Kelley v. R., [1998] 3 CTC 2479, 98 DTC 1622

Rip T.C.J.:

The appellants Stanley W. Kelley (“Kelley”), Clare Smith and Dale Smith are self-employed fishermen who catch lobster and ground fish off the shores of Nova Scotia for resale. They have each appealed from income tax assessments issued by the Minister of National Revenue (“Minister”) in which he added to their respective income amounts of money received from sales of lobster to an individual known as Brian Reynolds. The appellants Clare Smith and Dale Smith appeal from income tax assessments for 1989 and the appellant Kelley appeals from income tax assessments for 1990 and 1991. Laura Kelley, the wife of Stanley W. Kelley, also appeals her income tax assessment for 1990 on the basis that the amount of income assessed her husband is excessive and she should be entitled to a child tax credit for 1990 in the amount originally claimed by her in her income tax return. [1]

Evidence

Brian Reynolds

Brian Reynolds (“Reynolds”) and his brother Bruce own B. Reynolds Trucking Ltd. (“Trucking”). Trucking hauls seafood for sale to fish companies along the north-east coast of the United States, in particular Boston, Nova Scotia and other parts of Canada. At time of trial Trucking operated its business with six trucks of various sizes.

In 1989, 1990 and 1991, Reynolds also caused Trucking to haul seafood, primarily lobster, for his own account to customers in the Boston area. A truck would haul both Trucking’s and Reynolds’ fish product for sale.

The trucks did not always carry full loads. Reynolds stated his largest truck has the capacity of 375 crates and the smallest truck has a capacity of between 150 to 200 crates; each crate contained approximately 100 pounds of product. He stated that he has “done 250 trips a year” to the Boston area.

It was in 1989 that Reynolds first started buying lobster for his own account from fishermen. He did not maintain any books or records for his lobster enterprise. He “kept records for trucking but not for [the] under the table” business: he did not report sales and purchases of lobster when preparing his income tax returns. Some of the money from the lobster sales, however, “ended up in the trucking company”. Reynolds, his brother and his son, were paid “under the table” from the lobster sales.

The profit to Reynolds from the sale of lobster was the difference between the exchange rate between Canadian and US funds. For example, Reynolds would purchase lobster at, say, $3.00 a pound and sell the lobster in the United States for US $3.00 a pound.

In about 1993 Revenue Canada began to investigate Reynolds’ sales of lobster and as a result of the investigation the appellants Kelley, Clare Smith and Dale Smith were assessed tax for unreported lobster sales to Reynolds as follows:

In support of the alleged sales to Reynolds by these appellants, the Minister relied on slips of paper purporting to show quantities and prices per pound for lobster together with other documents purporting to show the signatures of the appellants and sale prices.

Reynolds stated that he bought lobster from fishermen living within the area of Port Latour in Nova Scotia. He says fishermen knew he was prepared to purchase lobster since he offered to purchase fish from them and by word of mouth in the community. He denied informing any of the fishermen that they would not have to report any income on sales to him.

The lobster season started in later November and lasted until the following April or May. Very little fishing took place during extreme weather conditions.

Reynolds recalled that in most instances fishermen would bring cases of lobster to a fish plant to be weighed. On some occasions Reynolds himself would bring the lobster to the plant for weighing. He said he had a rough idea of the weight by the number of crates being offered for sale. Fishermen were at the scales when the lobster were weighed. After the lobster were weighed, any of Bruce Reynolds, Reynolds’ son and an employee of Reynolds prepared a slip of paper containing the date of sale, the name of the fisherman and the weight of the lobster. One copy of the slip would be given to the fisherman and the other one would be given to Reynolds. Reynolds never prepared a slip but would keep the copies. These copies were included among the documents obtained from Reynolds by Revenue Canada.

Reynolds explained that usually a day or two after the lobster were weighed the fishermen would take the slip, or a copy, to Trucking’s office for payment. Reynolds said that sometimes the fishermen would pick up the money themselves or have others, such as a wife or girlfriend, collect for them. He stated he never “had a fisherman tell me he had not been paid”.

When a person brought the slip to Trucking for payment he or she would give the slip to Leora Christie, a bookkeeper who worked for Trucking. On occasion Reynolds was in the office when fishermen came for payment. Ms. Christie was paid a salary by Trucking and her work included attending to both Trucking’s business and the lobster sales. She was responsible for making deposits to and withdrawals from Trucking’s and Reynolds’ bank accounts. She was a distant relative of Reynolds.

