Irving H. Graham v. Minister of National Revenue, [1959] CTC 514, 59 DTC 1271

DUMOULIN, J.:—This is an appeal from a decision of the Income Tax Appeal Board (1958), 20 Tax A.B.C. 47, dated July 28, 1958, in respect of income tax assessments for five successive years, namely: 1949 to 1953 inclusive.

It should be noted, from the start, that we have here one of those few, and usually unfortunate instances, wherein a party appearing in his own behalf, in the dual capacity of counsel and witness, does meagre justice to each.

The appellant resides in the City of Calgary and is not presently engaged in the pursuit of any particular profession, trade or industry. At the material time, between 1949 and 1953, he had, according to his evidence, three sources of income: (a) rentals from real estate; (b) interest; (c) proceeds from a business known as: “A. A. Auto Baggage Transfer’’. Out of such revenues, he derived the wherewithal for himself, his wife and a family of five children in 1949, which by 1953 had grown to eight. Section 3 of the Notice of Appeal also mentions ‘‘the systematic purchase of discounted agreements for sale’’.

In the very candid, but possibly not all-pervading light of a one-sided version, that of respondent’s assessor, the trial revealed the following salient facts.

An aggregate amount of $91,273.42 would, in respondent’s view, represent Mr. I. H. Graham’s unreported income during the relevant period.

Before marshalling the essential figures given me by one of the local income tax assessors, Mr. James W. Halton, and written down in his very thorough balance sheet or comparative statement of Graham’s liabilities and assets for the critical period, a document filed as Exhibit 1, I should make due mention of another part of his testimony.

This witness, who impressed me as being a most painstaking, conscientious and patient official, expatiated on the appellant’s uncooperative, hindering attitude throughout. Appellant’s books of account were inadequate; vouchers for rental returns either could not be produced or, when available, did not tally with receipts for larger amounts handed out to the several tenants. Worse still, continues Mr. Halton, the appellant would in his income reports repetitiously include property maintenance claims for alleged repairs. painting for instance, which upon investigation, proved fictitious.

After repeated attempts and protracted endeavours to obtain from Graham some elucidation of such irregularities in his yearly reports, and discrepancies in his personal bookkeeping, Mr. Halton, meeting with little or no compliance, had no alternative other than a recourse to the ‘‘net worth” statement method provided for in the Income Tax Act S.C. 1948, ce. 52, Section 42(5) and the Income Tax Act R.S.C. 1952, c. 148, Section 46(6).

This system, as outlined to the Court by Mr. Robert Cheyne Nicholl, also a departmental assessor, is, technically at least, quite a simple one. Starting from a given date, in the instant case, December 31, 1948, a taxpayer’s financial situation or ‘‘net worth’’, arrived at in accordance with accepted processes of inquiry and accountancy, credit and debit, is eventually established at a stated sum which, here, reads: $67,485.93 (cf. Exhibit 1, sheet 2). This operation, repeated up to the final year within the questionable period, in this instance, until December 31, 1953, resulted in Graham’s assets reaching a summit of; $168,571.43 (Exhibit 1, sheet 1).

Now the stretch between the starting and terminal figures, due allowances had for proven capital accretions and statutory exemptions or deductions, should, if not otherwise accounted for, represent income.

Moreover to anyone possessed of even a remote knowledge of accountany, net worth statement is a self-explanatory expression.

The balance sheet written out with great care by assessor Halton (Exhibit 1) contains a list of appellant’s assets, personal, real estate and business chattels, and also a juxtalinear tabulation of the income reported and of revised income assessed by the department.

The difference is rather startling as a glance at the figures hereunder will show.

Such a gap between a reported net income, for the five-year period, of $17,110.27 and a corrected one of $91,273.42, was certainly not bridged by the appellant whose evidence might be fairly, albeit concisely, summarized thus:

‘ ‘ I may have erred in certain items of my income tax reports. I may have been neglectful in not obtaining vouchers for jobs done. I may have inadvertently duplicated claims for expenditures, but surely all these errors should not add up to more than half the claims raised against me.’’

To these surmises, Mr. Graham coupled a denial of his net worth value as per December 31, 1948, a protest that remained completely unsubstantiated. While in the witness box, questioned as to the origin or source of a $13,000 cash instalment paid by him in 1953 on the purchase price, $19,800, of his present home, he was unable to make an apt reply.

The only useful contribution vouchsafed by the appellant was a copy of Mr. Fordham’s decision dismissing the initial appeal before the Income Tax Appeal Board. This was filed as Exhibit A.

By dint of arduous investigations, Mr. Halton managed to piece together a picture, hereafter reproduced, of rentals receipted and of claims filed for alleged maintenance jobs, during this five-year period.

