Ernest Labelle v. Minister of National Revenue, [1983] CTC 2696, 83 DTC 599

Tremblay, TCJ [TRANSLATION]:—This case was heard on June 27, 1983 in the city of Montreal, Quebec.

1. Point at issue

According to the notice of appeal and the reply to notice of appeal, the problem is whether the appellant, who operates a farm and a business renting land and housing, is correct in not including in the calculation of his income for the taxation years 1974 to 1977 inclusive some $64,300.

The respondent included this income pursuant to an assessment on the net worth basis. According to the respondent, the appellant had a capital gain of $78,391 between December 31, 1973 and December 31, 1977, and for the four taxation years the appellant only declared income of some $48,700.

The respondent further contended that in the same years, the appellant’s living expenses amounted to some $33,350.

Finally, the respondent imposed penalties of some $3,300, alleging that the appellant committed gross negligence by not reporting a substantial portion of his income.

2. Burden of proof

2.01 The appellant had the burden of showing that the respondent’s assessments are incorrect. This burden of proof results not from a particular section of the Income Tax Act but from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 The facts presumed by the respondent are stated in subparagraphs (a) to (f) of paragraph 6 of the respondent’s reply to the notice of appeal. This paragraph reads as follows:

6. In assessing the appellant for the taxation years 1974 to 1977 the respondent, the Minister of National Revenue, relied inter alia on the following facts.

(a) During the taxation years at issue, the appellant operated a farm and a business renting land and housing.

(b) For each of the taxation years at issue, the appellant reported the following income:

Year	Income Reported
1974	$	9,380.00
1975		8,782.00
1976		14,355.00
1977		16,228.00

(c) Between December 31, 1973 and December 31, 1977, the appellant’s capital increased from $48,834.22 to $127,225.83, as appears more fully in the balance sheet of the appellant forming part of this reply to the notice of appeal, and attached hereto as Table A.

(d) In calculating his income for each of the taxation years at issue, the appellant failed to report income of $9,236.17 in 1974; $15,362.53 in 1975; $16,485.37 in 1976; and $23,234.91 in 1977, as appears more fully from the capital reconciliation of the appellant, forming part of this reply to the notice of appeal and attached hereto as Table B.

(e) During the taxation years at issue, the appellant kept no account book.

(f) In calculating his income for each of the taxation years at issue the appellant knowingly, or in circumstances amounting to gross negligence, failed to report a substantial portion of his income.

3. Facts

3.01 At the start of the hearing, it was admitted that the facts assumed by the respondent in paragraph 6(a) and (b) of the reply to the notice of appeal, set out above, were true.

3.02 In the course of his testimony, the appellant filed as Exhibit A-1 several statements of account from Ville Saint-Laurent dated August 16, 1982, regarding municipal and school tax arrears for 1966 to 1971: $7,000 taxes and $11,000 interest.

3.03 He also filed a cheque (Exhibit A-3) dated April 22, 1981 in the amount of $56,744.81, pertaining to municipal and school taxes for 1972 to 1978. A discharge receipt from counsel for Ville Saint-Laurent was filed as Exhibit A-4. This amount is meant to include court costs, the quantum of which has not been determined.

3.04 As Exhibit A-2, a letter from the law firm of Cloutier & Paquin dated April 5, 1983 was filed, stating that in an amended return counsel for Ville Saint-Laurent “fixed their claim at the capital sum of $7,006.20”. This exhibit was filed as legal expenses. However, a “re-amended statement” against appellant was filed by Ville Saint-Laurent as Exhibit A-5, in respect of taxes amounting to $7,006.20 for 1966 to 1971. The claim made in Exhibit A-2 is the same as that made in Exhibit A-5. It is therefore a bill for taxes.

3.05 The appellant maintained that, during the years at issue, he incurred several thousand dollars of interest and legal fees. He was allegedly involved in about ten court proceedings to protect property.

3.06 The witness for the respondent, Mr Delisle, stated that in his audit, after examining the appellant’s returns for the year at issue (Exhibits 1-1 to I-4) and the bank deposits for the same period, he found that the latter were higher than the income reported. He then proceeded to inquire further.

3.07 He then prepared draft balance sheets for the years concerned and a calculation of the difference by the net worth method. Following a meeting with the appellant and his accountant to discuss this draft, the appellant’s accountant produced financial statements (Exhibit I-5), showing certain errors in Mr Delisle’s draft, primarily for municipal taxes which he had not taken into account. Mr Delisle prepared new financial statements (Exhibit I-6), on which the assessments on appeal were based.