Reynolds stated that he had to open a bank account for the lobster business since the purchasers of lobster in the United States paid him by cheque in US funds. He would deposit the funds in a local branch of the Canadian Imperial Bank of Commerce. Occasionally Reynolds would deposit proceeds from Canadian sales in the bank account. In any event it was Ms. Christie who made the withdrawals, the withdrawals included amounts of $15,000, $30,000 and as high as $70,000. Reynolds said he trusted Ms. Christie and this is obvious from the evidence.

In Reynolds’ view Ms. Christie “did a real good job”. He did not ask her to prepare any books or records for the lobster business but she did so anyway; she was not paid for this extra work.

Eventually Reynolds and Ms. Christie had a falling out because she did not want to work after 3:30 p.m.

Dale Smith

Dale Smith testified that he has been a fisherman of haddock and lobster since 1979. He stated he sells lobster to “steady customers” and to two buyers in particular. He said he files all weight slips he receives from sales of lobster.

Mr. Smith acknowledged he sold lobster to Reynolds in 1990 in the amount of approximately $6,000 to $7,000 in cash and did not report the sale to Revenue Canada. In his view this was “a cash deal and therefore no income had to be reported”.

During the course of 1989, he said, he sold lobster only to his regular buyers and not to Reynolds.

Mr. Smith stated that his wife collected $7,073 in cash from Reynolds two or three days after he sold lobster to Reynolds on December 20, 1990. He denied receiving any documentation from Reynolds and insisted that he had “no idea” of the location of Reynolds’ office; nevertheless Mrs. Smith knew where to go to get paid.

Dale Smith denied the initials on a receipt dated December 13, 1989, (Exhibit A-3) were written by him. George Savage, a handwriting expert called by the appellants, concurred in Mr. Smith’s view and I, therefore, agree. Mr. Savage indicated Ms. Christie may have initialled the letters “DS” on the receipt but he could not be definite. [2] Ms. Christie denied the initials were made by her.

Mr. Smith did not at first recognize his wife’s signature on a receipt for proceeds of the December 20, 1990 sale.

He explained he kept cash at home since he lived far from any bank.

On cross-examination Mr. Smith acknowledged that when he was first interviewed by Stephen Bent of Revenue Canada during the summer of 1993 he denied he made any sales to Reynolds in 1990, notwithstanding he was shown a receipt of $7,073.50 for lobster sold to Reynolds, signed by his wife on or about December 20, 1990. He wrote Revenue Canada in January 1994 advising that the receipt signed by his wife was “not valid”. His wife prepared the letter and he signed it. It is only when he filed a Notice of Objection in April 1994 that he acknowledged the sale of December 1990. Mr. Smith stated that his wife handles all the money and he cannot say how much money he received from Reynolds or what was done with the money. He stated that he “never looked at the cash” when his wife returned home after being paid by Reynolds. He also stated in cross-examination that he did not know how his wife knew how much money was to be collected from Reynolds and when she was to get paid. He admitted in cross-examination that in 1990 Reynolds gave him a slip of paper containing number of pounds of lobster sold and the price per pound.

Mr. Smith stated that 1989 was an “average year” and he had no trouble selling lobster. He did acknowledge that he did have some trouble making sales in 1990.

Sherry Smith

Mrs. Sherry Smith testified on behalf of her husband, Dale Smith. She confirmed that she looks after her husband’s books and records. She also attends to his banking and is in charge of all administrative matters relating to his fishing enterprise. She also acknowledged that cash is kept in the house but, she said, most of the cash came from her mother who made gifts to her and her husband in amounts of $50 to $10,000. Mrs. Smith was unable to state the name of the lady who gave her the cash at Trucking. She stated that she never took part in any cash sales of lobster and is not aware of any other cash sales. She stated that her husband brings everything “home to me” and that he never does any banking. On returning from Trucking’s office with the money, she deposited the money, mainly in bills of one hundred dollar denominations, in the safe at home.

She also denied the initials purportedly that of her husband on a receipt dated December 13, 1989, included in Exhibit A-3. She also denied that she wrote the initials.

Clare Smith

During the trial of his appeal, after denying any sale to Reynolds in 1990, Clare Smith acknowledged that he sold lobster to Reynolds for $3,329.20 on or about December 16, 1989 and again on December 16, 1990 for $6,594.48. Soon after the sales he picked up the cash from Ms. Christie, whom he did not know at the time. Smith had denied that he initialled a receipt dated December 13, 1989, allegedly for another sale of lobster for $10,135.20 (Exhibit A-3) and another document dated December 16, 1989, with respect to the sale of lobster for $3,329.20.

