Paul Tkalych v. Minister of National Revenue, [1973] CTC 806, 74 DTC 6014

Heald, J:—This is an appeal by the plaintiff from a judgment of the Tax Review Board dismissing plaintiff’s appeal from the defendant’s assessment of plaintiff’s income tax return for the taxation year 1967. In issue in these proceedings is the propriety of the inclusion by the defendant of the sum of $10,275.54 in the plaintiff’s income pursuant to the provisions of subsection (1) of section 20 of the Income Tax Act.* [1]

The plaintiff, a native of the Ukraine, immigrated to Canada in 1949. He worked as a labourer on a Saskatchewan farm for a few years, then as a metal finisher with General Motors in Eastern Canada for a short time, returning to Saskatoon in 1952. For the next 13 years he was employed as an auto body mechanic in Saskatoon with various automobile dealerships. In 1958 plaintiff acquired five vacant lots from the City of Saskatoon. Shortly thereafter he commenced to build a garage and filling station on a portion of said lots, said building being 60’ by 60’ by 18’ high. The street address of said building was 1005 Avenue P South. Construction was commenced in 1958, but since the plaintiff in reality acted as his own general contractor and sublet the various subcontracts out himself, the construction took considerable time. Subject garage was substantially completed in 1960. The plaintiff had also purchased and installed some garage equipment. The building and equipment at 1005 Avenue P South was rented out to third parties as a garage and filling station in 1960 on a verbal lease calling for the payment of a monthly rental of $300. In September of 1963 the original lessees sold their business and the new owners entered into a written lease with the plaintiff for a period expiring on April 30, 1968 at a monthly rental of $275. Meanwhile, in 1963, the plaintiff commenced construction of an addition to the first building, said addition to be used as an auto body shop, the street address of said addition being 1009 Avenue P South. The auto body shop and the equipment installed therein was rented out to various third parties until 1966 when the plaintiff started his own auto body business at 1009 Avenue P South.

On January 3, 1967 the plaintiff sold the entire property at 1005 and 1009 Avenue P South and the equipment situated in said two buildings to one Kenna J Scissons for $60,000. Under the agreement for sale covering said purchase, the selling price was allocated as follows:

Commencing with the taxation year 1960, the plaintiff had claimed capital cost allowance on Class 6 (buildings) and Class 8 (equipment) assets in filing his income tax returns. Plaintiff’s 1960 tax return was his first return other than a salaried return and, although he had some assistance from his insurance agent in preparing said return, the return was improperly prepared. Accordingly, the plaintiff attended at the District Income Tax Office, Saskatoon on May 31, 1961 where he was interviewed by Mr Percy J Olson, a business files assessor, then and now in the employ of the income tax Department.

Mr Olson informed the plaintiff that he was not allowed to claim the entire mortgage payments made by him in 1960 against the rental income received from the garage and filling station property but that capital cost allowance and interest expenses, etc could be claimed. Attached to the 1960 return is a two page memorandum of this interview prepared by Mr Olson at the time. In said memorandum Mr Olson reports that he asked the plaintiff, inter alia, to submit “Invoices and cancelled cheques forming cost (italics mine) of Garage Bldg and Equip”. On June 7, 1961 the plaintiff returned to the Tax Office and had a further interview with Mr Olson which was fully recorded in a 3-page interview also attached to the 1960 tax return. Mr Olson reported that the plaintiff brought in on paper a list of costs in construction of the garage. He further reported that plaintiff had not kept his vouchers and that, accordingly, some of the figures were estimates. However, Mr Olson at that time had received a favourable impression of the plaintiff and thus accepted the cost figures given to him by the plaintiff on June 7, 1961. Thus, a building cost based on plaintiff’s own figures was set up at $14,948.66 and an equipment cost, also based on plaintiff’s figures, was set up at $4,329. Included in Mr Olson’s memorandum of June 7, 1961 is the following:

I emphasized the need to keep his vouchers and proper record of his costs. He admits he has been negligent up to now but stated that he will keep all his records and vouchers from now on.

In 1961 and 1963 the plaintiff was credited with additions to both his Class 6 and Class 8 assets as follows:

The substantial additions in 1963 were brought about by the construction of the body shop addition known as 1009 Avenue P South.

In all of his income tax returns from 1960 through 1966 the plaintiff claimed capital cost allowance on the basis of the figures set out above which had been furnished by him to the income tax Department and accepted by the Department. Then, in 1967, plaintiff sold the properties. Based on the allocation for buildings and equipment contained in the agreement for sale, the defendant, pursuant to subsection 20(1) of the Income Tax Act, purported to tax the plaintiff on the capital cost allowance recaptured by him in the sale. The plaintiff objects to said recapture and says that in filing his tax returns for 1963 and subsequent years, he ‘‘did not use for depreciation purposes the total cost of the body shop, Class 6, and tools and equipment, Class 8, but used only that amount for which he paid cash, but not the amounts he loaned or purchased on time” (see paragraph 4 of the statement of claim). This basic statement of the plaintiff’s position was amplified considerably by the plaintiff’s evidence at trial. He testified that, when he had the interviews with Olson in 1961, he informed him only about those items for which he had paid and did not include the items of building materials and equipment which had been used by him in construction but not paid for. He said it was his understanding from Mr Olson that he could only claim capital cost allowance on that portion of the cost actually paid for in the taxation year. Mr Olson, on the other hand, was quite positive in his evidence before me that, in both the interview of May 31, 1961 and the interview of June 7, 1961, he had explained the workings of the capital cost allowance to the plaintiff, that the Department was interested in total cost as opposed to that portion of the cost paid in a taxation year. Mr Olson also had the definite opinion that the plaintiff fully understood the matter of capital cost allowance as a result of said interviews.

