Archambault J.T.C.C.: — Ferme Klosterhos Inc. (Klosterhos) is contesting income tax assessments made by the Minister of National Revenue (the Minister) for the 1988, 1989, 1990 and 1991 taxation years. The Minister added to Klosterhos’s business income unreported income from sales of $9,370 in 1988, $26,105 in 1989, $11,960 in 1990 and $5,100 in 1991. The principal shareholder in Klosterhos, Mr. Rony Scherer, is contesting the assessments for the 1988 to 1991 taxation years inclusive made by the Minister who included in his income the amount of sales not reported by Klosterhos. His wife, Mrs. Elizabeth Scherer, is contesting income tax assessments for the 1989 and 1990 taxation years made by the Minister who disallowed the refundable child tax credits and the sales tax credit because of the increase in family income resulting from her husband’s reassessments. The Minister did not assess these three taxpayers any penalty.
The Facts
Of German-Swiss background, Mr. and Mrs. Scherer took up residence in 1981 in Rivière-Ouelle, a municipality located near La Pocatiére and Kamouraska, where they purchased a dairy farm. When he arrived in Canada, Mr. Scherer did not speak any French. During the hearing of his appeal, Mr. Scherer had some difficulty expressing himself in French. However, I found his comprehension of spoken French to be good. Mr. Scherer holds 80% of the shares of Klosterhos, while his wife holds the remaining shares.
Klosterhos operates one of the largest dairy farms in the region. Milk production and the livestock trade are its two principal activities. According to Mr. Scherer, during the period in question Klosterhos had a herd of approximately 150 cattle, including some 85 dairy cows, calves and heifers. At the hearing, Mr. Scherer did not file any audited financial statement confirming the number of animals that Klosterhos owned at the end of each of the relevant fiscal period. Instead he filed tables summarizing the fluctuations in its inventory of dairy cows for each of these fiscal years. This summary shows the number of cows at the beginning of the fiscal period, the number of cows bought and sold, to which is added the number of newly calved cows. Klosterhos does not keep any record of calf births, or any record of calves, heifers, cattle and bulls. The number of newly calved dairy cows that it adds to this inventory is merely an estimate based on projections that reflect a normal rate of reproduction of cows and the inevitable losses that a producer must absorb. Normal losses of animals from Klosterhos’s herd average 20%. However, because of a viral epidemic that occurred in 1988 and 1989, Klosterhos estimates that its rate of loss for these two years was 50%.
With regard to buildings, Klosterhos has two stables: one for cows and the other for calves and heifers. It also has a barn and a farm machinery shed.
As part of its livestock business, Klosterhos sells cows that have calved three or four times, sick cows, bull calves and occasionally heifers. The average price for a dairy cow ranges from $1200 to $1600. However, the selling price of a calf ranges from $450 to $600. Normally, Klosterhos sells its calves at Encans d’Animaux de Québec Inc. (Encans de Québec) located in St-Romuald. However, it sells most of its dairy cattle and heifers to other milk producers.
Mr. Scherer also maintained that until 1991, Klosterhos used livestock Carriers, primarily Ferme Claude Bélanger Inc. (FCB), to transport its animals to producers or to Encans de Québec. FCB is owned by Mr. Claude Bélanger of Ste-Louise. Mr. Bélanger was raised on his father’s farm which he acquired in 1978. In addition to this farm, he operated a livestock transportation and trading business. In 1983, Mr. Bélanger sold his farm in order to concentrate on the livestock trading and transportation business. It was then that he first met Mr. Scherer.
By the end of the eighties, FCB had some 1700 customers located in almost every part of Québec. According to Mr. Bélanger, Klosterhos was one of his biggest customers during the period in question. According to him, Klosterhos had a herd of between 300 and 350 animals.
FCB transports almost all the calves that Klosterhos sells at Encans de Québec. Because Klosterhos is one of his best customers, Mr. Bélanger is willing to transport free of charge cows sold by Klosterhos to other milk producers. Occasionally FCB transports these cows while making the rounds of its customers.
The Minister determined the amount of the sales not reported by Klosterhos following an audit of FCB. Mr. Bélanger and his wife, Mrs. Micheline Bélanger, testified at the Minister’s request. Mr. Bélanger described FCB’s activities in transporting the animals of its customers. Livestock producers call Mrs. Bélanger to say that they have a number of cows or calves to sell at auction. Mrs. Bélanger records the producer’s name and the number of cows or calves to be transported and gives this list to her husband. Mr. Bélanger makes a new list based on the geographic location of the customers so that he can make his rounds efficiently.