Clare Smith was firm in his position that a document dated December 13, 1989 was not part of any business transaction. He denied the initials “CS” on the document were written by him and according to Mr. Savage, a hand-writing expert, this lettering was not made by Clare Smith. However, even if Mr. Smith did not initial the receipt I do not believe I must find that he did not receive the money indicated on that receipt. There may be evidence suggesting that he did receive the money.

In a letter to Revenue Canada in January 1994, Mr. Smith denied any sale of lobster to Reynolds, specifically any sales to Reynolds on December 16, 1989, the day Revenue Canada assumed a transaction took place between Dale Smith and Reynolds.

Mr. Smith also said that he was accustomed to keeping cash at home; after a while he would deposit the money in the bank. He required cash in his business to buy equipment and supplies. Mr. Smith stated that he did not report any income from 1990 sales to Reynolds since he was paid cash. Mr. Smith commented that he is not married and is his own bookkeeper.

On cross-examination Clare Smith was shown an excerpt of his bank account ledger with the Bank of Nova Scotia. The ledger shows that he made a deposit of $5,614.68 on December 21, 1989; the records indicate that the amount deposited included 40 $100 bills. Mr. Smith disputed that this money came from Reynolds. He says he frequently has “bills around the house”. He stated that “a couple of times a year, perhaps once or twice, when I accumulate money I deposit it” in the bank account. Mr. Smith also testified that his regular customers usually pay him by cheque and only occasionally in cash. If in fact he is paid by cheque by his regular customers, he could not explain to my satisfaction the source of the 40 $100 bills he deposited to his bank account so soon after a purported sale to Reynolds took place. According to Ms. Christie’s records he was paid in $100 denominations.

Stanley Kelley

Stanley Kelley has been a fisherman for over 30 years. He knew Reynolds to be a purchaser of lobster and scallops. He stated that he first met Reynolds in 1990 when Reynolds acquired lobster crates from him. He said he “loaned” Reynolds 25 to 35 crates. He recalled Reynolds required him to sign for the crates and he did so. Kelley thought he would get the crates back after Reynolds sold lobster in the United States. He said that he called Reynolds several times to get the crates returned but Reynolds was not available. Eventually Reynolds told him the crates could be picked up at his home. Kelley said that all he got was a “bunch of junk crates back ... not the ones I loaned him”. Kelley stated that he was in a rage and had an argument with Reynolds. He stated that he might have signed a receipt to Reynolds when he got the crates back.

The Minister assessed Kelley for 1990 on the basis he entered into two lobster transactions with Reynolds on December 20, 1990, one for $6,899.60 and another for $7,921.85. Kelley denied the sales and his signature on any document purporting to evidence of sale. In his view, if he signed anything it was for crates and not for lobster. He thought that he may have signed certain documents in blank. It was Reynolds’ idea, Kelley said, for him to sign for the crates, even though he was lending the crates. With respect to certain documents at Tab 3 of Exhibit A-1, Kelley acknowledged his signature but could not say why he signed the documents. Here too, he thought he signed for crates when he picked them up at Reynolds’ home. With respect to other documents, he did not recognize any signature as his own except for his signature on a slip of paper indicating a sale of lobster for $7,921.85 on December 20, 1990. However he insisted that the document was signed in blank and that amounts were entered subsequent to the writing of the signature.

In cross-examination Mr. Kelley denied having any interview with a Mr. Steven Bent of Revenue Canada. In his evidence, Mr. Bent testified that he met Mr. Kelley at the latter’s home on February 11, 1993. Mr. Kelley stated that only a Ms. Elizabeth Kaiser interviewed him.

In cross-examination Kelley continued to deny his signature on any slip of paper indicating a sale of lobster to Reynolds for $6,899.60. He stated that he could not say whether he signed for crates or whether he signed the document in blank. Indeed, he said he could not remember ever signing such a document. In a question put to him by counsel for the respondent, Kelley said that “it was a hard thing to remember” but he believed that previously he had signed documents in blank for strangers.

Counsel for the respondent asked Kelley if he knew the reason Reynolds wanted Kelley to sign for crates Kelley was lending Reynolds since usually a recipient signs a receipt. He replied that Reynolds wanted him to sign and therefore he did. Kelley was vague as to the facts surrounding his signature in blank. He said he could not recall the circumstances of the making of the signature since the events took place seven years earlier. However he did say he was in a rush to get home that night, it was cold and was getting late; earlier in his evidence, Kelley indicated he had lots of time that evening to sign papers.

Ms. Christie’s records reflect payments to Mr. Kelley for the two transactions in issue. There are also receipts signed by Mr. Kelley acknowledging payments. Ms. Christie’s records also indicate the denominations of cash payments of both the $6,899.60 and $7,921.85 transactions. I have some difficulty, after observing Mr. Kelley, that he would sign documents in blank and give them to people he hardly knew. I also find it strange he would sign a document indicating he is lending crates to someone and not have the borrower sign a receipt for the crates. Mr. Kelley did not impress me: as a naïve person.

