Giovanni Pompa v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2793

Couture, CJ.T.C.C.:—This appeal was heard under the rules of procedure of the Tax Court of Canada governing the informal procedure. The appellant acted on his own behalf in appealing from assessments for the 1987 and 1988 taxation years. In reassessing the appellant, the Minister of National Revenue (the "Minister") added the sum of $10,450 to his reported income for the 1987 taxation year and the sum of $4,745 for the 1988 taxation year, alleging that those amounts had been received by him in the form of cash payments in circumstances that were described by the witnesses called by the Minister.

In his notice of appeal and testimony, the appellant denied that he had received the sums in question.

During the years under appeal, he worked as a day labourer foreman for a company by the name of Dunn & Benoît Construction (Canada) Inc. ("Dunn & Benoît") at an hourly wage of $14.53 in 1987, a rate which increased slightly in 1988.

Ms. Diane Daoust, an auditor with Revenue Canada, was called by solicitor for the Minister and explained to the Court the events that led the Minister to issue the assessments in question. She explained that she was an auditor with the Special Investigations Division of Revenue Canada and that it was in that capacity that she had had to work in the Dunn & Benoît case and in that of the appellant.

Following an audit of Dunn & Benoît's accounting records, Revenue Canada officials discovered that the company was transferring substantial sums of money to a business by the name of Horizontale Enregistrée ("Horizontale") through sham purchases. When this stratagem was discovered, the auditors threatened to disallow the expense which the company had claimed as a deduction. In view of this illegal manoeuvre, the two shareholders of Dunn & Benoît were confronted, and they admitted that they had indeed withdrawn sums from the company, but that those sums had been used to pay employees who worked overtime. The two shareholders therefore agreed with Revenue Canada officials to prepare T4 supplementary slips to take into account the cash payments to the employees and to provide them with vouchers for the amounts indicated on those T4 supplementary slips.

The witness explained that no supporting document was submitted attesting of the validity of the T4s for the 1987 taxation year, whereas the documents submitted to Revenue Canada for 1988 were for the period from March to September only, that is prior to the time when the Revenue Canada officials made their discovery. These documents included what was identified as site sheets prepared by the foremen, that is records of time worked by each employee for each day of the week. Regular and overtime hours were recorded on these sheets.

From information of this kind pertaining to the appellant for the 1988 taxation year, she prepared a summary table for the period from March to September, a copy of which was filed, and in which were reported the appellant’s hourly wage, his normal working hours and the overtime he worked, according to the company and to the Minister, as well as the amounts presumed paid in cash, as alleged by the shareholders of Dunn & Benoît. Also recorded was a cash bonus amount purported to have been paid to the business’s foreman, still according to the shareholders’ claim, an amount that will be explained below. It should be said that the witness made a tremendous effort to justify the assessments.

To the following question by her solicitor, “Can you swear that the amount that was added to his income is correct?—Answer: No.” She added, “Based on . . . based on my feeling, after working a couple of months on the case, I can tell you that I am convinced the employees received money from Dunn & Benoît, but in what proportion, that’s what I’m not certain about” (transcript, pages 210-11). As evidence, this statement is far from meeting the requirements of subsection 163(3) and the evidence that the appellant received cash amounts in 1988.

Ms. Daoust also mentioned that perhaps 200 Dunn & Benoît employees had received amended T4 slips. As far as she knew, roughly 100 at least had filed notices of objection to the assessments issued in response to these T4s for reasons which she did not explain. She was not aware what the remaining employees did.

Another witness called by the solicitor for the Minister was Ms. Sylvie Dubuc, who worked as a secretary for Dunn & Benoît from February to September 1987, when she was put in charge of preparing employees' pay.

She explained her work as follows:

I received the time sheets from the foremen for the week just completed; I received them on Monday. The hours worked each day were recorded on them for each employee for the days worked from Monday to Saturday. Out of the total for the week, I had to record a maximum of eight hours of work for the days from Monday to Friday in the automated pay system, whereas overtime, that is starting with the ninth hour each day, was paid at time, but in cash (transcript, pages 21-22).

In addition to the cash amounts paid to the employees, each foreman received a one dollar bonus under the collective agreement for each hour worked, an amount that was also paid in cash. The witness reported that she had received instructions in March 1988 to include 80 cents of that bonus in the foremen's pay cheque and to continue paying the difference, that is 20 cents, in cash.

