Dimitrios (James) Gallos and Apollo 8 Maintenance Services Limited v. Minister of National Revenue, [1986] 2 CTC 2241, 86 DTC 1690

Bonner, T.C.J.:—In 1968 James Gallos commenced to carry on the business of providing building maintenance and cleaning services. He did so as sole proprietor. Subsequently in September of 1972 the business was transferred to a corporation, the appellant Apollo 8 Maintenance Services Limited (hereinafter sometimes called "the company"). Mr. Gallos became sole shareholder, president and general manager of the company.

In assessing tax for the 1973 to 1977 taxation years of the company the respondent added amounts to declared income which according to the explanation forms accompanying the notices of reassessment were broken down as follows:

In assessing tax for the 1972 to 1977 taxation years of Mr. Gallos the respondent made adjustments to declared income as set forth on similar explanation forms as follows:

The Respondent also assessed penalties under subsection 163(2) of the Income Tax Act against both appellants.

The notices of appeal followed consistent patterns. So far as is now relevant Mr. Gallos asserted in each notice of appeal that he properly computed his income from office for the year, that he did not appropriate any property of the corporation and that there was no basis in fact or in law for the imposition of the penalties. At the hearing Mr. Gallos abandoned his appeal from the assessment for 1972. The company in each of its notices of appeal asserted that it properly computed its active business income for the year and that there was no basis in fact or in law for the assessments either of tax or of penalties. Bald assertions of this sort do little to clarify the issues.

The nature of the appellants’ position on the appeals became clear at the hearing. It was that the cleaning and maintenance business had a work force composed of both full-time and part-time staff. The full-time staff was engaged in regular five-day-a-week cleaning chores. The part-time workers were required to fill in for absent full-time workers, to do cleaning required by clients on an emergency basis and to perform the more extensive sort of cleaning chores usually reserved for weekends. Part-time workers were paid in cash. The cash needed to pay them was, according to the appellants, secured by cashing some of the cheques issued to the company by its customers. This was done by Mr. Gallos. That cash formed a part of its labour costs and was properly deductible in the computation of its income. No amount so used could be regarded as funds of a corporation appropriated to or for the benefit of a shareholder within the meaning of paragraph 15(1 )(b) of the Income Tax Act. Thus counsel for the appellants asserted that the only issue to be decided was the amount of the reduction in the additions to declared income required to reflect the payments made in cash.

The penalties were not mentioned at the hearing. I assume that the appellants' position is that they are entitled to relief in respect of the penalties only to the extent that they succeed in establishing that the respondent's computation of income and therefore of tax is too high with the result that the penalties must be reduced in accordance with the mathematical formula laid down by the Act.

Mr. Gallos testified that part-time workers were required for the purposes previously outlined. They insisted, he said, on payment in cash. The jobs for which they were required usually took one to two days to complete. Much of the part-time work was done on weekends. The amounts paid varied with the difficulty of the work, the length of time necessary for its completion and, sometimes, the length of notice given when the worker was Called in. He said that amounts paid per shift were in the $50-$60-$70 range. The number of workers engaged varied every weekend. According to Mr. Gallos sometimes as few as five were required. Sometimes as many as 15 were used. Mr. Gallos testified that he kept $3,000 in his pocket at all times for the purpose of paying the workers.

The payments to Apollo 8 made by means of cheques which Mr. Gallos later cashed were not declared by it for income tax purposes. The invoices which generated the payments were kept on a file separate from invoices pertaining to transactions which were reported for tax purposes. Mr. Gallos’ evidence was that he kept some sort of records or notes of the payments made in cash to the workers, but that he had thrown them away.

Evidence was given by each of 18 persons who worked part-time for Apollo 8 during the years in question. Almost all of them testified as to the years during which they worked, the frequency with which they worked, the average amount of work on each occasion and the amount normally paid. It was on the basis of this evidence and that of Mr. Gallos that the appellants' counsel submitted that the amount paid in cash could be computed.

