Tax Court of Canada Judgments

Date: 19981229

Docket: 96-4034-IT-G; 96-4035-IT-G

BETWEEN:

JACOB ERLICH, 649476 ONTARIO LIMITED,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Sarchuk, J.T.C.C.

[1] These are appeals by Jacob Erlich (Erlich) and 649476 Ontario Limited (the Corporation) from assessments of tax for their respective 1992 and 1993 taxation years, and in addition, in the case of the Corporation, for the 1994 taxation year. By consent, these appeals were heard together on common evidence.

[2] The Minister of National Revenue (the Minister) assessed Erlich on a net worth basis for the years 1992 and 1993. This assessment revealed a discrepancy between the income reported by Erlich and his net worth as calculated by the Minister. More specifically in reporting income for those two years, Erlich failed to report the amount of $400,932 and $38,701, respectively, as a shareholder benefit or as other income derived from the Corporation.

[3] In so assessing him, the Minister relied on, inter alia, the following assumptions:

a)                    at all material times hereto, the Appellant was both a shareholder and employee of the Corporation;

b)                      in a series of transactions in April 1992, the total sum of $366,950.00 was deposited in the Corporation to the credit of the Appellant's shareholder loan account;

c)                      the Appellant's explanation of the source of the funds that were deposited in the Corporation is not supported by the available evidence;

d)                      the sales figures reported to the Minister by the Corporation for the years 1988 to 1991 were understated by $378,044.00;

e)                      the Appellant destroyed the cash register tapes and sales records of the Corporation that would have disclosed the Corporation's sales prior to 1992;

f)                       the funds deposited by the Appellant in the Corporation in April 1992, were the unreported sales of the Corporation for the years 1988 to 1991 which had been appropriated by the Appellant;

g)                      the Appellant had previously appropriated the unreported corporate sales of a predecessor company, during the taxation years 1981 to 1985, which the Appellant had deposited, in part, to the credit of the Appellant's shareholder loan account in the predecessor company;

h)                      the Appellant's sales appropriations account for a substantial portion of the net worth discrepancy referred to in paragraph 5 above;

i)                        the remainder of the discrepancy is attributable to the following inclusions in the Appellant's net worth:

i)                      a standby charge and benefit relating to the Appellant's use of an automobile owned by the Corporation, as provided for in

j)                     

s. 6(l)(a), 6(1)(e), 6(l)(k) and 6(2.2) of the Income Tax Act (the Act);

(ii)                  personal living expenses of the Appellant and members of his family that were paid for by the Corporation;

(iii)                 revenue of the Corporation appropriated by the Appellant in the 1992 and 1993 taxation years and deposited to the credit of the Appellant's shareholder loan account in 1993;

j) throughout the 1992 and 1993 taxation years, the Corporation provided the Appellant with the use of two vehicles having a combined cost of $13,226.00, in respect of which a reasonable standby charge would be $3,174.00 in each year;

k) the Corporation paid all operating expenses incurred with respect to the Appellant's use of the vehicles provided by the Corporation;

1) a benefit was conferred on the Appellant by the Corporation with respect to the operating expenses of the vehicles provided by the Corporation to the Appellant which related to the personal use of the vehicles by the Appellant in 1992 and 1993, in the amount of $1,587.00 in each year;

m) the Corporation paid for personal expenditures incurred by the Appellant, Susan Lynch, Roma Erlich and Chana Erlich, in the amount of $5,471.86 in 1992 and $16,950.40 in 1993;

n) at the time the Corporation paid the personal expenditures incurred by Susan Lynch and Roma and Chana. Erlich, Susan Lynch was the Appellant's spouse, Roma Erlich was the Appellant's sister and Chana Erlich was the Appellant's mother;

0) the amounts paid by the Corporation with respect to personal expenditures made by the Appellant, Susan Lynch, Roma Erlich and Chana Erlich were a benefit conferred on the Appellant by the Corporation;

p) the Corporation conferred a benefit on the Appellant in the capacity of shareholder, in the amount of $400,932.00 in the 1992 taxation year and in the amount of $38,701.00 in the 1993 taxation year;

q)                    the Appellant did not report or include in income in the Appellant's return for the taxation years in question any amount in respect of the benefits referred to herein; and

r)                     in the alternative, the Corporation conferred a benefit on the Appellant in the Appellant's capacity as an employee, in the amount of $400,932.00 in the 1992 taxation year and in the amount of $38,701.00 in the 1993 taxation year