She explained that she calculated all the employees’ overtime hours for the week at their respective hourly rates and that she informed Mr. Benoît, one of the two shareholders of the company, of the amount of money required to pay them in cash. The latter obtained the cash amounts from the bank, and she put them into an envelope for each employee. That envelope was handed over to Mr. Benoît with the site sheets and all the vouchers.

Another witness, Mr. Serge Moffat, stated that he was president of Dunn & Benoît and also of Construction MBA Ltée (MBA). Mr. Moffat held 50 per cent of the shares in those two corporations, and Jerry Benoît held the other 50 per cent. Dunn & Benoît had operated since 1984 and MBA since 1987. He confirmed what Ms. Sylvie Dubuc had explained regarding the cash payments made to the employees of those corporations and added that some employees received all their wages in cash, without T4 slips issued for them by the corporations. He explained that day labourer employees were more likely to work overtime and that those overtime hours were mainly worked on Saturdays. According to him, the cash payments system had been introduced at the request of the employees who refused to work outside regular hours unless paid in cash.

Another witness of the solicitor for the Minister was Jerry Benoît, who confirmed Moffat's testimony in its substance. He added that Forme Horizontale was simply a corporate name registered in his name. When he received the envelopes from Ms. Dubuc, he handed them over to the "superintendents" of each site, and these latter's role was to distribute the pay to the employees. He was unable to say whether the appellant received the pay cheques and the envelopes for him and the employees of his team since they were distributed by the site "superintendent". He explained that there were two envelopes for the employees who were supposed to receive cash amounts: one contained the pay cheque and the other the cash amount. Lastly, he admitted that he could not swear that the amounts indicated on the T4 supplementary slips were accurate. He also admitted that, in the period during which the stratagem was used, he and Moffat withheld between $650 and $750 per week for themselves out of the amounts transferred to Forme Horizontale (transcript, page 143).

The Minister’s fifth witness was a certain Brandford Cairns. The latter stated that he had worked for Dunn & Benoît and MBA between the spring of 1987 and the end of 1988. One of his tasks was to gather the site sheets on Monday mornings, to hand them over to Ms Dubuc and to distribute the pay on Thursdays. He confirmed what Mr. Benoît had stated concerning the two envelopes, the one containing the pay cheque, the other the cash amount. He handed these envelopes over to the site foreman. He had no recollection of giving envelopes to the appellant or of having seen envelopes in the appellant's name. After admitting that he did not remember whether he had handed envelopes over to the appellant, he added, “I do remember . . . what I do know is that for almost . . . is that for the vast majority of the employees on the job sites, they were all given brown envelopes; not every single one, but I'd say over 90 per cent" (transcript, page 163).

When pressed by solicitor for the names of the employees who received cash payments, he answered, “I can't say . . . I don’t want to say I do, because I mean there are. . . like I was saying there were some that. . . there were a very few that did not get cash. Now, the large majority of them did" (transcript, page 168).

Another witness called by solicitor for the Minister was Gilles Barbeau. This person worked as a carpenter for Dunn & Benoît from September 1987 to July 1988. He indicated that the foreman on the site where he had worked, a certain Denis Allard, had approached him and suggested that he work “under the table”, to use his expression. His version was as follows: "And then I said that I wasn't too much in favour of that, but from time to time, if I really have to, l will.” But I said, "Under normal circumstances, that doesn't really interest me.” He told me, “If you don't do it, he says, we won't really be able to keep you." So I said, "Well, I said, if I do it, I said, I’m warning you, I might do it from time to time, every other weekend or something like that” (transcript, page 173). He admitted that ne had been paid in cash for the overtime he had worked. He also added,"However, I would like to point out that, when I received my additional tax assessment, it was five times the amount I had actually earned; I had to prove that I hadn't worked those hours; it was one fifth of that in 1987 and one fifth in 1988” (transcript, page 180). In other words, the T4 slips had been inflated to $2,400 in 1987 and to $2,275 in 1988. The witness had kept some report of his overtime hours for the two years, and the Minister agreed on a settlement in the amount of $743.82 for 1987 and $875.12 for 1988. Since the appellant had filed a notice of appeal from the assessments, a consent to judgment was filed with the Registry of the Court on January 21, 1993, confirming the settlement of the appeals for the above- mentioned amounts.

This completes a summary of the evidence adduced by the solicitor for the Minister. To this evidence must be added the facts of an appeal instituted by a certain André Côté (Côté v. Canada, (unreported) Doc. No. 92-1494) from an assessment for the 1985 taxation year in which the Minister added $6,110 to his income, an amount which had been indicated on a T4 supplementary slip produced by Dunn & Benoît. This appeal also concerned a settlement, and a consent to judgment was filed reducing the amount from $6,110 to $2,000.

