Bruce Fletcher v. Her Majesty the Queen, [1995] 1 CTC 2274, 95 DTC 134

Bonner J.T.C.C.:—The appellant appeals from assessments under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act”) for the 1987, 1988 and 1989 taxation years. For each year the Minister of National Revenue (’’Minister”) added to declared income amounts which he arrived at on the basis of net worth calculations. As well for the 1987 and 1988 taxation years he included in income pursuant to subsection 15(2) of the Act amounts in respect of outstanding shareholder loans. For 1989 an adjustment was made in respect of a loan repayment. The figures as set out in the explanations attached to the notices of assess-

A final adjustment for 1989 arises from the deletion of a taxable capital gain reported by the appellant. According to the appellant the gain was realized on a sale of a painting. In the appellant’s return of income for 1989 the gain was treated as exempt. In essence the assessor did not accept the appellant’s story that the sale of a painting accounted for part of the increase in the appellant’s net worth.

A net worth assessment involves an indirect measurement of income over a period. The net worth of an individual, that is to say, the excess of his assets over his liabilities is calculated at the end of a period and at the beginning of the period. The assessment proceeds on the assumption that the total of any increase in net worth over the period (to the extent that such increase cannot be attributed to non-taxable sources such as gifts and inheritances) plus expenditures made during the period for personal consumption is the amount of the individual’s income for the period. It is evident that the net worth method can never measure income with the same precision as the simple method of totalling salaries and profits from various sources in the manner contemplated by the Act. The net worth method should therefore be adopted only in cases where it is fairly clear that direct and accurate measurement of income is impossible.

The position of the appellant at the hearing of the appeals was that his returns of income were correct and complete. He asserted the apparent increases in his net worth were attribuable to gifts from two sources and to the realization of a gain on the sale of the painting. He asserted as well that the assessor drew erroneous conclusions with regard to his practice of acquiring $1,000 bills in exchange for notes of smaller denomination. In an appeal from an assessment of income tax the onus is on the taxpayer to establish on the balance of probabilities that the assessment is too high having regard to the law and the relevant facts. It is not enough for the taxpayer to show that the assessment might conceivably be too high. He must adduce credible evidence showing that on a proper and complete net worth his income is lower than the Minister found it to be. Where a taxpayer has placed himself in a position in which a direct and accurate measurement of income is impossible he can hardly complain in the course of an appeal from a net worth assessment of the inaccuracies inherent in that method. The position was set out by Christie A.C.J.T.C.C., in Kay (J.) v. Canada, [1995] 1 C.T.C. 2310, as follows:

It may be appropriate to say something about taxpayers keeping records and books of account. Under subsection 230(1) of the Income Tax Act every person carrying on business and every person who is required to pay taxes shall keep records and books of account in such form and containing such information as will enable the taxes payable under the Act to be determined. Failure to comply with the subsection will not, of itself, result in the dismissal of an appeal against a reassessment of liability to income tax. But it could interfere with an appellant’s ability to discharge the burden of proof on him of showing that, on a balance of probability, the reassessment is in error. This was recently dealt with by the Federal Court of Appeal in Sidhu v. M.N.R., [1993] 2 C.T.C. 278, 93 D.T.C. 5453 (F.C.A.). Mahoney J.A. in delivering the judgment of the Court said at page 281 (D.T.C. 5454-55):

The requirement of subsection 230(1) may fairly be characterized as absolute but the consequence of not complying is liability to conviction of an offence under subsection 238(2), not necessarily a conclusion that transactions which ought to have been recorded did not occur. The failure to record transactions will inevitably handicap a taxpayer seeking to discharge the burden of proving that they took place but the responsibility of the trial judge in such circumstances is to decide, on a balance of probabilities having regard to all the evidence and its credibility, whether any, all or none took place. The proper approach was demonstrated by Strayer J. in Schwartz v. The Queen, [1987] 2 C.T.C. 12, 87 D.T.C. 5274 (F.C.T.D.) at page 14 (D.T.C. 5275).