George Savage

Mr. Savage, who testified as a handwriting expert on behalf of the appellants, is a member of the Canadian Society of Forensic Science and was employed as a forensic document examiner by the Royal Canadian Mounted Police from 1970 to 1987. He has worked since 1987 as a forensic document examiner in private practice. The respondent did not challenge Mr. Savage’s credentials and consented to him being qualified as an expert.

Mr. Savage compared various receipts purported to have been given to the appellants Stanley Kelley, Clare Smith and Dale Smith by Reynolds against documentation, including cancelled cheques, bearing specimen signatures of these appellants. He concluded that Kelley wrote the signature Stanley Kelley on at least one of the documents, the receipt for the crates, obtained by Revenue Canada. However according to Mr. Savage, the evidence indicates that Dale Smith and Clare Smith did not write questionable initials “DS” and “CS”, respectively, on several receipts obtained by Revenue Canada. He acknowledged that initials may differ from the same letters in a full signature. In his view it is more difficult to conclude that someone has not written something than to conclude that someone did write something. He conceded that he did not see any specimen initial that he knew was executed by any of the appellants. He also conceded that he is “less comfortable” with initials because he has relatively little material to work with.

Leora Christie

After high school, where she studied to be a secretary and bookkeeper, Leora Christie worked for eight years for a fishing co-operative as a bookkeeper and secretary. She started working for Trucking in November 1989 and terminated her employment in June 1991. At Trucking Ms. Christie worked as a secretary, bookkeeper and telephone receptionist. She was responsible for banking, payroll, accounts payable, accounts receivable, source deductions, freight bills, paying drivers, trip reports and general bookkeeping. She was in regular contact with Trucking’s accountant.

With respect to the lobster business carried on by Reynolds, Ms. Christie was the person who made deposits and withdrawals from the bank, cashed cheques and paid the fishermen. She received wages as an employee of Trucking and stated she received no remuneration for the work she performed for Reynolds’ lobster business and she did not ask for any.

She testified that she left Trucking in June 1991 after a disagreement with respect to hours of work. She stated that she and Reynolds had not spoken to each other from the time she left Trucking to a week before the trial when Steven Bent of Revenue Canada telephoned her for a meeting; she phoned Mr. Reynolds to determine if he knew the reason Mr. Bent wanted the meeting.

Ms. Christie stated that she paid cash to the fishermen or their wives or girlfriends upon presentation of the slip of paper indicating the weight and price of the lobster. She denied giving anyone a form of receipt to sign in blank or that she initialled any receipt.

In cross-examination, she said that she worked on her own “quite a bit” and generally without any rigid supervision, although there was always someone in the office with her. She maintained “three or four books of account” for Trucking but no books of account for the lobster business.

Ms. Christie, however, did record the transactions of Reynolds’ lobster enterprise. She declared she prepared this documentation so that she would not be accused of any defalcation of funds. She did this, she said, to protect herself. Essentially the system she used to record the lobster sales consisted of:

a) A receipt she created from the information slip given to her by Reynolds. This receipt set out the weight of the lobsters, the price per pound to be paid, the date of the transaction and the name of the fisherman from whom the lobsters were purchased;

b) A receipt referred to as a “cash receipt”, which was a copy of the receipt in a). This was signed or initialled by the fisherman when he picked up cash payments. This receipt set out the weight of the lobster purchased, the price per pound to be paid, and the total amount due to the fisherman; and

c) A journal system with entries that set out:

1) the name of the purchaser of the lobsters from Reynolds,

ii) the name of the fisherman who sold lobsters to Reynolds,

iii) in some cases, the weight of lobster each fisherman sold to Reynolds, and the price per pound paid,

iv) the total amount that was owed to the fisherman,

v) in some cases, how the cash was paid to the fisherman, i.e. what denominations were paid out, and

vi) the difference between what was paid by the final purchaser to Reynolds and what was paid to the fisherman by Reynolds.

In his submissions, appellants’ counsel attacked the credibility of Ms. Christie. In cross-examining her, he suggested her previous employer had been under investigation by Human Resources Canada for irregularities under the then Unemployment Insurance Act and since she could not remember the investigation, her evidence was not reliable. However, upon the strong objection to this line of questioning by respondent’s counsel, counsel for the appellants conceded he had no proof such an investigation ever took place. I held that in the circumstances this was not a proper line of questioning. In his submissions, appellants’ counsel again raised this matter. I find this repeated line of attack by appellants’ counsel unprofessional. I had expected submissions based on proper evidence adduced at trial.