Having referred to this Côté case, I find myself obliged to point out the actions of the Revenue Canada officials and also of the solicitors who worked on that case because they clearly made misrepresentations to the Court concerning that appeal. They appear to me deliberate since they were made in documents filed with the Court, documents that are of a public nature. It should be noted that the original assessment respecting Côté was dated May 13, 1986 for the 1985 taxation year, and the notice of reassessment from which an appeal was instituted was dated January 7, 1992, that is six years later and clearly beyond the three-year time limit provided in paragraph 152(4)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (S.C. 1970-71-72, c. 63) (the "Act"). According to the Act and case law (Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182; subsection 163(3), Income Tax Act), the burden was therefore on the Minister to prove that the assessment was correct, that is in respect of both the increase of income and the penalty assessed.

The Deputy Minister of Revenue Canada has a statutory obligation under subsection 170(2) of the Act to send the Court copies of all returns, notices of assessment, notices of objection and notification that are relevant to the appeal.

A letter dated July 24, 1992 was sent to the Court registrar on behalf of the Deputy Minister and read in part as follows:

In compliance with the requirements of subsection 170(2) of the Income Tax Act, we hereby send you copies of the following documents:

(1) TT income tax return(s) for the 1985 taxation year(s) and documents relating thereto.

(2) n/a

(3) n/a

(4) n/a

[Translation.]

Since this return was not among the documents thus sent, the Deputy Registrar of the Court contacted the Assistant Deputy Minister of Revenue Canada and asked him to forward a copy of the return in question. The answer he received indicated that that return had long since been destroyed and that the document attached to the letter of July 24 was a computerized statement. It was alleged that that document contained the various amounts that had appeared on the income tax return filed by the appellant. It appears to me elementary that such a document cannot constitute an income tax return within the meaning of the Act since an income tax return is a form prescribed by the legislation, and the legislator specifically refers in subsections 170(2) and 165(3) [sic] to an income tax return.

Notwithstanding the fact that Côté's income tax return no longer existed, the Court noted that the notice of confirmation by the Minister provided "that the taxpayer knowingly, or under circumstances amounting to gross negligence, made an omission in his income tax return with respect to the 1985 taxation year within the meaning of subsection 163(2) of the Act. . . ." This document is dated June 3, 1992. (The emphasis is mine.)

Furthermore, paragraph 5(g) of the reply to the notice of appeal filed by the Minister reads:

5. The Minister took for granted, in particular, the following facts in making this reassessment:

(g) in thus failing to report his income, the appellant knowingly, or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of, a false statement or omission in the income tax return filed for the 1985 taxation year as a result of which the tax which he was apparently required to pay, based on the information provided in the income tax return filed for that year, was less than the amount of tax payable for that year.

[Translation; emphasis added.]

Since, in October 1992, Côté's income tax return for the 1985 taxation year had long since been destroyed, according to the information received from the Assistant Deputy Minister, I am convinced that, in assessing Coté on January 7, 1992, the Minister could not take it for granted that Côté had made a false statement or omission in his income tax return for the 1985 taxation year. It is entirely clear in light of this situation that, in his reply to the notice of appeal, the Minister could not legally represent that he had taken for granted certain facts when he knew that their existence was false. These statements in the notice of confirmation by the Minister and in the reply to the notice of appeal relating to Côté's income tax return were of a nature to mislead the Court with respect to the assessments validity, were a direct breach of a statutory obligation imposed on the Minister under subsections 170(2) and 163(3) of the Act and must undoubtedly have violated the appellant’s rights with respect to his appeal.

Apart from this derogation from the legislation, the above comments nevertheless clearly show that three appeals have been revised by the solicitor for the Minister to date, and in two cases, the latter admitted that the assessments were not accurate as issued. The third case is that of the appellant. In the two situations of Côté and Barbeau, the income of those appellants had been increased in the assessments based on the information indicated on the T4 slips provided by the shareholders of Dunn & Benoît, and the Minister conceded in the consents to judgment that that information was false.

The solicitor for the Minister submits that the evidence he has presented is sufficient for the Court to be able to find that the assessments issued were indeed correct. Unfortunately, the Court does not share this view. First it must be considered that the evidence submitted by solicitor is based in large part on documentation prepared by the shareholders of Dunn & Benoît, documentation originally prepared in order to evade tax and which served that purpose until the Revenue Canada officials discovered its existence.

In civil cases, the degree of proof which must be adduced in support of a proposition is based on the balance of probabilities.

