Gauthier v. MNR, 93 DTC 758, [1993] 1 CTC 2522, [1992] 1 CTC 2553 (TCC)

Tremblay, T.C.C.J.:— These appeals were heard on July 25 and 26, 1990, December 3, 4, 5 and 6, 1990, June 17, 20 and 21, 1991 and July 4 and 5, 1991, in Quebec City, Quebec.

1. Point at issue

According to the originating pleadings, the notices of appeal and the replies to the notices of appeal, the point for determination is whether the appellant, an accountant, was correct:

(1) in the calculation of income for the years 1972 to 1978,

(a) to consider the notices of reassessment of the years 1972 to 1975 as statute-barred, and,

(b) in the years 1975 to 1978, to deduct interest and losses sustained in the order of $450,000, and,

(2) in the calculation of income for the year 1980, inter alia, not to include a capital cost allowance recapture of $51,719.

The respondent argued that, following the 1976 purchases of four bush planes by the appellant and three associates for the purpose of leasing, those airplanes took on depreciation. In addition, the respondent contended that, as a result of the sale of three airplanes in 1980 to Diréquair, in which the appellant was a shareholder through Alperta Inc., there should be some recapture. According to the appellant, the selling price was $25,625. However, the respondent added to that the amount of $299,662, which consisted of a debt of the associates to the purchaser, Diréquair. The latter having written off the debt following the purchase of the airplanes, the total selling price, according to the respondent, was allegedly $325,287, which resulted in a taxable capital gain of $40,184, one quarter of which, $10,046, was allegedly attributable to the appellant.

As to the recapture, according to the respondent, it was $206,876, one quarter of which, $51,719, was allegedly attributable to the appellant.

The appellant argued that the three bush planes purchased in 1974 and resold in 1980 were not worth more than $25,625.

2. Burden of proof

2.01 The burden is on the appellant to show that the respondent's assessments are incorrect. This burden of proof results from a number of judicial decisions, including the judgment by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In that judgment, the Court ruled that the facts assumed by the respondent in support of assessments or reassessments must also be presumed to be correct until proven otherwise.

The appellant's general argument was described in his notices of appeal, while the respondent replied thereto with detailed assumptions of fact.

2.02(1) The facts alleged by the appellant in the instant case are described in paragraphs 1 to 5 of the notice of appeal 82-2147(IT) concerning the taxation years 1972 to 1978 inclusive. The notice of appeal reads as follows:

1. The Minister of National Revenue has added revenues and disallowed expenses arbitrarily and without right;

2. During the taxation years forming the subject of the present appeal, the appellant was a chartered accountant and an associate during a certain period, and the allocation of income should have been between him and his associate;

3. The appellant is not in a position to provide adequate explanations in response to the Minister’s notification given that the Minister has seized and has in his possession all documents; if the respondent returned his documents to him, more adequate work and full proof of the amounts added by the Minister and expenses disallowed could be refuted and/or accepted;

4. Because of his business income and business losses, the appellant was required to pay approximately $450,000, and his losses should be subtracted from the income which the Minister has attempted to attribute to him;

5. Upon receipt of the additional documents which the Minister might accept to remit to us, we shall provide more specific details for the appeal.

[Translation.]

It should be noted that the documents seized by the respondent at the appellant's premises in 1977 were returned to him in 1988. The facts assumed by the respondent in the present case were also described in subparagraphs 9(a) to (u) of the reply to the notice of appeal dated June 7, 1983. That paragraph reads as follows:

9. In reassessing the appellant for the taxation years 1972, 1973, 1974, 1975, 1976, 1977 and 1978, the respondent relied, inter alia, on the following facts:

(a) during the years under appeal, the appellant practised the profession of chartered accountant;

(b) the officers of the respondent proceeded by the reconciled loss and gain method with

— revenue and expenditure journals,

— copies of fee invoices,

— records and schedules of accounts receivable,

— copies of deposit slips,

— cheques issued by clients,

— personal accounts and financial statements of the appellant,

— fees deposited to the appellant’s personal account,

— cheques cashed by the appellant, not deposited or declared,

— visits by clients and fees paid in cash;

(c) from 1966 to October 31, 1972, the appellant practised his profession in a company with Mr. André Gagnon;

(d) from early 1973 and until December 17, 1973, a dormant company existed to enable the appellant and Mr. André Gagnon to collect accounts receivable; December 17, 1973 also marks the dissolution of the company mentioned in subparagraph (c);

(e) the appellant practised his profession alone until October 31, 1974, on which date he formed a new company with Mr. Yvan Gagnon;

(f) with regard to the 1972 taxation year, the appellant concealed and failed to declare net additional income of $12,583.34 as a result of the fact that he knowingly used a cash basis of accounting instead of an accrual basis of accounting and knowingly failed to declare interest income from the mortgage on a house in Chicoutimi-Nord, the whole as appears more fully in Schedule 1;

(g) with respect to the 1973 taxation year, the appellant concealed and failed to declare net additional income of $3,455.02 for the same reasons as stated in subparagraph (f) and also by virtue of the fact that the appellant knowingly failed to declare his rental income from a house located in Arvida, the whole as appears more fully in Schedule 1;

(h) with respect to the 1974 taxation year, the respondent reduced the appellant's income by the net amount of $3,050.63, the whole as appears more fully in Schedule 1;

(i) with regard to the 1975 taxation year, the appellant concealed and failed to declare net additional income of $45,788.17 arising from the practise of his profession (-$43,945.53) and an undeclared taxable capital gain (-$1,842.64), the whole as appears more fully in Schedule 1;

(j) still with regard to the 1975 taxation year, the respondent took into account a loss of $20,003.87 suffered by the appellant in the operations of the company B.B.D.G., as claimed by the appellant in establishing the net additional income of $45,788.17, the whole as appears more fully in Schedule 1;

(k) with regard to the 1976 taxation year, the respondent established the appellant's additional income at $14,964.78, obtained, on the one hand, by the fact that the appellant concealed and failed to declare an amount arising from the receipt of accounts receivable treated as bad debts and, on the other hand, by disallowing a deduction of $8,570 for interest "paid"; this deduction was disallowed because the appellant submitted no proof that a loan had been negotiated, the purpose of the loan and that interest had, in fact, been paid;

(l) still with respect to the 1976 taxation year, the respondent took into account, inter alia, a loss of $17,203.50 arising from the company B.B.D.G. and a carry over of a $1,000 capital loss arising from a deductible capital loss of $13,468 Sustained in 1977 as a result of investments in Tissus et Tapis Mme Roy et Les Immeubles R.G.H. Inc.; the whole as claimed by the appellant;

(m) with regard to the 1977 taxation year, the respondent established the appellant's additional income at $25,206.86, the whole as appears more fully in Schedule 1;

(n) with regard to the 1977 taxation year, the appellant again confirmed his guilty intent during the years under appeal in that, knowing that he was under investigation by the officers of the respondent, and having at his disposal the instruments necessary for the preparation of his income tax return, he produced a purely arbitrary return knowing it to be false in that no instrument was appended to it, thus forcing the officers of the respondent to resort to two peremptory demands, which led the appellant to modify his return considerably by means of two amended returns;

(o) still with regard to the 1977 taxation year, the respondent established the appellant's additional income, inter alia, by disallowing a deduction of $27,851.72 for interest "paid", for the same reasons as stated in subparagraph (k); the respondent also took into account a capital loss eligible for a $2,000 deduction for the same reasons as stated in subparagraph (I);

(p) with regard to the 1978 taxation year, the respondent established the appellant's additional income at $37,479.09, the whole as appears more fully in Schedule 1;

(q) still with regard to the 1978 taxation year, the respondent established the appellant's additional income, inter alia, by disallowing a $38,814.57 deduction for interest "paid", for the same reasons as stated in subparagraph (k), and by disallowing a claimed rental loss of $664; the respondent also took into account a Capital loss eligible for a $2,000 deduction for the reasons stated in subparagraph (k) [sic];

(r) with regard to each of the taxation years in question, the respondent's officers duly followed the accounting and legal principles applicable, inter alia, to the determination of the appellant's professional income, accounts receivable and permitted reserves;

(s) furthermore, with regard to each of the taxation years in question, the respondent's officers duly took into account the losses claimed and proved by the appellant, and, as to the "other losses", even based on the highly fragmentary and/or virtually non-existent bits of information, these alleged “ other losses" would appear at best to be of a capital nature, without any other effect on the facts on which the respondent has relied;

(t) furthermore, the appellant made a misrepresentation through wilful default or gross negligence when he filed his income tax returns; the appellant knowingly made or was grossly negligent in making all these omissions and false statements;

(u) these omissions and false statements had the effect of reducing the tax otherwise payable by the appellant and justify the imposition of the following penalties under subsection 163(2) of the Income Tax Act:

1972	$ 761.89
1973	$ 121.01
1975	$3,128.28
1976	$ 416.81
1977	$1,703.14
	[Translation.]

2.02(2) A. Concerning appeal 85-503(IT) in respect of the 1980 taxation year, the Original notice of appeal of March 9, 1985 and the amendment dated January 28, 1991 read as follows:

NOTICE OF APPEAL of March 9, 1985

THE APPELLANT APPEALS FROM THE NOTICES OF REASSESSMENT FOLLOWING THE NOTIFICATION BY THE MINISTER DATED DECEMBER 20, 1984 FOR THE YEAR 1980 AND ALLEGES THE FOLLOWING:

1. The Minister of National Revenue has added to the appellant [sic] the following income:

A. Capital gain from disposition of the airplanes of B.B.D.C. [sic] & Associés : $20,092. However, I did not even take part in the negotiations, and I even lost half of my net investment of $2,500.

B. Additional business recaptures: $51,719. In my view, however, I have never sought any recapture, something that I will be able to confirm at a later date.

Other information on this subject will be provided to you at a later date.