When Mr. Bélanger visits a customer, he takes possession of the livestock and attaches to the ear of each animal a tag bearing a number provided by Encans de Québec. These tags are numbered consecutively to permit identification of the animals. Each tag number is recorded on the list, beside the name of the owner of the animal. This system has a twofold purpose: to identify the owner to whom the proceeds from the sale of the animal is to be remitted, and to identify the origin of the animals. If, at slaughter, an animal is found to be diseased, Agriculture Canada inspectors must be able to identify the origin of this animal.
FCB transports the animals to St-Romuald where the auction is held. As one of the largest livestock carriers, FCB has its own pens. Encans de Québec provides a sales slip for each animal sold at auction. This sales slip identifies the animal by its tag number, the weight, selling price and time of sale. Using these sales slips, Encans de Québec prepares a list of all the animals sold by a producer and sends the producer a cheque for the total selling price of the animals sold. Since Mr. Bélanger is also in the livestock business, he receives a cheque payable to him whenever he sells his own animals at auction.
FCB began doing business with Klosterhos in 1983. Mr. Bélanger sold his farm and wanted to increase his turnover by transporting livestock. Since Klosterhos is one of the largest farms in the region, FCB hoped, by obtaining its livestock transportation business, to attract other customers in the region. FCB in fact succeeded in obtaining the business of the majority of the region’s producers.
However, Mr. Bélanger had to accommodate Klosterhos by agreeing to an arrangement with it: Mr. Scherer requires payment in cash. To this end, Klosterhos animals auctioned off at Encans de Québec are sold in FCB’s name even if FCB does not purchase Klosterhos calves for resale at a profit. This is strictly a contract of agency and transportation. Unaware that FCB is serving as Klosterhos’s agent, Encans de Quebec issues the cheque for the sale of Klosterhos animals to FCB, which then deposits the cheque to its account at the Caisse populaire and withdraws the money by signing a cheque made payable to “cash”.
For example, if three cows and five calves sell for an assumed price of $7,000, Encans de Québec deducts from the selling price sale and transportation fees. The net amount owed Klosterhos might be $6,685.50. Mrs. Bélanger withdraws $6,680 from the Caisse populaire and puts it in an envelope. She generally gives this envelope to her husband who gives it to Mr. Scherer. Mr. Bélanger pays the $5.50 out of his own pocket to ensure that Klosterhos receives every penny owed it. On two occasions, Mrs. Bélanger personally gave Mr. Scherer this envelope containing the cash proceeds from the sale of Klosterhos animals.
Mrs. Belanger confirmed that the name Klosterhos appears in her books as the customer who had animals transported. She submitted in evidence receipt registers, cheque stubs, invoices and sales slips in support of her testimony. In these books, the amount paid to Klosterhos is recorded as a cash payment. While auditing these books, FCB’s auditor noticed the cash payments made to Klosterhos. This auditor therefore made a list of all these payments to enable Mr. St-Pierre, the Department’s auditor assigned to Klosterhos, to audit the latter’s books. Mr. St-Pierre found no trace of these sales in either the books or the bank records of Klosterhos. However, he noted that Klosterhos received three advances that were recorded under its liabilities. The amounts and dates of these three advances were respectively $23,500 on June 8, 1988, $12,000 on July 13, 1989 and $24,00 on September 17, 1990. These advances came from a Swiss bank in the form of a bank draft. Mr. Scherer apparently confirmed to Mr. St-Pierre that these amounts were loans from his brother, Mr. Otto Scherer, a doctor practising in Switzerland. Mr. St-Pierre asked a colleague in special investigations, Mr. Gagnon, to analyse these books. He did a reconciliation between these amounts allegedly paid by Mr. Otto Scherer and the amount of the cash sales made by Mr. Bélanger. Based on this analysis, Mr. Gagnon concluded that there could be a connection between the cash payments and the advances given to Klosterhos, even though this reconciliation did not produce an exact correspondence. Mr. St- Pierre also noted that the interest on these advances had not been paid.
During his testimony, Mr. Bélanger swore that he in fact paid Mr. Scherer all the amounts entered in his books. According to him, he had no choice but to indicate the name of Mr. Scherer’s farm: he had to be able to provide the Agriculture Canada representative with information on the origin of the animals sold at the auction.
Analysis
As counsel for the appellants acknowledged, the disposition of these appeals depends entirely on the credibility of the witnesses. Contradictory testimony was given in this case. The Court must therefore choose one of the two versions of the facts. In his presentation of arguments, counsel for the appellants advanced the theory of a conspiracy against Klosterhos and the Scherers to ensure that Mr. Scherer, a German-Swiss immigrant, would have to pay income tax on these unreported sales. The evidence, however, does not support this argument. Moreover, the sales not reported by Klosterhos totalled some $52,500, the equivalent of selling one hundred calves at an average price of $500 a head. According to counsel for Klosterhos, this number did not correspond with the number of producing cows owned by Klosterhos, which Mr. Scherer estimated to be between 84 and 94.
