Susan Alexandropoulos and Terry Scanlon v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2716

Goetz, J.T.C.C.:— Well, in my recess I reviewed my notes, notes of evidence and the pertinent exhibits, and it's been decided that the appeal of Susan Alexandropoulos and that of Terry Scanlon be heard on common evidence, which they were. The decision I render will relate to each of their appeals.

Their appeals are identical. They’re appealing their assessments for 1987, 1988 and 1989 taxation years, wherein the Minister in his assessments levied penalties, which are set out in the Minister's reply in each of the pleadings; paragraph 9 of Scanlon's — Minister's reply to Scanlon’s appeal — paragraph 9 sets out the figures that the Minister says he understated his income for 1987, $3,949.34; for 1988, $6,591.70; and for 1989, $28,910.04. The same — the paragraph 9 of the reply to Alexandropoulos’s appeal set out — not the exact periods, but those are the figures I’m taking.

The case was argued by Mr. Scanlon on behalf of himself and Susan Alexandropoulos with whom he was operating a hotdog stand in the City of Ottawa.

In that the burden of proof to establish penalties rests with the Crown, the Minister called David Touhey, the accountant who had prepared the appellants’ 1987 and 1988 tax returns. He says that everything was paid by cash; the only documentation was receipts for cash payment for supplies. And in order for him to get income, he had to work backwards to receipts for supplies, wieners, buns, et cetera. And on his first meeting with the appellants he told them to keep books of record of income and expenses. The appellant says he said that “but he didn't tell us what kind of books to keep".

And in 1988 the accountant noticed the T-5 slips were getting bigger, which made him advise the appellant that they had to declare much more income than what they were claiming, and he reached a profit of $69,477. He said that the appellants advised him that they made about 40 per cent of profit over the cost of supplies.

Then Marilyn Wilkie, a business auditor with long experience with income at Revenue Canada, Bachelor of Commerce (Accounting), Certified Managing Accounting; she gave evidence in 1990 she checked the Scanlon files and asked Scanlon into her office asking him for books and records in which he could show his income and expenses. He didn't have a business bank account. He brought in his sales book showing cash sales every day, but it only related to the latter part of the taxation year 1989. She said he had no record of income and expenses for 1987, 1988 and 1989.

Mr. Touhey was called in to discuss the situation, and he told Ms. Wilkie that any documents or records or receipts, if any, had been handed over to him by the appellants, would be returned to the appellants after the tax return was completed. And this, I might say, is the usual practice of accountants preparing tax returns.

The appellant told her that he put cash in the cash drawer from daily sales and from this cash drawer he made daily purchases. At the end of the day he took the cash home. He would take the beginning and add the day's purchases and subtract his ending inventory at the end of the day; he would then enter it into his daily sales book.

He took the cash home and kept it there for two to three weeks, using some of it for living expenses and to buy inventory. After three weeks he would then deposit what was left.

The daily sales book, apparently, was filled out at home by Susan, whatever book there was, but it didn't relate back to the years 1987, 1988 and 1989, only for the latter part of 1989.

She was advised by Susan and Terry that they purchased a home in January 1990 for $140,000, and they paid by cash, not by cheque. They had no chequing accounts and no savings accounts. Decided to work out a net worth, which he says is determined by what assets had been acquired during the audit period and liabilities, if any.

She prepared a net worth statement which was filed as Exhibit R-3. There was a net worth statement for the partnership and a net worth statement for Susan Alexandropoulos and for Terry Scanlon. She discussed these with the appellants and there were some adjustments made with respect to personal living expenses which the Minister had calculated on the basis of Stats Can cost-of-living expenditures memoranda. When penalties were mentioned, Scanlon claimed ignorance, had limited knowledge of bookkeeping, and felt, therefore, no penalty should be imposed.

I can shorten this by simply stating that the appellant has admitted on his behalf and on behalf of the partnership and on behalf of Susan Alexandropoulos, that the net worth statements as filed are correct. Therefore, the key figures that I need to look at, because the net worth statements are clearly done and indicate a growth in capital and income over the relevant taxation years.

The business net worth statement showed that there was a discrepancy from the actual reported income for 1987, $13,067.92; for 1988, $20,014.09; and for 1989, $53,243.16. Now, that's a fairly large discrepancy. I referred to what was undeclared, which are in paragraph 9 of both the replies to the notices of appeal.