[4] In reassessing the Corporation for the 1992 taxation year, the Minister added to its income the amount of $390,699 as unreported income from a business and denied the deductions claimed with respect to certain club fees in the amount of $660 and with respect to the personal expenditures of Erlich in the amount of $5,472.[1]

[5] In reassessing the Corporation for the 1993 taxation year, the Minister added to its income the amount of $16,990 as unreported income from a business, reduced the capital cost allowance by the amount of the excess and denied the deductions claimed by the Corporation with respect to club fees in the amount of $390;[2] with respect to personal expenses of Erlich in the amount of $16,950 and with the deduction of a capital outlay of $3,500. The Minister also increased the cost of sales by the amount of $5,172 to correct an accounting error.

[6 In reassessing the Corporation for the 1994 taxation year, the Minister disallowed its claim for an alleged non-capital loss incurred in 1991 in the amount of $68,587.00.[3]

[7] In so assessing the Corporation, the Minister relied on, inter alia, the

following assumptions:

a) in a series of transactions in April 1992, the total sum of $366,950.00 was deposited to the shareholder loan account of Erlich;

b) Erlich's explanation of the source of the funds that were deposited is not supported by the available evidence;

c) the sales figures reported to the Minister by the Appellant for the 1988 to 1991 taxation years were understated by $378,044.00;

d) Erlich destroyed the cash register tapes and sales records of the Appellant that would have disclosed the Appellant's actual sales prior to 1992;

e) the funds deposited to the credit of Erlich's shareholder loan account in April 1992 were unreported sales of the Appellant and Erlich had appropriated;

f) Erlich had previously appropriated unreported corporate sales of a predecessor company and deposited a portion of those funds to the credit of his shareholder loan account in the predecessor company.

g) a portion of the funds deposited in Erlich's shareholder loan account in June 1993 also represent unreported sales of the Appellant;

h) the Appellant paid for certain personal living expenses incurred by Erlich, by his spouse Susan Lynch and by his mother and sister, Chana and Roma Erlich, in 1992 and 1993, a portion of which were not deducted from the shareholder loan account bearing the name of the individual concern, but rather were expenses from the general company account and claimed as an expenditure incurred for the purpose of producing income form a business;

i) the Appellant paid to Erlich's fitness club membership fees in 1992 and 1993 through its general expense account and the said fees were treated by the Appellant for income tax purposes as an expenditure incurred for the purpose of gaining or producing income from a business;

j) the cost of the Appellant's sales in 1993 was understated by the amount of $5,172.06 due to a credit that was posted by the Appellant to the cost of goods sold in error;

(k) the cost allocation between the land and building situated at 726 Queen Street in Kincardine, Ontario was $68,974.00 and $188,233.00 respectively, rather than $30,000.00 and $227,197.00, as reported by the Appellant in the 1993 taxation year;

1) an amount expensed by the Appellant for the purchase of new signage represented the acquisition of a capital asset (class 8);

m) with respect to the 1994 taxation year, there was no 'non-capital loss' as defined in s. 111(8) of the Income Tax Act (the Act) in 1991, that the Appellant could carry forward and apply against its taxable income in 1994; and

n) the Appellant did not report or include in income in the Appellant's return for the 1992 and 1993 taxation years, any amount in respect of the business income referred to herein.

[8] The primary issues to be determined are:

In the case of Erlich, whether he received a benefit in the amount of $400,932 in the 1992 taxation year and in the amount of $38,701 in the 1993 taxation year from the Corporation in the capacity of shareholder or, alternatively, in the capacity of employee.

In the case of the Corporation, whether the amount of $390,699 in the taxation year 1992 and the amount of $16,990 in the taxation year 1993 represent the unreported revenue of the Appellant.

