T-4749-73
The Queen (Plaintiff)
v.
Harold H. McKay (Defendant)
Trial Division, Collier J.—Vancouver, April 15
and May 9, 1975.
Income Tax—Calculation of income—Income from crimi
nal activity—Minister re-assessing income, alleging bank
deposits resulting from swindles—Board directing deletion of
deposits from income—Appeal by Minister—Pleadings
indicating different issue than that argued—Whether defend
ant knowledgeable of case he must meet—Whether onus
always on taxpayer—Income War Tax Act, R.S.C. 1927, c. 97
as am. ss. 58, 63(2), 69, 69A—Income Tax Act, R.S.C. 1952, c.
148, ss. 46, 56(2); S.C. 1970-71-72, c. 63 ss. 152(8) and
175(3)—Federal Court Rules 494(2), 461, 800.
The Minister re-assessed defendant's 1964-67 income based
on information obtained in an audit on one Whitworth, indicat
ing that defendant had made bank deposits as a result of a
swindle. On appeal, the Minister did not rely on a net worth
statement, and the Tax Review Board, treating it as simply a
failure to report the deposits, directed their deletion from
defendant's income. Even after amendment of the statement of
claim, it appeared that the Minister's case was based on the
existence of the deposits resulting from criminal activity, while
in fact, net worth comparisons seemed to be the essence of the
case. Defendant elected to proceed as if a net worth case had
been pleaded. When it became evident that the Court would
not accept most of plaintiff's evidence of criminal activity, the
trial continued on the basis that the onus was on defendant to
disprove the assessments. Defendant maintained that the depos
its represented (a) gambling winnings, (b) remains of cash
taken on trips to the United States, (c) repayment of loans.
Held, allowing the defendant's appeal in part, respecting the
1964 taxation year, and setting aside all penalties, his appeals
are otherwise dismissed. Defendant's explanations do not dis
place the onus on him; he has demonstrated no error in the
assessments. It has not, however, been demonstrated that
defendant knowingly failed to disclose the deposits, or was
grossly negligent in not so doing.
As to the question of onus, traditionally, in a trial de novo, it
is on the taxpayer, and he must present his case first. The
so-called "onus on the taxpayer" rule should not be rigid,
capable of no exceptions. In matters where the Queen is
plaintiff, there should be no hard and fast rule. In cases similar
to the one at bar, where serious allegations charging crime are
made by the Queen, as plaintiff, the onus should be on the
party raising them.
Pashovitz v. M.N.R. [1961] Ex.C.R. 365; Johnston v.
M.N.R. [1948] S.C.R. 486; MacDonald v. Canada Kelp
Co. Ltd. (1974) 39 D.L.R. (3d) 617; Contini v. Canarium
Investment Corporation Ltd. [1974] 5 W.W.R. 709,
discussed.
INCOME tax appeal.
COUNSEL:
S. A. Hynes for plaintiff.
J. A. Wener for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Goldman, Kemp, Craig, Wener, Vancouver,
for defendant.
The following are the reasons for judgment
rendered in English by
COLLIER J.: This is an appeal by the plaintiff
from a decision, dated July 19, 1973, of the Tax
Review Board. The case involves re-assessments by
the Minister of National Revenue in respect of the
defendant's income and tax for the years 1964 to
1967 inclusive.
I propose, at the outset, to review in detail some
of the circumstances leading to the assessments in
dispute, the course of this action in the Tax
Review Board, the pleadings before the Board and
in this Court, and the course the case took in this
Court. I make that review in order:
a) that these reasons for judgment may be more
intelligible if this matter should proceed to
higher Courts;
b) to make more intelligible to the parties my
later comments in respect of onus.
The defendant is now 74 years old. He has been
in many businesses or occupations over the years.
It is obvious the Minister of National Revenue
holds the view that some, at least, of those busi
nesses have been nefarious or criminal. The
defendant testified that he had been in hotel enter
prises since 1941, having owned either alone or in
partnership several hotels in British Columbia. His
last hotel interest was the Eldorado in Vancouver.
It was sold in 1961. He considers himself to have
been retired since that time. The Minister in the
pleadings apparently disagrees with that categori
zation of the defendant's status. The Minister has
alleged, among other things, that before and since
1961 the defendant has been in the business of
swindling, particularly a form called the "money
machine" swindle. It is not necessary here to
describe the details of that incredible fraudulent
charade usually used to bilk avaricious business
men.
For the years in question, the defendant filed
returns reporting net income as follows:
1964 — $16,129.58
1965 — $15,418.31
1966 — $10,972.33
1967 — $ 8,239.90
The Minister initially accepted those returns.
Some time before 1968, in the course of an audit
of a company known as Sears Construction Lim
ited (controlled by one Hilton Whitworth), the
Minister determined that $300,000 in cash had
been withdrawn by Whitworth from the company.
Whitworth was subsequently convicted of some
kind of misappropriation. At one stage he told the
Minister's officials that the company's money had
been lost by him as a result of a money machine
swindle. Certain names were given. The Minister
then assessed, for his alleged share of the proceeds,
one John L. Morgan as a perpetrator of or partici
pant in the swindle. On a further re-assessment
some unidentified bank deposits of U.S. currency
were added to Morgan's income. Morgan appealed
that re-assessment to the Exchequer Court. Even
tually he consented to a judgment which brought
into his income a one-quarter share of the dollars
larcenously extracted from Whitworth. Morgan is
alleged, during the settlement negotiations with
tax department officials, to have named the
defendant and others as his accomplices in the
Whitworth swindles'.