None of the workers declared the cash payments for income tax purposes. Many, but not all, asserted that they would not have worked had the payment been made by cheque. In explaining their reasons for insisting on cash many of these witnesses exhibited a curious reluctance to admit what was quite obvious, namely, that they had wanted to evade income tax.

The evidence of the workers was understandably imprecise. No records had been kept of the amounts in question which had been paid as much as 13 years before the hearing. Thus the evidence of a typical witness was that he had worked 15 to 20 times a year and had been paid $80 to $100 per job. During argument counsel for the appellants produced a calculation of the amounts which he asserted should on the evidence be found to have been paid in cash. Mr. Cancellara sought to overcome the imprecision of the evidence by basing his calculations on averages. Thus, in the case of the witness just mentioned, he arrived at an annual figure of $1,575 by multiplying 17.5 occasions by $90 each.

Counsel for the respondent did not, of course, contend either that the company's labour costs were not deductible because they had been paid in cash or that the cash used by Mr. Gallos to pay workers could be regarded as an amount falling within the sweep of subsection 15(1). He argued that the cash used to pay part-time workers was not shown to have come from the revenues which had been diverted into Mr. Gallos’ pocket and he suggested that the source of the cash may well have been corporate revenues which the respondent had never discovered and included in income. He argued as well that while the evidence did show that some wages had been paid by Mr. Gallos in cash which had come from the company it was insufficient to support any conclusion as to quantum.

The evidence, in my view, is insufficient to permit the Court to make a positive finding on the balance of probabilities that the income figures arrived at by the respondent on assessment were incorrect. The onus is on the appellant to establish just that. In Harry Dezura v. M.N.R., [1947] C.T.C 375; 3 D.T.C. 1101; Thorson, P. had this to say at 380 (D.T.C. 1103-4):

Ordinarily, the taxpayer knows better than any one else the amount of his taxable income and should be able to prove it to the satisfaction of the Court. If he does so and it is less than the amount determined by the Minister, then such amount must be reduced in accordance with the finding of the Court. If, on the other hand, he fails to show that the amount determined by the Minister is erroneous, he cannot justly complain if the amount stands. If his failure to satisfy the Court is due to his own fault or neglect such as his failure to keep proper accounts or records with which to support his own statements, he has no one to blame but himself.

In Lisunia Chernenkoff v. M.N.R., [1949] C.T.C. 369 at 374; 49 D.T.C. 680 at 683, Cameron, J. stated in similar vein:

My opinion is that the appellant must do far more than she has attempted to do here if her appeal is to be successful. There can be no question that the onus lies on the appellant and that, in my view, means that she must establish affirmatively that her taxable income was not that for each of the years for which she was assessed. Two courses were open to her, the first being to establish her income with proper deductions and allowances, and that course could quite readily have been followed.

In this case the evidence as to the number of times worked and the amount paid each time was imprecise, was unsupported by any record and was given by persons whose credibility was lessened by reason of their participation in a dishonest scheme. The schedule produced by counsel for the appellants underlined the difficulty of arriving at a reliable calculation on the basis of that evidence. That schedule arrived at an improbable result in that it indicated that the total of amounts paid to the workers exceeded the total of the unreported sales supposed to be the source of the payments.

It may be noted that the company neither pleaded nor attempted to prove that its income was some specific amount less than that found by the respondent on assessment. Had it been asserted and then either admitted or established by evidence that all elements of each of the calculations of income made by the respondent were correct save for those which were affected by the cash payments then proof that cash payments were made would have led to a conclusion that the assessments were too high. Similarly in the case of Mr. Gallos, had the case proceeded to trial on the basis that his income was the amounts assessed minus the amounts of the cash payments then proof the cash payments were made would have led to a conclusion that the assessments were too high. Obviously the task of meeting the onus of establishing taxable income in an affirmative way is a difficult one in the present case. However, it is not open to an appellant who has embarked on a scheme involving deceit to subsequently complain that his success in concealing the facts has made it impossible to prove them when it later suits his purpose to do so.

For the foregoing reasons the appeals will all be dismissed.

Appeals dismissed.