[9] Erlich's father had carried on a clothing business at various locations in Ontario for a number of years prior to 1972. In that year, as a result of his father's illness, Erlich took control of all of his business affairs. In the fall of 1973, he opened the Hanover store and since then has had "many different stores in small towns in southwestern Ontario, as many as 12, or 13, or 14 at one point...”...At all relevant times, Erlich was the president and sole shareholder of the Corporation. It and its predecessors carried on business as retailers of clothing and footwear and were also involved in the leasing of commercial and residential properties. During the taxation years in issue, the Corporation's clothing business was predominantly operated in Kincardine and in Hanover.

[10] In 1994, the Special Investigations Branch, Revenue Canada (S.I.), received information with respect to the Corporation to the effect that certain revenue had not been reported. The matter was referred to the Audit Division and assigned to John Douglas Bain (Bain). In September 1994, Bain spoke to Barry Reid, the Appellants' accountant at that time, and reviewed the manner in which the 1992 and 1993 financial statements and corporate returns were prepared. He then met Erlich at the Kincardine store and following a short discussion, began his audit. He spent approximately one week reviewing the available books and records of the Corporation during which he discovered that there were no source documents relating to the expenses and revenues for the 1991 taxation year. For 1992, "there was a box of records containing invoices for the expenses" but he said, "there were no cash register tapes or anything of that nature to verify anything else". With respect to the 1993 taxation year, some records including three general ledgers were provided but his examination disclosed that "on the revenue side, there was nothing to look at, I couldn't verify sales". Expense invoices were available but the cash register tapes had been destroyed and no inventory records for any of those years could be located. As a result, Bain sought further information and documentation from the Appellants but received very little and that was incomplete.

[11] In addition to the documents obtained from the Corporation and Erlich, Bain had available to him a copy of three pages of computer-generated information (the Sales Records) given to S.I. by John Michael O'Malley (O'Malley), a former employee of the Corporation.[4] According to O'Malley, Erlich was the source of this document and the information contained therein represented the weekly sales at the Kincardine and Hanover stores from 1987 through to 1992. Subsequently, in the course of his audit, Bain compared the sales reported in these documents as against the sales reported in the financial statements. His analysis led him to conclude that the sales figures reported by the Corporation for the years 1988 to 1991 were understated by $378,044.

[12] As there were no records to verify sales and since an allegation had been made that there were unreported sales in the Corporation and that cash was being taken out, Bain proceeded to perform a net worth audit of the shareholder, Erlich, for the 1991, 1992 and 1993 taxation years. The audit disclosed a net worth discrepancy in excess of $400,000. Included in the net worth calculations were sizable shareholder's loans due from the Corporation to Erlich. In particular, Bain noted that the sum of $366,950 had been deposited in the Corporation by Erlich in April 1992 to the credit of his shareholder loan account.

[13] When the audit was completed in March 1995, Bain telephoned Erlich and informed him of the discrepancies. Erlich "wanted a letter sent out on the net worth ... " and Bain forwarded a proposal letter to him for review. He received no response. At a later point of time, representations were made on behalf of both Appellants by their solicitors which were based in part on the assertion that Erlich's mother had found the amount of $366,950 in two boxes in a closet in her residence, which monies were turned over to Erlich in 1989. The position taken by Erlich was that this was the source of the funds he deposited in the Corporation in April 1992.

[14] As a result of these representations, Bain reviewed all of the personal income tax return information of Erlich's parents, Chana and Leon, for the period 1972 to 1986.[5] The review of the information available led Bain to conclude that they did not appear to have "a source of funds for that amount of money".

[15] Evidence was also adduced on behalf of the Respondent from O'Malley. He first met Erlich when engaged as a consultant for the Corporation with respect to a sales promotion. Shortly thereafter, in the summer of 1992, he was hired to manage the Kincardine and Hanover stores. The relationship quickly soured and on November 5, 1993, his employment was terminated.[6]

[16] Shortly after his engagement both stores were closed, the old stock was liquidated and the premises refurbished. In early 1993, they were opened under a new name, Brands Central. Although given cheque-signing authority, it was not on the Corporation's account into which the sales proceeds were deposited but was for a separate account which had been opened and into which Erlich deposited all funds necessary to pay the ongoing expenses of the business. O'Malley was to manage the stores but was not in any way involved in the financial management of the Corporation, had no access to its main bank account, was not responsible for the books and records of the Corporation and was not involved in the preparation of its financial statements. O'Malley

maintained that he did not deal directly with the accountant, Barry Reid, other than occasionally responding to a telephone request for specific information. With respect to other information such as sales data, accounts payable, payroll and reconciliations, it would have been provided to Erlich who in turn, or so O'Malley believed, passed it on to the accountant.

