, the plaintiff's action is upheld in part, solely so as to permit the sums set out in Exhibit D-2 filed herein and the sums of $409.96 and $12,987.73, which were discussed above, to be removed from the statement of his net worth. The counter-claim is also upheld in part so as not to permit the sum of $4,055 claimed as his wife’s personal savings to be removed from the statement of the plaintiff's net worth. In the circumstances, there will be no order as to costs.

Appeals dismissed.