I find that the records prepared by Ms. Christie reflect a true state of affairs. Ms. Christie’s bookkeeping system traced the paper trail from the time the lobster was originally weighed at the fishing plant to the time the fisherman was paid. In the journal entries (Exhibit R-l) the disputed transactions by each of the appellants are not separate entries but are part of the columns of names and amounts that record the total sale of lobster to Reynolds’ buyers. To enter a false transaction within these pages would require that the entire page be redone to keep its authenticity, she could not just make a fake receipt and insert a name and amount into the record keeping entries. The appellants have acknowledged the accuracy of several transactions recorded in the journal entries and there is no reason to believe that other journal entries are not true.

There was no motive raised at trial for Ms. Christie to prepare false records. Her evidence was that her relationship with Brian Reynolds, the only person who could benefit from any false records, was strained. She testified the records were kept contemporaneously with the occurrence of events in issue. Transactions with persons other than the appellants are also recorded. None of the appellants has been able to show any error of substance in the records prepared by Ms. Christie.

On the whole of her evidence, I find Ms. Christie to be a reliable and relatively credible witness, notwithstanding she willingly participated with Reynolds in his “under the table” enterprise.

Steven Bent

Steven Bent works in the Halifax District Office of Revenue Canada and prior to 1994 worked in the Business Audit Section of Revenue Canada.

Mr. Bent first contacted Reynolds in September 1992 to audit Trucking and during the course of the audit found the lobster transactions in issue. Following an interview with Reynolds, Mr. Bent contacted various people in the United States with whom Reynolds did business and was able to get copies of cancelled cheques from these US businesses. Mr. Bent then arranged to meet Ms. Christie to discuss the sales. At first, he said, she was reluctant to divulge any information but soon revealed that she kept records of the lobster transactions so that she would not be blamed for taking any money. She told him the documents were at Trucking’s office and they would reveal with whom Reynolds did business as well as who received money.

The next step in Mr. Bent’s work was to confront Mr. Reynolds who eventually acknowledged his sales of lobster in the United States. Reynolds provided the documentation prepared by Ms. Christie to Mr. Bent.

Mr. Bent also said he met with Mr. Kelley on February 11, 1993. Mr. Kelley told him he did not deal in cash and reported all of his income. Kelley also said he did not know Brian Reynolds.

Mr. Bent explained that documents in Exhibit A-l represent individual payments to the appellants that are “tied into the total” and correspond to cheques by purchasers in the United States to Reynolds.

Decision

During the course of the trial I realized that, except for Messrs. Savage and Bent, none of the witnesses I heard was completely candid in giving testimony. Some were less uncandid than others. For example, both Dale Smith and Clare Smith originally denied sales to Reynolds that the latter informed Revenue Canada did take place. They wrote to Revenue Canada expressly denying the existence of such sales. When a taxpayer lies to the taxing authority during the assessment or objection level, the taxpayer’s credibility at trial may be suspect as well: Huzan v. Minister of National Revenue (1991), 91 D.T.C. 1257 (T.C.C.) at 1262-1263. As far as Ms. Christie’s evidence is concerned, she ought to have known the source of the initials denied by the appellants Clare Smith and Dale Smith.

In his written argument, appellants’ counsel asked that I allow the appeals since the appellants Stanley Kelley, Clare Smith and Dale Smith had provided evidence which casts real and significant doubt on the assessments in issue. He placed great weight on the evidence of Mr. Savage as to rebut the legitimacy of the assessments. Counsel also submitted that since the assessments were based on information provided by Mr. Reynolds and Ms. Christie the assessments are no good: Reynolds “was involved in a large, complex scheme for tax evasion” and Christie “played a significant role in that scheme” by recreating some of the alleged receipts and invoices.

I disagree with appellants’ counsel. On examination of the testimony of all of the witnesses I have to conclude that there are more serious inconsistencies in the testimony of the appellants than in the testimony of the respondent’s witnesses.

It is not enough for the appellants to succeed by attacking the business carried on by Mr. Reynolds on the grounds that its purpose was to evade tax. Each of the appellants must satisfy me that on the balance of probabilities he did not enter into the transactions with Mr. Reynolds that Revenue Canada says he did. None of the appellants Clare Smith, Dale Smith and Stanley Kelley was able to do this and therefore each of their appeals is dismissed with costs.

The appeal of Laura Kelley is also dismissed without costs since there will be no change in Mr. Kelley’s income as a result of his appeal.

Appeals dismissed.