In the judgment by the Supreme Court of Canada in Continental Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164, 131 D.L.R. (3d) 559, the Court's unanimous decision was delivered by Laskin, C.J., who wrote as follows at page 170 (D.L.R. 563-64):

There is necessarily a matter of judgment involved in weighing evidence that goes to the burden of proof, and a trial judge is justified in scrutinizing evidence with greater care if there are serious allegations to be established by the proof that is offered. I put the matter in the words used by Lord Denning in Bater v. Bater, [1950] 2 All E.R. 458, at page 459, as follows:

It is true that by our law there is a higher standard of proof in criminal cases than in civil cases, but this is subject to the qualification that there is no absolute standard in either case. In criminal cases the charge must be proved beyond reasonable doubt, but there may be degrees of proof within that standard. Many great judges have said that, in proportion as the crime is enormous, so ought the proof to be clear. So also in civil cases. The case may be proved by a preponderance of probability, but there may be degrees of probability within that standard. The degree depends on the subjectmatter. A civil court, when considering a charge of fraud, will naturally require a higher degree of probability than that which it would require if considering whether negligence were established. It does not adopt so high a degree as a criminal court, even when it is considering a charge of a criminal nature, but still it does require a degree of probability which is commensurate with the occasion.

[Emphasis added.]

In a judgment of this Court, Tatarchuk Estate v. M.N.R., [1993] 1 C.T.C. 2440, Judge Bowman, relying on the Supreme Court judgment cited above, writes as follows on the balance of probabilities at page 2443:

Where fraud is alleged, as it is here, a Court must, even in applying a civil standard of proof, scrutinize the evidence with great care and look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established.

Thus, having levied a penalty in the assessment under appeal, the Minister in so doing assumed the statutory obligation defined in subsection 163(3).

That subsection reads as follows:

163(3) Burden of proof in respect of penalties.—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.

This penalty is determined on the basis of the amount of income added to the income reported by a taxpayer. The additional tax is then determined, and the penalty represents a percentage of that additional tax.

To fulfill this statutory obligation, the onus is thus on the Minister to determine with certainty the amount of income not reported by a taxpayer. In an assessment, the Minister may not arbitrarily set a penalty which is not based on a proven amount of undeclared income, and this evidence may not be based on vague presumptions on his part. A statutory obligation to prove the existence of certain facts requires clear and precise evidence to be presented. If that evidence is based on a balance of probabilities, the facts proved must follow one from the other so that, upon analysis, they lead to a logical and convincing conclusion.

In the appeal of Chopp v. M.N.R., [1987] 2 C.T.C. 2071, 87 D.T.C. 374, Associate Chief Justice Christie of this Court stated at page 2075 (D.T.C. 377):

Inter alia, subsection 163(2) makes it necessary to the determination of the penalties payable by the appellant in respect of his 1980 and 1981 taxation years that the respondent affirmatively establish the amount of understated income in each year. There is reported authority with which I will deal in a moment that shows the underlying difficulties in doing this on the basis of net worth reassessments in the absence of admissions by the appellant under cross-examination or otherwise.

[Emphasis added.]

In Fortis v. M.N.R., [1986] 2 C.T.C. 2378, 86 D.T.C. 1795, Judge Rip of this Court made the following comments at page 2386 (D.T.C. 1801):

The amount of the understatement of income for the year must be known prior to the penalty being assessed and the Minister must establish to the Court the precise quantum of the understatement of income for the year. As stated earlier, the Court cannot determine whether the penalty was in an amount authorized by subsection 163(2) unless the Minister first shows the taxpayer failed to report income and what that unreported income was. (Elchuk v. M.N.R., [1970] C.T.C. 326, 70 D.T.C. 6235 (Ex. Ct.))

In his argument, the Minister claims that, for the 1988 taxation year, certain documents filed for the period from March to September show that the appellant apparently worked overtime during that period, and he believes that this evidence is sufficient for the Court to find that the assessment as issued must be affirmed. He admits that this evidence is not complete, but that it is circumstantial evidence that justifies dismissing the appeal. For 1987, recognizing that documents similar to those filed for 1988 were not available, he nevertheless submitted that the practice followed by Dunn & Benoît in remunerating employees for overtime in 1988 had been the same in 1987, according to certain witnesses, and that that justified the Court in also affirming the assessment for that year.

