Royal Craft Products Ltd. v. Minister of National Revenue, [1986] 1 CTC 2290, 86 DTC 1196

Tremblay, T.C.J.:— This appeal was heard on common evidence with the appeal of H. A. Coulson (No. 80-1769) [[1986] 1 C.T.C. 2305] on April 15, 16 and 18, 1985 at the city of Edmonton, Alberta.

1. The Point at Issue

The point is whether Royal Craft Products Ltd. (Royal Craft) is correct in not including in its income for the 1969 through 1974 taxation years approximately $205,000.

The respondent contends that the said amount is due to understated sales and overstated expenses. Moreover, the respondent levied a penalty of approximately $6,000.

The appellant contends that the said amount of $205,000 was a reimbursement to the shareholder and manager, Mr. Coulson, for expenses incurred on its behalf.

The amount of approximately $143,000 was included in Mr. Coulson’s income as appropriations ($132,000) and benefits ($11,000) for the 1969, 1972 and 1973 taxation years.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's assessment or reassessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

6. In so reassessing the Appellant, the Respondent assumed, inter alia, that:

(a) the income of the Appellant for the years under appeal herein was understated by the amount of the discrepancies shown on the statement attached hereto as Schedule I;

(b) the Appellant knowingly, or under circumstances amounting to gross negligence, has made or participated in, assented to or acquiesced in the making of, a statement or omission in its returns of income in respect of each of the taxation years under appeal within the meaning of Section 163(2) of the Income Tax Act, as a result of which the taxes that would have been payable by the Appellant if the taxes had been assessed on the basis of the information provided in the returns are less than the taxes payable by the Appellant to the extent of $2,041.17 in 1969, $2,266.56 in 1970, $6,317.03 in 1971, $3,086.06 in 1972, $9,036.93 in 1973 and $2,692.47 in 1974.

2.03 As Schedule I is part of the assumptions of fact, the figures included in the said Schedule are also assumed to be correct. They read as follows:* [1]

3. The Facts

3.01 By notices of reassessment, dated April 30, 1976, the respondent reassessed the appellant for the 1969 through 1974 taxation years to increase the taxpayer's income by the following amounts of understated income and overstated expenses:

3.02 In the same notices of reassessment the respondent levied penalties under subsection 163(2) of the Income Tax Act in respect of understated income as follows:

3.03 At the beginning of the trial, it was agreed to number, as Exhibit A-1, Schedule I produced by the respondent with the reply to notice of appeal in Royal Craft’s appeal and quoted above.

3.04 Counsel for the appellants informed the Court that from the list of 18 points in Exhibit A-1, only three are contested, No. 1, No. 4 and No. 11. They read as follows (reproduced at p. 2295):

3.05 The fiscal year of Mr. Coulson is the calendar year. The fiscal year of Royal Craft is from September 1 of one year to August 31 of the following year.

3.06 At the beginning of the trial, counsel for the parties also agreed to produce as Exhibit A-2 a “comparison schedule of amounts included in charges” of both appellants with regard to the 1970 to 1974 fiscal years of each one. This document gives the details of the “Understated Income” and a part of the “Overstated Expenses”.

There is a list of names of people, the date of the transaction and the amount involved. The list totals 196 transactions concerning “Understated Income” and 28 transactions concerning “Overstated Expenses”. The transactions concerning the understated sales mainly show the details of Item 13 of Exhibit A-1 (quoted above in para. 2.03) “Sale proceeds not deposited”.

3.07 For a better understanding, it is useful to quote Schedule “A” produced with the reply of the respondent to the notice of appeal of Mr. Coulson. This schedule mainly shows the benefits and appropriations of Mr. Coulson.

3.08 The parties filed 54 exhibits: 18 by the appellant and 36 by the re- spondent.

3.09 Royal Craft was incorporated in December 1959. Its main object is “construction” and selling products to contractors.

