Harold H McKay v. Minister of National Revenue, [1973] CTC 2306

The Chairman (orally: June 19, 1973):—This is an appeal by Harold H McKay against a reassessment of the Minister of National Revenue for the taxation years 1964 to 1967, inclusive.

The issue is whether or not the bank deposits of the appellant should have been included, in the relevant years, as set out in Exhibit A-1, which contains schedules for each of the years in question. Schedule 2, for the year 1964, contains two large items of $16,081.25 and $12,319.37, respectively, the first being a question of gambling proceeds during a visit to the United States, the appellant having brought back some $15,500 in American bills and the balance representing the foreign exchange premium. The second large sum was, he states, in repayment of part of a mortgage loan on a tugboat owned by a man by the name of Morgan, who is one of the persons named In the Minister’s reply as an associate of the appellant at one time or another.

The Minister’s case is mainly based on an allegation of the participation by the appellant in a swindle known as “the money machine practice”. I have heard detailed evidence on the operation of this type of swindle. Basically, and fantastic as it may seem, confidence men are able to persuade obviously otherwise respectable businessmen that they can duplicate their money by putting it into a machine or a chemical solution and, by doing so, produce vast sums of paper currency. In this case, a man allegedly was induced to put up the sum of $300,000, and the Minister’s allegation is that the appellant was the beneficiary to the extent of at least 25% of this money.

Dealing first with that aspect of the case, the only evidence that the respondent is able to bring forth is that of Sergeant Steenson of the Royal Canadian Mounted Police, who relates conversations between himself and a man named Joseph Eror, who was convicted of a similar type of swindle and sentenced to 5 years in gaol, which term, on appeal, was substantially reduced to 18 months, which he served mainly in the infirmary, and who was in his late seventies or early eighties when released. The sergeant became quite friendly with this Joseph Eror and learned, in conversation with him, that over a period of about 40 years Eror had been involved in many different types of swindles which had allegedly grossed some $2,000,000. In the course of these conversations, Eror mentioned that at one stage he had the appellant in this case as a partner. The evidence of the sergeant is submitted on the basis that it should be accepted as an exception to the “hearsay rule”, being made as an admission against interest in that Eror was leaving himself open to an income tax reassessment by the Minister of National Revenue whereby he might be liable to pay a considerable sum of money. In my view this evidence is clearly inadmissible because, on the evidence of the sergeant, Eror was “broke” at the time and was attempting to borrow money from the appellant, which he was unsuccessful in doing. It therefore seems clear to me that

(a) he would have had no fear of repercussions in telling the story because he did not have the funds wherewith to pay any tax that might have been levied against him, and (b) the possibility existed that he was upset at the appellant for not having lent him the money.

The other aspect of the case on that particular point is the evidence of Mr Cowper, who dealt with one John L Morgan, who, quite coincidentally, as the result of the auditing of the books of a company controlled by the person who had put up the money, was found to have been involved in a “money machine” swindle. There is also evidence by Mr Cowper that Morgan was eventually reassessed, and the matter was proceeding to trial. On examination-for-discovery, at which evidence was given under oath, Morgan denied any knowledge of the money machine swindle. He subsequently appeared at the office of the local taxation district with his lawyer and his accountant, admitted to participating in the swindle and named other people, including the appellant in this case. A settlement was subsequently made in that tax problem and, according to Mr Cowper, expenses that had been claimed by Morgan were allowed and, as a result, a reassessment eventually was made against this appellant on the assumption that he had taken part in that money machine swindle involving the sum of $300,000.

I find the evidence of Morgan inadmissible as hearsay, and even if it is not hearsay, I can attach no weight to it whatsoever, because Morgan is clearly a liar, having lied either under oath on examination- for-discovery, or when he told a different story to Cowper at a time when it was apparent to him that he could obtain an advantage for himself. It is difficult for me to know on which occasion, if on either, he was telling the truth.

Therefore the allegation that this appellant obtained the money included in these deposits through the swindle known as “the money machine” is unsubstantiated by the facts. I am impressed by the words of my confrere Mr St-Onge in Victor Fabre v MNR, [1969] Tax ABC 615 at 628; 69 DTC 476 at 481, where he states:

. . . The Board cannot cast doubts upon all the depositions for the defence of the appellant, especially when faced with such hypothetical evidence from the respondent.