[17] O'Malley described the Sales Records provided to S.I. as "a history of the sales in his store from 1987 through to 1992 when I joined him".[7] These documents had been given to him by Erlich to enable him to prepare an annual sales plan. O'Malley testified the Sales Records were utilized in their discussions as to when sales and promotions should occur and formed the basis of future sales forecasts. Certain notations on the first page were in his writing while others were made by Erlich. With specific reference to the column headed "93", the hand-written numbers were entered by him and represented the actual sales which he entered at the end of each week for comparison purposes to the same period in the previous years.

[18] According to O'Malley, all of Erlich's previous records, "all the business records, all the previous boxes of tapes, ledgers, everything" were stored in the basement of the Kincardine store. During the renovation of the premises in January and February, 1993, that space was required and Erlich said he would take them home. O'Malley testified that he assisted in loading them into Erlich's car but beyond that had no personal knowledge as to what happened to the records thereafter.

[19] Evidence was also adduced on behalf of the Respondent from David Wesley Glazer (Glazer), who performed an audit for Revenue Canada in respect of both Appellants' 1981 to 1985 taxation years.[8] It commenced with a detailed analysis of the growth of the shareholder's loan to the Corporation and ultimately led to a net worth audit of Erlich. The substantial increase in the shareholder's loan balance was initially explained by Erlich as representing "loans from his parents". Glazer continued his audit but found no evidence to support Erlich's claim. Erlich also told Glazer that he had to put the money in to keep his corporations afloat financially. However, Glazer's analysis of the Corporation's books and records disclosed a substantial number of improper entries and, as he observed, the problem was that the source of these funds were not Erlich but rather were the proceeds of corporate sales which should have been recorded as such and should not have been credited to the shareholder's loan account. "So it was really understated sales and overstated shareholders loans". Adjustments were proposed by Revenue Canada in respect of a number of such items and were accepted by Erlich and the Corporation.

Evidence adduced on behalf of the Appellants

[20] The Appellant, Erlich, concedes that he made cash deposits to the Corporation totalling $366,950 but says these funds came from his mother. More specifically, he says that at a family gathering in 1989, his mother revealed that she had found two boxes containing a total of $366,950 in Canadian currency. According to Erlich, his mother had no idea as to the source of the money. These monies were turned over to him and they were kept in his home in various hiding places until approximately 1992 when they were deposited in the Bank (somewhat piecemeal) and then transferred to the Corporation.

[21] When asked by his Counsel to respond to the Minister's assumption that the source of these funds was the Corporation, he said:

I categorically disagree. In the systems that I painstakingly tried to show that were in place, in my mind make it very clear that everything was balanced and cross-balanced and I don't know how this could have happened. Further, I believe that the report that is being used here to create the extra numbers is a cross between gross sales and net sales and there is some incorrect numbers being put in to the system.[9]

With respect to the Sales Records, Erlich maintains that he did not create these documents and implied that O'Malley or his son, Robert, were responsible. He further stated that the information in the Sales Records was "absolutely" inaccurate in that it "did not match the information that the accountants were provided with".[10] According to Erlich, the Corporation's financial statements were prepared by the accountants on the basis of that "information", and accurately reflected its financial affairs and more particularly, accurately reflected its actual sales and expenses in the years 1986 to 1993. That was he said, because in 1984 a program was developed which enabled him to keep inventory control and permitted him to measure its gross sales, net sales, costs of goods sold and "a number of items such as this that are important retail tools that will help me to measure performance and hence the future, potential future performance". He detailed at great length the manner in which the business records were kept and said that:

Through all the cumbersome system I had, the mechanical system and the little bit of computer system that we had, we kept as accurate records as was humanly possible, referenced, cross-referenced and cross-checked to be able to come up with these sales numbers that are across the top. So everything had to balance, cross-balance and check and cross-check.