3.10 In a letter dated February 9, 1973 answering a demand relating to a failure to file corporation tax return, Royal Craft, through Mr. C. H. Quil- liam, CA, member of the accountant firm Quilliam, Stuart and Company, informed the respondent as follows:

Our records indicate that the last corporation return filed for the above named client was the year ended August 31st, 1968, and Mr. Coulson informs us that the company has been inactive since that date. Our records further indicate that because the company was inactive, the company was excused from filing the 1969 return.

Mr. Coulson has asked us to inform you that the company at one stage was at jeopardy of being struck from the Company Register, but has been re-instated. However, the company has not conducted any business for the last several years, and consequently has not filed returns.

However, on Mr. Coulson’s own admission for failing to file returns, Royal Craft was convicted later in 1973.

3.11 Mr. Coulson was also a shareholder of Associated Grand Builders Ltd. This company was incorporated in March 1969 originally under the name “Associated Grand Construction Ltd.” (Exhibit R-10 — Minute Book of Associated). In December of the same year, however, the name was changed to “Associated Grand Builders Ltd.” (Associated). The main object was also “construction.”

3.12 Mr. Coulson and a Mr. John Bury each owned 50 shares of Associated. At the beginning they were both directors. Mr. Bury, however, resigned as director in May 1970 (Exhibit R-10 — Minute Book of Associated). This is the last official inscription in the Minute Book. Associated never filed its income tax returns.

3.13 Pursuant to Exhibit A-1, Item No. 4, a total of $52,583.87 was deposited in the bank account of Associated. This was included in the income of Royal Craft by the respondent. In 1969, however, a deduction of $12,021.83 was taken into account, (This is part of $24,722.28 of expenses in Item 8 of Exhibit A-1 quoted above) and $13,091.49 in 1970 (Exhibit A-1, Item 8) (testimony of Mr. Lucas). From deposits in the bank account of Associated, it appears from Schedule “A” filed with the reply to notice of appeal (para. 3.07 above) that an amount of $44,738.20 was included in the income of Mr. Coulson for the 1969 calendar year, as appropriation. The appropriate deduction of $23,350.56 was also made for the expenses paid. This $23,350.56 is part of $24,722.28 (Exhibit A-1, Item 8).

3.14 Mr. Lucas, a supervisor with Revenue Canada, was, in 1975, an investigator with the Special Investigation Section of the Department of National Revenue. He had to analyse the income reported by the two appellants. The 1969, 1972 and 1973 returns of Mr. Coulson were respectively filed on August 10, 1973, February 26, 1974, and April 24, 1974.

Royal Craft filed its returns as follows: 1969 on August 20, 1973; 1970 on September 12, 1973; 1971 on September 12, 1973; 1972 on March 6, 1974; 1973 in January 1975 and 1974 on March 3, 1975.

The records of Royal Craft, seized on March 3, 1975 (Exhibits A-14, R-7) consisted of a synoptic journal, the accountant’s working papers, cancelled cheques, numerous expense vouchers, bank statements and receipts. With those documents, he was able to reconcile the figures of the financial statements filed with the tax returns.

3.15 To overview the whole case, however, Mr. Lucas had to consider the 10 bank accounts used for various amounts of income by the appellants. For the year 1969, however, the appellant’s accountant, in reporting the gross sales, based them on three different bank accounts: one in the name of Royal Craft, one in the name of H. A. Coulson and one in the name of H. A. Coulson House Account at the Canadian Imperial Bank of Commerce (C.I.B.C.).

3.16 In overviewing the case, Mr. Lucas stated that certain deposits in the name of Mr. Coulson from September 1968 to June 1969 were not included in the synoptic journal and hence in the income by Royal Craft's accountant. They totalled $21,955.85 (Exhibit A-1, Item 1). He found other additional deposits to the H. A. Coulson House Account in C.I.B.C. on 118th Avenue, in an account in the name of Paramount Home Supplies and especially deposits to Associated. "Associated . . . was a name that Royal Craft Products used to sell certain jobs, sometimes siding, sometimes construction, sometimes other things, and the accounts were intermixed,” said Mr. Lucas.