Needless to say very little doubt can be entertained on the score of rentals acknowledged by corresponding receipts, but skepticism, akin to disbelief, attaches to the would-be off-setting total of more than half the gross rentals. In an ordinary ease, such a poor investment would be improbable, the ‘‘ peculiarities’’ of this one render it untenable.

This list, of course, sets out gross returns only. Lacking the necessary details regarding civic taxes, insurance and some allowance for unescapable maintenance, I am left to my own conjectures.

Mr. Graham, in Section 3 of his Notice of Appeal, attributes (‘ . . the difference in net worth between these two years [presumably December 31, 1948, and December 31, 1953] . . . mainly to capital gains on properties purchased by myself and subsequently sold at a profit, and capital gains obtained in the purchase of discounted Agreements for Sale, these transactions being a part of a systematic plan to improve investments and the amounts so made are capital accretions’’.

I had the impression that in a rapidly developing centre such as Calgary, real estate profits might, to some extent, justify the upsurge of Mr. Graham’s ‘net worth’’, until I heard Mr. Halton’s evidence and perused the balance sheet, Exhibit 1.

The only property sold, bearing civic number and address 2125, 2nd Avenue, N.W., netted a profit of $2,895, in 1952, which was duly dealt with as a capital gain.

Agreements for sale listed on the first and second sheets of Exhibit 1, indicate for December 31, 1948, a total of $14,105.50 ; of $17,948.60 on December 31, 1952, and, lastly, of $17,285.94, on the closing date, December 31, 1953. Even if purchased at a fantastic discount of fifty per cent or more, as implicitly suggested by one Mr. Cheney (cf. Exhibit A, p. 8), these transactions add up to a fraction only of the over-all appreciation in Mr. Graham’s holdings.

The notes above will show, I trust, the hopelessness of this appeal, but the matter extends further.

By way of cross-appeal, respondent contends that the Income Tax Appeal Board’s decision (ef. Exhibit A), allowing for a deduction of $24,000 from the total five yearly net income upon which appellant is taxed, should be varied and the assessments appealed from restored. The learned member of the Board largely based his decision for such partial relief upon assessor Cheney’s evidence to that effect.

Associated with his colleague, Halton, in the preparation of appellant’s net worth for the material time, Mr. Cheney, now deceased, had testified at the first hearing of the case.

In the Appeal Board’s decision, tendered as Exhibit A, and left unchallenged by respondent, I read that:

“At the hearing, Mr. Cheney, whose evidence particularly impressed me, disclosed that he had recommended to his superiors in the respondent’s department that a reduction of $22,886.54 be made in the total amount added to the appellant’s income. He gave the particulars thereof and these included, inter alia, a reduction of $10,000 in respect of the agreements for sale involved and a substantial lessening of the cost of living estimate, with which I unhesitatingly agree. Mr. Halton, too, thought that $1,800.00 per annum was enough. ...”

Some few lines above, Mr. Fordham, Q.C., had written that: ‘‘ Arbitrary assessments are necessarily based largely on estimates . . . and accordingly there is ample room for error’’; an opinion I fully share, and so did Mr. Halton, in my presence, who, admitting in all frankness a possibility of error, nonetheless, would have liked to be told wherein he had erred.

Since Exhibit A was allowed to remain unrebutted, I feel justified to infer that respondent accepts as reasonable Mr. Cheney’s evidence before the Income Tax Appeal Board, and admits that had he lived and testified anew he would have asserted the selfsame facts.

In Dezura v. M.N.R., [1948] Ex. C.R. 10, at p. 19, wherein a hotel keeper and beer parlour operator ‘‘unable to produce proper books or accounting records’? was assessed by the Minister conformably to Section 47 of The Income War Tax Act, R.S.C. 1927, c. 97, a provision nowise different from those actually invoked. Thorson, P., wrote:

“While I am satisfied that the estimate of $32.00 per keg is too high, it is difficult in the absence of reliable records to find precisely how much too high it is. But since the Minister’s estimate is reviewable the Court may substitute its finding even although such finding may itself have to be an estimate.”

Indeed, decisions in eases of this nature can hardly avoid being conjectural. I know full well that a presumption of correctness operates in favour of the respondent on the cross-appeal as on the appeal itself. However, regarding the cross-appeal, I feel inclined to hold that Mr. Cheney’s evidence overcomes this presumption and I would not disturb Mr. Fordham’s finding regarding a deduction.

For those reasons given above, the appeal is dismissed with costs going against the appellant, Irving H. Graham.

Respondent’s cross-appeal is also dismissed but without any costs, since the appellant is not a member of the Bar.

The record in this case shall be referred to the Minister of National Revenue for consequential re-assessment and interest adjustments.

Judgment accordingly.