' These allegations are summarized from the reply to notice
of appeal filed in the Tax Review Board (January 29, 1973),
the statement of claim in this Court (filed November 16, 1973)
Continued on next page
On June 10, 1969, the Minister issued re-assess
ments. He added to reported income the following:
1964 '— $54,255.01 (bank deposits)
1965 — $23,487.96 (bank deposits)
$10,000.00 (a mortgage payment)
1966 — $47,738.34 (bank deposits)
$ 143.76 (other income)
1967 — $ 9,226.54 (bank deposits)
$144,851.61
Penalties (under subsection 56(2) of the Income
Tax Act and section 19 of the B.C. Income Tax
Act) in the total amount of $17,916.99 were
assessed. Interest of $14,463.22 was added.
The taxpayer filed notices of objection. There
followed an exchange of correspondence and infor
mation between the defendant, through his
accountant Mr. Foster, and the tax department
(see Exhibit 5-B). The department accepted or was
satisfied with the explanations given for many of
these deposits and reduced the above figures to the
following:
1964 — $51,021.55 (13 deposits)
1965 — $17,207.96 (9 deposits)
1966 — $ 4,205.00 (3 deposits)
1967 — $ 2,700.00 (4 deposits)
$75,134.51
Re-assessments (dated May 18, 1971) was issued
accordingly.
The defendant appealed to the Tax Review
Board. At that stage, the Minister had not pre
pared a net worth statement for the period in
question, nor did he rely on a form of net worth
statement which had been submitted by Mr.
Foster, following a departmental request on March
19, 1970. The Tax Review Board heard the appeal
Continued from previous page
and the amended statement of claim again in this Court (filed
March 6, 1975). Morgan and the other alleged swindlers are
now all dead, except for the defendant and two others. The
latter two did not give evidence before the Tax Review Board
or this Court.
on June 19, 1973. The Chairman said in part:
... 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 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.
It appears that certain evidence was led before
the Board in an attempt to prove participation by
the defendant in the money machine swindle of
Whitworth. The Chairman, for several reasons,
ruled the evidence (which was basically hearsay)
inadmissible. The Board went on to accept evi
dence given by the defendant or on his behalf as to
substantial sources of capital funds from which the
defendant could have obtained the monies making
up the so-called unexplained deposits. The Board
directed the deposits be deleted from the defend
ant's taxable income.
The original statement of claim in this Court is
substantially the same as the reply filed by the
Minister in the Tax Review Board. It begins by
stating that the Minister included in the defend
ant's income certain bank deposits totalling the
amount earlier set out. I then quote paragraph
two:
2. The above amount represents some or all of the Defendant's
share of the proceeds of various frauds and other criminal acts
perpetrated by the Defendant and others on a number of
individuals through the medium of a confidence game known as
the "money machine" swindle, including two swindles perpe
trated against one Hilton Whitworth, of Vancouver, British
Columbia.
I also quote a portion of paragraph three, which
has twenty subparagraphs:
3. In re-assessing the Defendant for his 1964 to 1967 taxation
years, the Minister of National Revenue assumed, inter alia,
that:
(a) for a number of years up to and including 1964, and
subsequent years, the Defendant had been engaged with
others in the practice of defrauding persons through the
operation of the "money machine" swindle. Associated with
the Defendant were:
John Chmelyk — Deceased August 29, 1961
John Polonich — Deceased November 5, 1964
Fred Collins — Deceased March 13, 1965
James Gray — Deceased June 10, 1965
Joseph Eror — Deceased December 20, 1966
John L. Morgan — Deceased 1972
Raymond Outtrim — Still alive
(see *528-58 DTC 395)
L. Ackerman — Unknown
(b) during his 1964 taxation year the Defendant and his
criminal associates defrauded the said Hilton Whitworth, of
$298,000.00 by means of the money machine swindle;
Subparagraphs (c), (d), (e) and (g) describe in
some detail the alleged money machine swindles
perpetrated on Whitworth by the defendant and
others in November 1963 and again in October
1964. Some of those subparagraphs, and later
subparagraphs, describe how the proceeds of the
fraud found their way into numerous bank
accounts. The defendant and his alleged co-cons
pirators are said to have been the owners of the
various accounts.
Subparagraphs 3(o) and (p) indicate the extent
to which Her Majesty was prepared to go in
attempting to prove liability for additional tax and
penalties. I quote:
3. (o) the Defendant has also had a number of financial trans
actions with the aforementioned Gray and Polonich, details
of which will be led at the hearing of this appeal;
(p) the Defendant has for many years been suspected by
various police authorities as being involved in money
machine swindles. He was arrested and held overnight for
questioning by the Vancouver City Police in 1950 with
respect to a money machine swindle, but no charges were
laid. He was an associate and friend of Joseph Eror, who,
along with Raymond Outtrim and Fred Collins, were arrest
ed and charged, in 1967, with fraud in connection with a
money machine swindle in Richmond, British Columbia.
Eror was convicted. He died shortly after his release from the
British Columbia Penitentiary. Before his death, Eror named
the Defendant as his co-conspirator and accomplice in a
number of money machine swindles;
The trial commenced, on those pleadings, before
me on December 5, 1974. Before any evidence was
led counsel for the taxpayer stated what he
thought the issues to be. In his view the major
dispute was as to the accuracy of a net worth
statement prepared by the Minister, an answering
net worth statement prepared on behalf of the
taxpayer, and the inferences to be drawn from the
evidence in respect of net worth. Counsel for the
plaintiff, during the pre-evidence discussion,
indicated the Minister's net worth statement had
been prepared by the revenue department after the
Tax Review Board decision
... in order to justify the assessment, and our position will be
that those net worth statements will in fact show an income
discrepancy of some $83,000 which the taxpayer failed to
include in his income for the 64 to 67 taxation years.