AMENDMENT TO THE NOTICE OF APPEAL FOR THE YEAR 1980. [January 28, 1991]

The appellant, given leave to amend his notice of appeal for the year 1980 by decision of Judge Guy Tremblay, provides the following facts and reasons:

(a) For the years 1972 to 1978 and for the year 1980 and following, the appellant claimed loan losses which he incurred on the ground that, during all those years, he had been a high-risk money lender, whom one usually sees for loans made by financial institutions, and he was approached as a last resort.

(b) To protect himself, the appellant, in addition to a very small rate of return, took a position as endorser, guarantor or shareholder with an option to take control of the business in case of default.

(c) In this way, over the years, he lent to, was guarantor for or took a majority shareholder position in the following companies, partnerships and businesses:

Les Immeubles Pet Inc.	Savo Ltée
Les Immeubles René Boily	Tabagie et comptoir lunch
Mount Glenn & Ski Resort Inc.	La Jasette Inc.
Roger Chouinard	Transport Robert Richer Inc.
Arvida Importations	Camions Nord-Est Inc.
Les Voyages Ultra Inc.	Ben Transport Ltée
R.I.E.L.T.A. Inc.	Garage Auger Inc.
Tissus Tapis Mme Roy Jonquière Inc.	Tissus Tapis Mme Roy Jumbo Inc.
Tissus Tapis Mme Roy Chicoutimi Inc.	Landry

(d) A money lender with high interest rates takes no risk, but the person who lends on margin with a lower interest yield runs greater risks, and the nature of the loans is more speculative.

(e) Furthermore, the Department of National Revenue is quite comfortable with this kind of transaction, given that it normally treats them as speculative and taxes the income as business income. Where losses occur, the Minister should obviously follow the same logic.

(f) For the year 1980, the appellant claims 57 per cent of the loss in the accounts receivable of the company Raymond Gauthier and Yvan Gagnon, which accounts receivable, $42,963.45 of $75,374.45, appearing in the financial statements to June 30, 1979, were never received by him.

(g) For the year 1980, the capital gain added by the Minister is incorrect, being first the statement of assets in the company B.B.D.G. after six years of ownership and an airplane completely out of order. Furthermore, there were five shareholders in the company, not four, so that the percentage (per cent) should be 20 per cent, not 25 per cent. The appellant also recovered only $2,500 of his $5,000 investment, and is therefore claiming a $2,500 loss.

(h) The appellant did not claim a capital cost allowance for the years 1977 and 1978 and therefore cannot be subject to the recapture.

(i) The appellant is entitled to other interest and expenses, and he will prove so at the hearing.

For all these reasons, we ask the Court to allow the appeal and to set aside and/ or amend the reassessment for the year 1980.

[Translation.]

B. The facts assumed by the respondent in his reply to the notice of appeal of August 13, 1985 are described in subparagraphs 4(a) to (q). They read as follows:

4. In reassessing the appellant for his 1980 taxation year, the Minister of National Revenue relied, inter alia, on the following facts:

(a) During the taxation year in question, the appellant exercised his profession of chartered accountant;

(b) During the 1975 taxation year, the appellant formed Société B.B.D.G. & Associés with Messrs. Gaston Boulanger, Marc Boulanger and Claude Deschênes, each holding an equal 25 per cent interest;

(c) Société B.B.D.G. & Associés was formed in order to purchase airplanes and to lease them to a company called Diréquair Inc.;

(d) The shareholders of Diréquair Inc. were Mr. Gaston Boulanger (25 per cent) and the company Alperta Inc. (75 per cent);

(e) The shareholders of Alperta Inc. were, inter alias, Messrs. Marc Boulanger, Claude Deschênes and Gaston Bélanger [sic]; Messrs. Marc and Gaston Boulanger and Claude Deschénes directly or indirectly held 40 per cent of the shares in Diréquair Inc.;

(f) In 1975, Société B.B.D.G. & Associés acquired four airplanes of various models: one Cessna 180J, two De Havilland Beaver aircraft, model DHC-2, and a fourth, a DHC-3 Otter aircraft, at a total cost of 356,144;

(g) The De Havilland Beaver aircraft, model DHC-2 MK, identified by the letters C-GAJL, bearing serial number 1397, was damaged in 1976 and resold for scrap on February 9, 1977 at the request of the insurers of Société B.B.D.G. & Associés;.

(h) Following the loss of this aircraft, the cost of the other planes was indicated as $244,919 under cost of capital assets in the balance sheets of Société B.B.D.G. & Associés;

(i) On May 15, 1980, Société B.B.D.G. & Associés sold airplanes to Diréquair Inc. for the amount of $25,625, indicated on the contract, and the company also received a write-off of debt in the amount of $299,662 owed to Diréquair Inc., thus raising the total consideration or proceeds of disposition of the airplanes to $325,287;

(j) The amount of $25,625 indicated on the contract of May 15, 1980 is not representative of the fair market value of the airplanes assigned since it does not take into account the write-off of the debt of $299,662;

(k) Furthermore, at May 15, 1980, Société B.B.D.G. & Associés was not dealing at arms' length with Diréquair Inc.;

(l) At May 15, 1980, the fair market value of the airplanes and their equipment was $325,287, and, once the cost of acquisition recorded on the balance sheet is deducted, the capital gain was $80,368 and the taxable capital gain $40,184, one quarter of which, $10,046 is attributable to the appellant;

(m) At May 15, 1980, the undepreciated capital cost of the airplanes was the same, $38,043, as at December 31, 1978, and, taking into account the initial cost in the order of $244,919, the total recapture was $206,876, one quarter of which, $51,719, is attributable to the appellant;

(n) In filing his tax return in 1975 and 1976, the appellant claimed capital cost allowances in the amount of $20,295 in 1975 and $17,613 in 1976;

(o) He claimed no capital cost allowance in 1977 or 1978;

(p) In addition, the appellant instituted an appeal before this Court, file 82-2147(IT), with regard to his taxation years 1972 to 1978 inclusive, and consequently he will no doubt be in a position to claim a capital cost allowance totalling $13,811 in 1977 and 1978, in which case the recapture in 1980 would be $51,719;

(q) All these capital and other losses were duly computed and applied to the 1980 taxation year.

[Translation.]

3. Difficult hearing

As a result of the appellant's health, the mass of documents (tens of boxes were involved, including 111 exhibits filed, comprising some 500 pages) and the many years in question, 1972 to 1978 and 1980, the hearing took 11 days spread over four stages. It is equally difficult to summarize the evidence.

4. The years 1972 to 1975: statute-barred or not?

4.01 The first point in issue is whether the years 1972, 1973, 1974, 1975 are statute-barred years under subsection 152(4) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). This subsection reads as follows:

152(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

4.02 Citing the Levy case [6.02(9)], counsel for the respondent argued that the fact the appellant had accounted for his income in 1972 and the following years according to the cash basis of accounting system, not according to the accrual basis of accounting system, as provided by the new Income Tax Act, which entered into effect on January 1, 1972, meant he had thus reduced his income. Consequently, he at least committed a misrepresentation that is attributable to neglect and carelessness. Since the appellant was an accountant, counsel for the respondent emphasized, he could not be unaware of this provision of the new Act.

4.03 At the start of the investigation, following the Levy case, the Court took for granted that the appellant had to proceed first. The evidence that was filed will now show us whether the respondent had reason to issue the reassessments.

The increase or reduction in income declared by the appellant, as established by the respondent in the reassessments, was as follows:

4.04 The respondent's main reproach against the appellant is that he did not take accounts receivable into account in determining his income.

The Court admits that imposition of the accrual basis of accounting system on professionals has, in the short term, made the incomes of these taxpayers tend upward. I say "in the short term" because if one considers, over the long term, the provisions for doubtful and bad debts, the accrual basis of accounting system means that only accounts actually received are included in income. The same is also true of the cash basis of accounting system, although the latter includes the account only in the year of collection. In practice, the accrual basis of accounting system includes accounts receivable only when they are no longer doubtful.

Of course, the application of the accrual basis of accounting system starting on a given date, here January 1, 1972, brings forward the taxation of accounts receivable to a certain degree, just as it also permits the deduction of accounts payable.

In the instant case, the appellant contended that the schedule of accounts receivable was prepared regularly for the following dates and totals:

The company also had its book of accounts receivable. Is it possible that it was not taken into account? Mr. Gagnon was responsible for accounts receivable. He could not logically do ail the work of establishing the accounts receivable and then be unaware of them when establishing the financial statements.

According to the appellant, the accounts receivable — that is, with doubtful accounts subtracted — should have been included in the total of $70,523.09 for "fees and interest”, which appears in the income statement of his 1972 income tax return (Exhibit 1-1) (transcript, vol. 2, pages 49-50). The appellant was not certain, however. The Court must therefore proceed with the respondent's figures and study them.

4.05 Accounts receivable of $80,419.91

4.05.1 In the instant case, the total accounts receivable of the company Gauthier, Gagnon (André) (see paragraphs 9(c) and (d) of 2.02(1) concerning the existence of this company) were indicated as follows in the financial statement (Exhibit 1-3, Schedule 2) prepared by the respondent:

Exhibit 1-11 shows the schedule of accounts receivable to April 30, 1972 prepared by the appellant and totalling $80,419.91.

A note in Schedule 2 of the financial statement (Exhibit 1-3) reads as follows:

Net accounts receivable as at 17/12/73 were established from the list of $31,355.23 to that date. We deducted all uncollected accounts to the end of 1976 as bad debts as at 17/12/73.

[Translation.]

On the one hand, this clearly confirms that, to all intents and purposes, only the accounts receivable received were taxed. On the other hand, it therefore appears that, at April 30, 1972, that is on the date on which the accounts receivable stood at $80,419.91, the appellant was apparently entitled to deduct, as a provision for then doubtful accounts, an amount of at least $14,575 ($31,355 — $16,780), since, in any case, they subsequently proved to be bad debts. Another amount for debts then doubtful has to be added as the doubtful accounts were received later on. In my opinion, that amount can reasonably be evaluated at $7,287.50, that is 50 per cent of the bad debts. There was therefore a doubtful accounts amount of $21,862.50 at April 30, 1972 out of a total amount of $80,419.91. This figure appears reasonable to me because of the number and nature of those accounts: 494 accounts, 210 of them between $15 and $40. The average of the whole was $162 ($80,400 -e- 494).