He also said he never found a synoptic journal, or any type of journal, written records, cheques, deposit slips, etc. for Associated. It has no activity whatsoever except the bank account and a small number of contracts that were among the records of Royal Craft. The only records available to Revenue Canada from Associated is the Minute Book (Exhibit R-10). The last inscription is dated May 1970. From the bank, the investigator obtained a photocopy of the bank card, in fact a business record of Associated with the bank. It is from that document that were computed the deposits for the different years. According to Mr. Coulson, Associated had books and records. But it seems nobody found them. Concerning the bank account, it was found that deposits were made in the amount of $19,401.58 in 1969 for the fiscal year of Royal Craft (Exhibit A-1, Item 4).

3.17 The amounts from all the deposits in different bank accounts appear in Exhibit A-1 under the heading 1969 (see para. 2.03 above). Expenses paid by cheques not recorded by Royal Craft were allowed in the amount of $24,722.28 (Exhibit A-1, Item 8).

3.18 The amount of $44,738.20 included in the income of Mr. Coulson, as it appears in Schedule "A" quoted above (para. 3.07) as deposits of Associated under the heading of Appropriations, is part of the $52,583.87 (Exhibit A-1, Item 4). The fiscal year of Mr. Coulson (calendar year) and the fiscal year of Royal Craft (from September 1 to August 31) explain why $44,738.20 was included in the income of Mr. Coulson in 1969.

3.19 Mr. Bury, the co-shareholder of Mr. Coulson in Associated, was not present in Court to give testimony. It was not possible to reach him, according to Mr. Coulson.

3.20 Some contracts were obtained from third parties with the Associated name on them. The evidence is that when the payments were going in on these contracts, or when subsequent mortgages were entered into as a result of those contracts, the payments were recorded in the synoptic journals and in the other documents of Royal Craft, as prepared by the accountant of the latter. For instance, in 1970 there was a transfer from Associated of $1,500 in H. A. Coulson's account. This $1,500 was included in the income of Royal Craft by the accountant Quilliam.

In fact, Royal Craft was a contractor, doing construction and repairs. Sometimes the name of Associated was used, for instance in the case of Greville Griffin, Alex L. Janggren, Bela Lazlo, Malcolm Minnick and Francis Thamar (Exhibit A-13). Many times the third party paid the total amount of the repairs. Many times, however, the said party could not pay the total amount and then a mortgage was registered to guarantee the payment of the debt. Most of the time however, the mortgage was held by Mr. Herbert

A. Coulson (Exhibits A-7, A-8, A-11, A-16, A-17 and R-28(c)) or Linda Gay Coulson (Exhibits A-5 and A-18). At certain times, Mr. Coulson transferred the mortgage to Mrs. Lilly I. Quilliam, spouse of the accountant (Exhibits A-6, A-9 and A-10) or to a trust (Exhibit A-12, four mortgages). According to Mr. Lucas approximately 70 per cent of the mortgage was not held by Royal Craft but by Mr. Coulson (Exhibits A-4 and A-6).

All of those mortgage payments were recorded by the respondent as income of Royal Craft. The evidence given by the appellants as payments of expenses by Royal Craft, or by Mr. Coulson, concerning the contracts does not amount to $2,000.

3.21 As Exhibit R-35, the respondent filed a summary of the different figures involved in the reassessments from the taxable reported income by Royal Craft to the “Total Tax and Penalties” including “Revised Taxable Income,” “understated sales, etc.”. The “Taxable Income Reported” and the “Revised Taxable Income” read as follows:

The figures of the third column are the same as those of the bottom line of Exhibit A-1 quoted in paragraph 2.03.