The following interchange took place between
counsel and myself:
MR. HYNES: Now to that extent, my lord, the case before
you is different than that from the Tax Review Board, we
are simply not asking you to affirm or disaffirm the
decision of the Board based on the same evidence.
We will be calling, as well my lord, other evidence,
including the evidence of Sergeant Steenson who is
referred to in the Tax Review Board decision to attempt
to associate the taxpayer with other people whose activi
ties were in the nature of money machine swindles.
Now, my lord, there are a couple of statements in the
Minister's statement of claim which I would like to draw
your attention to and I think that—
THE COURT: Can I ask this, are you throwing out all the
assumptions stated by the Minister in the pleadings?
MR. HYNES: No, my lord.
THE COURT: I see. You are still saying that the source of
these deposits came from a share in money machine
swindles?
MR. HYNES: Yes, my lord, I am glad you mentioned that
because it isn't really a necessary part of the Crown's
case to show the source of unexplained funds, it is
sufficient simply for the Crown to say these funds are
here, you haven't been able to show that they came from
a capital source, therefore we have assumed them to be
income and that's the end of that.
THE COURT: There is such a thing as fairness and in two
courts, the Crown has pleaded at length the assumptions,
I know the Minister is not bound by the assumptions but
if the Crown is saying well really we don't have to go on
this, I think something formally should be put on the
record to that effect and something should have been
formally put on the record before we got into this court
room. I think it's unfair to say well, I have got four pages
of assumptions which allege criminal acts and then say,
well now, when we get into the federal court, we really
don't have to prove all that, all we have to do is file net
worth statements and if we can establish them, that is it.
In other words, the taxpayer is being called upon to meet
a different case than he had to meet in the Tax Appeal
Board and what is presently on the pleading. Now I know
the onus of proof, I know all that.
MR. HYNES: My lord, the taxpayer has been well aware for
some considerable time of the case that he is going to be
called upon to meet.
THE COURT: On the pleadings?
MR. HYNES: No, my lord, but in practice here, the discover
ies and that, all of these statements have been—
THE COURT: Why isn't it on the pleadings?
MR. HYNES: Well my lord, I think that's fair comment, the
Minister could perhaps—should have amended the plead-
ings to allege net worth statements would be relied upon.
THE COURT: Well let's go ahead but I think it's a very bad
practice.
As a result of that and further discussion, the
trial was adjourned after evidence was heard from
three witnesses. The understanding was that the
statement of claim would be amended. On Decem-
ber 16, 1974, the resumption of the trial was fixed
for April 15, 1975. An amended statement of
claim was filed on March 6, 1975. I again think it
desirable to quote certain paragraphs:
1. On May 18, 1971, the Minister of National Revenue (here-
inafter referred to as "the Minister") re-assessed the Defend
ant's tax for the 1964, 1965, 1966 and 1967 taxation years to
include in the Defendant's income for those years certain bank
deposits which the Defendant claimed to be unable to identify,
totalling over the said taxation years, $75,134.51. Upon assess
ing the Defendant, the Minister levied penalties by virtue of the
appropriate provisions of the Income Tax Act and of the British
Columbia Income Tax Act.
2. The Defendant, in filing his Notice of Objection and Notice
of Appeal to the Tax Review Board, continued to maintain that
he was unable to identify the source of these deposits. At a
subsequent hearing before -the Tax Review Board, he alleged
that the deposits were gambling winnings and re-deposits of
money taken to the United States for the purpose of gambling.
3. The above amount in fact represents a portion of the
Defendant's share of the proceeds of various frauds and other
criminal acts perpetrated by the Defendant and others on a
number of individuals through the medium of a confidence
game known as the "money machine" swindle, including two
swindles perpetrated against one Hilton Whitworth of Vancou-
ver, British Columbia'.
4. In re-assessing the Defendant for his 1964 to 1967 taxation
years, the Minister of National Revenue assumed, inter alia,
that:
a I point out that these wide and vague allegations were
retained in this amended statement of claim and no particulars
were given of the "various frauds", "criminal acts", or of the
alleged victims.
(a) From 1930 up to and including 1964 and subsequent
years, the Defendant was associated with some or all of the
following individuals, who were engaged in the practice of
defrauding persons through the various swindles or other
confidence games, including the "money machine" swindle:
John Chmelyk — Deceased August 29, 1961
John Polonich — Deceased November 5, 1964
Fred Collins — Deceased March 13, 1965
James Gray — Deceased June 10, 1965
Joseph Eror — Deceased December 20, 1966
John L. Morgan — Deceased 1972
Raymond Outtrim — Still alive
(see *528-58 DTC 395)
Louis Ackerman — Unknown
The Defendant also has a personal history of involvement
in confidence games'.
(b) During 1964 the Defendant and Morgan, Polonich and
Gray defrauded the said Hilton Whitworth, of $298,000.00
by means of the money machine swindle.