An examination of the evidence as a whole leads me to prefer Mr. Belanger’s version. To begin with, this witness appeared to me to be a very honest man. He answered clearly and forthrightly the questions put to him by both counsel. Mrs. Bélanger, who was not present in court during her husband’s testimony, corroborated his testimony regarding the important facts. Mr. Bélanger’s testimony to the effect that FCB agreed to sell in its name animals belonging to Klosterhos and that it gave the proceeds from the sale to Mr. Scherer in cash is supported by various exhibits, in particular the receipt registers in which the name Klosterhos appears with the notation that the animals were to be sold in Bélanger’s name. There are also the sales slips, copies of bank statements and invoices that confirm the activities that, according to Mr. Bélanger, were carried out on behalf of Klosterhos. Mr. Bélanger also told the auditor, Mr. St-Pierre, that he was present on one of the occasions on which he visited Mr. Scherer’s farm to negotiate cash sales. This meeting took place in 1992 even though Mr. Scherer stated that he did not do business with Mr. Bélanger after 1991.
Klosterhos did not produce any evidence to contradict the evidence presented by the Minister, in particular the Bélangers’ testimony. When Mr. Scherer testified during the presentation of evidence in chief, he stated that he made no sales to Mr. Bélanger. This statement does not contradict the testimony of Mr. Bélanger who stated that he did not purchase any animals from Klosterhos but acted instead as nominee and as its agent. In particular, Mr. Scherer did not contradict Mr. Bélanger’s testimony that he was present on Mr. Scherer’s farm in 1992 during the income tax auditor’s visit and that he negotiated cash sales of animals in accordance with the scheme used for the years 1988 to 1991. It is important to note that it is not surprising that the name Klosterhos appears in FCB’s books, given FCB’s obligation to be able to provide Agriculture Canada inspectors with information on the origin of the animals that Mr. Bélanger delivers to Encans de Québec.
Klosterhos’s evidence was limited to the testimony of Mr. Scherer who stated that he deposited the proceeds from all the sales made on behalf of Klosterhos to Klosterhos’s bank account. The argument of Klosterhos was limited to questioning the Minister’s figures for the unreported sales and it cited in this regard the incompatibility of these figures with the size of its herd. Moreover, Mr. Scherer attributed lower sales in 1989 to a viral epidemic that occurred in 1988-89. According to Mr. Scherer, Klosterhos suffered losses of 50% at the time. No evidence, either oral or documentary, was presented to corroborate these statements by Mr. Scherer.
In order to accept the argument that the figures on the unreported sales are incompatible with the size of the herd, one would have to be persuaded that the documents presented in court by Mr. Scherer accurately reflect Klosterhos’s inventory. However, Klosterhos kept no record of its calf births. No inventory was taken of calves, heifers and bulls. Its inventory consisted solely of the number of producing cows. Although the corrections made to the inventory with respect to purchases and sales are supported by exhibits, the addition of newly calved cows is based solely on an arbitrary assessment done by Mr. Scherer and this assessment reflects the normal rate at which cows reproduce and the normal losses of animals. This is quite surprising! No financial statement audited by Klosterhos’s auditors was produced to lend credibility to the figures supplied by Mr. Scherer. In light of these facts, it is difficult to give any probative value to the tables filed by Mr. Scherer. In conclusion, Mr. Scherer’s testimony did not persuade me that Klosterhos’s assessment was ill-founded.
With regard to Mr. Scherer’s assessment, the evidence revealed that Mr. and Mrs. Bélanger gave Mr. Scherer envelopes containing the cash proceeds from the sales of animals. The evidence did not reveal that these sums had been given to Klosterhos. It is possible that these sums may have been advanced through Mr. Scherer’s brother, Mr. Otto Scherer. If we assume that the advances made by Mr. Otto Scherer are in fact the proceeds from unreported sales, this transaction does not constitute payment of the monies owed this corporation. In Klosterhos’s books, these sums are recorded under liabilities. This situation is not therefore inconsistent with Mr. Scherer’s having personally kept the proceeds from the unreported sales. On the balance of probabilities, I believe that Mr. Scherer appropriated the sum of $52,533, which constitutes the total of the unreported sales for the years 1988 to 1991 inclusive. This sum constitutes income in his hands under subsection 15(1) of the Income Tax Act.!
With regard to Mrs. Scherer, the sole objection concerned the calculation of family income. In light of the conclusions which I have reached with respect to the assessment of the unreported sales of Klosterhos and of the amount appropriated by Mr. Scherer, there is therefore no reason to after Mrs. Scherer’s income tax assessments.
For these reasons, the appeals of Klosterhos and those of Mr. and Mrs. Scherer are dismissed and the income tax assessments made by the Minister are affirmed.
Appeals dismissed.