William Hum v. Minister of National Revenue, [1985] 1 CTC 2434, 85 DTC 385

Rip, TCJ:—In assessing income tax to the appellant, William Hum, for 1977 and 1978 the respondent, the Minister of National Revenue, added to his income previously assessed the sums of $40,000 and $29,153.73, respectively; the respondent described these amounts as “unexplained deposits”.

Prior to the issuing of the notices of reassessments and subsequent to the filing of notices of objection the appellant and his representative “explained” to the respondent’s officials that the appellant visited his ailing father in Hong Kong in 1977 and that his father gave him, as the eldest son of a Chinese family, $80,000, the bulk of the father’s estate, so that Mr Hum could administer the estate in favour of the family. The appellant says he gave this explanation to the respondent but obviously the respondent did not accept this explanation as credible. However, I can find no provision in the Income Tax Act (“Act”) which provides that “unexplained deposits” are to be included in income.

The notification by the respondent of confirmation of the reassessments states the amounts of $40,000 and $29,153.73 are to be included in the appellant’s income for 1977 and 1978 respectively in accordance with the provisions of subsection 9(1) of the Act. The respondent, in his reply to notice of appeal, relies on sections 3, 9 and 152 and says that the reassessments were based on the assumption that the “$40,000 and* [1] $29,153.73 were income to the appellant which was not reported in his returns of income”. Only in the reply to notice of appeal does the respondent finally reveal in clear terms the basis of the reassessments, although I would suggest the taxpayer could have easily inferred — and in fact did infer — at the very beginning of the reassessment process the respondent was questioning whether he had any unreported income. However the Minister has a responsibility to taxpayers to explain any assessment in clear and certain terms. Otherwise the Minister may find himself in an unnecessary dispute with a taxpayer.

At time of trial the appellant was 44 years of age. He emigrated to Canada from Hong Kong in 1951. His father resided in Hong Kong in 1951 and his mother was in China, which he left after the revolution. In Canada the appellant lived with his grandfather in Saint John, New Brunswick where he attended school until 1957 when he was mid-way through Grade 8.

Since leaving school Mr Hum has worked at various restaurants in Fredericton and Saint John. At first he was an employee, performing various jobs from a counter attendant to waiter to bartender to assistant manager. His salaries were modest, ranging from $1,500 per year to $6,800 per year by 1969. In 1969 he was a participant in a group which purchased a restaurant in Saint John but after a fire in the restaurant in that year he left the partnership and worked for two years in other restaurants in that city. In June 1971 the appellant, together with his brother, acquired another restaurant in Saint John which previously had been only marginally successful. The purchase price for the restaurant was $21,000; the appellant assumed an existing mortgage of $5,000, a second mortgage in the amount of $9,000 was given back to the vendor and the balance of the funds was provided as to $1,500 by each of the appellant, his brother and the appellant’s wife and with moneys received from the appellant’s sister in Hong Kong, who was in the process of immigrating to Canada. The appellant’s brother left the restaurant a year later and the appellant repaid his brother the $1,500 the brother had previously invested in the business.

The appellant and his wife worked long hours operating the restaurant doing all sorts of work required in such a business. There is no evidence as to the income of the business for its first fiscal year of operation by Mr Hum but the net income reported to the respondent for the subsequent years was as follows:

On June 1, 1977 Mr Hum transferred the restaurant business to Crest Investments Limited, a company the shares of which were owned by the appellant.

During this time Mr Hum testified he played poker with acquaintances and friends and from time to time with others; in all, there could be thirty to forty people involved in this activity. The frequency of the poker games was about once a week and the stakes could be “high” or “low”, “high” being “a few hundred dollars or more depending on who is playing’’, according to the appel- lant. As a result of his poker playing activities the appellant would keep on hand $2,000 to $3,000, more or less depending on his success playing poker; he would also have cash on hand from the restaurant.

In August 1977 the appellant was informed by his sister that his father was very ill; the latter had been in poor health for at least one year. On or about August 24 the appellant flew to Hong Kong to visit his father; he arrived in Hong Kong on August 25, 1977 and remained there until September 11.

The appellant’s father was in fact very ill; he died in November 1977. During his visit to his father the appellant says he received from his father “close to $40,000” in Canadian currency. At the same time the appellant’s sister in Hong Kong sent a bank draft in the amount of $40,000 from Hong Kong to Mr Hum in Saint John. The $80,000, Mr Hum testified, represented the bulk of his father’s estate. Mr Hum explained to the Court the money was family money and it is Chinese custom that the eldest son controls the parent’s inheritance with the responsibility of investing the money and distributing it to the children as and when required. As indicated earlier, Mr Hum had also made this explanation to the officials of the respondent.

