Barry Beech v. Her Majesty the Queen, [1977] CTC 361, 77 DTC 5249

Mahoney, J:—The issues are the inclusion in the plaintiff’s 1970 taxable income of $4,800 paid him by his employer and penalties assessed under the federal and provincial Income Tax Acts for each of 1968, 1969 and 1970.

As to the $4,800, the plaintiff was a shareholder and manager of a company called Brantford Builders’ Supplies Ltd until February 1970, when all the shares of that company were purchased by Brantford Concrete Pipe Co Ltd, a company owned by British interests. Brantford Builders’ Supplies was thereafter operated as a division of the purchasing company and the plaintiff was employed during most of the balance of 1970, as the division’s president and general manager, at a salary in excess of $25,000 per annum. He resided at his home near London, Ontario and lived about half the time in a motel at Brantford.

During 1970 a total of ten cheques, each for $575, were issued to him. The first was dated February 16; the last November 5. Of that total of $5,750, on assessment, $4,800 was added to his income as “Additional income from employment”. The plaintiff claims that these payments were reimbursement for travelling expenses. His evidence is that he travelled between 30,000 and 35,000 miles to promote the sale of his employer’s products. He claims that he submitted vouchers to support these expense advances, that $575 was the maximum monthly expense he was entitled to claim and that, in fact, he exceeded that amount regularly and was out of pocket the excess. He produced no such vouchers, nor evidence of any effort to obtain the same from his former employer, nor of why the same were not forthcoming. If there was a written contract governing his employment, it was not introduced in evidence.

There are many possible explanations, in addition to that given by the plaintiff, as to why these regular monthly payments were made. Those include that postulated by the learned Member of the Tax Review Board in his decision (at p 2179 [76 DTC at 1137]). For example, I have considerable difficulty reconciling the plaintiff’s testimony that he was paid salary at a rate of over $25,000 per year and, if one accepts his evidence as to his maximum monthly expense allowance, that he was employed at that rate for about ten months, with his reported income from employment of less than $16,000 for the entire year. It is not, however, for the Court to speculate on such things but for the plaintiff to satisfy the Court as to the truth of his explanation. He has not done so and his appeal in respect of the $4,800 will be dismissed.

The penalties were imposed by virtue of subsection 56(2) of the federal Act, as it then stood* [1] and by a practically identical provision of the Ontario legislation.! [2] The penalties assessed, federal and provincial respectively, were: for 1968, $543.98 and $203.08; for 1969, $3,097.15 and $1,156.28 and, for 1970, $82.64 and $29.62.

The plaintiff reported total income of $17,145.79 in his 1968 return. On reassessment, $6,560.05 was added which the plaintiff admitted, before the Tax Review Board, had been properly added.

The plaintiff reported total income of $32,688.23 in his 1969 return. Included in that was an estimated $1,000 business income. On reassessment his business income was determined to have been $12,684.22. He was also found to have omitted a further $18,777.10 from his reported income. There were other amounts in dispute in 1969 but it appears that the penalty was imposed only in respect of the $11,684.22 undeclared business income and the $18,777.10. Again, the propriety of the inclusion of these amounts in his income was admitted before the Tax Review Board.

The plaintiff reported total income of $9,165.73 in his 1970 return. On reassessment a number of items were taken into account resulting in a substantial increase in income. The only item material to the penalties is $1,665.21 which represented unreported additional sales and rental income and which was admitted to have been properly added before the Tax Review Board.

While there is little evidence as to the precise nature and scope of the plaintiff’s income-generating activities during these years, except as to his employment during most of 1970, the clear inference to be drawn is that he was engaged in a number of business activities. His 1968 income was entirely from self-employment; his 1969 and 1970 returns disclose that his income from self-employment in each of the years was substantial. In each year the net amount in respect of which the penalty was assessed was arrived at after taking into account a number of transactions.

The $6,560.05 omission in 1968 amounted to about one-quarter of the plaintiff’s total income; the 1969 omissions totalled almost half his total income and the 1970 omission represented about 15% of that year’s total income. The plaintiff’s explanation of these omissions is set forth in Exhibit P-3, a letter from the plaintiff's counsel to the defendant’s counsel dated March 23, 1976. The truth of its contents is not challenged. What it all boils down to is that the plaintiff’s records of the various transactions in which he engaged during those years were entirely inadequate. He gave what he had to a firm of chartered accountants and signed and filed returns prepared by it. His evidence, seeking to place responsibility for the omissions in the returns on the accounting firm rather than on shortcomings in the information he provided to it, is not at all convincing.

Except for blaming his accountants, the plaintiff offers no real excuse for the omissions in his 1968 and 1970 returns. As to the 1969 return, the $18,777.10, which was comprised in a single bank deposit, seems originally to have been regarded as a capital receipt. It is apparent that this misconception did not arise after a deliberate consideration of the nature of the receipt but resulted entirely from the inadequacy of his records.

The plaintiff contends that a penalty ought not be levied in respect of the $11.684.22 because, by including the $1,000 estimate of business income in his 1969 return, he had given notice that he had such income and that the correct amount would be reported when ascertained. I accept that, on occasion, circumstances may dictate that a taxpayer must estimate some item of his income. However, where those circumstances, as alleged here, consist of the taxpayer’s own gross negligence, I fail to see that the inclusion of an estimate, per se, alters the fact that the understatement of income in the return was made by the taxpayer in circumstances amounting to gross negligence. The adequacy of the estimate will, of course, have a direct bearing on the severity of the penalty.

I did not find the plaintiff a forthright, responsive witness. I did not find the explanations he offered persuasive. The plaintiff’s course of conduct during the period in issue was to keep inadequate records of his business transactions and to certify and file income tax returns, prepared as best they could by his accountants, based on those records. As a result, he understated his income by amounts that were large in both absolute and relative terms. On the whole of the evidence, the reasonable conclusion to be drawn is that he adopted that course of conduct, if not deliberately, in circumstances amounting to gross negligence. I find that the penalties were properly imposed.

The action will be dismissed with costs.

Appeal dismissed.