Veselinovic (E.) v. M.N.R., [1995] 1 CTC 304

Giles A.S.P.:-The motion before me sought an order extending the time within which an appeal might be instituted pursuant to the provisions of subsection 167(4) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act"). The failure to file in this matter came about by misadventure, namely the unforseen breakdown in the plaintiff’s solicitor’s office system due to illness. Steps were immediately taken to remedy the situation, however, that is not enough. It is necessary that the plaintiff show that an arguable case exists. The defendant has argued that the plaintiff has had her day in Court, to wit, a long hearing before the Tax Court. That, however, is not the point. Almost invariably persons appealing to this Court will have had a "day in Court" which resulted in the decision being appealed. In this case it is apparent that the appeal will be decided on the evidence as to the ownership of certain real estate. An appeal to this Court, being handled as a trial de novo, it is only necessary to show that a case could be made on the evidence. The evidence heard in the Tax Court of Canada would be available to be led in this Court. In that Court, further written argument was asked for and a decision was reserved. It is thus apparent to me that the case before the Tax Court of Canada was not a frivolous case but rather a case requiring considerable consideration. All that is required here is that there be an arguable case. The fact that at the earlier hearing the matter was not dismissed out of hand reveals the existence of an arguable case. The facts upon which a judge of this Court will have to make a decision de novo are the same, therefore the time for filing an appeal will be extended.

Order

The time for filing an appeal is extended to April 1, 1995.

Motion granted.

421229 Ontario Limited, Rohan Wijesinha,

[Indexed as: 421229 Ontario Ltd. v. Canada]

Federal Court-Trial Division (Reed J.), on appeal from a decision of the Tax Court reported at [ 1991 ] 1 C.T.C. 2331, November 18, 1994 (Court File Nos. T-2043/45/46-91).

Income tax-Federal-Income Tax Act, R.S.C. 1952 c. 148 (am. S.C. Freedoms-Unreported income—Penalties.

The case related to unreported income and penalties imposed under subsection 162(3). The individual appellants were the shareholders of the corporate appellant, D Inc. ("the company"). The company was engaged in the business of importing cut flowers from many places around the world and reselling them to a variety of customers in Canada. The Minister’s assessment was based on the assumption that during the years under appeal, one of the individual appellants, R, who was the managing director and a shareholder of the company, directed one of the company’s customers to make cheques, which were tendered for the purchase of flowers from the company, payable to the individual appellants or to cash. These cheques were then, according to the Minister, deposited in the personal bank accounts of the individual appellants. At the trial, R gave evidence that all customer payments were recorded. In addition, three customers and a former salesman for the company testified as to the procedure which was followed when sales were made to, or by, them (or him).

HELD:

R’s evidence was not believable. Although the appellants’ other witnesses testified as to the procedure which was followed when the salesman sold the flowers, that procedure was not necessarily followed when R, himself, was the salesman. Also there was evidence that some of the sales made from the warehouse were on a cash basis. In the result, with respect to the non-reporting, the appellants had failed to disprove the Minister’s assumptions. With respect to the penalties, it was held that the circumstances with respect to the non-disclosure of income clearly demonstrated gross negligence. The penalties were accordingly confirmed and the appeals dismissed.

Sherman Hans for the appellants.

Margaret Nott for the respondent.

Reed J.:-These reasons relate to four claims which appeal the Minister’s reassessments of taxes payable by, and penalties imposed upon, the four plaintiffs. It is based on the fact that moneys payable to the corporate plaintiff were paid directly into shareholders’ personal accounts.

The Minister’s reassessments are that: 421229 Ontario Ltd., carrying on business under the name of Daphne Flower Imports, ("the company") failed to report income in the amounts of $15,761 and $52,527.25 for the 1984 and 1985 taxation years respectively; the taxpayer Rohan Wijesinha ("Rohan") failed to report income in the amount of $25,467.85 for the 1984 taxation year; the taxpayer Daphne Wijesinha ("Daphne") failed to report income in the amount of $46,123, and interest thereon of $3,766 for the 1985 taxation year. Penalties for late filing and for failing to report income knowingly or in such circumstances as to amount to gross negligence were also assessed. The reassessment of Kingsley Wijesinha ("Kingsley") was based on the assertion that he was not entitled to claim his wife as a dependant for the 1985 taxation because his wife earned more than $3,630 in that year.

The facts relating to the four claims are interrelated and it was agreed that they would be heard together on common evidence. These reasons relate to all four claims.

The company is engaged in the business of importing cut flowers from many places around the world and reselling them to a variety of customers in Canada, (e.g., flower wholesalers, retailers, supermarket chains). During the years in question Rohan, who is the managing director and a shareholder of the company, directed one of its customers to make cheques, which were tendered for the purchase of flowers from the company, payable to either Rohan or Daphne personally or to cash. These were deposited in the personal bank accounts of Rohan and Daphne. Daphne is the majority shareholder of the company.

When Mr. Allen, the Revenue Canada tax investigator, attended at the company premises to review the books and records of the company, for the years 1984, 1985 and 1986, these could not be found. They had been stored in boxes on top of the cooler (a large structure in which cut flowers are stored). Mr. Allen found empty boxes but no records for the years he was investigating. Records for later years were there.