Mr Hum testified the $40,000 draft sent to him in Saint John by his sister was waiting for him on his arrival from Hong Kong. This was corroborated by Mrs Hum. On September 14, 1977 Mr Hum placed the funds in a term deposit with the Canadian Imperial Bank of Commerce branch in Saint John; the confirmation of the initial bank term deposit was tendered in evidence and written on the face of the confirmation was the following notation: “These funds came on a Hong Kong Draft, payable to Mr Hum in Can Dollars Drawn on Toronto”.

Mr Hum’s evidence was that this notation was typed on the confirmation by the bank. His evidence on this point was not challenged by counsel for the respondent.

Mr Hum stated he invested the funds in a term deposit with the bank to draw interest. The $40,000 has been reinvested with the Canadian Imperial Bank of Commerce and various occasions since 1977 and at time of trial was still invested with the bank.

Mr Hum testified that he carried the cash on his person on his return to Canada. The money was in various denominations, $100 being the highest denomination. Mr Hum stated most of the $40,000 in cash his father gave him came from his mother’s estate; his mother had died in 1965. Mr Hum stated that he retained the money once he arrived in Saint John in cash rather than depositing it in the bank because he was planning to build a second restaurant in Saint John with his brother and the contractor for the restaurant informed him he could obtain a better price for equipment if he paid for the supplies in cash. Mr Hum said approximately $30,000 of the cash was used for the new restaurant and the balance was spent on behalf of his family or retained in cash. In examination-in-chief the appellant stated that $29,000 of the cash was used to purchase equipment for the new restaurant. Under cross-examination Mr Hum admitted that total contract price for the new restaurant was for $31,101 and the amount was paid, as work progressed, by various cheques payable to the contractor. Prior to a progress payment becoming due Mr Hum would deposit sufficient funds in a bank account specificially opened for the new restaurant and then a cheque would be drawn on the account payable to the contractor. Mr Hum admitted that ‘‘not much” more of the money was spent for the new restaurant. He commented that “as it worked out (I) didn’t need (the) $40,000 available in cash for discounts and then (it) was deposited to the bank”. He did confirm he paid for some supplies in cash, but this would have amounted to only a few thousand dollars.

Bank deposit slips dated April 24, 1978, May 10, 1978, May 25, 1978 and August 17, 1978 adduced as evidence show cash deposits in various denominations: there were deposits of $108 in one dollar denominations, $16 in two dollar denominations, $555 in five dollar denominations, $1,070 in ten dollar denominations, $9,780 in twenty dollar denominations; $2,850 in fifty dollar denominations, $7,400 in one hundred dollar denominations and $2,000 in one thousand dollar denominations. Other deposits were made to the bank account later in the year and again in 1979.

The appellant says his gambling money and the cash he received from his father were hidden in the same place without any distinction as to its origin and this is the reason why the denominations deposited in the bank account were so varied.

The evidence is clear the $40,000 draft received in 1977 came from Hong Kong. The appellant said the draft arrived in Saint John before his arrival from Hong Kong; this evidence was not impeached on cross-examination and was corroborated by Mrs Hum who was described by counsel for the respondent as a credible witness. Mr Hum’s explanation as to the source of these funds, on the balance of probabilities, is persuasive. There was no suggestion the money had its origin in Canada or from a business carried on by Mr Hum outside Canada, or was income from some employment. I therefore accept Mr Hum’s evidence in respect of the bank draft.

I have difficulty following the evidence in respect of the cash the appellant purportedly received from his father. Mr Hum testified he kept the money in cash because he was told the suppliers of equipment for the new restaurant would give him a better price on a cash sale. However the payments made to the contractor were by cheque. He would deposit money in the bank account which he opened up specifically for the new restaurant and then write cheques against the account for progress payments to the contractor. The appellant admitted relatively very little money was paid in cash to suppliers. At one point in time he surely knew that the vast bulk of the restaurant cost would be paid for by cheque but still he kept the money in cash, depositing only amounts required to honour these cheques. Mr Hum deposited the $40,000 received by way of bank draft immediately upon his return to Saint John, he said, because he wanted to earn interest. But he was not interested in investing even a part of the cash he said he brought with him from Hong Kong. Mr Hum’s testimony in respect of the cash did not appear to be as forthright as that concerning the bank draft for $40,000. In my view something is missing from Mr Hum’s evidence. His actions were not consistent with his declared intentions.

Mr Mockler, the appellant’s counsel, argued that the respondent did not present any contrary evidence and therefore the appellant’s evidence should be accepted. I would agree with counsel if I could accept the appellant’s evidence as to the source of the cash. However on a balance of probabilities I do not accept Mr Hum’s evidence that his father gave him $40,000 in Canadian currency.

The appeal against the appellant’s tax assessment for 1977 will be allowed and the appeal against the 1978 assessment will be allowed only to reduce unreported income by $1,400. Mr Hum will be entitled to his party and party costs.

Appeal allowed in part.