3.22 Moreover, as Exhibit R-36, the respondent filed as a summary the different figures involved in the reassessments from the “previous Net Income Report” by Mr. Coulson to the “Total Tax of Penalties,” including “Revised Net Income,” and “appropriations etc.”. The “Previous Net Income Reported” and the “Revised Net Income” read as follows:

The figures of the third column are the same as the total of benefits and appropriations of Schedule “A” of the reply to the notice of Mr. Coulson’s appeal quoted above in paragraph 3.07.

3.23 The evidence shows that the overstated expenses of Royal Craft which became benefits for Mr. Coulson were items mainly charged to materials. In fact they were expenses in brokerage to purchase personal shares (Coch

ran Murray: $818 in 1970, $265 in 1971, $1,819 in 1972), expenses for babysitting (Cecilia Frederiks: $215 in 1970, $100 in 1971, $45 in 1972), expenses for personal card-playing bets (Otto Beitel: $65 in 1970, $415 in 1972, $280 in 1972; also Sandra Beitel, $235 in 1972), expense for purchase of paintings for personal residence (Apex painting: $447 in 1971), payment of second mortgage of his personal residence (Hubert Hoffman: $100 in 1971), promotional expenses without vouchers (H. Hoffman: $1,035 in 1971), in payment of personal loan (Mel Charney: $100 in 1972) and in travel expenses without support ($2,400 in 1972). The latter figure in the journal was debited “travel” and credited to Mr. Coulson's shareholder’s loan account with Royal Craft. There was no support for this.

There was no support either for $3,647.95 in 1971 and $5,500 in 1972 debited in the journal as “sales” and credited to Mr. Coulson’s shareholder's loan account with Royal Craft (Exhibits A-2, R-35, Schedule “A”, para. 3.07 and testimony of Mr. Lucas).

3.24 Concerning the understated sales, among others $34,181.59 in 1971, they consisted of $3,491.71 in deposits to Royal Craft (Exhibit A-1, Item 4), plus $10,044.09 forgotten by the appellant’s accountant, in deposits to Royal Craft (Exhibit A-1, Item 18) and $21,371.16 in sales proceeds determined from third parties (Exhibit A-1, Item 13) not deposited anywhere, so not accounted for (Mr. Lucas's testimony).

The same explanation applies for the figures that appear in line 13 of Exhibit A-1, paragraph 2.03, under the heading “Sales proceeds not deposited”: $4,138 in 1970, $12,873.14 in 1972, $31,104.58 in 1973 and $18,571 in 1974.

3.25 Concerning Item 11 of Exhibit A-1 (para. 2.03) the evidence is to the effect that Mrs. Linda Coulson, spouse of the individual appellant, received $2,200 in 1971 and $2,750 in 1972.

Mr. Coulson testified that she received that money from Royal Craft because she worked answering the telephone. According to Mr. Lucas however, there is no cheque, no document or anything to prove that such amounts were received by Mrs. Linda Coulson from Royal Craft. However, a few weeks after she had received the money, it was transferred to the bank account of Mr. Coulson.

Mr. Lucas explained that the amounts were included in the income of Royal Craft and Mr. Coulson because the transfer was the ordinary method that Mr. Coulson used:

He transfers back and forth numerous times between accounts and confuses the issues, and he doesn't keep clear distinctions by his own testimony, between himself and the various corporations and the various bank accounts. So therefore the analysis of all the bank accounts had to be looked at as a whole, and therefore the $2,200.00 was included. And it was, this belief of mine was enforced by the fact that the $2,200.00 was transferred to Mr. Coulson's account which was one of the accounts that was used to determine income of the corporation.

Exhibit A-5 shows, however, that in September 1971 she became the mortgagee for the sum of $5,000 due by Edward V. Sjolie and Lorraine A. Sjolie of Camrose, Alberta. They had to pay equal consecutive monthly instalments of $82.50 commencing on September 15, 1971. From Exhibit A-2, it appears that payments were made from September 15, 1972 to January 15, 1973. Those payments were included in the income of Mr. Coulson and in that of Royal Craft.