The remaining subparagraphs of paragraph 4
again set out the source of the Minister's informa
tion that the defendant had been a participant in
the Whitworth money machine swindles. Subpara-
graphs (f), (g) and (h) are substantially the same
as subparagraphs 3(o) and (p) of the earlier plead
ing. The following paragraph six was new:
6. The presiding member of the Tax Review Board, in his
Reasons for Judgment, stated that since the Defendant had sold
interests in a number of businesses during the years under
appeal and during prior years, there was a potential source of
funds available to the Defendant which might have been avail
able to provide for the deposits in issue, and which the Minister
of National Revenue had not accounted for. Since that decision
was handed down, the Minister of National Revenue, through
his officials, has prepared net worth statements for the Defend
ant which demonstrate, inter alia, that the funds received by
the Defendant from the sale of his business interests have been
accounted for and were therefore not available to the Defend
ant to provide a possible explanation for the bank deposits.
These statements also confirm, by the net worth accounting
technique, that the Defendant received approximately
$75,000.00 in cash from unexplained sources.
In my opinion, the pleadings throughout (in this
Court and in the Tax Review Board) indicated to
the taxpayer the case he had to meet was that
during the years 1964 to 1967 he made bank
deposits of funds (income) which had been derived
from the alleged swindles perpetrated on Whit
' I point out that this subparagraph alleges (for the first time
in this litigation) association with others alleged to be swindlers
using "various swindles" including the money machine swindle.
Again no particulars are given.
worth. It is true that the technical wording in
amended paragraph three includes an allegation
that the unexplained funds originated from
... various frauds and other criminal acts perpetrated ...
through the medium of a confidence game known as the
"money machine swindle" ...
without restricting the swindle to the Whitworth
fraud. But when the statement of claim is read as a
whole it seems clear the real allegation is that the
money making up the "unidentified" deposits
came from the Whitworth swindles.
The addition of paragraph six merely indicates,
to my mind, that the plaintiff proposed to rely on
net worth statements to confirm or verify the main
substance of the case. The basis of the amended
statement of claim, as I see it, is still a claim
advanced against the taxpayer founded on "unex-
plained" deposits, the source of which is said to be
two criminal swindles. The inference the plaintiff
seeks to be drawn is that the deposits represent
income rather than capital receipts. The amend
ments do not really meet the objection I made
when the case first came on for hearing: if net
worth comparisons were to be the essence of the
matter, then that should be so indicated in the
pleadings; the taxpayer is entitled to know the case
he has to meet. This point came up again for
discussion during the resumed hearing. Counsel
for the taxpayer understandably elected to proceed
as if in fact a net worth case had been pleaded
rather than undergo further adjournments in order
for additional amendments to be made.
I shall now comment on the manner in which
the trial then proceeded. Counsel for the taxpayer
in December had, without discussion, accepted the
traditional position and view that, because this was
a trial de novo and "the onus being on the taxpay
er", the defendant should put his case in first 4 .
'This practice that a respondent taxpayer (in a tax appeal
case in this Court) should "go first" stems, as I understand it,
from the remarks of Rand J. in Johnston v. M.N.R. [1948]
S.C.R. 486 at page 489-490:
Notwithstanding that it is spoken of in section 63(2) as an
action ready for trial or hearing, the proceeding is an appeal
from the taxation; and since the taxation is on the basis of
certain facts and certain provisions of law either those facts
Footnote continued from previous page
or the application of the law is challenged. Every such fact
found or assumed by the assessor or the Minister must then
be accepted as it was dealt with by these persons unless
questioned by the appellant. If the taxpayer here intended to
contest the fact that he supported his wife within the mean
ing of the Rules mentioned he should have raised that issue
in his pleading, and the burden would have rested on him as
on any appellant to show that the conclusion below was not
warranted. For that purpose he might bring evidence before
the Court notwithstanding that it had not been placed before
the assessor or the Minister, but the onus was his to demolish
the basic fact on which the taxation rested.
Instead, the taxpayer abstained from making that allega
tion. As fact it was not raised by the defence although
involved in the reference to the rule of the schedule applied
by the assessor, but in the reply it was denied as fact. There,
then, appeared the first reference to an allegation that should
have been in the claim; and on principle I should call it an
indulgence to the taxpayer, assuming that he desired to raise
that point in appeal, to be permitted so to cure a defective
declaration. The language of the statute is somewhat inapt to
these technical considerations but its purpose is clear: and it
is incumbent on the Court to see that the substance of a
dispute is regarded and not its form.
I am consequently unable to accede to the view that the
proceeding takes on a basic change where pleadings are
directed. The allegations necessary to the appeal depend
upon the construction of the statute and its application to the
facts and the pleadings are to facilitate the determination of
the issues. It must, of course, be assumed that the Crown, as
is its duty, has fully disclosed to the taxpayer the precise
findings of fact and rulings of law which have given rise to
the controversy. But unless the Crown is to be placed in the
position of a plaintiff or appellant, I cannot see how plead-
ings shift the burden from what it would be without them.
Since the taxpayer in this case must establish something, it
seems to me that that something is the existence of facts or
law showing an error in relation to the taxation imposed on
him.
and of Kellock J. at page 492:
As I read the provisions of the statute commencing with
section 58, a person who objects to an assessment is obliged
to place before the Minister on his appeal the evidence and
the reasons which support his objection. It is for him to
substantiate the objection. If he does not do so he would, in
my opinion, fail in his appeal. That is not to say, of course
that if he places before the Minister facts which entitle him
to succeed, the Minister may arbitrarily dismiss the appeal.
No question of that sort arises here, and I am deciding
nothing with respect to it.