Then dealing with the net worth statement of Terry Scanlon, it shows a discrepancy per the net worth between reported income and actual income for the year 1987, $3,949.34; for 1988, $6591.70; and for 1989, $28,910.04.

For Susan Alexandropoulos, the discrepancy for 1987 was $9,118.59; for 1988, $13,422.70; and for 1989, $24,333.13.

Now, it then comes to — from those figures, what twigged Ms. Wilkie to the fact that whether penalties should be levied under the circumstances, the discrepancies were that large. And usually penalties are imposed after a net worth where the discrepancy between declared income and undeclared income is large; and two, and very important, no books of records, no receipts, nothing retained by the taxpayer to assist the Court — to assist the auditor in making her audit.

Admittedly, the appellants cooperated when they first met with Ms. Wilkie, and on her persistence she was able to get all of their bank accounts. And from those bank accounts and the declared actual assets that they had, she was able to draw her net worth statements. Suffice it to say that the appellants were satisfied with their final figures.

She says the first criteria that she used was: Did they knowingly not report? She says they reported 30 some thousand over a four-year period, but had accumulated $64,000 in the bank. The appellant would be aware of this. Scanlon kept changing his bank accounts, and moving it by way of cash to each bank. Why he did this I do not know. But he constantly moved the full amount from each bank to a new bank; there'd be no paper trail as to where the cash came from. And then she added to that the fact that he bought a 140 some thousand dollar home in January, 1990, and still had $10,000 in his bank account. Therefore, we con- cluded he knew he had the money.

The other criteria was materiality: Were the amounts large enough that he would notice? The figures show that they were indeed, because in 1989 unreported income was 84 per cent of the total net business income declared that should have been reported in those years. It was such a large amount that the implication is very strong that the taxpayer would know that there was a discrepancy. The third criterion is: was he aware; they had their daily cash book. Neither appellants retained expense receipts, and there are no books or records.

Now, when dealing with that, the appellant Scanlon says that yes, Touhey their accountant back in 1987 said, "Where are your book and record of business?” And they said they had none. So then he told them to keep them, to start keeping them, which they never did. On being questioned, Scanlon said he never inquired as to what kind of books they should keep and that Touhey their accountant never told them. I find it very hard to give credence to that statement.

The other fact that bothers the Court is that each year when he signed his tax return, he didn't look at what he had made the previous year as shown on his tax return, which was not a very complicated return; and he wasn't curious as to how much he had paid out in the preceding year and how much income he had made in each preceding year. That, to me, is unbelievable. And to claim that ignorance of tax matters was a reason why penalties should not be imposed — these are just simple, basic matters that would be interesting, even if one of my children opened up a lemonade stand, they would certainly know what they spent — probably their father’s money anyway — but they would know what their father spent and how much they took in in a day.

The same thing applies to the appellants. If I accept Scanlon's evidence that he wasn't curious as to what he made the preceding year, or how much he was paying tax on, but he happily paid the tax, he leaves the Court in the position that ne has brought himself clearly within the ambit of gross negligence. He must have known of something, especially when the accountant told him, "Hey, your T-4 slips are too high. We've got to declare more income.” That didn't bother him at all, or Ms. Alexandropoulos.

So I find that the penalties assessed to both appellants for the 1987, 1988 and 1989 taxation years were properly assessed in accordance with subsection 163(2), because the appellant knowingly — and that’s clear to me — or in circumstances amounting to gross negligence in carrying out a duty or obligation under the Act, made or participated in, assented to or acquiesced in the making of false statements, or omissions in the income tax returns for those years; and as a result of which the tax that would have been payable or assessed on the information provided in the income tax return filed for those years, was less than the tax payable for those years within the meaning of subsection 163(2) of the Act.

Two of the key criteria that all the cases deal with are two: a wide discrepancy between declared income and undeclared income, and the failure to keep proper books of record; however in this case, failure to retain the receipts that they say they handed to the — receipts for expenses that they handed to the accountant, those two facts in themselves satisfy the Court that the assessments of both appeals are correct and the appeals are dismissed.

Appeals dismissed.