Bowman T.C.J.:
1 This is my oral judgment in the case of Roger Robichaud v. The Queen, 96-1393(IT)G. These appeals are from re-assessments from the appellant's 1991, 1992 and 1993 taxation years. Mr. Robichaud challenges the disallowance in the computation of his income from the manufacture and sale of wreaths of the following amounts:
| 1991 | - | $35,060 |
| 1992 | - | $34,247 |
| 1993 | - | $45,037 |
2 These amounts, according to the reply, represent about 35% of the amounts claimed by Mr. Robichaud for salaries and wages, subject to certain adjustments.
3 For about ten years now, Mr. Robichaud has carried on the business of manufacturing and selling wreaths. The business appears to be one that involves the sale of a high volume of wreaths, as many as ten 10,000 dozen in a year. I shall endeavour to outline the essentials of the business. In July or August, purchasers from the United States and Canada approach Mr. Robichaud with orders for wreaths and they frequently pay him advances up to $20,000. Commencing in October, after the first frost, Mr. Robichaud hires workers to go in the woods to gather evergreen tips which are brought back to four locations in New Brunswick where he has buildings at which the wreaths are assembled on wire rings or frames. The four locations are Lamèque, Portage River, Leech and Néguac, the last one being his home. The wreaths range in diameter from 10 inches to 72 inches, although the majority sold are 10 to 12 inches in size.
4 For the purpose of gathering the evergreen tips and mounting them on the wire frames, as well as baling the completed wreaths, loading them on trucks and transporting them, Mr. Robichaud hires a large number of workers. Most of those who assemble the wreaths are women, although there are some men. During the period October to December in which the work was done, Mr. Robichaud paid the workers on a weekly basis although recently he started paying them on an hourly basis. He estimated that at Leech he had 10 to 15 workers, 20 to 30 in Néguac, 18 to 20 in Portage River and another group at Lamèque. In the payroll book for 1993, for example, about 75 workers are listed as having been employed in the business.
5 The business was substantially transacted in cash, both in respect to receipts and payments of wages. The workers wages were paid to them in envelopes containing cash. They were put in evidence as exhibits A-1, A-2, and A-3 payroll books for 1991, 1992 and 1993 setting out the amounts paid to each of the workers as well as statements of remuneration for each worker signed by Mr. Robichaud and submitted to Employment and Immigration Canada for employment insurance purposes and T-4 slips for each worker submitted to the Department of National Revenue.
6 The payroll books were not prepared by Mr. Robichaud. He did not complete grade 3 and cannot read or write. Nor were they prepared by Mrs. Robichaud, based on her testimony which I accept. I conclude therefore that they were prepared by the bookkeeper, Mr. Lucien Savoie, who has since died. Although he obviously could not testify, this is the best conclusion that I can reach on the evidence.
7 In the taxation years 1991, 1992, and 1993, the appellant claimed in computing income from the business deductions for wages and salaries of $179,895, $184,939, and $278,873 respectively, including Unemployment Insurance and Canada Pension Plan contributions. The assessments allowed him $144,834, $149,691.63, and $233,836 respectively.
8 The premise upon which the assessments are based was that the additional amounts claimed by the appellant and disallowed by the Minister were not laid out for the purpose of gaining or producing income from the appellant's wreath-making business within the meaning of paragraph 18(1)(a) of the Income Tax Act or alternatively that the amounts claimed beyond what was allowed were unreasonable within the meaning of section 67. At trial, counsel for the respondent abandoned the argument under section 67. Accordingly it is not necessary for me to consider the effect of the recent decision of the Federal Court of Appeal in Mohammad v. R. (1997), 97 D.T.C. 5503 (Fed. C.A.). I might observe that once the argument under section 67 is abandoned — and it seems to have been a significant factor in the assessor's thinking, given her reliance upon industry norms — it leaves the assessment hanging by a very frail thread without any underpinning.
9 There remains, therefore, the contention that the amounts were not outlays or expenses made or incurred for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a).