Since the appellant had a 50 per cent interest in the company, he was therefore entitled to subtract $10,931.25 for doubtful accounts in calculating income for the year 1972.

4.05.2 In addition, concerning the year 1972, the appellant contended that his first associate, Mr. André Gagnon (period from May 1, 1966 to October 31, 1972), owed him the sum of $36,000: a first amount of $18,000 at the company's inception in 1966 for the purchase by Mr. Gagnon of his right to an equal share in the company, and a second amount of $18,000 lent in 1969 or 1970 to enable Mr. Gagnon to purchase a house. Upon the company's dissolution on October 31, 1972, Mr. Gagnon still owed the appellant between $13,000 and $18,000. The appellant's balance sheet at September 15, 1973 (Exhibit A-1), nearly 11 months after the dissolution of October 31, 1972, shows that there was still an account receivable of $13,000 due from André Gagnon, chartered accountant. The figure of $18,000 at October 31, 1972 therefore seems more probable. He apparently collected $5,000 during this period from October 30, 1972 to September 15, 1973. Further on in his testimony, the appellant was categorical that the first $18,000 due as of 1966 had been paid. There therefore remained only the second $18,000 lent plus interest.

Thus, $5,000 was collected between October 31, 1972 and September 15, 1973, and the remaining $11,614 between December 18, 1973 until the end of 1976, according to the respondent's note at the bottom of Schedule 2 of Exhibit I-3.

4.05.3 Mr. Gagnon paid him with the accounts receivable to which he was entitled as a result of the dissolution. He apparently even transferred roughly $30,000 to offset the losses on the remaining $13,000; the appellant apparently collected only $11,614. The appellant argued that, in the end, there was a shortfall of $1,400. According to the appellant, the respondent allegedly taxed him on his accounts receivable, which, in his view, were only a repayment of debt by his associate.

The question that occurs to the Court is the following: were the accounts receivable which the associate remitted in order to pay his debt included in the accounts collected? The amount of $80,419.91 in accounts receivable at April 30,1972 should be considered as having increased or decreased until October 31.1972. Some accounts were collected and other new accounts were added. On the one hand, it was very difficult for the respondent to foresee that such a debt repayment might be made through accounts receivable. On the other hand, let us suppose that, having known it, the respondent might have taken it into account: how could he have proceeded? First, he would have had to tax half the collected accounts in the hands of each of the associates, as he in fact did. He then would have had to subtract in the appellant's hands the portion included in his income arising from the $30,000, or $16,780; that is to say, $5,000 between October 12, 1972 (Exhibit A-1) and September 15, 1973, and $11,780 (this amount is taken from Exhibit 1-3, Schedule 2, as being collected by the appellant), according to the respondent, between December 17, 1973 and the end of December 1976, that is over three years, as appears from the note of the respondent in Schedule 2 cited above (4.05.1) and also of Mr. Bertrand Gilbert, witness of the respondent.

Thus, in proportion to the periods involved, the sum of $5,000 was apparently collected as follows: $952.30 in 1972 (two months) and $4,448 in 1973 (eight and a half months). The sum of $11,780 was collected in equal amounts of $3,926.66 for each of the years 1974, 1975 and 1976.

4.06 Still concerning the calculation of income for 1972, the tax paid for the house rented in Arvida (501, Boulevard Harvey) in the amount of $377.54 (Exhibit A-4) should also be subtracted. This amount was not recorded in the financial statement concerning the Arvida house (Exhibit 1-3, Schedule A-4).

Exhibit A-4 was a mortgage statement to December 31, 1972 from La Mutuelle du Canada. This sum of $377.54 was paid for taxes, which implies that the appellant had paid his taxes.

4.07 Chicoutimi-Nord property

4.07.1 Concerning the Chicoutimi-Nord house (1120, rue Roussel), the appellant contended, inter alia, that, in 1972, the amount of $2,487.50 in income, as it appears on the financial statement (Exhibit 1-3, Schedule 5), should read $1,487.50. This Schedule 5 of Exhibit 1-3 reads as follows:

SCHEDULE 5 [EXHIBIT 1-3]

RAYMOND GAUTHIER

INVESTMENT INCOME RE MORTGAGE ON PROPERTY

LOCATED AT 1120, RUE ROUSSEL, CHICOUTIMI-NORD, QUEBEC

1972

1973

1974

1975

1976

TOTAL

Amounts received as

interest and repayment

of expenses incurred by

the creditor $2,487.50 $1,850.00 $1,000.00 $1,000.00 $1,166.10 $7,523.60 Expenses incurred by

the creditor to earn this

income 660.80 686.52 692.57 656.51 642.91 3,339.31 - property taxes

- heating 253.71 335.25 588.96 - insurance 87.00 151.00 238.00 - interest 91.00 51.00 142.00

660.80 864.52 743.57 910.22 1,129.16 4,308.27

Net investment income $ 1,826.70 $ 925.43 $ 256.43 $ 69.78 $ 56.94 $3,218.33 4.07.2 The appellant's claim appears on Exhibit 1-26, filed by the respondent.

4.07.3 This item of the Chicoutimi-Nord house was the subject of long discussions during the investigation. This property was acquired by the appellant around 1963 and sold on November 1, 1971 to Mrs. Yvette Lafond, wife of Mr. Jean Villeneuve, for the price of $17,500.

The payment being $1,000 in principal per year plus interest at the rate of 8'/2 per cent, and since it was impossible for the purchaser to meet the payments, the property was reconveyed to the appellant on May 13, 1974 by contract before the notary Jean-Pierre Du rocher. It was on the basis of this reconveyance that the respondent calculated a capital gain of $8,500, as appears in Schedule 5 of Exhibit 1-3 above.

According to Exhibit A-27, a mandate, terminating on July 31, 1974, to attempt to sell the said property for the price of $18,000 was given to Mrs. Yvette Lafond by the appellant. A sum of $1,000 was promised to Mrs. Lafond for this sale.

4.07.4 On October 29, 1974, before the notary Jean-Pierre Durocher, Mrs. Yvette Lafond sold the said property to Mr. Roger Savard (Exhibit A-80) for the price of $23,000. It is this amount which the respondent used as the price of disposition in the calculation of the capital gain. On the face of it, the legal situation is ambiguous. Was there really reconveyance by the appellant? In any case, in Exhibit A-80, the purchaser agreed to pay the appellant the amount of $23,000 in monthly instalments of $237.34 at an interest rate of 12 per cent. The balance owed by Mrs. Yvette Lafond in principal, interest and debt-carrying charges, in addition to taxes paid by the appellant and repairs made to the property, was included in the price of $23,000. According to Exhibit A-80, Mrs. Yvette Lafond intended to remain liable to Mr. Gauthier for principal and interest due in accordance with the original 1971 contract, that is, inter alia, the interest at 12 per cent of the initial price.

4.07.5 A work sheet of the appellant filed by the respondent as Exhibit 1-29 concerned the revenue and expenditures of the Chicoutimi-Nord property. It appears from this exhibit that, during the years below, the appellant received the following amounts in principal and in interest:

This exhibit shows the calculation of interest and principal owed by Mr. Jean Villeneuve at July 31, 1974. That sum stood at $16,863.34. On August 26, 1974 (Exhibit I-9, page 13), that is before the sale (Exhibit A-80), the appellant received $1,000 in principal from Mr. Jean Villeneuve. It appears that Mr. Roger Savard did not make payments too often because, according to Exhibits 1-17 and I-9 (page 20), it seems that Mr. Villeneuve made another payment of $1,000 in August 1975.

According to Exhibit 1-29, on April 2, 1977, the sum of $33,224.62 was owed to the appellant by Roger Savard and Yvette Lafond, the whole including principal, interest ($4,214), municipal ($1,059.75) and school ($997.12) taxes, insurance ($161), repairs ($4,030) and carrying charges ($545). A principal amount of $1,000 was apparently paid in 1976. As a result of the exhibits filed confirming the appellant's testimony, the preponderance of evidence is that the revenues were $1,487.50 in 1972 and $810.76 in 1973. Since the interest due was Calculated from October 29,1975 to April 2,1977, for a total of $4,212, there was therefore no interest payment during the period between 1975 and 1976. Since some sums were paid, they were therefore principal (see 4.14.4 and 4.14.5).

4.07.6 It therefore appears that Schedule 5 of Exhibit I-3 must be corrected accordingly to show that, for the years 1972 to 1976, the sum of $1,000 in principal must be subtracted from income.

4.08 During testimony, the appellant filed Exhibit A-32 concerning travel expenses, salaries, etc. (one of the five employees whom the appellant paid in cash). In November and December 1972, he received $416.75, and, during 1973, $2,169.80. At that point, during the filing of the exhibit, counsel for the respondent also stated that he did not doubt the witness's credibility.

4.09 The sums received by Mr. Léon Harvey: are they deductible? If so, what sums are deductible?

4.09.1 Mr. Léon Harvey, first witness to be heard in this case, introduced himself as an international business consultant, a profession which he himself defined as follows:

That is to say that it is trying to find the right people in the right place at the right time, and advising other people, generally in Quebec or Canada, or even elsewhere, advising them on problems which could occur or which should occur in various places. In short, it is a fairly broad profession. (transcript, volume 1, page 5)

[Translation.]

The witness began practising his profession in 1960 and was still practising it in 1990 at the time of his testimony.

4.09.2 It was around July-August 1973 that Mr. Harvey was put in touch with the appellant. Mr. Harvey's brother, who lived in Chicoutimi, knew the appellant and knew that he lent money. A client of the witness needed money at the time. [translation] ”. . . it was petro-dollar madness then; so I had opportunities, knowledge of various countries in the Middle East." (transcript, volume 1, page 6). Mr. Harvey contacted the appellant, who reached him in Montreal.

. . . I explained the situation to him. I explained that it did not require much Capital; it was expenses that had to be covered in order to go conduct inspections on various . . . That the people who wanted to go to the Middle East, that they wanted to know what was happening there, how to address the market, all that. So it necessarily took an amount of money in order to hold on while waiting.