The law places the onus on the taxpayer in such cases to prove wrong the Minister’s reassessment on the basis that the taxpayer is in a better position to prove what actually happened, if he chooses and is able to do so. Unfortunately, the plaintiff has not been willing or able to particularize in any way the purchases made by him. He has confirmed on many occasions that the figures provided by his accountant as to his total purchases were correct. If he had made any effort to corroborate this and his oral evidence had seemed forthcoming and credible, it might have been possible to find in his favour even in the absence of any vouchers, receipts or other written records. Unfortunately neither of these requirements were met.

To the foregoing I might add that if on an appeal to this Court the circumstances are such that because of failure to keep records of business transactions or to keep reasonably comprehensible records the onus on the appellant cannot be discharged then, I think, the appellant can only be regarded as the author of his own misfortune.

The appellant was born in 1960. He left school in 1978 upon completion of Grade 12. While in high school the appellant worked in his father’s waste disposal business. As well during that period he worked from time to time for local farmers and carried on a small lawn and garden maintenance service. After leaving school the appellant continued to carry on the lawn and garden business. The appellant’s father, Orvis Fletcher, turned part of his waste disposal business over to the appellant and his brother, Murray and permitted them to use his garbage trucks without charge save for fuel and maintenance. In 1983 or 1984 the appellant started to work as a manager of a moving picture theatre.

The appellant was married in 1984. Before that time he lived at home and paid nothing for room and board. Following his marriage the appellant and his wife continued to live with the appellant’s parents. They paid no rent and contributed only occasionally to the cost of food. The appellant and his wife bought and moved in to their first home in 1989. The appellant’s wife worked following the marriage. Both were inclined to save their money. The evidence thus tends to indicate that up to December 31, 1986 the appellant worked hard and saved a substantial portion of his earnings.

During the three years in issue the appellant had three main business interests. He had a 50 per cent interest in a company, Woodstock Amusements Ltd. which in early 1987 bought a drive-in movie theatre and The Vogue, a 700-seat indoor theatre. The appellant was responsible for the day-to-day operation of The Vogue. The drive-in and The Vogue were sold a few years later and a new theatre was constructed. The appellant was also responsible for the day-to-day operation of the new theatre. The theatre companies paid the appellant a monthly wage for his services in managing the operation and for his services in removing garbage generated by the theatres. The appellant’s second area of business activity was the waste disposal business. From 1979 to 1989 the appellant carried on that business in partnership with his brother in a territory which had been turned over to them by their father. In 1989 the appellant’s father handed over the rest of his business to his four boys. Later that business was sold outright. Finally the appellant during the years in question continued to carry on the landscaping or lawn maintenance business which he had started when in high school.

The appellant made a practice of keeping large sums of money in cash in a safe in his father’s home. It was argued that the Minister’s figure for cash on hand on December 31, 1986, $22,000, was too low. The appellant made a practice of exchanging smaller bills for $1,000 bills. When a bank or trust company had $1,000 bills on hand no record was kept of the exchange. However when such bills were specially ordered for the appellant a record was kept by the financial institution. The $22,000 figure represents the total of orders made in 1986 for $1,000 bills. It does not include a six- bill order of August 7, 1986. The records relating to that order were lost. Counsel for the appellant argued that the $22,000 figure must be too low not only because of the $6,000 but also the appellant was able to produce $70,000 in cash early in 1987 for the purchase of his shares in Woodstock Amusements Ltd. Counsel pointed as well to the appellant’s assertion that he could have paid the entire $140,000 cost of the Woodstock shares in cash and that he borrowed $70,000 for that purpose only because he wanted to establish a credit rating with the bank.