10 The case was argued by the respondent on the basis that this allegation involves one of the two separate hypotheses: either (a), the amounts were not laid out at all; or (b), if they were, they were laid out for some purpose other than the gaining or producing of income. I might note the alternative positions did not emerge from the reply to the notice of appeal as clearly as they might have. I should not have thought that an allegation that an amount was not laid out for the purpose of gaining or producing income carried within it an implied assertion that the amount was not laid out at all.
11 Nevertheless, I have to deal with the evidence before me and counsel for the appellant accepted that the respondent's reply contained implicitly these two assumptions.
12 The assessor, Ms. MacKenzie testified. She is now an officer of the Special Investigations Branch, but in February of 1995 she was with the audit division of the Department of National Revenue. She examined the records, specifically the payroll books which form part of exhibits A-1, A-2 and A-3 and met with Mr. Robichaud on February 20, 1995. She confirmed that the payroll records were consistent with the amounts claimed as salary and wages. She believed, however, that the records were unreliable. She and other members of the department spoke to a number of the workers listed in the payroll books. There were none among those contacted who stated that they did not work for Mr. Robichaud. It is not entirely clear from the evidence whether the assumption that the records were unreliable led her to make the further calculations that I shall describe, or whether those calculations led her to conclude that the records were unreliable. In either event, she stated that Mr. Robichaud told her that a good wreath maker could make $16 an hour and could make 8 to 10 dozen wreaths in a day. She concluded that on average it cost Mr. Robichaud $2.10 per wreath and on the assumption that 90% of the wreaths produced and sold were 10 to 12 inches in diameter, she concluded that Mr. Robichaud's costs were overstated. She also concluded that the industry norm was that wages and salaries were about 62% of gross sales. For 1991 and 1992, she applied a 65% factor to sales to determine what she assumed to be, the cost of wages. This is not what was pleaded. The reply states that 65% was the percentage applied to the salary and wage expense claimed.
13 While I do not wish to impugn this witness' honesty or good faith — she struck me as an honest and conscientious official — the premises upon which she operated were in my view unreliable and therefore her conclusions were untenable. She based many of her calculations on what she understood Mr. Robichaud to have told her. For example, what percentage of sales made up the 10 to 12 inch wreaths, what the hourly rate of good workers was, and so forth. It must be borne in mind that Mr. Robichaud has a grade 3 education and cannot read or write. Having observed him in the witness box, I can well understand how there can be plenty of room for misunderstanding between him and Ms. MacKenzie. His evidence in court was imprecise in many details and he denied that he made to Ms. MacKenzie a number of statements attributed to him. He is hard of hearing; he had difficulty understanding some of his own lawyer's questions or those of counsel for the respondent. This is not a matter of anybody deliberately lying. It is merely a problem of communication. Although there are contradictions in his evidence, I believe that he tried to tell the truth according to his recollection and his understanding of the questions put to him.
14 Against this, we have a number of factors to be weighed. In the first place, there is the fact that Mr. Robichaud's business is conducted almost entirely with cash. One might draw a sinister inference from this but I do not think in this case it would be justified. Mr. Robichaud is of a generation, educational background and mind-set that apparently leads him to distrust banks and cheques.
15 The one concrete piece of evidence that I have are the payroll records, statements of remuneration and T-4 slips. They were prepared by the bookkeeper who is now deceased. If they are false they would have had to be deliberately falsified for the purposes of the Income Tax Act and Unemployment Insurance Act. I do not see how they could have been inadvertently falsified. In the absence of cogent evidence of fraud I am not prepared to find that there was deliberate falsification. As business records prepared by the bookkeeper they are prima facie evidence that the statements contained in them are true and there is no evidentiary basis upon which I can conclude that they are inaccurate, false or unreliable. They have not been impugned in any particular. I conclude therefore that the appellant has met the onus of showing on a balance of probabilities that the assessments are wrong. Specifically I find as a fact the amounts claimed as salaries and wages were laid out and that they were laid out for the purpose of gaining or producing income from the appellant's business and not for some other purpose.
16 The appeals are therefore allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.
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