It was then that we developed, let us say, temporarily; we tried to put in a little money in order to continue what we had begun. (transcript, volume 1, pages 7-8).

Mr. Gauthier started with five ($5,000) or six thousand dollars ($6,000), and then every month, two (2) months, there were other expenses that added up, and we were still waiting for results. So Mr. Gauthier advanced . . . He even personally advanced [money to] me because I had somewhat neglected some businesses that I had, and it was in that way that it. . . (transcript, volume 1, page 8)

[Translation.]

During 1973 and 1974, [translation] “ there were a lot of expenses. Personally, [the appellant apparently advanced] roughly twenty thousand ($20,000) perhaps; I can't say exactly. I don’t remember the exact amounts. Perhaps more, perhaps a little less.” (transcript, volume 1, page 9)

Mr. Harvey had business relations with the appellant from 1973 to 1976, both in and outside Canada.

4.09.3 In Canada, the witness and the appellant became involved with a Mrs. Roy from Chicoutimi in the area of carpets, floor coverings. There was one store in Chicoutimi and one in Jonquiére. The witness himself had a business, Distribution Argo. It was a wholesale business. Every month, Mr. Harvey went to Ontario (Lindsay) to buy roll ends [translation]"which we sold in Quebec as far as the North Shore”.

With the appellant, Mr. Harvey also had another business in St-Hubert, “Tissus et tapis Jumbo”. It was a retail business.

4.09.4 The projects outside Canada constituted the largest activity:

. . . projects involving the purchase and sale, contracts for, if you will, architecture, engineering, and sales of products as well, abroad, overseas. (transcript, volume 1, page 12)

[Translation.]

4.09.4(1) The witness gave a certain number of contacts which he had overseas and said how he had obtained them. He expressed himself as follows:

I had contacts in Syria, with the Government of Syria, and I had contacts in Kuwait and in Saudi Arabia, and Bagdad, Iraq, and Egypt. In all those countries, I had contacts at the governmental level through personal friends in the embassies here in Canada, to whom I rendered certain services in '67 [during the Montréal World's Fair].

It was particularly from ‘67 on that I had my international role, through the contacts. I had obtained . . . I had . . . that is to say, the Government of Quebec asked me in '67 to act as a consultant, because there was a problem regarding the V.I.P.s, as they call them

They had rented rooms, but the rooms did not exist; the hotels did not exist. So during the entire summer of'67,1 placed those people, I saved them their ten per cent deposit; well, you know about all that. I picked them up in Dorval . . .

My job, through Mr. Ouellette [Deputy Minister of Tourism], was to investigate and at the same time to go meet these people at the airport in order to take them to their . . . So that was how I met especially people like Rockefeller, people like the Rothschild’s, African princes, princes from virtually everywhere. Because I rendered them those services.

We stayed in touch afterward; it was from those contacts that the request for submissions came under various products.

I was often busy going to the United States, to New York, in particular, Boston, Toronto, Nova Scotia. I have been virtually everywhere. In France, depending on what was requested. And fairly often, it wasn't me who went there. Someone was sent in my place because I had to stay in Montréal to keep control, as it were, of all the files that had been started. (transcript, volume 1, pages 12-14)

[Translation.]

4.09.4(2) Mr. Harvey explained that the expenses he incurred were mainly travel expenses:

. . . I travelled around the world three times a year, to 40 countries.

Fairly often, it was for unofficial investigations for various governments, various companies, land deals, or. . . And then a guy like me on the road costs a $100,000 a year. That was in '80, '82. Today, it's more than that.

There were years when I made seven trips to Africa in the same year. . . . (transcript, volume 1, page 15)

[Translation.]

4.09.4(3) Mr. Harvey explained that, among the many projects, [translation] "Some things materialized, but were not ultimately finalized. . .”, for example, in Syria and Iraq. He expressed himself as follows:

In Syria. To the Government of Syria, we sold, in seventy . . . late'73, early'74 — I can’t say, with the submissions — we ultimately obtained a contract for eight Caterpillar bulldozers. There were three D-9s and five D-85.

So we did the tests, telexes and all that; everything was under control. The contract Ultimately, the government asked that a representative be sent to sign the contract on the spot. No one saw any objection; they sent the bureau chief to sign it.

I didn't have the time to go there just for that because everything was well structured and entirely approved on both sides: the contracts with the telexes, tests, all that, and even the letter of credit had been structured, confirmed, all that.

So when the letter of credit arrived via our government representative, an error had been introduced, by whom I don't know, but it was supposed to be eight bulldozers, five D- 8s, three D-9s with "rippers". But the D-8s had “ blades” and hooks, and the D-9s had“ blades” and “rippers”.

So the letter of credit showed eight bulldozers with “ blades” and "rippers", including three D-9s and five 0-85. The "rippers" cost $43,000 each. So, five more "rippers" meant $200,000. We weren't making that in profit. There remained $143,000 profit on the order, so we couldn't spend another $200,000. So we tried to get the Government of Syria to negotiate to redo. . . .

JUDGE:

Q. The contract?

A. That is to say, not the contract — the contract was well done — but the letter of credit: it had to be in proper order. So the wording had to be changed. So, in the end, that dragged on, then matters shifted with respect to Syria with Canada, then the troubles began, then it. . . .

Q. It fell through?

A. It fell through. I abandoned it in any case. (transcript, volume 1, pages 17-19)

[Translation.]

4.09.4(4) The Bagdad deal:

We had, with Kenworth . . . with Kenworth, it’s not Bagdad that defaulted; it's the company Paccar [sic] International that entered the field when all the negotiations were under way, and we had closed the deal for 1,000 trucks with garages and so On, a system; it took me six months to negotiate that; Paccar [sic] International didn't believe in it, so I had negotiated with Montréal, the Montréal subsidiary.

So when they saw that it was true, that it was really serious, and that the people, the representatives of the Bagdad government were coming here to Montréal, Paccar [sic] International of Washington, D.C., immediately decided that they were the ones selling the trucks outside the country, outside North America and that we had nothing to do with it. So they went directly, without notifying us, without telling us. So we were stuck with expenses that brought in nothing. (transcript, volume 1, pages 19-20)

[Translation.]

Later, the same company, Packard, once again beat out Mr. Harvey and his associates. Mr. Harvey then became discouraged:

. I . I told Raymond: "Drop the expenses; it's finished; there's nothing more to do with it. We're going to eat our shirts and more." I said,“ Mine is already eaten, and you're in the process of eating yours." (transcript, volume 1, page 22)

[Translation.]

4.09.5 International business was transacted under the cover of an entity bearing the name Prodimpex, in other words, "produits import-export" [translation: import-export products].

In addition to the sum of $20,000 advanced above, Mr. Harvey said that, "Prodimpex certainly cost a lot of money. . . . It was more than $100,000. I am certain of it" [translation]. He expressed himself as follows:

Q. Who supplied the funds?

A. Well, let us say, Raymond [the appellant] provided a large share of them. Some small shares were provided by. . . I knew of a $5,000, a $15,000 by Arabs who were part of it, who wanted to invest funds in order to help pay certain costs. But these were just very insignificant amounts compared to the expenses that were being incurred.

Q. To your knowledge, Prodimpex Incorporée was formed around 1975 perhaps. . .?

À. 1974, 1975.

Q. Right, had it already operated as a company? Had there been something? Are you a shareholder?

A. No, no I have never had, I have never seen a minute book or shares. There were never any meetings; we operated more as associates. We wanted it to move ahead, to find a way for it . . . for there to be something that materialized because there is no point in dividing up expenses when there are no revenues. Each of us paid what we could, then we waited for the rest. As long as there was no revenue, there was no problem. But we had planned that it should become a company. (transcript, volume 1, pages 23-25)

[Translation.]

4.09.6 The witness summed up the utilization of the money received as follows:

A. Travel expenses and hotel expenses, necessarily. That's all that included. .. . . There were some expenses for. . . . A little liquidity was needed in order to survive, but, in my case, there were no enormous amounts of money because I had an opportunity; my wife had an income; she worked, so that was never a problem. I have never been a big consumer, even abroad. We take care of our waistlines. . . .

Q. In any case, you did not purchase immoveable property with that?

A. No, no, no.

Q. Ah, good, that is what I was trying to determine.

A. It was pure [sic] expenses.

Q. It was more in order to maintain yourself in your business relations with the various countries of the world and to try to see. . . .

A. A lot of telephone calls, telexes, in addition to the trips; it was on that.

Q. Yes?

A. It doesn't take long to spend $3,000 on telephone calls. (transcript, volume 1, pages 26-27)

[Translation.]

4.09.7 Concerning the amount, the witness contended that he personally received between $18,000 and $25,000 from the appellant. Furthermore, the appellant apparently advanced the vast majority of the $100,000 spent by Prodimpex. (transcript, volume 1, pages 31-32).

4.09.8(a) In cross-examination, the witness asserted that, at the first meeting with the appellant in 1973, they had solved the problems of "jumbo Inc.” and "Distribution Argo Inc.” together.

4.09.8(b) According to the witness, the money advanced by the appellant was his own money. "There was no one behind it” [translation] (transcript, volume 1, page 37). A cheque in the amount of $6,500 to the order of Léonce Harvey and dated December 17, 1973 was filed as Exhibit A-16.

4.09.8(c) According to the witness, Tapis et Tissus Roy [sic] (Chicoutimi, Jon- quière) lasted only two or three months.

4.09.8(d) Prodimpex was an organization whose head, at least at the outset, was Mr. Jacques St-Laurent, with an office located at 1010 Ste. Catherine. There was also the witness and Mr. Dennis Lynch, a retired engineer. Concerning the clientele, the witness said," First, we definitely did not do subcontracting. They were direct contracts from governments" [translation] (transcript, volume 1, page 46). As an example, he cited a submission to the Government of Kuwait made for a Montreal company for the construction of two multi-storey buildings, a $43 million project. Germans and Swiss won the contract. Fees for the work done on the submission would be received only when the submission would have been awarded. Each time, there was a written agreement between Prodimpex and the company providing a mandate to do a given piece of work, in particular the submission.