I further think that that situation persists right down to
the time when the matter is in the Exchequer Court under
the provisions of section 63. I regard the pleadings, which
may be directed to be filed under subsection 2 of that section,
as merely defining the issues which arise on the documents
required to be filed in the court without changing the onus
existing before any such order is made. In my opinion
Continued on next page
A chartered accountant (Mr. Foster) gave evi
dence in which, on various grounds, he disagreed
with a number of items which the Minister's repre
sentatives had included or excluded in net worth
statements prepared by them on July 4, 1974,
(Exhibit 18) and September 20, 1974, (Exhibit 5).
Continued from previous page
therefore the learned judge below was right in his view that
the onus lay upon the appellant.
In the Johnston case, the sections of the statute referred to by
Rand J. were from the Income War Tax Act R.S.C. 1927, c. 97
and amendments. Thurlow J. in Pashovitz v. M.N.R. [1961]
Ex.C.R. 365 said, at page 371, in respect of the 1948 statute:
When assessments of tax are made, they are made pursuant
to s. 42 (now s. 46), and it has been held under similar
provisions contained in the Income War Tax Act that, on an
appeal to this Court from such an assessment, the onus of
proof that there is error in it falls on the taxpayer.
He then cited substantially the same portions of the reasons in
the Johnston case as I have set out above.
I observe that subsection 175(3) of the "new" Act provides:
An appeal instituted under this section shall be deemed to be
an action in the Federal Court to which the Federal Court
Act and the Federal Court Rules applicable to an ordinary
action apply, .... [see also Rule 800 of the Federal Court
Rules].
Rule 494(2) provides, generally speaking, that the order of
presentation of evidence shall be the plaintiff first and then the
defendant:
(... shall be entitled to adduce evidence ... in the following
order ...).
It may be the dissenting reasons of Locke J. in the Johnston
case (pages 495-497) are now germane to the procedure and
the "onus" in appeals governed by subsection 175(3). I express
no opinion on this point. In the present case it was, throughout,
accepted by both sides that the "onus" was on the taxpayer.
The Johnston case dealt with the statute applicable for the
1944 taxation year. No reference was made to section 69 of the
Income War Tax Act. It had no application, because notices of
appeal and dissatisfaction had been filed within the required
times. Subsection 69A(4) was added in 1946. I have not over
looked the difference in wording and probable effect of subsec
tion 42(6) of the 1948 Act (later subsection 46(7)), and
subsection 152(8) of the "new" Act. I express no opinion on the
meaning to be given to "... be deemed to be valid ..." or as to
how it may affect an "onus" to demonstrate error in an
assessment. I suggest subsection 152(8) is of no great assistance
in determining who should "go first". It can be argued the
present practice (in a case such as McKay) means the plaintiff
has waived her right to adduce evidence in chief, and is limited
to matters in reply only.
Those two statements also included source and
application of funds computations for the four-
year period. In the former, the total unexplained
source of funds was calculated as $77,449.26 and
in the latter as $84,324.26. I shall return later to
the various net worth statements.
The taxpayer was then called. He gave evidence
supporting the assumptions made by Mr. Foster in
the net worth statement that witness had prepared
(Exhibit 4). That document purports to show there
were no unexplained sources of funds, but in fact
an amount of $20,175.74 over the application of
funds. Mr. McKay, in chief, categorically denied
ever having participated in any money machine
swindle.
In cross-examination, the plaintiff sought to
question the taxpayer in respect of other alleged
money machine swindles and other frauds suggest
ed to have been perpetrated by the defendant prior
to 1963. Some of the questions put had reference
to criminal activities going back to the 1930's. It
was urged this line of cross-examination was ad
missible under the so-called evidentiary principle
of "similar acts". A number of oral legal skir
mishes took place. I think it fair to say most of
them occurred between counsel for the plaintiff
and the Court. I think it right to say they were
largely instigated by myself. Counsel for the Min
ister candidly stated he had, a very short time
before the resumption of the trial, unearthed a
large volume of potential evidence relating to the
taxpayer's allegedly criminal and fraudulent
activities going back many years. He stated, and I
accept, that all the documentary evidence relevant
to those matters (not necessarily money machine
swindles) had been made available to the taxpay
er's counsel as soon as possible. The pleadings
were, however, not amended to set out these new
matters (either by way of specific allegation or by
way of particulars) nor was the additional docu
mentary material dealt with as provided by Rule
461.
As I see it, Her Majesty whether represented by
the Minister of National Revenue or any other
Crown officer should be meticulous in pleading
fully the case proposed to be made in support of
the impugned assessment, and in complying with
the rules as to discovery and production of docu
ments so the taxpayer can apply for adjournment
or further examinations for discovery. There is, in
my view, neither compliance with the Rules of
Court nor the general principles of fairness when a
large volume of documentary and potentially very
prejudicial evidence is delivered to opposing coun
sel's doorstep on the eve of trial. This is particular
ly so in a case such as this where serious allega
tions of criminal misconduct are being made.
After considerable argument and discussion,
counsel for the Minister rightly assumed the Court
was going to rule most of the "similar acts" evi
dence inadmissible for a number of reasons 5 . He
advised that the Minister did not propose to pro
ceed further with that type of evidence or ques
tioning either in support of proof of the Whitworth
swindle, or to attack the defendant's credibility 6 .