He asserts that at all relevant times, the Corporation's books were maintained in this manner and all required information was regularly provided by him to the accountants.

[22] Erlich testified that records for a current year, clearly labelled and marked, were kept in a filing cabinet while those from earlier years were stored in an area set aside for that purpose in the Kincardine store. As for the missing documents, Erlich said that while he understood that records for the taxation years in issue were destroyed, he had no idea how that occurred other than: I was told they were destroyed by a number of people ... " and that to the best of his recollection they were destroyed during the period of time that O'Malley was employed as manager.

[23] The arrangement with O'Malley was terminated in November 1993 because in Erlich's view, he did not perform in certain areas with respect to the business. He alleged that sales had dropped off and that while he repeatedly asked O'Malley to maintain a proper record-keeping system, he was dissatisfied with the progress that was being made. By the fall of 1993, when Erlich dismissed O'Malley they were on very bad terms. O'Malley sued the Corporation

and Erlich for wrongful dismissal. Counsel were retained, further legal actions and counter-suits followed and several years passed before the issues were resolved.

The Glazer Testimony

[24] Counsel for the Appellants objected to the introduction of evidence of a previous audit conducted by Glazer on the basis that it was similar fact evidence and in the context of this particular case, was inadmissible. The position advanced was that the similar facts were not logically relevant in determining the matter in issue in the present appeals nor was there any substantial connection between the actions of the Appellants during the period of time previously audited and the circumstances that are before the Court.[11]

[25] It is generally accepted that evidence of similar facts is considered collateral and is generally inadmissible unless there is, as Bull J.A. observed in MacDonald v. Canada Kelp Co. Ltd.:[12]

... a real and substantial nexus or connection between the act or allegation made, whether it be a crime or a fraud (but not, of course, limited to those), and facts relating to previous or subsequent transactions are sought to be given in evidence, then those facts have relevancy and are admissible not only to rebut a defence, such as lack of intent, accident, mens rea or the like, but to prove the fact of the act or allegations made. ...

Bull J.A. went on to say at page 627:

... As I have indicated, the test is relevancy and relevancy depends largely on nexus or connection of the other transactions with the ones in issue - and a strong connection can well be admissible as relevant to the fact of the actus reus. ...

[26] The question of the admissibility of similar fact evidence was also dealt with by McIntyre J. in Sweitzer v. The Queen.[13] After reviewing the general principle set out by Lord Herschell in Makin v. The Attorney-General for New South Wales,[14] McIntyre J. stated:

Over the years in seeking to apply this principle judges have tended to create a list of categories or types of cases in which similar fact evidence could be admitted, generally by reference to the purpose for which the evidence was adduced. Evidence of similar facts has been adduced to prove intent, to prove a system, to prove a plan, to show malice, to rebut the defence of accident or mistake, to prove identity, to rebut the defence of innocent association, and for other similar and related purposes. This list is not complete.

This approach has been useful because similar fact evidence by its nature is frequently adduced for its relevance to a single issue in the case under trial. It has however involved, in my opinion, a tendency to overlook the true basis upon which evidence of similar facts is admissible. The general principle described by Lord Herschell may and should be applied in all cases where similar fact evidence is tendered and its admissibility will depend upon the probative effect of the evidence balanced against the prejudice caused to the accused by its admission whatever the purpose of its admission. ...

[27] With these principles in mind, I concluded that the evidence tendered by the Respondent has substantial probative value which outweighs any prejudicial effect on the Appellants and is admissible. There is, in my view, a clear nexus between the previous transactions and the matters before this Court. In both instances, that is in the previous audit and the one currently before this Court, the same Corporation and shareholder are involved and in each instance, the issue was misappropriation of corporate funds. On each occasion, representations were made to officers of Revenue Canada with respect to the increases in the shareholder loans. Glazer's evidence is relevant and admissible to rebut the Appellants' assertions with respect to the source of the funds and, as well, goes directly to the issue of Erlich's credibility.

Conclusion

[28] In the absence of reliable records, whether they are either non-existent, destroyed, or otherwise not produced, the Minister may issue a net worth assessment to properly determine a taxpayer's liability. The net worth assessment is arrived at by determining the taxpayer's assets and liabilities at the end of the taxation year and at the end of the last previous year for which tax could be determined and assuming that the taxpayer's income for the intervening period was equal to the increase in his or her net worth in the period plus the estimated amounts spent for personal and living expenses. The onus rests on the taxpayer to satisfy the Court that the assessment is wrong.