3.26 There was a discussion about a payment of $1,500 made on July 24, 1972 by a Mr. Arthur Hainsworth (Exhibit A-2, p. 3) to a Mr. David Lukas (Exhibit R-27-c). Pursuant to the agreement dated May 10, 1972 between Royal Craft and Mr. and Mrs. Hainsworth, the total of the contract is $2,650. A first cheque of $1,000 was issued to the order of “Royal Craft Inc./' on May 11, 1972. The second one, probably at the end of the work, was issued on July 24, 1972 to David Lukas (Exhibit R-27-c). According to Mr. Coulson, Mr. Lukas was an employee working for the company as an applicator. Mr. Coulson contends that neither he nor Royal Craft received that cheque. It is true that the cheque was endorsed only by David Lukas. However, on the front of the cheque on the lower left-hand side, it is written “Payment on Royal Craft Inc/'. It seems to be the handwriting of Mr. Hainsworth if one compares his signature on the cheque with the said written words.

3.27 Finally, there was also a discussion about an amount of $500 in the Fred McLean Agreement that appears first in Exhibit A-2, p. 3, April 1972. Pursuant to the original agreement (Exhibit R-25-c), it is written:

The agreement is dated February 10, 1972. A first cheque was issued on that same date of February 10, 1972 in the amount of $500. A second one was issued on April 11, 1972 in the amount of $1,711; both to the order of Royal Craft (Exhibit R-25-b).

In the copy of the agreement (Exhibit R-25) which was given to the investigator Mr. Lucas by Mr. McLean, one can read “Paid in full, $2,713.” It is signed by Mr. Coulson who recognized his signature. Mr. McLean would have said to Mr. Lucas that he had to pay an extra $500 in cash in addition to the two cheques.

4. Law — Cases at Law — Analysis

4.01 Law

The former Income Tax Act, which was in force until the end of December 1971, and the new Income Tax Act, in force since January 1, 1972, are both implicated in this appeal. Indeed, the taxations in dispute are from 1969 to 1974. The main provisions of the new Income Tax Act involved are subsection 152(7) (identical to subsection 46(6) of the former Act), subsection 163(2) of the new Act (identical to subsection 56(2) of the former Act) and subsection 163(3) of the new Act (not existing in the former Act). They read as follows:

152. ...

(7) The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.

163. . . .

(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of

(a) 25% of the amount, if any, by which . . .

(3) 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.

Concerning the appeal of Mr. Cou:son, provisions 15(1)(b) and (c) of the new Act and 8(1 )(b) and (c) of the former Act are involved. They are analogous. Subsection 15(1) reads as follows:

15. (1) Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(d) on the reduction of capital, the redemption of shares or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 84, 88 or Part II applies,

(e) by the payment of a dividend, or

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

4.02 Cases at Law

The only case the Court refers to is that of Cloutier v. The Queen, [1978] C.T.C. 702; 78 D.T.C. 6486.

4.03 Analysis

4.03.1 A. Royal Craft

Three points are at issue concerning the appellant company. The only three points that are contested in the basic document Exhibit A-1 are Items 1, 4 and 11 (para. 3.04).

4.03.2 Concerning the $52,583.87 coming from deposits in the bank of Associated (Exhibit A-1, Item 4, para. 2.03), Royal Craft contends that there was a bona fide operating company, that Associated was a separate company from Royal Craft and therefore that this $52,583.87 had to be taxed in the hands of Associated and not in the hands of Royal Craft. What does the evidence show?

Associated was incorporated in 1969 (para. 3.11), Royal Craft in 1959 (para. 3.09). In this respect, they are two separate companies.

In substance however, what is the truth?

In 1973, Mr. Quilliam, an accountant, informed the respondent that Royal Craft had had no activity since 1968. However, following the admission of Mr. Coulson, Royal Craft was convicted for not having filed income tax returns (para. 3.10).