Let us say, first, that the documentary evidence adduced by the solicitor for the Minister is suspect since it arises from a fraudulent and illegal practice on the part of Dunn & Benoît. The practice which the shareholders adopted was to enable them to extract funds from the company and also to appropriate part of those funds personally. Benoît himself admitted this stratagem. When this practice was discovered by Revenue Canada officials,the shareholders' defence was that that money had been used to pay the employees. It must be recognized that it was in the shareholders’ interest to increase as much as possible the amount of money which was supposed to have been paid to the employees, including the appellant. The manner in which they chose to clear themselves of this fraud and to try to reduce the amount that might have been attributed to them personally as income was to issue T4 supplementary slips in the names of the employees.

Solicitor for the Minister invited the Court on numerous occasions to consult Dunn & Benoît's documentation filed in evidence and which, in his view, constitutes sufficient evidence to establish the validity of the assessments.

For the 1987 taxation year, if he had examined certain documents himself, he would have noticed that an appreciable number of hours were recorded on the computerized sheets as the appellant had claimed. The latter filed 43 pay cheque stubs for the year in question, and, on 16 of them, additional hours are recorded under the heading "double time", notwithstanding what the witness Sylvie Dubuc stated in her testimony, that "the overtime was paid at the regular hourly rate” (transcript, pages 21-22). Thus, for example, comparing the computerized sheets with the cheque stubs for the period ending April 24, 1987, we see that the cheque stub indicates 24 regular hours at $14.11 for a total of $338.64 and, in addition, four hours at double time for a total of $112.88. Identical information appears on the computerized sheets for the same period. The same is true for the weeks of May 2, 9 and 16 and for a certain number of other periods. In fact, according to this documentation, the appellant allegedly worked at least 62 overtime hours in 1987 for Dunn & Benoît.

The appellant filed only 15 cheque stubs for the 1988 taxation year, and there was no indication that he might have worked overtime or that the company might have paid him amounts in addition to his wages.

Solicitor for the Minister submitted that his evidence constituted circumstantial evidence sufficient to enable the Court to find that the appeal should be dismissed.

For circumstantial evidence to be accepted in the absence of direct evidence of certain facts, the testimonial and documentary evidence submitted must, as a whole, necessarily permit the Court to find that the existence of those facts is at least probable. However, for such evidence to be able to stand instead of direct evidence, it must lead logically and convincingly to a likely and virtually inevitable conclusion.

If the Minister had called a certain number of Dunn & Benoit's former employees as witnesses and these latter had admitted that they had received cash amounts for overtime work, it would then have been reasonable to suppose that the appellant had also shared in that system. Or, alternatively, if the superintendent of the site where the appellant had worked had, and testified that he had, distributed certain envelopes to the appellant, such evidence would also have been sufficient.

The fact that Ms. Dubuc had put cash into envelopes and had handed them over to Benoit does not prove that the money was in fact distributed to those for whom it was intended. The path of that money could have stopped at Benoit or, alternatively, at the site superintendents who were to distribute it. No one can confirm or deny this possibility. What happened to the amounts recorded on the T4 slips prepared by Benoit for the employees Côté and Barbeau and which were in addition to those admitted in the consents for judgment? Furthermore, Cairns, another witness of the Minister, stated that not all the employees received an envelope containing cash. It is entirely possible that the appellant was one of those who did not receive an envelope. This would confirm his claims, and the Court has no reason to doubt his testimony.

In the absence of more tangible evidence which might have placed the appellant closer to the money which the Minister attributed to him for the years under appeal, I cannot see how evidence based essentially on suspect documentation can be sufficient. This finding is all the clearer when the basic documents, that is to say the T4 slips issued by Dunn & Benoit which were used to determine the amount of additional income assessed, were acknowledged as inaccurate with respect to the amount recorded on them by their author. In addition, similar slips which were used for the same purposes in two other appeals were officially acknowledged as erroneous by the Minister. How in the circumstances can one plausibly concur in the claims of solicitor for the Minister and admit that these facts taken together constitute sufficient circumstantial evidence?

In my view, for the 1987 taxation year, the Minister was far from discharging the burden of proof required by the Act and case law. For the year in question, there is nothing linking the appellant to the amount of $10,450 which he was purported to have received from Dunn & Benoît.

For the 1988 taxation year, the onus was also on solicitor for the Minister, according to the case law, to affirmatively establish the amount of understated income (Chopp, supra), by the appellant, and he was unable to adduce such evidence. Furthermore, as the appellant argued that he had not received cash from Dunn & Benoît, the burden was on the Minister to prove that the appellant had indeed received that money. This was not proved.

Consequently, the appeals for the 1987 and 1988 taxation years are allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment.

Appeal allowed.