In this particular case, I would substitute the word “hearsay” for the word “hypothetical”.

The question then is, where did the money come from, and is the explanation given by the appellant sufficient to discharge the onus cast upon him, because he still has that onus with respect to the items that have been assessed by the respondent? He has given in evidence that he is a man of 72 years of age. He was quite firm in his answers. He has been subjected to severe cross-examination. He has been shown to be hesitant in admitting the obvious with respect to convictions. However, those convictions were almost 40 years ago. He has given an explanation for each of the deposits at issue. I would not wish it to be inferred from the final result—which is becoming increasingly obvious, I would think, in this case—that I consider that the appellant is a man of great veracity and upon whom I would wish to bestow the mantle of great credibility. However, he has stated that the moneys deposited were as a result of moneys he won or moneys that he took with him on gambling trips to the United States, or were moneys repaid on account of loans that he had made, some by way of mortgages and promissory notes. In some cases, the names of the persons involved are listed on the schedules to Exhibit A-1.

I think the law is quite clear that where an individual simply takes the witness-stand and says that an unexplained sum of money is the result of good fortune at the gambling tables, this is insufficient to discharge the onus upon the appellant. I must therefore look at the appellant’s evidence to see what, if anything, there is to corroborate the allegations made by him. I think this is an unusual case, and the Minister, in my view, has taken an unusual approach in assessing this man in the manner in which he did.

At the outset I had thought that it was a net worth assessment, but it is not, and the matter has been treated simply as a failure to report the amounts deposited. Therefore I think it is a very salient fact that this appellant at one time owned three hotels in or about the City of Vancouver, namely, the Astoria, the Eldorado, and the City Centre. He said that he sold them about 1960 or 1961, which was about the time that he retired. It is not clear whether this was at the end of 1960 or early in 1961, but he has been unoccupied since that time. He says he sold the City Centre Hotel, his share being in the form of a mortgage in the amount of $100,000, repayable at the rate of $12,000 a year, plus interest. He received $170,000 as his share of the mortgage taken back at the time of the sale of the Eldorado, payable at $25,000 a year, and he stated that he also received $150,000 in cash. These figures were not attacked in any way by the respondent, and I am certain that a simple examination of the records at the Registry Office, or whatever system is in effect in this jurisdiction, could have borne out the fallacy of this position, if it existed.

It can be seen, therefore, that there is evidence of a substantial source of funds which the appellant could have carried on with, as he says he did, and I find that his explanation as to the funds being redeposited funds or profits from gambling is more than a mere statement to that effect, and is believable because of this substantial amount of money that he had.

The appellant also loaned money to individuals, which is uncontradicted. There are evidences of repayment on account of those loans, and apparently he suffered losses on at least one of them.

So I find that the appellant has discharged the onus cast upon him to explain the deposits made as listed on Schedule 2 of Exhibit A-1.

The only other issue that remains is the question of interest which has been added by the respondent to the appellant’s taxable income for each of those years. Mr Foster, a chartered accountant in this city who was called in in 1969 when this appellant was faced with these difficulties, has suggested that the loan to a person by the name of Jordan and/or Fire Valley Farms was a bad debt in the year 1966 when the Department included, out of a payment of $10,000, a sum of $6,360 as interest. He feels that the proper course, on sound accounting principles, would have been to apply that against capital rather than income. That may be; but I think it is also a sound principle under the Income Tax Act that the Minister has applied the formula that he did in view of the fact that moneys were paid in the year prior to that in connection with this same loan, and there was nothing to indicate that it would not be recovered in the future. In any event, if I have to stretch a point to find some liability on this appellant, I will do so; and I do so by finding that the interest charged throughout is proper, and the appeal with respect to that element has failed.

I feel that I cannot complete this judgment without saying that, if it were not for our system of jurisprudence, where inferences must be based upon facts and not upon suspicion, the appellant would not be so fortunate as he is in this judgment today. Nevertheless, regardless of my own personal feelings, I must apply the law as rigidly as possible, notwithstanding my own deep suspicions with respect to the conduct of the appellant in this case.

The appeal will therefore be allowed in part, the bank deposits added to the income of the appellant in the respective years will be struck out, and the matter will be referred back to the respondent for reassessment, adding only the interest and penalty as set out in Schedule A-1.

Appeal allowed in part.