According to the witness, he received 75 telephone calls a day for all kinds of things. “We did cleaning, then we came up with a project every week, sometimes two. . . . Import- export is continual buying and selling. It’s trading" [translation] (transcript, volume 1, page 52).

In addition to the two building projects in Kuwait, the witness also detailed projects for the sale of bulldozers and baker’s ovens. (transcript, volume 1, pages 64-65) He again explained the project for 1,000 trucks with garages to Iraq, (transcript, volume 1, pages 69-72)

There were also the offers for the purchase and sale of sugar. ("That was madness,” the witness said [translation].) The sugar sold for as much as $1,000 a ton (transcript, volume 1, page 68). It was impossible to find any.

4.09.8(e) There was no written contract between the witness and Messrs. St- Laurent and Lynch. They did the work, trying to earn revenues. The appellant advanced him the funds for running expenses: telephone, rent, travel. Mr. St- Laurent, the director, did not issue cheques without vouchers. According to the witness, the appellant no doubt had to check expenses when he supplied the funds. In 1973 and 1974, he apparently advanced $100,000 (transcript, volume 1, pages 48-52).

4.09.8(f) According to the witness, it was the appellant who supplied the first funds to the organization, which took the name of Prodimpex". It was from that point that the witness and Mr. St-Laurent, who had the international contacts, started projects at that level. Previously, it had been only carpets within Canada.

With Jumbo, Argo, all that, we operated in carpets, then in. . . . But I, at my personal office, I nevertheless had continual contact with the outside. Then Mr. St-Laurent had some as well. So we wanted to pool that, but we didn't have the resources. My stores weren't producing the resources, so I couldn't pay the expenses to go overseas because that’s when I asked Raymond to advance us funds (transcript, volume 1, page 56).

[Translation.]

4.09.8(g) At times, Prodimpex had major projects outside Canada. Then, depending on the need, contractors, engineering or architectural firms were put in touch and agreements were reached.

It was hard for the witness to provide documents on all this work, all these trips, between 1973 and 1979 because all the books were stolen on two occasions. The office was broken into twice.

4.09.8(h) The organization’s banking institution was the National Bank of Canada, virtually opposite their office on Ste. Catherine Street. Messrs. St- Laurent and Lynch signed the cheques.

4.09.8(i) The witness said that they had a lot of expenses, but that revenues were virtually nil: $5,000 from C.O.J.O. (Comité organisateur des Jeux olympiques [Translation: Olympic Games Organizing Committee), an amount to Prodimpex for an address by Mr. Lynch. The only revenues were advances made by clients to contribute to expenses "pertaining to very specific trips. On that point, the major Canadian corporations . . . groups of consulting engineers, such as S.N.C. As you know, those people also need contacts." [translation] (transcript, volume 1, page 61)

4.09.8(j) The witness did not remember whether a charter had been obtained for Prodimpex. On this matter, he expressed himself as follows:

We all told ourselves that together, if one day we made profits, we would get a charter, and we would divide the shares.

Q. Only if there was revenue?

A. Well, yes, we had to start by breaking through somewhere. But we always thought that it was going to succeed from one week to the next. So you keep going, you keep going, you keep going.

But we realize that more than $100,000 was needed to make it in that field. Because the big companies spend millions of dollars. (transcript, volume 1, pages 63-64)

[Translation.]

4.09.8(k) Concerning the division of possible revenue, the witness said:

Well there, there was . . . We said to ourselves that when it happened, we would talk about it. But it was mainly Mr. . . the more money Mr. Gauthier put into it, the greater chance he had of having a majority of shares if shares were ever distributed. Because it is certain that the more you put into a business, the more revenue you will have, if there is any revenue, (transcript, volume 1, page 74)

[Translation.]

The witness emphasized that there had been no structuring period during the said years, or very little. "We had the people we needed; we had the offices" [translation] (transcript, volume 1, pages 75-76).

The efforts and money supplied apparently served as a basis for distributing the company's shares and thus revenue. Further on (transcript, volume 1, page 104), to the question from counsel for the respondent: what kind of capital was in there?, the witness answered: "We had nothing. From the point of view of capital, it represented only expenses" [translation]. I am of the view that the reporter should have put a period after the word “ capital”, not after the word "nothing", thus producing: "We had nothing, [sic] From the point of view of Capital, it represented only expenses" [translation].

4.09.9 In re-examination in chief, Mr. Harvey stated that he had continued to give consultations and to make projects materialize both within and outside the country. For example, he had formed a group and succeeded in selling 11 CL-144 airplanes and 60 engines to countries in Central America and Africa. He had had exclusive sales rights for 30 days. The federal government had been trying, unsuccessfully, to sell them for a year. Previously, in 1972, he had caused 500 Canadian army trucks to be sold for $2,500 per truck.

Today, because of his health, he only consults.

4.09.10 Counsel for the respondent expressed his surprise at the absence of evidence on the subject of contracts granted at the international level. The witness answered:

A. Sir, in international business, the contract is a hand shake.

JUDGE:

Q. What? The contract is a hand shake?

A. It's a hand shake, and the quality of the individual who gives it. If your hand shake is not worth a contract, it doesn't matter whether the contract is as thick as a bible; it will be worthless at the international level, where there is no law. An oral contract cannot be broken.

So the contracts of $100,000,000 or more which I have seen granted before me, acted like at a Swiss bank; [sic] it was more than $100,000,000; everything was done with a hand shake.

Mr. MARECKI:

Q. I will ask the question once more. How do you explain the absence of contracts during this period for Prodimpex?

A. It was a different period. Nineteen seventy-four, '74, if you remember well, there was a crisis, the madness called the petro-dollar. The countries. . . . It was attractive because no one knew the Middle East.

To give you an example, I opened the markets in the Middle East for the lumber that is currently being sold in Quebec. I am still . . . I received another order for lumber recently, and it's mills that have never given me a cent, but I opened the markets for them.

They gave, on the first order, they gave me a few bucks in order to supply, to go find the markets. Then, after that, it was over. Because you have no control as a consultant; you have no control over orders.

If it pays, that's good. If it doesn't pay . . . what's a contract worth, Your Honour, if a guy doesn't want to pay? You can sentence anyone to pay, but if he has no money. . . .

That's what happened to me. I have lost $1,000,000 overnight already (transcript, volume 1, pages 94-95).

[Translation.]

The witness explained that, if their group (Messrs. St-Laurent, Lynch, the appellant and himself) were unable to secure major international contracts from 1973 to 1976, it was mainly because of the lack of experience, inter alia, of Quebec businessmen and even large companies that want to have it all without following advice.

There was also the fact that many submissions from foreign countries were solicited pro forma because the contract had already been promised to someone else. But the Canadian government had a good name, and appearances had to be kept. Much money and energy were nevertheless expended to prepare the said submissions.

Subsequently, after 1976, after the group's dissolution, contracts were obtained by members who had continued individually. One of them made $300,000 in a single deal with Saudi Arabia. As for the witness, it took him three years to obtain a contract to sell the pulp and paper of a Quebec company, without a discount, outside the country. However, 97 per cent of our pulp and paper is sold by New York at a 10 or 15 per cent discount on the international price” [translation]. This discount, according to him, may be explained by the fact that the majority of paper mills have always been financed by the English and Americans. The discount is provided at the financing contract level. Today, an ever decreasing number of paper companies are financed by foreigners, and the international price can thus be maintained without a discount.

4.10 Were the expenses incurred in the context of Prodimpex or in the context of the business of Tapis Jumbo and other allowable expenses? The appellant's testimony must also be considered.

4.10.1 According to the appellant, he apparently advanced approximately $100,000 to Prodimpex, including the sum of $42,000, which he apparently borrowed from the National Bank of Canada (transcript, volume 3, page 123) at the start of July 1974. The appellant filed financial statements of Prodimpex's income for the period from July 1, 1974 to June 30, 1975, showing a net loss of $84,441 (revenue $7,715 and expenses $92,156), as well as for the period from July 1,1975 to June 30, 1976 (no revenue, and expenses of $16,219).

The income statements and summaries (Exhibit A-27) were supported by accounting cash books (Exhibit A-28) and cheques and bank statements (Exhibit A-29). The bank was the National Bank of Canada, Branch 143, account number 01-948-20. Everything was recorded in detail on the summary by the appellant. The Court was able to check, and it appears that the books were well kept.

The Bank lent $44,000 to Prodimpex, a loan endorsed by the appellant, $1,100 to Léonce Harvey and $66,714.82 to the appellant ($39,805 in 1974-75 and $26,909.82 in 1975-76). The whole was supported by appropriate vouchers.

4.10.2 The principal expenses among those totalling $92,156 for the fiscal year ended June 30, 1975 and $16,219 for the one ended June 30, 1976 were:

These figures do not show, among the appellant's advances, the sum of $9,400.88, debited on March 24,1975 from the account at the National Bank of Canada, Jonquiére, in favour of Mr. Léonce Harvey, as appears from Exhibit A-20(b). The same Exhibit A-20(b) shows another transfer to Léonce Harvey, dated March 19, 1975, in the amount of $239.78.

Furthermore, according to Exhibit A-51, an amount of interest of $5,570.77 was owed in 1976 by the appellant to the National Bank and Provincial Bank. This was a debt of Prodimpex, the whole according to a statement prepared by Mr. Yvan Gagnon, the appellant's associate.

4.11 Proof of loans

4.11.1 One of the appellant's major claims is that, on the one hand, he conducted very numerous financial activities, including the Prodimpex deal, from 1973 to 1976, and many others as well, not all of which were profitable. For these purposes, the appellant contended that he borrowed money or endorsed these persons at the bank and was subsequently forced to pay interest.

4.11.2 A statement of affairs was filed as Exhibit A-30 on December 23, 1980. Liquid assets stood at $186,100 and liabilities at $1,984.041. The latter were distributed as follows:

Of the contingent liabilities totalling $1,552,855, the sum of $1,283,845 had been taken on through endorsements.

