John Adam v. Minister of National Revenue, [1984] CTC 2978, 84 DTC 1895

Tremblay, TCJ [TRANSLATION]:—This case was heard on February 8, 1983 in Quebec City, Quebec.

1. The Point at Issue

The question is whether the respondent is correct in imposing on the appellant, in accordance with subsection 163(1) of the Income Tax Act, penalties of $28,000 for the taxation years from 1972 to 1976 inclusive.

The respondent claimed that the appellant wilfully attempted to evade payment of tax by not filing income tax returns as and when required by subsection 150(1) of the Act, and that the penalty of 50 per cent of the amount of the tax that the appellant sought to evade is justified.

The appellant maintained that he at no time wilfully sought to evade payment of tax.

2. The Burden of Proof

In accordance with subsection 163(3), the burden of establishing the facts justifying imposition of the penalty is on the Minister.

The facts on which the Minister relied to justify his assessments are outlined in paragraph 3 of the reply to the notice of appeal. The paragraph reads as follows:

3. In assessing the appellant for the 1972 to 1976 taxation years the respondent, the Minister of National Revenue, relied inter alia on the following facts:

(a) during the taxation years in question, the appellant operated a business distributing Wynn’s products under the corporate name “Lubrico Enr’’;

(b) the appellant did not file income tax returns during the period from 1969 to 1978;

(c) on December 30, 1976 the Minister of National Revenue sent a formal request to the appellant that he file an income tax return for each of the 1972 to 1976 taxation years;

(d) on July 29, 1977 the appellant was fined $75.00 for failing to file a tax return for the 1972 taxation year within the allowed time limit;

(e) on August 10, 1977 the Minister of National Revenue sent the appellant a final demand for an income tax return to be filed for each of the 1972 to 1976 taxation years;

(f) on February 8, 1978 the appellant was fined $150.00 for failing to file his income tax return for the 1972 taxation year within the allowed time limit;

(g) on March 7, 1978 the appellant was fined $150.00 for failing to file his income tax return for the 1973 taxation year within the allowed time limit;

(h) in view of the absence of an adequate accounting system, the Minister of National Revenue was obliged to establish the appellant’s income for the 1972 to 1975 taxation years by the “net worth’’ method;

(i) the appellant’s income for each of the taxation years in question totalled the following amounts:

1972	$ 18,795.74
1973	$ 28,916.54
1974	$ 42,348.98
1975	$ 55,444.82
1976	$100,833.17

(j) the appellant knew that he had to file an income tax return for each of the taxation years in question;

(k) by not filing an income tax return as and when required under the Act, for each of the taxation years in question, the appellant wilfully sought to evade payment of the following taxes:

1972	$ 2,612.87
1973	$ 4,750.65
1974	$ 8,512.72
1975	$12,081.42
1976	$29,542.13

3. Facts

3.01 In accordance with the testimony of Messrs Robert Labrecque, chief of a subsection in Registration and Gratien Chabot, an internal auditor, witnesses for the respondent, and the six exhibits filed from 1-1 to 1-6, the Court considers that the facts on which the respondent relied in imposing the penalties, outlined in subparagraphs (a) to (k) of paragraph 3 in the reply to the notice of appeal given above (para 2), have been proven prima facie.

As a result of the respondent’s evidence, if the appellant had not indicated a desire to testify the appeal would have been dismissed in its entirety, even though Mr Amyot, the auditor who conducted the investigation, was not “absolutely convinced’’ (the term used by Mr Gratien Chabot) when he decided to impose the subsection 163(1) penalties. According to the report on this subject, there was in fact a case “for and against”. What was the appellant’s defence?

3.02 In his testimony the appellant, aged fifty-two, stated the following.

(a) He started in product sales. Formerly, he was employed at the Hotel Château du Lac at Lac Beauport as a parking attendant or cashier. He did not have a business before 1969.

(b) From 1969 to 1975 his business grew so much that he was forced to move twice, first from the premises where he set up business in 1969 and then again, both due to lack of room.

(c) His territory was large: it extended beyond the Quebec City area. In fact, his territory covered the North Shore, Saguenay-Lac St Jean, Quebec City, Trois-Rivières and the Gaspé.

(d) The appellant did not really believe that he was making a profit since he had no money in the bank. He used liquid assets to pay his suppliers immediately, without obtaining credit from the bank.

(e) In both moves, he was careful to move his boxes of bills, cheques and bank receipts.

(f) He said that from 1972 to 1975 he looked for a qualified person to keep his books, but seemingly in vain. In 1975 or 1976, he said he found a Mr Marlin. However, he did not want to undertake it, perhaps due to the amount of work. The appellant also contacted a Mr Claude Rondeau and others, but without success. A certain Guy Cantin was also contacted, but also without success.

(g) During this period, $13,000 to $14,000 in stock was stolen by a salesperson, whom he named, who was responsible for a district. In each of the districts, which he also named (the North Shore, and so on), there was a salesperson responsible.

(h) The appellant stated that he had not purchased bonds or made specific investments, only a small cottage he bought at Loretteville for $1,500 and then transported to some land he had acquired while working as an employee at Chateau du Lac.