Several different explanations were given as to what had happened to the records. A new warehouse had been built in 1985 and the company had moved to new premises-the records were lost in the move. It was also suggested that mice may have got into the records because florist’s sheet moss was also stored on top of the cooler and this attracted mice. These explanations did not explain why records for some of the years after the move to the new warehouse were also missing. It was, then, suggested that the records might have gone missing in 1987, when staff had been instructed to move the boxes from the centre of the roof of the cooler to its edges.

Evidence was called from three customers of the company and from a person who had worked as a salesman for the company. Their evidence was that the practice followed when purchasing flowers, to their knowledge, was that purchase orders were signed, the flowers delivered (or picked up by the customers), the sale was recorded in the computer by the office at the end of the day or during the day, a computerized invoice was sent to the customer at the end of the month, and the customer paid the bill. The salesman indicated that he was paid on commission and thus every sale he made had to be entered into the computer and recorded, otherwise there would have been a discrepancy between what he was paid and what he knew he was entitled to, as commission on the sales he had made. Counsel for the plaintiffs argues that this evidence of the procedure followed, as described in the testimony of these individuals, together with Rohan’s evidence that the practice was invariably followed, demonstrate that all sales were recorded.

I am not persuaded. The evidence of Rohan is simply not believable. It is self-serving. It is unsupported by any direct documentary evidence. Documentation was sought by Revenue Canada from the customer who had been directed to make the cheques out to Daphne, Rohan or cash and no monthly computerized invoices were among them. While the sales handled by an employee salesperson might, in general, have to be recorded in order to properly record the commissions, no such requirement would be necessary when Rohan was himself the salesman. Also there is evidence that some of the sales made from the warehouse were on a cash basis. In addition, as I understand the evidence, it was often Rohan who entered the sales data into the computer.

The plaintiffs contend that the money which was paid directly into the personal accounts of Rohan and Daphne was always treated as the company’s money, that it was placed there on a temporary basis and eventually paid back into the company. Indeed, Mr. Allen had initially investigated whether the revenue from cash sales and cheques for many sales (i.e., besides those of the one customer for which there was a clear documentary record-Gatto Flower Distributing) were being diverted from the company’s account and funnelled back into the company under the heading of shareholder loans. These allegations, except with respect to the Gatto cheques, were dropped when documentation was provided showing that Kingsley had inherited approximately $350,000 from his mother’s estate in Sri Lanka. Although the foreign exchange controls of that country prohibited this money being taken out of the country, he devised a smuggling scheme whereby he paid amounts in Sri Lankan currency to people who were coming to Canada, or he paid for services they might require such as their passage to this country, and they reimbursed him in Canadian currency after their arrival. His brothers in Australia and Holland did likewise with respect to their respective $350,000 shares of the estate.

The burden is on the plaintiffs to prove, on the balance of probabilities, that the Minister’s assertions with respect to the non-reporting of income are not true. Counsel for the plaintiffs made a passing reference to the jurisprudence which has held that various reverse onus provisions, in some criminal offences, are unconstitutional as contrary to the Canadian Charter of Rights and Freedoms. An argument in this regard was not elaborated in any great detail. I note, however, that the income tax system is a selfassessment system. All the information concerning the taxpayer’s affairs is in the knowledge of the taxpayer. In such circumstances, once the Minister has proven the facts which exist in this case, there can be no complaint about the onus of proof to disprove the conclusions which arise therefrom being on the taxpayer. With respect to penalties imposed pursuant to subsection 162(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), the Minister must demonstrate that the taxpayer "knowingly or in circumstances amounting to gross negligence" failed in an obligation imposed by the Act.

The plaintiffs have given no convincing explanation as to why the moneys in question were paid into the personal accounts of the shareholders. One suggested explanation was that this was so that the money could earn interest. This is clearly nonsense. Another explanation was that it was done so that there would be money readily available to pay the contractors when the new warehouse was being built. There is no reason why the money was any more readily available for this purpose in the personal accounts of shareholders than it would be in the accounts of the company. What is more, as I understand the evidence, all the records relating to the building of the new warehouse have also been lost.

The plaintiffs tried to demonstrate that all the money which had been paid into the personal accounts of Rohan and Daphne had in fact found its way back into the company-that the matter was merely one of "an internal movement of money", or reconciliation as counsel for the plaintiffs described it. I note that while this is a family run business, it is not a small unsophisticated one. It reported gross yearly sales of around $2 million and employed 11 employees.

An amount of money as great if not greater than the total amount of the Gatto cheques was deposited by the shareholders into the company’s account. That fact, however, does not prove that the shareholders did not appropriate for their own benefit the Gatto moneys or that the Gatto sales were properly recorded in the accounts of the company. Indeed, one of the attempted linkings between the deposits to the company’s account and a withdrawal from the shareholder’s account would ask the Court to believe that Daphne withdrew $4,000 in cash from her personal account, in order to deposit it, in cash, into the company account at the same bank branch on the same day. (The deposit being for $9,000, not $4,000 and being in denominations of 20, 50 and 100-dollar bills.) This is not credible.

The plaintiffs have not proven that the Minister’s reassessments were incorrect. The circumstances with respect to the non- disclosure of income clearly demonstrate gross negligence.

For the reasons given the claims will be dismissed. The defendant is entitled to the costs of the action.

Claims dismissed.