André Bégin v. Her Majesty the Queen, [1994] 1 CTC 2806, 94 DTC 1292

Lamarre Proulx, J.T.C.C.:— These are appeals concerning the 1985, 1986 and 1987 taxation years. The assessments under appeal were made following a calculation of the appellant’s income made using the net worth method. The total adjusted income based on net worth, the total reported income and the difference of income according to the net worth statement for the years in issue are as follows:

The appellant was a practising optometrist during the years in issue. The following is a schematic table of income from the appellant’s professional business and of the income reported by the appellant based on Exhibits I-1, 1-2, 1-3 and Exhibit A-1, tab 16:

Exhibits I-1 to 1-3 show that the reported income was composed of income from the professional business and from investment income.

The appellant, the members of his family and the accountant explained the differences between the declared income and the income computed using the net worth method by loans in the total amount of $202,616 made in 1985 to members of the family and repayments of those loans in 1985, 1986 and 1987. Those loans and repayments are described at tab 13 of Exhibit A-1. This is a table prepared by the accountant and since it was the basis of the appellant's defence, it is reproduced below in full:

ADDITIONAL ASSETS

	1984	1985 1985	1986 1986	1987
Mr. Henri Durand,
sum lent in 1981	$ 35,000
Repayment		($12,000)	($12,000)	( $5,000)
Ginette Bégin	31,067
Repayment	(2,200)	(3,000)	(4,500)	(8,500)
Rachel Bégin	28,940
Repayment	(2,500)	(5,000)	(8,000)	(5,000)
Richard Bégin	30,767
Repayment	(2,200)	(3,000)	(5,000)	(8,000)
Jules Bégin	12,000
Repayment		(4,000)	(5,500)	(2,500)
Pierrette Bégin	10,000
Repayment			(10,000)
Pierre Bégin	29,273
Repayment	(2,400)	(6,000)	(10,000)	(6,000)
Michel Bégin	25,569
Repayment	(2,400)	(4,800)	(6,200)	(11,000)
TOTAL LOANS	202,616
REPAYMENTS	(11,700)	(34,800)	(56,700)	(40,500)
DIFFERENCE IN ASSETS		$ 46,273	$ 93,735	$48,315

During the examination of the accountant, the latter corrected the repayment totals as follows: $37,800 for 1985, $61,200 for 1986 and $46,000 for 1987.

Henri Durand was the appellant’s son-in-law at the time. Jules et Pierrette Bégin are the appellant's father and sister. The other persons named in the table above are the appellant’s children.

The alleged loans and repayments appear at tabs 5 to 12 inclusive of Exhibit A-1. These are entries made by the appellant on odd pieces of paper of amounts lent to the children since January 1975 for Ginette and Rachel Bégin, since 1976 for Michel Bégin, since December 1977 for Richard Bégin and since December 1978 for Pierre Bégin. This summary bookkeeping of loans stopped in December 1984. Although the appellant and his wife mentioned that financial assistance had continued during the years in issue, the records filed contained no mention of any loans subsequent to 1984. Each page recording the loans was signed by the daughter or son concerned. Each testified. They said they trusted their father and that if it was written down, then it was true. They could not say exactly what the borrowed amounts were. During the years in issue, the children’s ages ranged between 25 and 30 years, and all have university degrees.

As regards the individual amounts of the repayments for the years in issue, they varied from $2,000 to $400 for a total of $16,000 for Ginette; from $2,000 to $200 for a total of $18,000 for Rachel; from $1,000 to $300 for a total of $16,000 for Richard; from $1,500 to $200 for a total of $22,000 for Pierre. All these amounts were allegedly paid to the appellant in cash, without any request for a receipt or any written document whatever. The children did not initial the appellant’s repayment records, which once again consisted of odd sheets of paper on which amounts were indicated with regard to a date. No child filed a bank book indicating substantial withdrawals in respect of the alleged repayments or any other document. They explained in their testimony that they trusted their father with respect to the accuracy of the amounts recorded.

In some cases, however, the parents and the children put their agreements in writing, as witness, in particular, Exhibit A-11, a repayment by one of the daughters of a substantial advance which had been made to her. All used cheques for their usual business activities.

The children’s income tax returns for the years in issue were filed by the respondent under the numbers 1-5, 1-6, 1-7 and I-9. A number of those returns did not show employment income or showed only small investment income or amounts of employment income much too small when the children’s financial responsibilities were taken into account, particularly those pertaining to their own children, their spouses and their housing, to permit the substantial repayments entered by the appellant in his records.

The explanations provided by the children were either absurd—such as, for example, that they had borrowed in order to make repayments when the employment income was zero—or so evasive that they were incoherent.

As to the repayment of Henri Durand, the appellant explained that the documents filed at tab 12 of Exhibit A-1 in support of a loan of $35,000 were not the right ones. They concerned a previous $35,000 mortgage loan which had been completely repaid in 1983. The testimony at the hearing contradicted that given in examination for discovery. The existence of that $35,000 loan to Henri Durand was ultimately not proved. The repayments by Henri Durand were allegedly made in cash without a request for a written receipt for the amounts totalling $29,000 during the years in issue.

The loans and repayments of Jules and Pierrette Bégin were of the same kind. Jules allegedly received $12,000 from the appellant in order to purchase an automobile. He allegedly put that money in a safe deposit box. He allegedly repaid his brother during the years in issue, all in cash.

The official of the Minister of National Revenue (the "Minister") testified for the respondent. He first communicated with the appellant by telephone at his office on November 10, 1988 and reported there on November 16, 1988.

He explained that he had asked at the start of his audit whether the appellant had received an inheritance or won one of the lotteries held in Canada. The answer was no. He began by drawing up a summary net worth audit which he said was a routine test in order to verity the accuracy of the reported income, and the wide discrepancy in the total income required him to proceed with a detailed net worth audit.

The expenses of the appellant’s professional business seemed to him reasonable. In his view, it was not a matter of expenses excessively inflated or too large a deduction made for depreciation. The difference between reported income and that established by the net worth method could only have come from undeclared income, either professional or other income.

He explained to the Court that no element in that net worth audit had been estimated. Everything had been computed from cheques, invoices and bank accounts. He did not obtain from the appellant an explanation of the source of the appellant’s substantial additional income.

The loans and repayments were not mentioned at the time of the audit conducted by the Minister's official or at the time the draft assessment was presented. The draft assessment was presented on May 26, 1989. There were no representations made by the appellant and the assessment was issued in December 1989. It was at the time of the notice of objection prepared by the accountant and signed by the appellant that the appellant’s loans and the children’s reimbursements were mentioned for the first time.

The penalties were assessed because of the large difference between the reported income and the income calculated according to the net worth method, because the appellant was an educated man, and because it is he who kept the books with the assistance of his wife.

I have already proceeded to a certain analysis of the probative force of the evidence adduced in my description of the latter and indicated its weaknesses. My conclusions will therefore be brief. I cannot in any way give any belief to the appellant's argument that he received the repayments in question during the years in issue according to the terms and in the circumstances described above: substantial amounts were all allegedly paid in cash, written receipts were allegedly not requested, the income of some children was nil, others had financial responsibilities which did not permit them to make those repayments. To have conceived and dared adduce such evidence is beyond understanding.

The appeals are dismissed with costs.

Appeals dismissed.