[29] In brief form, the position which the Appellants take is that the Minister in assessing erred in concluding that the funds deposited by Erlich in the Corporation in 1992 were the unreported sales of the Corporation for the years 1988 to 1991 which had been appropriated by him. The Appellants contend that the Minister's conclusion is wrong because it ignores the actual source of the funds which, they say, was the money found by Erlich's mother. The Appellants assert that Erlich's testimony regarding the system of record-keeping established the accuracy of the corporate financial statements as well as the accuracy of the sales reported and that the system effectively prevented the type of appropriation asserted by the Minister. It was further argued that the Sales Records which formed the basis for the Minister's assumptions were created by some person other than Erlich and have been shown to be inaccurate and misleading.

[30] I propose to first deal with the testimony adduced on behalf of the Appellants as to the source of the monies advanced by Erlich to the Corporation in April 1992. Erlich's testimony, and that of his mother, was clearly intended to suggest that since his mother found the money in a box which also held some of Leon Erlich's papers, he must have been the original source of the funds. Called upon by his Counsel to speculate as to how that might have come about, Erlich conceded that his father's clothing business could not have generated this type of money but said he bought and sold real estate and that it was possible that he had bought and sold more than Erlich was aware of. He also asserted (without any further explanation) that his father was a "money engraver" and that on several occasions, he had travelled to Europe, New York, Los Angeles and Mexico.[15] These attempts to attribute the "found money" to Leon Erlich are totally unconvincing. The evidence is that he retired in 1972 and that Erlich took over the family business at that time. It is also a fact that Leon Erlich suffered from Alzheimer's for most of the 15 years prior to his death in 1987. Chana Erlich testified that they had turned over all of their property to Erlich in or about 1974 and Erlich himself said that he had been paying the bills for his mother and father since 1973 and that "my mother and father gave over to me all their assets by 1984 and prior to that it was a staging thing". [16]

[31] It is also a fact that both Glazer and Bain independently reviewed the income sources of Leon and Chana Erlich and concluded that they could not have been the source of these funds. I note as well that Erlich was specifically asked whether he had suggested to Glazer during the earlier audit that loans from his mother were the source of capital going into the business and his response was: "I can't recall all that detail back then, I am sorry".

[32] The testimony adduced on behalf of the Appellants with respect to the source of the funds is, in my view, simply not credible.

[33] To support the Appellants' position that appropriations from the Corporation were not the source of the funds in issue, the validity, accuracy and origin of the Sales Records were challenged. In this context, it became most evident that the credibility of the witnesses, Erlich and O'Malley, would be a critical factor. Counsel for the Appellant urged the Court to disregard the testimony of O'Malley with respect to the Sales Records and the missing corporate documents as that of "a disgruntled individual who had reason to create some difficulties in the life of Mr. Erlich and the company". As previously observed, it was obvious that Erlich and O'Malley have a visceral dislike for each other. While it would be naive to assume that O'Malley was not motivated by his antipathy towards Erlich when he turned over the Sales Records to Revenue Canada, it would be equally naive to disregard Erlich's real and substantial interest in the outcome of these appeals and to accept without question Erlich's accusation that O'Malley, or his son, fabricated the Sales Records and deliberately misrepresented their import. The same comments apply to his attempts to implicate O'Malley in the destruction of records of the Corporation.

[34] Having had the advantage of hearing Erlich's testimony first, I observed O'Malley with extra care during the whole of his testimony including the vigorous cross-examination to which he was subjected. While there were aspects of his testimony, particularly as it related to his dismissal and the subsequent law suits which were questionable and not particularly convincing, I am satisfied that with respect to the Sales Records and the missing corporate documents, the evidence of O'Malley is to be accepted in preference to that of Erlich.