Finally they filed the returns. Moreover, after investigation, reassessments were issued. The major part of the said reassessments is not contested.

Concerning Associated, it is contended that the amount of $52,583.87 has to be included in its income (Exhibit A-1, Item 4). However, Associated has never filed an income tax return since its incorporation (para. 3.12). There is no evidence that Associated had an accounting system except the affirma- tion of Mr. Coulson that there was one. From the time of the seizure in 1975 to the trial in 1985, Mr. Coulson had a lot of time to find and file documents. A bona fide operating company keeps some records, journals, etc. The minute book is the main document of this company. The last official inscription is dated May 1970.

The only director of Associated, since 1970, is Mr. Coulson, who is also the only director and main shareholder (99 per cent) of Royal Craft. The two companies have the same address (paras. 3.11, 3.12 and 3.16).

The evidence, however, shows that a certain number of construction contracts have the name of Associated (para. 3.20). It seems at first glance that this company was carrying on business.

Mr. Quilliam, accountant of the appellants, used these contracts to compute the income of Royal Craft. The amounts indeed were in the synoptic journal and other documents of Royal Craft (para. 3.20). Without hesitation, the Court concludes that Associated was only a dummy company; the amount of $52,583.87 has to be included in the income of Royal Craft with the appropriate deduction of $12,021.83 in 1969 and $13,091.49 in 1970 for expenses paid (para. 3.13).

4.03.3 Royal Craft objected also to Item 1 of Exhibit A-1 “Deposits to H A Coulson a/c . . . not included in sales,” totalling $104,667.56. The important activity of Mr. Coulson in the administration of Royal Craft, the existence of 10 bank accounts, the lack of efficiency in the accounting system of Royal Craft and the lack of proof in the appellant’s evidence force the Court to conclude that. the total amount of $104,667.56 must be maintained in the income of Royal Craft for the five years involved.

4.03.4 Concerning Item 11 of Exhibit A-1 “Deposits Lynda Coulson Savings a/c" (para. 3.25). In my opinion, Mrs. Linda Coulson was part of the system of Mr. Coulson and Royal Craft. How can it be explained that she became mortgagee of an account receivable for work carried out by Royal Craft? Moreover Mrs. Linda Coulson was not produced as a witness. Counsel for the appellants knew before the trial that the savings bank account of Mrs. Coulson would be one of the points he would object to. The only affirmation of Mr. Coulson concerning the source of the money was that his wife had worked for Royal Craft. No cheque, no document and no journal entry confirms this affirmation. The reassessments must be maintained on that point.

4.03.5 Counsel for the appellants in his submission questioned Item 8 of Exhibit A-1, “Expenses paid by cheque not recorded by t/p [taxpayer]": $24,722.28 in 1969, $13,091.49 in 1970, for a total of $37,813.77. It is obvious from the title of this item and the testimony of Mr. Lucas that these expenses were not recorded by the taxpayer, and therefore no deduction had been formerly claimed by the appellant company for these expenses.

The appellant did not give substantial evidence to prove that the figures were not correct and that a larger amount had to be deducted. The appellant had the burden of proof. The quantum of the expenses must be maintained in the computation of the income. The evidence concerning “sale proceeds not deposited” (para. 3.24) confirms that not only the expenses but the whole accounting system was deficient.

4.03.6 Concerning the amount of $1,500 paid by Mr. Arthur Hainsworth (para. 3.26), the Court concludes that the amount must be included in the income of Royal Craft because it was payment for the work carried out by Royal Craft. The latter indeed could not ignore the existence of a balance of $1,500 and certainly claim it. However, as Royal Craft had to pay David Lukas as an employee, the same amount must be deducted as an expense. It would be surprising indeed if Royal Craft paid this employee twice. Thus, as the $1,500 was included in both appellants’ income, an equal deduction must be granted for the 1972 taxation year in both appeals.

