Rodrigue Boudreault v. Minister of National Revenue, [1978] CTC 3196, [1978] DTC 1859

Guy Tremblay [TRANSLATION]:—This case was heard at Chicoutimi, Quebec on October 17, 1977.

1. Point at Issue

It must be decided whether the Department of National Revenue is correct in disallowing equipment expenses of $1,994.34 and $2,710, claimed by the appellant and his partners for the 1973 and 1974 taxation years, against partnership income derived from a business operating a skidder. It must also be decided whether a penalty of $118.40, that is, 25% of the additional tax for 1973, imposed for fraud or gross negligence, is justified.

2. Burden of Proof

The burden is on the appellant to prove that the respondent’s assessments concerning disallowed expenses are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

On the other hand, the burden is on the respondent to prove that the appellant committed fraud or gross negligence if he wishes the 25% penalty under subsection 163(2) of the new Act to be maintained.

3. Facts

3.1 In 1973 and 1974 the appellant operated a skidder for the Price company in partnership with Messrs Ange-Marie and Cyprien Boudreault.

3.2 The appellant did not include the profits from the operation of the skidder in his income in his 1973 and 1974 tax returns.

3.3 The work of the skidder which the appellant operated was to move to the road lumber cut by his two partners.

3.4 The Price company had a garage where the appellant and his partners could have repairs done and could buy fuel.

3.5 According to Exhibit I-2 from the Price company, the income of the operation was as follows for the years in question:

3.6 The income termed “net” by the Price company could be reduced by other expenses. After recovering a number of supporting documents, the appellant in fact claimed other expenses as shown below:

3./ The following amounts were added to the partnership’s and the appellant’s income by a notice of assessment from the Department dated August 28, 1976:

3.8 Following a notice of objection from. the appellant, the respondent by a notice of reassessment dated February 24, 1977 allowed interest expenses of $625 for 1973 and $775 for 1974. The appellant’s additional income was reduced as follows:

3.9 The expenses disallowed by the respondent are $1,994.34 for 1973 and $2,710 for 1974. These expenses are claimed by the appellant under the heading “equipment expenses’’:

These figures are taken from Exhibits 1-3 and 1-4, which are headed “Draft revised assessment 1973” and “Draft revised assessment 1974”.

3.10 Photocopies of supporting documents relating to these “equipment expenses’’ for the years in question were filed as Exhibits A-1 and A-2.

3.11 Mr Lapointe, an accountant, took over the appellant’s file in 1975 when the respondent required supporting documents from the appellant. On Mr Lapointe’s advice the appellant then went to. see his former suppliers and obtained, among others, the supporting documents filed as Exhibits A-1 and A-2.

3.12 According to the evidence of Mr Pierre Chevalier, an auditor for the respondent for 9 /2 years, the supporting documents marked with an “X’’ by a Mrs Pelletier of the department had been disallowed. Generally speaking, the supporting documents from large companies such as Eaton and Asbestonos Corporation were allowed but the others were disallowed.

3.13 When he in fact telephoned the other suppliers in 1976, they told him that they had no supporting documents or record. In addition, according to Mr Chevalier, the invoice numbers on the documents supplied were in sequence, which showed that they had been prepared at a later date and without justification, at the time of the appellant’s visit in 1975.

4. Comments

4.1 By producing supporting documents relating to his expenses the appellant has, at first sight, discharged the burden of proof that he bore.

The evidence of the respondent’s witness does, however, seriously call into question the validity of the supporting documents filed as Exhibits A-1 and A-2.

The Board has carefully examined each of the exhibits. The totals both of documents disallowed (those marked with an “X”, according to the witness Trépanier), and of those allowed, show some differences, as set out below:

On the assumption that there was a simple technical error, the Board therefore takes, first, the amounts of $1,086.17 and $1,249.71 to be accepted for 1973 and 1974 respectively. Why did Mr Chevalier tell the Court that all the disallowed documents were marked with an “X” by Mrs Pelletier, if this was not so? And why did he not check them? Is the totalling of the figures in question not part of the audit?

According to the respondent’s witness, he came to the conclusion that the documents were fabricated after the event, or falsified, because the numbering of the documents was continuous from one invoice to the other. The Board looked among the disallowed documents (those marked with an “X”) for invoices with continuous numbering. Five of the total of 18 were in this category, all in 1974. Three came from Jean Enr garage of Rivière Eternité and two from the Boudreault garage of Chicoutimi. The first are numbered 9, 10 and 11 and are dated December 7, 1974 (No 9), May 18, 1974 (No 10), and June 8, 1974 (No 11). The two others are numbered 42 and 43 and are dated November 15, 1974 and November 29, 1974 respectively. In the Board’s view this does not amount to a preponderance of evidence that these numbered pages came from the same invoice book. The department’s evidence (and the burden of proof was on it since it wished to reject documents filed by the appellant which, at first sight, should have been accepted) is not that the numbers followed on from one invoice book to another. Why should the pages of each invoice book not be numbered quite simply from 1 to 40 or 50, (if there are 40 or 50 pages), each book thus having its own run from 1 to 40 or 50?

There is thus no preponderance of evidence that the invoice pages numbered 9, 10 and 11 from Jean Enr garage necessarily came from the same invoice book, much less that the purchases were not made.

Mr Chevalier said that he telephoned supplier, but he did not necessarily say all suppliers. Some said they had no accounting documentation. Was the meaning of those words properly understood? Was the audit carried out in the same way as the totalling of the invoices filed?

To sum up, the appellant has discharged the burden of proof and the respondent’s evidence in rebuttal has not persuaded the Board that it must disallow all the amounts disallowed by the department.

After examining each of the disallowed documents, the Board admits them all, even though one of them may give rise to certain doubts. Has the witness not sworn that he actually incurred those expenses for the purposes of his business?

In the Board’s opinion this matter could have been settled out of court.

4.2 The Penalty

It must be decided whether the 25% penalty on the 1973 tax (which involves the sum of $118.40) should be maintained. Has the respondent demonstrated that there has been gross negligence or fraud in accordance with subsection 163(2) of the new Act?

In view of the fact that the Board has allowed all the expenses it appears, at first sight, that no penalty should be imposed; this, how- ever, is not necessarily the case. It should be noted that, according to the evidence, the appellant did not report his income from the skidder in 1973 and 1974; this in itself implies gross negligence. How could he possibly overlook this income when it results from his everyday work, which produced gross income of $12,908.56 and $15,451.34 for the partnership of which he was a member? Nevertheless, this involves net additional income of $1,699.95 in 1973, that is, 20% of the appellant’s net reported income of $8,380.

The penalty was imposed at the time of the first assessment for 1973, issued on August 26, 1976. No penalty was imposed for 1974.

The Board takes the view that the penalty imposed for 1973 should be maintained.

5. Conclusion

The appeal is allowed in part and the matter is referred back to the respondent for reassessments in accordance with the above reasons for judgment.

Appeal allowed in part.