Thus, there is a direct conflict in the testimony of Mr Olson and the plaintiff. The plaintiff went on in his evidence to give particulars of the cost of both buildings and the equipment installed therein. His figures were not substantiated by receipt or vouchers but seemed, in many instances, to be estimates received by him at a much later date from his suppliers. Based on the plaintiff’s evidence at trial, the first building and the equipment therein cost him in the order of $33,000, the second building and the equipment therein in the order of $48,000 for a total cost of $81,000, approximately.

It is instructive to test the plaintiff's credibility as to these alleged cost figures by inquiring as to the source of funds available to the plaintiff during the period in question. The evidence is clear that plaintiff’s sources of funds were as follows:

In an effort to increase the amounts of money available to the plaintiff to a figure near $80,000 so as to render credible plaintiff’s testimony at trial that the total costs were some $81,000, plaintiff’s counsel submitted that in addition to the sources of funds above referred to totalling $58,300, the plaintiff had rental income totalling $15,000 and savings from his wages totalling $10,000 which, when added to the figure of $58,300, would produce a total figure of some $83,000 which was available to the plaintiff to construct and equip said buildings.

Such a submission is not supported by the evidence. Based on plaintiff’s own income tax returns for the period 1960 to 1966 inclusive, his total wages and net income from rentals produced only a total net income of some $7,800 (this is when depreciation allowances are added to his income in order to properly portray cash flow). It should also be remembered that during most of this period, plaintiff had four dependent children ranging in ages from 4 years to 19 years. It should also be remembered that <luring this period the plaintiff built another house in Saskatoon where he and his family now reside. Taking all of this evidence together, I have reached the firm conclusion that the plaintiff’s evidence at trial as to total costs of some $81,000 cannot be accepted.

Another cloud on the plaintiff’s testimony to the effect that he claimed capital cost allowance only on those items for which he paid during the year in question stems from the documentary evidence at trial in respect of two expenditure items. According to the memorandum of June 7, 1961, prepared by Mr Olson, referred to earlier herein, the plaintiff was credited on his 1960 return with the purchase of a pump and tank from Imperial Oil Ltd at a cost of $1,600, said figure being included in the total of Class 8 assets in the sum of $4,329. And yet, from the conditional sale contract filed in evidence (Exhibit D-2) between Imperial Oil and the plaintiff, it is clear that plaintiff only paid $172 in cash on the execution of the contract and agreed to pay the balance in 40 equal monthly instalments commencing June 1, 1960. If the plaintiff’s version of his interviews with Mr Olson are correct, one would have expected him to claim capital cost allowance only on the down payment plus any monthly payments paid on account prior to December 31, 1960. And yet we find plaintiff claiming capital. cost allowance on the entire cost, not merely on that portion of the cost actually paid. In his evidence at the trial before me plaintiff sought to explain this discrepancy by saying that he prepaid the amount of the conditional sale contract before his interviews of May and June 1961 with Mr Olson. However, it is significant to observe that he gave no such explanation either in his evidence before the Tax Review Board or on his examination for discovery in this action.

The other documentary evidence which contradicts the plaintiff’s oral testimony at trial has to do with vouchers submitted by plaintiff to Mr Olson during the June 7, 1961 interview from Johnny’s Plumbing & Heating totalling $1,400. The statement from said firm shows that the $1,400 figure was the total cost figure. The same statement shows that the amount paid in 1960 was $1,100. It is hard to understand why the plaintiff would submit vouchers showing total cost in view of his evidence now to the effect that his understanding in 1961 was that he could not claim total cost, but only the amount paid by him.

In summary, I am not prepared to accept the plaintiff’s evidence at trial as to the cost of subject buildings and equipment. Nor am I prepared to accept his post facto explanation of what transpired in the interviews with Mr Olson. I found the plaintiff to be evasive and most unconvincing as a witness. At the trial before me, he contradicted many of the answers given by him before the Tax Review Board and on discovery in this action. Furthermore, as indicated herein, his testimony has been contradicted in many instances by documentary and other evidence. On the other hand, I found Mr Olson to be a most credible witness indeed. Additionally, his evidence was strengthened by the memoranda of conversations with the plaintiff prepared by him contemporaneously with the events in question.

It follows that the plaintiff has not discharged the onus cast upon him by the Act in attacking the validity of the defendant’s assessment.

The appeal is accordingly dismissed with costs.