4.03.7 Concerning the $500 in the Fred McLean agreement (para. 3.27), the Court must approve the inclusion of that amount in the income. The signature of Mr. Coulson indeed appears under the words “paid in full $2,713”. In the circumstances, the hearsay of Mr. Lucas from Mr. McLean can be used to confirm the figures $2,713 contested by Mr. Coulson because the copy of the agreement (Exhibit R-25) on which these words are written was in the hands of Mr. McLean. It was his receipt. He gave it to Mr. Lucas. Moreover, it seems to me that the figure, "$2,713" was written with the same pen as the words, “Paid in full — H. Coulson”.

4.03.8 Penalty

Concerning the penalty, the respondent has the burden of proof for the 1972, 1973 and 1974 taxation years pursuant to subsection 163(2) of the new Act. For the 1969, 1970 and 1971 taxation years, the burden of proof is on the shoulders of the appellant pursuant to the former Act. The penalties for the six years involved from 1969 through 1974 (para. 3.02) are maintained except for the penalty involved in the $1,500 paid by Mr. A. Hainsworth (paras. 3.26 and 4.03.6). Indeed the quantum of the amount not reported in the income by the taxpayer (the total taxable income reported by the taxpayer for the six years) was $51,340.64. The revised taxable income total $257,525.46 (Exhibit R-35), the lack of efficiency in the accounting system of the company and the business experience of the administrator Mr. Coulson all amount to gross negligence.

All those circumstances do not constitute merely an error of judgment or ordinary negligence of little consequence, but constitute a serious fault in behaviour, difficult to explain, and socially intolerable, all of which amount to gross negligence, as was decided by Mr. Justice Marceau in the Cloutier case (para. 4.02).

B. Mr. Herbert A. Coulson

4.03.9 Concerning Mr. Coulson, the main point was the amount of $44,738.20 of appropriations in 1969 from deposits in the Associated bank account. Mr. Coulson was then one of the directors. He was the president of the company and had the authority to sign the cheques.

Counsel for the appellant contends that Mr. Coulson was not the only one to be authorized and it is possible that Mr. Bury took the money from the bank. This is a gratuitous affirmation; there is no evidence to this effect.

Moreover, the credibility of Mr. Coulson is highly affected. In his 1969 return, he reported a gross income of $5,000 as salary from Royal Craft. However, there were then seven people in the family, among them five children ranging in age from 10 to 16. During this year, he incorporated Associated which never filed income tax returns and which the Court concluded was not a bona fide but a dummy company.

4.03.10 Associated was part of the system of Royal Craft and Mr. Coulson on the same level as the 10 bank accounts. The preponderance of the evidence is to the effect that the said amount must be maintained in the 1969 income of Mr. Coulson, taking into account the appropriate deduction of $23,350.56 (par 3.07, Schedule “A”, paras. 3.17 and 3.18).

4.03.11 The other points (benefits and other appropriations) must also be maintained as reassessed. The assumptions of facts indeed and the evidence (para. 3.23 not contradicted by the appellant) again force the Court to dismiss the appeal on these points.

4.03.12 Penalty

For the same reasons given above in 4.03.8 and moreover considering that Mr. Coulson was the soul of the whole organization and thus responsible for the lack of efficiency in the accounting system, the penalties must be maintained.

Indeed the amount of over $140,000 of new income added for the three years involved (para. 3.22) speaks for itself.

There is an exception for the penalty involved in the amount of $1,500 of a deduction resulting from the payment of the same amount by Mr. A. Hainsworth in 1972 to Mr. David Lukas (paras. 3.26 and 4.03.6).

5. Conclusion

The appeal of Royal Craft is dismissed for the 1969, 1970, 1971, 1973 and 1974 taxation years and allowed in part for the 1972 taxation year in accordance with the above Reasons for Judgment.

Appeals dismissed (with minor exception).