A conclusion that the Minister’s figure for opening net worth is too low must rest on acceptance of the appellant’s explanations as to various sources of cash which he says he had on hand on December 31, 1986. The central problem with this appeal is credibility. The appellant’s stories and explanations as to cash on hand on December 31, 1986 and as to variations in cash on hand during the net worth period might conceivably be true but I am far from persuaded that they are true. Much of the appellant’s testimony is improbable and is inconsistent with evidence given by him under oath at the examination for discovery. Moreover the evidence offers no clear basis for any conclusion as to the amount of the appellant’s cash supply at any time relevant to the net worth assessment. The appellant denied having counted the total cash on hand in the safe at any time.

There was evidence that cash was advanced or given to the appellant prior to and during the net worth period by Lyle Murray Gowing. Mr. Gowing, whose sister is married to the appellant’s father and who himself is married to the appellant’s grandmother, testified that he advanced approximately $130,000 in cash to the appellant over the years from 1986 to 1989. He said that he had more than $200,000 in cash in a safe at home and had from time to time advanced cash totalling $130,000 to the appellant at the appellant’s request. No written record of the transaction was kept. Mr. Gowing said that he kept track of the figures in his mind. He said further that he told the appellant that he would not be asked to repay the funds unless he found himself in need of money.

Mr. Gowing was not an impressive witness. Answers given by him on cross-examination raised considerable doubt as to his ability to advance money in the amounts alleged. Mr. Gowing operated a taxi business from 1961 to 1978 and he then retired. He could not say how much he earned from the taxi business. He reported little or no income for a number of years prior to 1987. When questioned about his reasons for not filing tax returns for some of the years he suggested that like a lot of other people he did not want to pay tax. He could not remember the amounts of individual advances to the appellant, when the advances were made or even when the total reached $130,000. I cannot believe his testimony.

The appellant did not give any accurate account of the amounts and dates of individual advances said to have been made by Mr. Gowing. He stated that at times he borrowed money even though he had no reason at all for doing so. He stated that he simply kept the borrowed money in cash in his father’s safe. He admitted on cross- examination that he said the figure was $130,000 because that was what his Mr. Gowing told him. In summary the evidence as to alleged advances by Mr. Gowing is insufficient to point to error in any of the net worth calculations made on assessment.

The next improbable story related to alleged gifts to the appellant by Mrs. Evelyn Kirk. Mrs. Kirk was an elderly widow. She was a client of the appellant’s landscaping business. The appellant asserted that gifts of cash made to him by Mrs. Kirk to assist with the education of his daughter Nadine accounted for part of his opening cash on hand. He said that in June or July 1985 he and his wife and Nadine, who was then approximately 1 month old, visited Mrs. Kirk. On that occasion Mrs. Kirk was said to have handed to appellant an envelope containing a card and a substantial amount of cash. The appellant said that he did not count it. Further cash gifts were said to have been made in December 1985 and early in 1986. All of this was in support of an assertion that the appellant had approximately $175,000 in cash on hand at the end of 1986. Although the appellant’s wife testified that she was present with her daughter on two occasions when gifts were made her evidence did little to support her husband’s story. She did not count the money. The envelopes were not opened in her presence. She did not see the appellant put the gifts in the safe. It is possible that Mrs. Kirk did give money to the appellant for his daughter. It is even possible that she did so more than once. However if any gifts were made the amount of them and the extent of their impact on opening net worth has not been established by reliable evidence. The appellant’s evidence at the hearing of the appeal was, once again, in conflict with the evidence given by him on discovery. Furthermore the appellant stated that the amount of the first of the gifts was $15,000 but asserted as well that he did not count either it or any of the other gifts.

It should be noted that savings from the appellant’s frugal lifestyle and from the proceeds of gifts, if any, made to the appellant by Mrs. Kirk and Mr. Gowing could well be reflected in the Minister’s calculations of assets on hand on December 31, 1986. The net worth working papers, Exhibit A-3, disclosed that the appellant had substantial holdings of guaranteed investment certificates and mutual funds on that date.