[35] 1 was particularly unimpressed by Erlich's testimony with respect to the Sales Records. Asked by Counsel to explain how this document could come into existence, he said it formed part of the information on the computer that was used at the relevant time and he believes that it: "represents a combination of gross sales, net sales and possibly some mark-downs" for the period of time 1987 to mid-1993, and that "someone extrapolated some of this work incorrectly" from the computer records. He implied that since the O'Malleys had access to the computer, they must have been the source. Since Erlich was aware that O'Malley, Sr. was computer-illiterate, he pointed the finger of suspicion at the younger O'Malley.

[36] Erlich's assertion that the Sales Records were not produced by him is on the whole unconvincing and difficult to accept. The information contained therein admittedly came from the 1987 to 1993 period, most of which predates O'Malley's arrival. At all relevant times, Erlich had access to the corporate files and records through a computer kept at his home office. Furthermore, although he flatly rejected O'Malley's assertion that the Sales Records were used as a planning document, a number of comments written by him are found on them. With respect thereto he equivocated on a number of occasions, saying by way of example:

and so when I look at the numbers O'Malley has written in his dark handwriting, if you look at week no. 36, it is possible that I wrote this information at that point in time, but again I do not know. I could have written this information before any of this information was written. I don't know.

Counsel for the Respondent suggested that the Sales Records were in fact used in discussions with O'Malley and put the following question to Erlich:

Q. Perhaps you could have been discussing with Mr. O'Malley your targets for him for the next blank period coming up ahead, something of that nature?

A. I would argue that Mr. O'Malley has pieced out here in his own darker handwriting certain things. I can't comment because I don't know why they are there. I can only tell you and reaffirm in my handwriting that is faint, it looks clear to me that we are strictly speaking about specific terms of time that I have indicated for the best promotional activities, which essentially were the May 24th weekend and the forward X number of weeks and through the Christmas period, that is all I would agree to.

With respect to the accuracy of the information in the Sales Records, the following exchange took place:

Q. So, not in the course of planning, or perhaps in the course of very loose planning Mr. O'Malley and yourself look at this document. Would not you have said to him at that point, or if these numbers are no approximately correct, said, what's this nonsense. We can't plan on this basis, this overstates everything, we are not going to do that well?

A. I remember having a conversation with Mr. O'Malley with regards to thinking in terms of this planning, he talked about 20% mark-downs. When you are thinking about retail pricing by the time it nets out to the consumer you have about a 20% mark-down involved. What I mean is the regular price would be 89.99 like that Nike for example, sold at 79.99 and that would be an example of the leeway between regular and sale that he needs to shoot for in terms of planning. That's all I could read out of that.

Erlich's answers were, in my view, deliberately evasive and unresponsive.

[37] With respect to the missing corporate records, Erlich denied any knowledge of the circumstances under which they disappeared or were destroyed and implied that O'Malley was responsible. As for his assertion that he received certain information regarding their destruction from a number of individuals - I observe only that none of them were called to testify. He also said that he never noticed that they were missing since he "never had anything to do with the records other than to know they were there". Since the evidence as a whole strongly suggests that Erlich was a very hands-on manager, this comment is, in my view, not plausible.

[38] One final observation. The foundation for Erlich's characterization of the Sales Records as inaccurate is that they disagree with the Corporation's financial statements. Erlich's evidence as to who actually provided the information to the accountants is inconsistent, saying at one stage that he attended to this task, while on other occasions, suggesting that it was his bookkeeper and while he was there, O'Malley. The two accountants who acted for the Corporation and for Erlich in the years 1987 to 1993, Schmidt and Reid, were not called to testify. A fair inference for their absence is that their testimony would not have assisted the Appellants.

[39] 1 have previously adverted to the fact that in an appeal against an assessment for tax assessed on a net worth basis, the onus lies on the Appellant to establish on a balance of probabilities that taxable income was not as assessed. The Appellant, Erlich, has failed to do so. Furthermore, on the evidence adduced, both Appellants have failed to establish that the discrepancies in issue are not the result of misappropriation of corporate funds.