'If this trial had been heard with a jury, I would have had no
hesitation in immediately rejecting all of this evidence on the
grounds its obvious potential prejudice far outweighed whatever
probative value the evidence might otherwise have had. It has
been many times said that evidence of "similar acts" is not
admissible to prove general propensity or (to relate the problem
to this case) because the defendant had perhaps at one time
been involved in money machine swindles, he probably was
involved in the Whitworth swindle. The whole problem of the
use of "similar acts" evidence in civil cases has been reviewed
at length in two decisions of the British Columbia Court of
Appeal: MacDonald v. Canada Kelp Co. Ltd. (1974) 39 D.L.R.
(3d.) 617 and Contini v. Canarim Investment Corporation Ltd.
[1974] 5 W.W.R. 709.
6 I indicated, at one stage, that some of the disputed evidence
might be relevant to the general question of credibility, or
perhaps relevant to some other allegations in the pleadings.
Paragraph 4(k) of the amended statement of claim alleged the
bank deposits were income to the defendant "from the afore
mentioned criminal activities". Paragraph 4(1) alleged:
... the above amounts are income from the defendant's
business.
The Minister elected not to try and have the evidence admitted
with reference to other allegations, or in respect of credibility.
The case then continued on the basis the onus
was on the defendant to establish the assessments
in question were wrong; that there was evidence of
cash deposits in the years in question adding up to
the amounts earlier set out; that the defendant's
explanations were either not to be accepted or
were insufficient. Both parties relied on their
respective net worth statements. The Minister
asserted his net worth statement showed an unex
plained source of funds of at least $84,000; that
this confirmed the unexplained cash deposits of
approximately $75,000 came from sources other
than those testified to in evidence by the
defendant.
That concludes (unfortunately at some length)
the review I referred to in the second paragraph of
these reasons.
I propose now to deal in some detail with the
"deposits". Of the 13 deposits in 1964, ten were
made to the Canadian Imperial Bank of Com
merce and three to the Royal Bank of Canada. All
of the deposits were in cash except one (November
9, 1964) which was a transfer from a bank account
in San Francisco. The amount transferred was
$11,500 U.S. Premium of $819.37 was credited. I
am satisfied on the evidence given by the taxpayer
and supported by documents that the substantial
portion of the November 9 amount was the repay
ment to the taxpayer in cash of monies owing to
him on a mortgage (for $13,000 originally) on a
vessel (the North Coaster No. 1). The defendant's
recollection is that in that month at San Francisco
he was repaid $10,000 by Morgan of Skeena
Towing Ltd. He put this sum plus some gambling
winnings made at Las Vegas or Reno into his San
Francisco bank account, then had the funds trans
ferred to Vancouver. I accept the defendant's
explanation of this particular deposit including his
statement that the balance ($1,500) of the deposit
was in all likelihood obtained by gambling. As will
appear later in these reasons, I am unable to
accept the defendant's general evidence as to gam
bling winnings and losses because of its vagueness.
In respect of this particular deposit, I find his
testimony to be reliable. He was able to recall
depositing some winnings along with the cash
repayment. The plaintiff is, therefore, directed to
deduct the amount of $12,319.37 from the defend
ant's income as computed by the Minister for
1964.
The remainder of the deposits for 1964, and the
deposits for the other three years were made (with
two or three exceptions) in cash, usually U.S.
currency, and with relatively large bills (Exhibits
5-45 and 14). The largest individual deposit was
approximately $16,000. Other deposits varied
from approximately $5,000 to $4,000 to $2,000
and downwards. As I earlier indicated, the parties
proceeded on the basis the onus was on the defend
ant to destroy the Minister's assumption that these
monies, in the absence of reasonable and accept
able explanation, must be characterized as
income'. The defendant's explanation (and it is his
viva voce evidence alone) is that all these deposits
represented cash receipts by him from the follow
ing sources or a combination of them:
a) Gambling winnings;
b) The remains of cash taken by him on trips to
the U.S. to visit relatives and to gamble;
c) Cash from persons who from time to time
owed or paid him money.
I am unable to accept the defendant's explana
tions. I do not say they are clearly false. They are,
I find, too vague both as to the nature and sources
of the receipts and as to the times of receipt. In
coming to that conclusion I have tried, in fairness
to the defendant, to make considerable allowance
for the fact he has been called upon through the
medium of initially concurring assessments, then
arbitrary re-assessments in 1969, further re-assess
ment in 1971 and the subsequent litigation to try
and come up with satisfactory explanations of
banking transactions which go back many years
and for which he has no records. His evidence as to
his gambling winnings and losses was, however,
contradictory and to my mind insufficient to dis
' The deposit of June 24, 1965, of $380.20 (bond coupons) is
obviously income.
place the assumptions of the Minister or, to put it
another way, the onus upon the taxpayer'.
The defendant said he has or had a number of
relatives in California. There is no doubt he enjoys
gambling. He has gambled at Las Vegas and Reno
over the years. I find nothing illegal, immoral, or
sinister in that. He testified on examination for
discovery that between 1960 and the date of his
examination for discovery (in March of 1974) he
had lost between $25,000 and $50,000 gambling.
At the same time, he endeavoured to say that he
had won approximately $27,000 in 1964; that this
explained many of the cash deposits in that year
including a large one on February 12 of some
$15,000 U.S. funds. In his net worth statements, it
was the defendant's position that no portion of his
8 I have already commented at some length on this problem
of onus (see footnote 4). As this case was originally pleaded and
as the plaintiff at first attempted to prove by evidence, the
deposits allegedly came from serious criminal acts. If those
same allegations had been made (as well they might) in a
criminal charge against the defendant, the well-known onus of
proof beyond a reasonable doubt would have applied as well as
the presumption of innocence. Her Majesty would have been
prosecutor (plaintiff). The defendant, in the hypothetical crimi
nal case, would not have been compelled (for practical pur
poses) to go into the witness box (as he was in this "civil" case)
nor would he have been compelled to (perhaps) give evidence
against himself in pre-criminal trial interrogation under oath.