The appellant objected to this petition in bankruptcy filed by the National Bank, whose claim stood at more than $300,000. The appellant appealed to the Superior Court. On March 1, 1982, a Superior Court decision ordered that the appellant-debtor be declared bankrupt and that a receiving order be issued against him. The appellant appealed from this decision to the Court of Appeal, which granted him a stay in order to pay his debts.

On September 17, 1985, upon application by the appellant in the instant case, the Superior Court rescinded the receiving order issued March 1, 1982. The reasons for decision were that the applicant had paid most of the creditors to their satisfaction and that he “was able to honour his obligations in general and as they became due" [translation].

The evidence and the decision of March 1, 1982 were reproduced in the joint file of the Court of Appeal (Exhibit A-47). It is admitted that, of the sum of $300,000 owed to the National Bank, $253,814 were loans made to various individuals or companies whom the appellant had endorsed or for whom he had co-signed. This admission was made by the witness of the National Bank, Mr. Michel Vézina.

4.11.3 Exhibit A-33 confirms Mr. Vézina's testimony in detail. A letter dated December 20, 1978, sent by the Assistant Manager of the National Bank of Canada, demanding the sum of $344,696.28 was followed on January 3,1979 by a letter from counsel for the latter, claiming the sum of $320,551.28. This last letter reads as follows:

Dear Sir:

We have received instructions from our client, the National Bank of Canada, to claim from you the sum of $320,551.28, being the unpaid principal and interest as of December 25, 1978 for advances for which you are responsible either as subscriber of the notes, or as endorser, or as guarantor, and specifically concerning the following accounts:

(1) Three notes subscribed by you on January 25, 1977, January 31, 1977 and February 10, 1977, the balance of the principal and interest of which are $25,217.61;

(2) A note subscribed by René and Jacqueline Boily dated June 7, 1977 and endorsed by you, the balance of the principal and interest of which are $19,936.67;

(3) A note subscribed by Bernard Coulombe on February 1, 1977 and endorsed

by you, the balance of the principal and interest of which is $510.44;

(4) A note subscribed by Claude Fortin on December 5, 1977 and endorsed by you, the balance of the principal and interest of which is $9,073.97;

(5) A note subscribed by Jean-Jacques Gagnon on January 18, 1978, endorsed by

you, the balance of the principal and interest of which is $27,064.05;

(6) A note subscribed by Michèle Dubois Spencer on January 18, 1978, endorsed by you, the balance of which is $17,468.50;

(7) A note subscribed by Rosaire Savard on February 10, 1978, endorsed by you, the balance of the principal and interest of which is $5,241.68;

(8) A note subscribed by J.H. Ouellet on December 23, 1977, endorsed by you, the balance of the principal and interest of which is $24,779.89;

(9) A note subscribed by Marguerite R. Gauthier on August 9, 1977, endorsed

by you, the balance of the principal and interest of which is $17,171.16;

(10) A note subscribed by Georges Pappas on November 19, 1976, endorsed by

you, the balance of the principal and interest of which is $28,886.63;

(11) By virtue of your guarantee on behalf of P.D.C. Inc., you are liable for $28,813.66, the balance of the principal and interest;

(12) By virtue of your guarantee on behalf of Lesta Inc., you are liable for $28,563.85, the balance of the principal and interest;

(13) By virtue of your guarantee on behalf of" Les Immeubles Maribo Inc.”, you are liable for $25,308.22, the balance of the principal and interest;

(14) By virtue of your guarantee on behalf of" Centre de Camion Nord-Est Inc.”,

you are liable for $27,802.69, the balance of the principal and interest;

(15) By virtue of your guarantee on behalf of "Les Entreprises Greta Inc.”, you are liable for $17,141.19, the balance of the principal and interest;

(16) By virtue of your guarantee on behalf of "Voyage Ultra Inc.”, you are liable for $15,548.06, the balance of the principal and interest;

(17) A note subscribed by Voyage Ultra Inc. on January 19, 1978, endorsed by you, the balance of the principal and interest of which is $2,023.01.

Should you fail to forward the sum of $320,551.28, in addition to the cost of this letter, by January 10, 1979 at the latest, legal proceedings will be instituted without delay.

Please act accordingly.
Yours sincerely,
REINHARDT, DESCHAMPS & LEBEL,
Per: Maurice LeBel
Cost of letter: $20	[Translation.]

4.11.4 As Exhibit A-34, the appellant filed a list of persons to whom he had lent since 1964. This list is not exhaustive:

11. Mrs. Fernande Tremblay $6,500

Exhibit A-38 shows that Mrs. Fernande Landry-Tremblay borrowed $7,500 on July 7, 1975 at an interest rate of 12 per cent.

12,13. José-James O'Reilly	$50,000
Michael O'Reilly	$90,000

Exhibit A-39 filed jointly shows a series of loans at 13 per cent interest from June 21, 1988 to September 20, 1989, totalling the sum of $141,924.08. On October 29, 1990, interest stood at $30, 411.87. No principal had been paid. This money is at times paid directly to the borrowers, at others to the borrowers’ creditors.

14,15. Denis Ouellet

J.H. Ouellet

In his testimony (transcript, volume 4, page 155), the appellant said he endorsed Denis Ouellet for $250,000, but did not remember the amount he lent him personally. He was obliged to pay $15,000 as a result of his guarantee. As for J.H. Ouellet, he endorsed him for $10,000.

The Ouellet brothers had a truck sales company called Centre du Camion Nord-Est Inc. In its letter (Exhibit A-33, 4.11.3), the National Bank of Canada showed endorsements in the order of $24,779.89 for J.H. Ouellet at item 8 and for $27,802.69 for Centre du Camion Nord-Est Inc. at item 14.

16.	Gaston Boulanger	$5,000
	Loan to start up the company B.B.D.G. (Boulanger, Boulanger, Deschênes,
	Gauthier). This was an investment. The loan must have been made around
	1976.
17.	Roland Gauthier	$4,000
	This loan dates from 1973. The borrower was the appellant's brother.
18.	Jean-Jacques Gagnon	$25,000	1978
	The National Bank of Canada claimed $27,064.05 from the appellant at item
	5 in its letter (Exhibit A-33, 4.11.3). The borrower was starting out in a
	business producing advertising plates for the front of automobiles.
19.	Georges Pappas	$25 ,000	1976
	This was an endorsement. The National Bank of Canada claimed $28,886.63
	from the appellant at item 10 in its letter (Exhibit A-33, 4.11.3). The sum
	borrowed was apparently invested in a centre called Glen Mountain Ski
	Resort.
20.	Colonel St-Arnaud	$20,000
	This was a loan made at the same time as the endorsement of Georges
	Pappas in 1976. Both invested in Glen Mountain Ski Resort.
21.	Claude St-Arnaud	$10,000
	This was an endorsement. The borrower invested in a radio station in
	Dolbeau and repaid the entire amount.
22.	Lynda Ouellet	$15,000	1988
23.	Denis Caron	$ 5,000	1988
24.	A major in aviation	$ 5,000	1988
	This loan was made for the purchase of an immoveable property in Mon
	treal.
			[Translation.]

4.11.5 The appellant filed jointly as Exhibit A-33 the demand of January 3, 1979 by the legal counsel of the National Bank of Canada, which is cited in full above at paragraph 4.11.3. This letter did not distinguish between principal and interest in the amounts due. However, another document was also part of Exhibit A-33; this was the letter of December 20, 1978 addressed to the appellant by the assistant manager of the National Bank of Canada, Mr. Denis Auclair.

This letter drew the following distinction between the principal of $320,852.37 and the interest of $23,843.91.

You are liable to the National Bank of Canada for the sum of $344,696.28, including a personal note, endorsements and guarantees, details of which we are providing you, in addition to accrued interest to December 25, 1978 inclusive.

These liabilities may therefore be summarized as follows:

PERSONAL NOTE	PRINCIPAL	INTEREST		TOTAL
Gauthier Raymond	$ 25,000	$	256.85	$ 25,256.85
INDIRECT LIABILITY ON
ENDORSEMENT
Bédard, J.E.	$ 11,602.37	$	134.20	$ 11,736.57
Boily, René & Jacqueline	19,750		231.32	19,981.32
Centre du Camion Nord-Est Inc.	25,000		2,802.69	27 ,802.69
Coulombe, Bernard	500		12.33	512.33
Fortin, Claude	9,000		103.56	9,103.56
Gagnon, Jean-Jacques	25,000		2,064.05	27 ,064.05
Gauthier, Mrs. Marguerite	17,000		209.59	17,209.59
Pappas, Georges	25,000		3,886.63	28,886.63
Ouellet, J.H.	24,500		279.89	24,779.89
Spencer, Michèle Dubois	16,000		1,468.50	17,468.50
Voyages Ultra Inc.	2,000		23.01	2,023.01
Royaume de l'Électronique Enrg.	5,000		241.68	5,241.68
	$180,352.37	$11,457.45		$191,809.82
INDIRECT LIABILITY ON GUARANTEE
Centre du Camion Nord-Est Inc.	$25,000	$2,802.69		$27,802.69
Immeubles Maribo Inc. (Les)	25,000		308.22	25,308.22
Lesta Inc.	25,000		3,563.85	28,563.85
P.D.C. Inc.	25,000		3,813.66	28,813.66
Entreprises Gréta Inc. (Les)	15,500		1,641.19	17,141.19
	$115,500	$12,129.61		$127,629.61
			[Translation.]

4.11.6 On February 15, 1982, the National Bank of Canada filed a petition in bankruptcy against the appellant. The latter was declared bankrupt by a decision of the Superior Court delivered on March 1, 1982 (Exhibit A-47).

On August 18, 1983, however, a final settlement was reached upon the payment by the appellant of the sum of $45,000 (Exhibit A-48).

4.11.7 In January 1980, the appellant stood surety for a sum of $50,000 borrowed by Mr. Joseph-Henri Ouellet. When the latter went bankrupt, the appellant was ordered by a decision of the Superior Court dated February 7, 1991 (Exhibit A-46) to pay the principal of $50,000 and interest owed at the rate of 15 per cent since May 1, 1983.