I turn next to the appellant’s story as to the sale of a painting in 1989 for $92,000 in cash. An outline of that story now follows. The painting is said to have been found in the attic of a house which had been left to the appellant’s father by his father. The house was subsequently sold to the appellant. In 1984 when the appellant and his wife were cleaning the house they discovered a number of paintings in the attic. Some time later the appellant took the paintings to a number of art dealers in Toronto and learned that they might be valuable. Later he received a phone call from a man who a short time later purchased one of the paintings. It was said to be a work of Tom Thomson. The purchase price was said to be $92,000 and to have been paid in cash at the appellant’s insistence because a certified cheque might be forged. The price is said to have been negotiated by the appellant without the benefit of any independent assistance in arriving at the value of the work. The cash is said to have been put in the safe. Neither the appellant’s wife nor anyone else can corroborate the appellant’s story as to the amount paid. The purchaser cannot now be traced. The appellant produced a document described by the appellant as a ’’receipt for $92,000" prepared at his request for income tax purposes by the purchaser at the time the sale took place in February 1989. The document is quite unusual. Normally a buyer will not give a receipt for the purchase price of the article bought by him. Normally a bill of sale is not furnished by purchaser to vendor. The document itself appears on its face to have been altered both as to date and to what now appears to be a $92,000 figure. Like much of the rest of the appellant’s evidence the painting story could conceivably have some basis in fact. It was partially corroborated by the evidence of the appellant’s wife. However she had no independent knowledge of the amount paid. Having regard to my assessment of the appellant’s overall credibility I cannot accept the story as an explanation for the receipt in 1989 of $92,000.

I turn next to the argument based on use of the $1,000 bills. The assessor determined by reference to bank records the number of such bills acquired by the appellant in each year. He made his net worth calculations on the premise that all such bills were held by the appellant at the end of the year save for bills used in documented expenditures such as the purchase of the car. The appellant testified that he used the bills to pay for small change required to operate the moving picture theatre. That evidence was corroborated to some extent by the testimony of Mary Ann Merkel who formerly worked in ticket sales and at the candy bar of the appellant’s theatre. She stated that from time to time the appellant gave her a $1,000 bill to enable her to purchase $2 notes and 25 cent and $1 coins. Some corroboration was also provided by the appellant’s wife who testified that the appellant sometimes gave her $1,000 bills with instructions to go to the bank and exchange for smaller denomination notes and coins.

The evidence of Mrs. Merkel and of Mrs. Fletcher does not demonstrate that the assessor’s figures for $1,000 bills on hand at the end of the years 1986 to 1989 were wrong. Not all of the appellant’s acquisitions of $1,000 bills were recorded. The evidence of the assessor, which I accept, was that the financial institutions made records only when bills had to be specially ordered to satisfy the appellant’s request. Thus there is uncertainty as to the extent to which the appellant used $1,000 bills to purchase small change and as to the exact number acquired by him in unrecorded transactions. Any adjustment to the net worth in respect of the use of $1,000 bills to purchase change would involve simple guess work and would therefore be totally unwarranted.

I turn next to the inclusions in income based on subsection 15(2) of the Act. The balance sheets of the appellant’s company, 693957 Ontario Inc., recorded substantial amounts of cash as corporate assets. The company had no bank account and it was admitted that all corporate cash was kept by the appellant mingled with his own money in the safe in his father’s home. In argument counsel for the appellant pointed to acquisitions made by the company which he asserted must have involved the use of the cash. He took the position that such use was inconsistent with any loan by the corporation to the appellant and he asserted that the law does not require that a corporation keep its cash in a bank account. I accept only the second part of the argument. The corporation may have used its cash to some extent but as time passed it generated more. All of the cash was effectively treated by the appellant as his own. The evidence upon which counsel relies does not in my view support a conclusion that the cash loaned was repaid within the period laid down in paragraph 15(2)(b) of the Act.

The appeal will therefore be dismissed with costs.

Appeal dismissed.