Here the defendant was examined for discovery. (I know only
those portions of his discovery put to him at trial.)
I am not overlooking the practical factual situation in most
tax cases. The facts are usually within the full knowledge of the
taxpayer. Sometimes the revenue department, when assessing,
does not have all those facts or knowledge of where to obtain
them. The use of assumptions in the pleadings is therefore
understandable, particularly when Her Majesty is the defend
ant. I am not convinced, however, the so-called "onus on the
taxpayer" is a rigid rule, capable of no exceptions. I incline to
the view that, in cases where Her Majesty is the plaintiff, there
should be no hard-and-fast rule. Each action should be looked
at on its own issues and in its own circumstances. In this
particular case, and in analogous cases, where serious allega
tions charging crime are made by Her Majesty, as plaintiff, the
onus of proving them and of leading evidence should be on the
party who raises them. It is not sufficient, in my view, to say
that "tax cases" are somehow different from other civil cases
tried in this Court.
overall gambling losses should be taken into
account. Yet, for the purpose of explaining the
deposits in 1964, he insists the alleged winnings in
that year ought to be taken into account and
accepted as the source of the deposits. His testimo
ny on this whole subject matter is, I repeat, too
vague and inconsistent to be relied upon. Those
comments apply also to the other explanations that
these funds may have been the remains of sums
taken to the U.S. for expenses and for gambling
purposes, or monies paid to him by others (loan
repayments).
I must, however, record some sympathy for the
taxpayer and some criticism of the Minister in
respect of three deposits in 1967: $500 (a cheque),
$100 (cash) and $200 (cash) respectively. Those
amounts are almost miniscule in comparison with
many of the other amounts disclosed and investi
gated in connection with this taxpayer's affairs
over the years in question. I suspect the tax gather
er, as well as the particular assessor, or the par
ticular investigator in this case, might well have
equal difficulty (three, four or five years later) in
endeavouring to explain to suspicious officialdom
the source of a $100 deposit.
I now deal with this case on the basis of the net
worth statements. I observe, at the outset, that
these statements must be accepted with caution.
The basic premises of the statements filed by the
Minister and criticized by the defendant are
founded on the defendant's recollection (some
years later) of his net worth as of January 1, 1964,
and the changes in it up to and including Decem-
ber 31, 1967. According to the net worth state
ment filed by the Minister (Exhibit 5) the total
unexplained source of funds amounted (as I have
earlier set out) to some $84,000. It was conceded
in argument that the mortgage repayment in
respect of the vessel, the North Coaster No. 1,
probably should have been included. I am pre
pared, as well, to accept the defendant's evidence
that, as of January 1, 1964, he owned shares in
MacLeod-Cockshutt valued at $1,000. There is a
dispute as to the amount to the credit of the
defendant in a San Francisco bank account as of
December 31, 1967. The difference between the
parties is $9,000. The Department used second
hand information obtained from a Canadian bank.
This indicated the defendant had a balance of
approximately $15,000. That was not in fact the
case. That mistake indicates the care one must
exercise in using and giving weight to net worth
statements based on the frailties of human recol
lection and second-hand evidence. It did, however,
come out at trial that, during the years in question,
there had been large deposits totalling approxi
mately $9,000 made to the San Francisco bank
account. The Minister is fortunately able to say
that, while it appears the $15,000 bank balance
figure was an error, it turns out there were addi
tional unexplained deposits of approximately
$9,000. The defendant's explanation of these par
ticular deposits was similar to the explanations I
have previously characterized as unacceptable.
The Minister included in his net worth calcula
tions two unexplained cheques drawn by the
defendant, totalling $9,500. Mr. Foster excludes
them. I find no good reason supporting one view or
the other.
The Minister, in endeavouring to trace the
source and application of funds, includes in his
calculations gambling losses for the four years in
question estimated at $25,000. The basis for that
figure comes from the examination for discovery
which I have earlier referred to. Mr. Foster would
delete any amount for gambling losses because he
accepts Mr. McKay's statement that, over the
years, the defendant had overall losses. He argues
there is no sound reason to attribute half of the
highest estimate of losses to the years in question.
I agree that the treatment by the department is
arbitrary. So is the exclusion of any losses by the
defendant. Both net worth statements are there
fore suspect.
The defendant testified he had been repaid
approximately $9,000 by one James. He (McKay)
had loaned monies to a company called Maui
Holdings Ltd. He had also guaranteed a bank
loan. James in some way had become liable to
McKay through default by the company in these
loan transactions. The defendant testified that
James had paid him the $9,000 in "dribs and
drabs", always in cash. The defendant's evidence
was unclear as to the years in which these monies
had been repaid. He appeared to suggest a good
deal of it had been paid between 1964 and 1967.
He said he gave James receipts. James was called
to testify on the defendant's behalf. He did not, in
my view, inspire confidence by his recollection of
the facts. He guessed he had personally paid back
$5,000 to $10,000; that his secretary seemed to
think it was around 1964 or 1965. He did not
produce or volunteer the receipts. I am unable to
attach sufficient weight to the evidence of James
and the defendant as to this transaction in order to
find on a balance of probabilities that the defend
ant was repaid $9,000 during the period in
question.