4.12 Investments

4.12.1 On May 29, 1973, the appellant acquired ten shares of the capital stock of Motivo Inc. for the total amount of $1,000 (Exhibit A-40). This company, whose secretary was Mr. Clément Miclette, had its head office in Kenogami.

4.12.2 On October 4, 1973, the appellant acquired 12,500 common shares, with no par value, in the company Opéra Diamond Ltée. The head office of that company was on Sherbrooke Street in Montreal. Mr. Jean G. Douville was its president, and Mr. Claude Béland its secretary. This company apparently went bankrupt thereafter. Nothing indicates what amount was paid for the two certificates. The certificates number 0-061 for 10,000 shares and number 0-062 for 2,500 shares were filed as Exhibit A-41. However, mention is made of this investment in Opéra Diamond Ltée on the balance sheet as at September 15, 1973 in Exhibit A-1, and the cost is $10,000.

4.12.3 It appears from the same Exhibit A-1, the balance sheet as at September 15, 1973, that the appellant possessed:

— 700 of 2,500 shares in Tissus et Tapis Mme Roy Chicoutimi Inc.:	$ 7,000
— 300 of 2,500 shares in Tissus et Tapis Mme Roy Jonquiére Inc.:	$ 3,000
— 200 of 1,000 shares in Les Immeubles R.G.H. Ltée:	$ 2,000
— 50 per cent of shares in Ben Transport Inc. and Garage Alger Inc. For
the valuation of these shares, the words” offer refused” are written:	$50,000

4.13 Interest earned and interest paid

4.13.1 In his income tax returns below (Exhibit I-2), the appellant declared the following interest as income:

This interest was included in the appellant's income.

4.13.2 The appellant also claimed deductions for the following interest paid for the years below:

These interest deductions were disallowed by the respondent. The content of the following exhibits should be seen in detail:

4.13.2(a) 1975 Exhibit A-49

It should be noted at item 1 that the sum of $549.53 concerns the accounting firm of Gauthier, Gagnon (Yvan). This amount was taken into consideration as a deduction in the calculation of the firm's revenue. It was part of the sum of $1,514.73 (interest and bank charges) shown in the firm's statement of revenue and expenditure appended to the 1975 income tax return (Exhibit 1-1). The profits were distributed (paragraph 4.21) on the basis of the conclusions of the analysis of the appellant's financial activities. Only $7,024.65 ($7,574.18 — $549.53) could therefore be taken into account.

4.13.2(b) 1976 Exhibit A-51

Concerning item 1, in 1976, the sum of $3,774.31 was paid in interest to the National Bank alone (4.17.6). Subject to the conclusions of the analysis, this amount should therefore not be counted twice. There would therefore remain $17,615.71.

4.13.2(c) 1977 Exhibit A-53

Subject to the results of the general analysis, the interest of $3,762.75 collected by the firm Gauthier, Gagnon was already considered in the calculation of the firm's profit.

4.13.2(d) 1978 Exhibit A-54

1. Bank of Montreal, The Bay $15,000 — 13 / per cent x 25/365 $ 138.69

2. Caisse populaire St-Laurent $9,000 x 12 per cent	1,080
$20,000 X 13 per cent	2,600
3. Bank of Montréal, Arvida $9,000	2,750
4. Canadian Imperial Bank of Commerce $30,000 x 12 per cent	3,600
5. Federal Business Development Bank	1,000
6. Mortgage loan	7,500
7. National Bank $45,000 x 12 per cent	5,400
8. Les Filles de Ste-Marie $24,000 x 12 per cent	2,880
9. Gauthier Gagnon, Provincial Bank	4,183.13
10. Carmen Duchaine	2,800
11. Jean-Marie Boily $34,120 x 12 per cent	4,094.40
Total	$38,026.22
	[Translation.]

The interest from the firm Gauthier, Gagnon ($4,183.13) was already considered in the calculation of the accounting firm's profit.

Concerning item 8, the appellant had to pay the sum of $53,000 in 1983 to settle some bad investments (4.16).

4.13.3 The Court notes that the appellant had had to pay interest for a long time. In the liabilities on the balance sheet as at September 15, 1973 (Exhibit A-1), the appellant had long-term debt of $36,488.11, including $24,500 in longterm notes. In addition, he had a contingent liability of $22,800, which consisted of endorsed notes. It therefore follows that interest had to be paid.

4.14 In determining the appellant's income for the years 1973 to 1977, the respondent took into account the appellant's receipts at the National Bank of Canada and at the Bank of Montreal, the whole comprising 23 8” x 14” pages filed as Exhibit 1-9.

According to the appellant, a certain number of these deposits which the respondent considered as revenue were loan repayments.

4.14.1 In addition, Exhibit 1-19 entitled," Billing of receipts from 1/11/72 to 31/10/76

— Period during which he [the appellant] operated alone + subsequent receipts from his own accounts receivable” [translation] is a document on the basis of which the respondent prepared Exhibit 1-9.

4.14.2 According to the notes on file written by the auditor on the first pages of Exhibit 1-19 and forming part of this exhibit, the respondent did not include in income the sum of $44,000 (eight different accounts), which had not been included in income in the appellant's return and which consisted of loan repayments. Among those accounts, there were Roger Chouinard, $8,000; J.M. Boily, $15,000; R. Harvey, $4,000; Mrs. L. Lévesque, $4,000; Claude Roy, $4,000; Tissus et Tapis Mme Roy Chicoutimi, $2,000; Tissus et Tapis Mme Roy Jon- quiére, $1,000; Tissus et Tapis Jumbo, $6,000.

Separate from the above sum of $44,000, amounts totalling $175,000 originating from a religious community to be invested with General Trust of Canada also were not included in the appellant's income.

4.14.3 The following receipts in issue were made at the National Bank of Canada.

It appears from Exhibit 1-19 that Mr. Léonce Harvey apparently made payments of $1,000 on February 28, 1974 and of $5,000 on March 21, 1974, which were repayments and which the respondent considered as income. Mr. Léonce Harvey never paid fees to the appellant. These were repayments of advances.

4.14.4 In 1975, the respondent considered as income sums which the appellant contended were principal payments (repayments, etc.) or payments received in trust.

The three preceding amounts totalling $10,000 were loan repayments, according to the appellant.

According to the respondent, however, the $16,000 loan to Mr. Chouinard was made on February 28, 1973 and was repaid as follows: $8,000 on August 28, 1973 (Exhibit 1-19, page 19), $4,000 on September 29, 1973; $1,000 on September 29,1973; $1,000 on October 29, 1973; $1,000 on November 20, 1973 and $1,000 on December 20, 1973. The other payments were considered as income (Exhibits 1-19, page 16, and I-9, page 20).

This amount of $10,000 received in 1975 was therefore correctly included in income. There remains a balance of $2,825 not to be included in income.

4.14.5 The deposits below, the correctness of whose inclusion in his income the appellant denies, were made at the Bank of Montreal.

4.15 1977 Exemption and depreciation

4.15.1 Concerning his return for the year 1977, the appellant claimed not to have claimed the spousal exemption of $1,990.

4.15.2 For the same taxation year, depreciation for his automobile was not $449, but $2,136. An additional amount of $1,687 should therefore be allowed. Exhibit A-79 shows the purchase and the appropriate calculation of a Continental car of $7,000 in January 1977.

4.16 The religious community

The appellant wished to emphasize that he had acted only as a dummy for the religious community, on whose behalf he transacted two (2) to three (3) million dollars. He lent $175,000 to Alperta Inc., a Diréquair shareholder (Exhibit 1-32). That loan is retraced in Exhibits A-9 and A-19 and in the receipts in Exhibit 1-9 on December 11, 1974 for $100,000 and January 17, 1975 for $75,000. The appellant argued that, even though he was only a dummy, he had been obliged to repay that community the sum of $53,000 for bad investments made. He had been obliged to pay interest [4.13.2(b), 4.13.2(d)].

4.17 Prodimpex

A series of documents were filed jointly as Exhibit A-77 concerning, inter alia, claims by the National Bank of Canada and the Bank of Nova Scotia concerning Prodimpex. The letters from the National Bank of Canada dated from 1975, 1976 and 1977.

4.17.1 A letter of April 12, 1977 was addressed to the appellant by the National Bank of Canada informing him that it had received to that date the total sum of $14,125 against advances of $44,000 on October 2, 1975. The sole payer was the appellant, even though Messrs. Denis Lynch, J.M. St-Laurent, Georges Pappas and Karl Mainberger had all subscribed to the note. The interest was at the rate of 12 A per cent. The unpaid balance was $29,875. It therefore appears that the sum of $14,125 was only the principal paid, not to mention the interest.

4.17.2 The letter of June 19, 1975 from the National Bank of Canada already spoke of a debt of $43,340.25, including a $35,000 note and a bank overdraft of $7,934.46, plus total interest due of $372.40. In addition, in 1975, the appellant transferred as collateral a $5,000 Canada Savings Bond with accumulated interest at five per cent and expiring on June 1, 1988.

4.17.3 In addition, as a result of a series of accounts and payments made, it appears that, from February to December 1976, the appellant paid the National Bank of Canada in interest the sum of $3,774.31 and, in the first three months of the year 1977, the sum of $1,193.60, a monthly average of $382.14 for the 13 months. That was in addition to the $5,000 in principal paid from June 1976 to March 1977.

4.17.4 Still under Exhibit A-77, a letter of December 14, 1979, received from the National Bank of Canada, constituted an acknowledgement of payment of $495.17 for interest as at September 22, 1979. The letter points out that the unpaid interest to November 22, 1979 stood at $411.14 "after deduction of the sum of $125 represented by the cashing of coupons on Canadian government bonds held as collateral” [translation]. It therefore appears that the interest for the two months (September 22 to November 22) stood at $561.14 ($411.14 + $150).