Collateral Issues

[40] In addition to sales appropriations the net worth discrepancy of the Appellant, Erlich, was attributed, inter alia, to such items as standby charges and benefits relating to his use of an automobile owned by the Corporation and personal living expenses of Erlich and members of his family. Concurrently, in assessing the Corporation, the Minister disallowed all personal expenses paid by the Corporation. Agreement has been reached on some of these items:

(a) Huron Ridge - personal residence - The Appellants maintain that Erlich had an office in his residence and that the expenses

so incurred were a deductible expense to the Corporation. The parties have agreed that the amounts to be allowed as office expenses are $1,100 for 1993 and $1,250 for 1992. The allowance of these expenses to the Corporation will also have the effect of reducing the shareholder's benefit to Erlich by the same amounts.

(b)                  Investment expenses - Erlich borrowed the sum of $100,000 by way of a personal line of credit. These funds were loaned to the Corporation and invested in mutual funds by the latter. During the relevant period of time, six payments of $600 each were made on Erlich's line of credit. Four amounting to $2,400 were reported on the shareholder's loan account while two totalling $1,200 were expensed by the Corporation. It is agreed that the amount of $1,200 which was added to Erlich's benefit in the T1 return should be adjusted in his favour in taxation year 1993. With respect to the same investment, the parties have agreed that the Corporation is entitled to an interest deduction in the amount of $2,170.79.

(c)                  With further respect to the 1993 taxation year, the Appellant Erlich is also to be allowed a deduction of $1,744 with respect to interest incurred on the refinancing of his home, the proceeds of which were used for investment purposes.

(d)                  The Thornhill residence (sometimes referred to as the McMorran or Vaughn residence) - This was a property owned by Erlich in which his mother and sister resided. Erlich maintained that his business brought him to Toronto several times a month and that he conducted business at that residence at least one or two times a month. There was no office in the residence per se, but there was "a very private and quiet downstairs area" which was used for that purpose. Substantial expenses were claimed for both 1992 and 1993 including 100% of the property taxes, water, gas, telephone and T.V. bills. In the course of his examination-in-chief, Erlich conceded that many of these items should not have been claimed as business expenses[17]. The parties agree that if the Corporate Appellant is entitled to treat certain items as deductible office expenses, the amount of $2,000 for each of 1992 and 1993 would be acceptable. I have considered Erlich's testimony on this issue and am not at all satisfied that it supports the deductibility of the amounts in issue. Accordingly, the Corporate Appellant is not entitled to the deduction of any of the amounts under this head.

(e)                  Automobile expenses - The Corporation owned two vehicles. It is not disputed that one was driven by his wife and the other by Erlich, albeit on an interchangeable basis. The Minister in assessing Erlich included in his income a standby charge of $4,761 for each of taxation years 1992 and 1993. Erlich initially testified that 99% of the use of the vehicle was business related but when his Counsel observed that driving to and from work ought not to be included, Erlich reduced the business use to 70%. No logs were kept and Erlich's testimony provided little support for his estimate. It is incumbent upon an Appellant to maintain sufficient records of use of a corporate vehicle to permit the Court to determine whether the Minister's inclusion of the standby charge was sound. That has not been done. The evidence adduced does not warrant any interference with the Minister's assessment.

(f)                   Signs - In the course of his audit, Bain examined an invoice from Classic Sign & Design which appeared to reflect the acquisition by the Corporation of three signs. The amount expensed was $3,500. He concluded that these items should have been capitalized as Class 8. The Minister in his assessment did so and a capital cost allowance was given on the items in issue. The question is whether the items were properly capitalized. Erlich testified that these were signs which had been removed from stores he previously owned and

which were subsequently taken out of storage and refurbished. The Appellants' position is that the cost of refurbishing was an appropriate expenditure and ought not to be treated as a capital item. Sufficient question has been raised regarding the validity of the Minister's conclusion. Accordingly, the Corporation will be permitted to deduct the amount in issue as a current expense in 1993.

[41] A number of other items were raised in the original Notice of Appeal including the payment by the Corporation of personal expenditures incurred by the Appellant, his spouse, Susan Lynch, Roma Erlich and Chana Erlich. These have been abandoned.

[42] The appeals are allowed to permit the Minister to reassess with respect to the minor adjustments enumerated in paragraphs 40(a), (b), (c), and (f). Beyond that, the Appellants are not entitled to any further relief. The Respondent is entitled to its costs.

Signed at Ottawa, Canada, this 29th day of December, 1998.

"A.A. Sarchuk"

J.T.C.C.

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