Charles Caron, Mariette Dumais v. Minister of National Revenue, [1982] CTC 2694, 82 DTC 1719

The Chairman [TRANSLATION]:—With the consent of the parties, the appeals of Mr Charles Caron and Mrs Mariette Dumais from the assessments for the 1972, 1973 1974 and 1975 taxation years were heard on common evidence.

At issue are the assessments of the appellants for the 1972-1975 period made in accordance with the net worth method. The assessments for both appellants for the 1975 taxation year were calculated at nil. As a result of a motion by counsel for the respondent, the appellants’ appeals for the 1975 taxation year were quashed.

During the years at issue, that is, from 1972 to 1974, Mr Caron and Mrs Dumais were partners in a record and cassette production company operating under the name of Les Zorros Disques Enrg. For 1972, 1973, 1974 and 1975, Mr Caron reported as total income the sums of $1,788.82, $2,516.95, $1,552.52 and $470.56 respectively. For her part, Mrs Mariette Dumais reported income of $1,788, $2,457.38, $1,552.52 and $404.91 for the same years.

The Minister, through reassessments based on capital reconciliations, as indicated in schedules A and B attached to the replies to the notices of appeal, established that the appellants’ total unreported business income amounted to $23,637.15. The respondent therefore allocated this amount equally and added the sum of $2,954.64 to the income reported by Mr Caron and Mrs Dumais for each of the years at issue and assessed them a penalty under subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, for each of these years.

Summary of the Facts

Prior to 1972 Mr Caron, a record producer, recorded his own compositions using musical instruments and production equipment valued at $8,650 as at December 31, 1971. It is alleged that in 1970 Mr Caron’s savings amounted to $20,000. This money was apparently entrusted to his mother who resided in St-Cantin, New Brunswick. According to the explanation given by Mr Caron for turning over such a substantial sum of money to his mother rather than depositing it in the bank, he feared that his spouse, from whom he had been separated since 1950, might have taken it from him.

The partnership of Mr Caron and Mrs Dumais in the production of Les Zorros Disques Enrg dates from 1970. According to the testimony of Mr Guy Belanger, an appeals officer for the Department of National Revenue who examined the appellants’ notices of objection and had the opportunity of meeting them, bookkeeping was non-existent at Les Zorros Disques Enrg and the complete absence of an adequate accounting system for recording the various transactions made assessment of the appellants by the net worth method inevitable. In any case, the appellants are not contesting this indirect method of assessment.

The objection raised by Mr Caron and Mrs Dumais during the hearing was that, in their capital reconciliation, the Department’s officials failed to take account of the $20,000 that Mr Caron claims to have possessed in 1972; that the amounts allowed in the reconciliation for the musical instruments and the musical reproduction equipment were not accurate and that the personal expenses attributed by the respondent to the appellants were exaggerated.

Nevertheless, the allegations concerning the amounts allowed for the instruments and the reproduction equipment and the personal expenses were not made until the hearing of the appeals. Concerning the list of instruments and the equipment as it appeared in Exhibit A-1, Michel Dubois, an auditor with the Department of National Revenue, stated under oath that the list in question has been drawn up in Mr Caron’s presence and that the estimated cost of the various items listed therein was based either on related invoices or on information provided by Mr Caron. During subsequent years, certain reproduction equipment was added or exchanged, such as two sound columns, some amplifiers and microphones about which information was also provided by Mr Caron; these additions were considered in the capital reconciliation and the appropriate depreciation was calculated. (Schedule I attached to the reply to the notice of appeal.)

In his cross-examination the appellants’ representative was unable to induce Mr Dubois to contradict his testimony and the appellants have not demonstrated in any way that the amounts allowed in respect of the musical equipment were erroneous.

The appellants’ objection concerning the issue of personal expenses was raised only in the course of their argument. No evidence was introduced and, moreover, no mention was made of the appellants’ personal expenses during the proceedings. Accordingly, the Board would not be justified in varying the Minister’s assessments in this respect.

As counsel for the respondent has emphasized, the issue here is clearly one of credibility. It is not surprising that the Minister of National Revenue ordered an investigation in a case where the income of each of the owners of a business was reported over four consecutive years as ranging between $400 and $2,500. The very amounts represented as business income raise serious doubts as to their accuracy. The appellants did not explain how they managed to survive on such tiny incomes, even less how they were able during this period to make trips to St-Cantin, NB at Christmas and Easter. Where did they find the $3,500 that they owed in 1971 and paid off in 1975? Although the appellants claim to have built their own house, even to the point of digging their own cellar, where did they find the money to purchase the building materials?

It is quite beyond belief that Mr Caron had $20,000 in cash at St-Cantin and that his mother was keeping this money in a closet in her home at a time when her financial difficulties were such that Mr Caron’s brother had to help with her basic living expenses. At that time, the interest alone on this $20,000 would have been sufficient to help Mr Caron’s mother. Before accepting such a statement, I would require very substantial corroboration and none has been forthcoming. Moreover, if Mr Caron had $20,000 in cash at St-Cantin, why then would he have been obliged to borrow sums of money totalling more than $20,000 that he owed in 1975? The appellants have not established to the satisfaction of the Board that Mr Caron held $20,000 in cash on December 31, 1971, and the Minister did not err by including this amount in his capital reconciliation. Moreover, the appellants have failed to demonstrate that any of the figures used in the Minister’s reconciliation were erroneous in any way.

The amounts of income unreported by Mr Caron and Mrs Dumais for the years in question were so substantial that, even allowing for the complete absence of appropriate bookkeeping methods (an offence in itself) for the operation of their business, they would have been quite aware of the existence of those amounts in each of the years at issue. The penalties provided under subsection 163(2) of the Act are therefore applicable in the circumstances.

For these reasons, the appeals of Mr Caron and Mrs Dumais for the 1972, 1973 and 1974 taxation years are dismissed.

Appeals dismissed.