The final transaction relied upon by the defend
ant as a capital source of cash funds relates to the
alleged sale of certain shares in a private company
called Fire Valley Land and Cattle Co. Ltd. (Fire
Valley). The controlling shareholder at one time
was Lloyd Jordan. He, too, gave evidence on
behalf of the defendant. He, too, as was the
defendant (in many matters) and the witness
James, was devoid of any records or documents of
probative assistance. What evidence was adduced
did prove to my satisfaction that the defendant
had at one time loaned Fire Valley $50,000 and
another company in which Jordan had an interest
an equal sum of $50,000. It appears that at some
stage the $50,000 loan to Fire Valley (originally
secured by a mortgage) transformed itself into a
personal loan to Jordan. As security, Jordan
handed to McKay share certificates 3 to 6 inclu
sive representing all the issued and outstanding
shares of the company. It was agreed that if
Jordan defaulted in payments, McKay, after
reasonable notice to Jordan, could sell the shares
(see Exhibit 3). Both the defendant and Jordan
testified that default was made in repayment.
McKay said he sold the shares to one Cloutier for
$40,000 in cash, $10,000 of which was in U.S.
funds. The defendant relies on receipt of this large
sum of cash as a source for the unexplained funds.
I point out the only amount (deposits) in issue for
the year 1967 is the relatively small sum of $2,700.
If the assessments in question were based purely
on net worth comparisons covering 1963 to 1967,
then I assume it could be argued this $40,000
amount, if in fact it was received, could be applied
over the four years. The assessments here, how
ever, are in respect of particular deposits in par
ticular years. I fail to see, therefore, how an
alleged receipt of $40,000 in 1967 can explain
deposits going back to 1964.
In any event, I find the evidence adduced by the
defendant in respect of this particular transaction
does not meet the usual civil onus, i.e., a balance of
probabilities. The taxpayer himself kept no written
records of these matters. A record of the Canadian
Imperial Bank of Commerce (Exhibit 9) indicates
the Fire Valley shares were handed to the bank in
1966 for safekeeping and not released to the
defendant until August of 1968. The defendant's
evidence in chief was that the Cloutier purchase
was in 1967. The clear inference I draw from his
testimony was that the shares had been given to
Cloutier at the time the $40,000 was paid. On
being confronted in cross-examination with Exhib
it 9 the defendant agilely shifted his ground. He
then purported to recall there had been some
problem at the time about transferring the shares
into Cloutier's name; he had not in fact delivered
them to Cloutier until some time later, after the
latter had threatened legal action.
The defendant also testified he had, at the
request of Cloutier, given him a receipt for
$50,000 even though only $40,000 had been paid.
It seemed to be assumed at trial that the Cloutier
in question was one Joseph Omer Cloutier who
died on December 13, 1970. The son of that
deceased gave evidence. He was a good reliable
witness. I accept his testimony. His father had
been an accountant for many years. He had retired
in 1965,_ although he still kept up an interest in
mining companies. His son, upon the father's
death, went through all his father's affairs. He
found no documents or records relating to Jordan,
the defendant, or Fire Valley. His father had never
told him about a transaction of that kind. It was
his father's habit usually to discuss any business
matters of that sort with him. Mr. Cloutier, Jr.
stated his father was meticulous in the matter of
keeping records. I am not persuaded this deceased
Cloutier was necessarily the alleged purchaser of
the Fire Valley shares. If it was in fact another
person with the same name, it seems to me the
defendant should have produced that person to
corroborate his and Jordan's evidence, or
explained the failure to produce the real purchas
er. In any event, the whole transaction as recount
ed by the defendant, Jordan, and another witness,
Bettin (none of whom impressed me on this par
ticular matter) is so vague that I cannot accept it
as establishing, on a balance of probabilities, the
defendant received $40,000 in cash in 1967.
That concludes my views on the submissions
made on behalf of the defendant in respect of the
net worth statements. To my mind, the evidence
and arguments put forward do not destroy or
topple the assumptions (that the deposits were
income), nor demonstrate error in the assessments.
There remains the validity of the penalties
imposed by the Minister pursuant to subsection
56(2) of the Income Tax Act and section 19 of the
British Columbia statute. The Minister has alleged
that the defendant knowingly or under circum
stances amounting to gross negligence made state
ments or omissions having the tax result contem
plated by the subsection. As I translate that to the
pleadings, the Minister says the defendant know
ingly failed to disclose, as income, the deposits in
question or was grossly negligent in not so doing.
If the onus is on the defendant to destroy that
allegation, I find that he has met it. If the onus is
on the Minister to prove the allegation, then the
Minister has not satisfied it. My basic conclusion
in this case is that the defendant has not dis
charged the overall onus of showing the assess
ments (in so far as they added the deposits into
income) were incorrect. That does not mean, nor
does it imply, there has been intent or negligence
of any kind on the part of the defendant in making
statements or omissions in the returns for the years
in question.
To sum up: the defendant's appeal in respect of
the 1964 taxation year is allowed in part. The
re-assessment, dated May 18, 1971, for that year
is referred back to the Minister with a direction
that there be deducted from his calculation of
income the sum of $12,319.37. The assessment of
penalties for each of the years in question is vacat
ed or set aside. The re-assessments, all dated May
18, 1971, are referred back to the Minister with
that direction, as well as for re-assessment in
respect of interest. The appeals are otherwise dis
missed. As the plaintiff succeeded on the major
issues, she is entitled to full costs against the
defendant.
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