3.08 Exhibit 1-6 consists, first, of the balance sheet at December 31 in each of the years 1973 to 1977 (Table A). Capital increased from $48,834.22 at December 31, 1973 to $127,225.83 at December 31, 1977. In addition, Mr Delisle then took into account municipal taxes: from $18,672.60 in 1973 to $48,986.30 in 1977. According to Mr Delisle, the appellant’s accountant agreed with Table A.

3.09 The calculation of the difference by the net worth method (Table B of Exhibit I-6) indicates that the appellant’s personal expenses were $7,350 (1974), $8,000 (1975), $8,000 (1976) and $10,000 (1977).

According to the figures presented by the appellant’s accountant (Exhibit I-5), these expenses amounted to $8,500 (1974), $9,000 (1975), $9,500 (1976) and $10,000 (1977). However, the accountant had deducted from these amounts pensions allegedly paid by the children during these years. Mr Delisle said that he had disallowed these alleged pensions because appellant had earlier told him that he was not being paid any pension by his children.

Table B of Exhibit I-6 was accepted by the appellant’s accountant.

3.10 The respondent imposed penalties of $361.60 (1974), $731 (1975), $871.97 (1976) and $1,335.07 (1977) on the ground that the appellant committee gross negligence in not reporting a substantial portion of his income.

3.11 The appellant, who said he had only five years’ schooling, stated that he had kept no accounting system during the years at issue, but had retained all his receipts and all his bank deposit and withdrawal slips.

4. Act and analysis

4.01 Act

The main sections of the Income Tax Act concerned in the case at bar are 152(7) and 163(2) and (3). They read as follows:

152. (7) The Minister is not bound by a return of 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 statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax which would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

(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 Analysis

4.02.1 As noted above, the burden of proof is on the appellant. It is not easily discharged, particularly as the services of counsel were only obtained a few hours before the case began.

4.02.2 The main evidence presented by the appellant concerns municipal and school tax bills (Exhibits A-1 to A-5, see paras 3.02 to 3.04); the evidence is that these tax bills, filed at the hearing by the appellant (Exhibit A-6), were taken into consideration by the respondent’s assessor in preparing the assessment. It was admitted by Mr Delisle that, though he was not able to take them into account in making the draft assessment, he took them into account after receiving the documents (Exhibit I-5) provided by the appellant’s accountant (para 3.07).

Exhibit I-6 shows under the liabilities item “real estate taxes and interest payable” at December 31,1973 the amount of $18,672.60; at the end of 1974, $24,467.19; at the end of 1975, $30,964.19; at the end of 1976, $40,039.55; and at the end of 1977, $48,986.30.

4.02.3 Essentially, no valid evidence was presented to contradict Tables A and B of Exhibit 1-6, which form the very basis of the respondent’s assessment. Further, these tables were approved by the appellant’s accountant. As it is bound by this evidence, the Court can only confirm the assessments made.

4.02.4 It is quite possible that a more exhaustive preparation of the case could locate legal expenses and interest which would reduce the amounts taxable. However, this evidence must be presented by the appellant. The latter was not taken by surprise in having to prepare his case. It was ap- pealed in October 1981 and was postponed at the request of the appellant himself, who wanted to find someone to represent him.

4.02.5 Penalty

As provided in subsection 163(3), cited above, in a penalty the burden of proof rests with the respondent.

The respondent must show that the appellant, by failing to include in his income for the years at issue an amount of some $64,300, made an omission amounting to gross negligence.

Proof of this is ordinarily by showing that the appellant had such a deficient"accounting system that the omission of income constituted gross negligence in such a system.

In the case at bar, the system consisted of a receipt and of bank deposit and withdrawal slips. It was by using this system that the respondent’s auditor found that, for the years in question, more money had been deposited than the appellant had reported as gross income in the said years.

The system may thus seem to be adequate for a farmer and a lessor of land; but if it sufficed for the respondent to establish the said income, how is it that the appellant himself was not able to establish his own income? Was this his accountant’s fault?

No evidence was presented as to this. However, because of the large amount of some $64,300 and the taxpayer’s business experience, the Court must confirm the assessments made by the respondent and dismiss the appeal.

5. Conclusion

The appeal is dismissed in accordance with the foregoing reasons for judgment.

Appeal dismissed.