3.03 The accountant Marcel Gagnon testified, inter alia, as follows.

(a) He was approached by the appellant to do his accounting at the end of 1976 or the beginning of 1977, but he could not actually start work on it until April 1978.

(b) All the bills, cheques and documents had been saved by the appellant for the years in question and filed by year and by client. All of this, from 1969, constituted a mass of documents, which helps to explain why it was difficult to find someone to do the financial statements.

(c) A large part of the appellant’s inventory over the years was paid almost upon receipt.

(d) The financial statements for 1976, 1977 and 1978 were completed when the respondent’s accountants went to the appellant’s place of business. The work for 1974 and 1975 was already in progress.

(e) He was able to balance all the business’s operations.

(f) Even though all the operations were balanced for the years 1976, 1977 and 1978, when the respondent’s auditor arrived he advised that they proceed by the capital reconciliation method for 1972 to 1975. This was done.

3.04 Mr Jacques Amyot, a former employee of the respondent who audited the appellant in 1979, testified as follows.

(a) The financial statements for 1976, 1977 and 1978 were prepared when he first visited the appellant.

(b) It was he who asked that the statements for 1972 to 1975 be prepared by the capital reconciliation method in order to save time. Mr Gagnon prepared them.

(c) During his investigation, he had complete co-operation from the appellant and Mr Gagnon.

3.05 Mr Amyot confirmed Mr Gratien Chabot’s testimony that he had not been in favour of imposing the subsection 163(1) penalty, but that the group chief had the final word.

4. Act — Case Law — Analysis

4.01 Act

The section of the Income Tax Act mainly involved in the instant case is 163(1) and (3). It reads as follows:

Sec 163. (1) Every person who wilfully attempts to evade payment of the tax payable by him under this Part by failing to file a return of income as and when required by subsection 150(1) is liable to a penalty of 50% of the amount . . . [of]

(a) the tax sought to be evaded . . .

(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.

4.02 Case Law

The case law cited by the parties is:

1. Joseph De Smet v MNR, [1977] CTC 2342; 77 DTC 231;

2. John West v MNR, [1980] CTC 2255; 80 DTC 1226;

3. Isadore Waxstein v MNR, [1980] CTC 2398; 80 DTC 1348;

4. Hervé Gagné v MNR, [1981] CTC 2503; 81 DTC 431;

5. William A Fulcher v MNR, [1981] CTC 2198; 81 DTC 569;

6. The Queen v Anton J Pongrantz, [1982] CTC 259; 82 DTC 6200;

7. Gary P. Sorenson v MNR, [1981] CTC 2601; 81 DTC 499;

8. The Queen v George E Paveley, [1976] CTC 477; 76 DTC 6415;

9. Jean Louis Tessier v MNR, [1980] CTC 2384; 80 DTC 1322.

4.03 Analysis

4.03.01 1976 Taxation Year

Upon hearing the evidence, the Court allowed the appeal for the 1976 taxation year. Learned counsel then presented their defence for the taxation years from 1972 to 1975 inclusive.

4.03.2 It appears from subsections 163(1) and (3) and from the case law cited by the parties that, in order to reverse the burden of proof, the respondent must show that the taxpayer, by not filing tax returns, sought to evade the tax he had to pay.

The fact of not filing tax returns is not in itself conclusive evidence of evading taxes. The circumstances must be examined in each case.

4.03.3 From the evidence given I think it is clear prima facie that the appellant was to some extent negligent in not filing his tax returns. He should certainly have suspected that he had taxes to pay, since he was forced to move twice due to lack of space (para 3.02(b)). He also admitted that the figures for his gross income went from $18,795 in 1972 to $100,000 in 1976, and these figures were prepared by his own accountant.

Further, it was only following the imposition of the third penalty in March 1978 (para 2(3)(g)) that Mr Gagnon was hired to prepare the tax returns. Finally, the business environment in which the appellant worked could not help but continually remind him of “the problem” of taxes.

4.03.4 On the other hand, the appellant emphasized his efforts to find an accountant. Is it possible that between 1972 and 1976 it was really so difficult to find an accountant in the Quebec City area? The Court doubts it. Were the appellant’s efforts really serious? The Court doubts it also. Did the fact that he paid for his stock quickly with no liquid assets remaining really make him think that he had no tax to pay? It is not impossible. No evidence was given as to his schooling, but was he really incapable of realizing that, once his inventory was paid for, it was an asset so far as he was concerned. I repeat, it is not impossible. In addition, the appellant said he was robbed, and he does not seem to have accumulated money in investments.

Neither can the Court ignore the fact that the appellant, despite his numerous moves, always kept the supporting documents for his business, filed by client and by year. How can this mode of behaviour be reconciled with the respondent’s belief that the appellant “wilfully attempted to evade payment of tax”? The Court has considerable doubt in favour of the appellant. Should it be concluded that the attempt to evade tax was only temporary? No evidence was given to this effect.

As considerable doubt remains, as this considerable doubt concerns an important point, and as the burden of proof rests with the respondent, the Court allows the appeal.

5. Conclusion

The appeal is allowed and the whole is referred back to the respondent for reassessment in accordance with the foregoing reasons for judgment.

Appeal allowed.