4.17.5 It appears from the documents that, at the end of November 1979, the outstanding principal was still $22,500. One may therefore conclude that the appellant paid interest to the National Bank of Canada from April 1977 to November 1979 (32 months) at a rate of at least $240 a month, or $7,680 (April to December 1977: 9 x $240, or $2,160; 12 months in 1978, or $2,880; and 1979: 11 months, or $2,640). Consequently, between the start of April 1977 and the end of November 1979, the appellant repaid $7,375 in principal ($29,875 x $22,500), all while continuing to pay interest at 12 A per cent.

4.17.6 It therefore appears from the above information that the appellant paid the following sums in interest for Prodimpex:

4.17.7 Tissus & Tapis Jumbo Inc.

On September 22, 1976, the National Bank of Canada (Exhibit A-77) notified the appellant that, having stood surety for the $10,000 note for Tissus et Tapis Jumbo Inc., he was required to pay principal and interest of $534.45. To this letter, the appellant answered on October 5, 1976 that the house of Mr. Léonce Harvey had been sold, that the notarized contract would be signed on November 22 following and that the debt would then be paid. Exhibit A-74 also shows that the appellant issued a series of postdated cheques to the order of the Federal Business Development Bank concerning Tissus et Tapis Jumbo Inc. At the start of February 1977, the debt was $27,000. The series of 12 cheques (March 1977 to February 1978) paid $6,500 in principal and $2,110 in interest in 1977, and $340 in 1978. In December 1983, the Bank accepted the sum of $1,000 as final settlement of a debt not appearing in the document.

4.17.8 B.B.D.G.

On May 18, 1976, in a letter to the Bank of Nova Scotia (Exhibit A-77) (Mr. P. F. Howard), the appellant authorized Mr. N. Leclair to take possession of matured coupons on $30,000 worth of Canadian government bonds, in perpetuity, which the bank held as collateral on the appellant's behalf in support of advances made to B.B.D.G. The letter contains no mention of the amount borrowed. In addition, Exhibit A-76 shows that a decision of January 9,1979 ordered the appellant to pay the sum of $25,952.70 plus interest and charges to the Bank of Nova Scotia.

4.18 Boily, Tremblay, Gauthier

A letter of October 25, 1983 (Exhibit A-67) written by Mr. J.L. Chouinard, Manager of the Bank of Montreal (Jonquière branch), stated that the Bank would accept as full and final payment the sum of $5,500 paid by Mr. Raymond Gauthier for the advances made to Messrs. René Boily ($9,100), Armand Tremblay ($5,106) and Raymond Gauthier ($13,379).

4.19 Mortgage loan

At the start of the year 1979, the appellant had guaranteed a loan of $75,000 with interest at 12 per cent as a mortgage loan. On June 27, 1980, the sum of $9,000 in interest was due. Judgment was delivered on December 5, 1980, totalling $84,682.50 with costs. The appellant settled the whole for $15,000. In 1984, in a series of five cheques spread out from December 1983 to April 1984, the defendants in addition to the appellant were Bob R. Larouche Inc. and Placements Claude St-Arnaud Inc. (Exhibits A-64 and A-65).

4.20 Centre du Camion Nord-Est Inc.

It appears from Exhibit A-68 that the Canadian Imperial Bank of Commerce launched an action against the Centre du Camion Nord-Est Inc., Mr. Denis Ouellet and the appellant (who had stood surety) for $35,869 on March 16, 1979. Judgment was delivered on June 19, 1981. The bank settled for an amount less than the appellant had paid.

4.21 Firm Gauthier, Gagnon (Yvan)

4.21.1 Year 1975

In his 1975 tax return, the appellant appended, inter alia, a financial statement for the period ended October 31, 1975 for the revenue of the accounting firm formed by the appellant and Yvan Gagnon. The company's net revenue was $57,157.19, and the allocation as follows: Raymond Gauthier, $37,152.17; Yvan Gagnon, $20,005.02

4.21.2 Year 1976

The figures from the statement of revenue and expenditure for the year 1976, that is from November 1, 1975 to October 31, 1976, for the same accounting firm were as follows:

In addition, the appellant had to take into account, inter alia, his income and interest expenses.

4.22 The appellant filed a charitable donation of $1,890 (Exhibit A-3). This was money originally lent in 1972 without interest to the" Fabrique de la paroisse de Fatima”. On July 24, 1990, the appellant informed the parish that he had remitted this account receivable. The "Fabrique" then issued him a receipt for $1,890 with the annotation, "1972 fund-raising campaign".

The Court is of the view that the receipt is good for the year during which he remitted his account receivable. It was during that year that he made the donation.

Furthermore, the entry under the item investment" in the balance sheet, Exhibit A-1, as at September 15, 1973, reads "Fabrique N.D. de Fatima, $1,115”. This means that the appellant considered it an investment. In 1990, he decided not to be repaid, to make a donation. That donation cannot be valid for the year 1972.

4.23 For the year 1978, the appellant filed an official receipt (Exhibit A-55) from the Liberal Party of Canada, according to which he paid the sum of $100 on December 21, 1978. It is known that the Act permits a deduction of $75 in the calculation of taxes.

4.24 Concerning the year 1975, the appellant filed two receipts from charities (Exhibit A-50): one for $50 issued by the "Corporation Épiscopale Catholique Romaine de Chicoutimi” on September 1, 1975, the other for $200 issued on June 5,1975. These amounts were not claimed in the tax return (Exhibit 1-1).

5. Year 1980 — notice of appeal 85-503(IT)

The facts alleged in the amended notice of appeal (2.02(2)A and the reply to the notice of appeal (2.02(2)B concerning the 1980 taxation year and which were confirmed by the testimony of the witnesses and the exhibits filed may be summarized as follows.

5.01 An aviation company, Diréquair, which had operated in the Chibougamau area since 1968, found itself in financial difficulty in late 1974, early 1975 and was financially unable to purchase airplanes.

5.02 The appellant and other persons decided to help Diréquair by purchasing airplanes in order to lease them to it. The goal was precisely to help the business make it through by means of the financing of airplanes. These persons first formed a company. They were Messrs. Gaston Boulanger, Marc Boulanger, Claude Deschênes, the appellant Raymond Gauthier and his brother Georges-Albert Gauthier. This last withdrew. Subsequently, in 1976, under the name B.B.D.G. et Associés, each invested $5,000, which represented an equal 25 per cent share.

5.03 The shareholders of Diréquair Inc. were Gaston Boulanger (25 per cent) and the company Alperta Inc. (75 per cent), which comprised roughly ten shareholders, including two chartered accountants. Three of the shareholders of Alperta Inc. were Gaston and Marc Boulanger and Claude Deschênes. Together they owned directly or indirectly 40 per cent of the shares in Diréquair Inc. The appellant owned no share in Diréquair.

5.04 In 1975, the company B.B.D.G. et Associés purchased four airplanes, a Cessna 180J, a recent model, two De Havilland Beaver DHC-2s, the latest models of which had been built in 1941, and a fourth airplane, a DHC-3 Otter, for a total cost of $356,144. These planes served as bush planes "for Indians, hunters and fishermen" [translation].

5.05 The required money was borrowed from the Bank of Nova Scotia, in addition to the sum of $25,000 provided by the original five associates. Georges-Albert Gauthier subsequently withdrew from the deal. The shares of Tapis Mme Roy and Tapis Jumbo were put up as collateral in addition to the airplanes themselves. The bank was fully paid.

5.06 In fact, on May 22, 1975, the lessor company leased the said airplanes to Diréquair, the lessee. The lease prices were as follows:

— $35 per flight hour for a Beaver, from May 22, 1975 to May 22, 1978 [Exhibit 44(a)];

— $25 per flight hour for the Cessna for the period from June 17, 1975 to June 17, 1978 [Exhibit A-44(b)];

— $45 per flight hour for the Otter for the period from June 27, 1975 to June 27, 1978 [Exhibit A-44(c)];

— $35 per flight hour for the 2nd Beaver for the period from June 28, 1975 to June 28, 1978 [Exhibit A-44(d)].

The lease price could be increased during the period by written notice from the lessor. In case of refusal by the lessee, the lease could be cancelled by the lessors [sic].

In addition, the lessee had to pay all operating costs, insurance according to the conditions of the Canadian Transport Commission and was subject to a certain number of conditions standard in the case of this kind of leasing (lessor's right to visit, obligation to maintain the aircraft in good condition, etc.)

5.07 In 1976, one of the two Beavers was damaged and resold for scrap in February 1977. Following this loss, the cost of the other airplanes was carried at $244,919, under the cost of capital assets on the balance sheet of the company B.B.D.G. et Associés.

5.08 The loss, which ultimately had been caused by the capital cost allowance, was Claimed by the appellant, as set out below, according to the financial statements of the company B.B.D.G.

5.09 On May 15, 1980, the company B.B.D.G. et Associés sold the three airplanes to Diréquair for the sum of $25,625.

The respondent added to this disposition price the sum of $299,662, that is B.B.D.G.'s debt to Diréquair written off at the time of the sale of the airplanes, and imposed a taxable capital gain of $10,046 on the appellant and the recapture of depreciation of $51,719 also in the appellant's income.

Subparagraphs 4(i) to (p) of the reply to the notice of appeal cited above in paragraph 2.02(2)B clearly describe the respondent's position.

5.10 The respondent's claim is clearly described in dollars and cents on the T7W-C form for the year 1980, attached to the notice of reassessment of April 16, 1984. The appellant's income tax return for the year 1980 indicated gross income of $7,000. The T7W-C form read as follows:

The table to which reference is made above reads as follows:

Recapture of depreciation and taxable capital gain upon the sale of airplanes by B.B.D.C. [sic] et Associés to Diréquair

1980 taxation year

			Applicable
		Calculation	to Mr.
		for B.B.D.C.	Gauthier 25
		[sic]	per cent
Revised proceeds of disposition:
Sale price according to contract	$ 25,625*
Add:
Amount considered as part of pro
ceeds of disposition
Amount due to Diréquair erased
by the	$299,662	$325,287“
by the company		$325,287**
Deduct:
Cost according to B.B.D.C. [sic]
balance sheet as at 31/12/78		244,919
balance sheet as at 31/12/78
Capital gain		$ 80,368
Taxable capital gain		$ 40,184	$10,046
Recapture of depreciation
Cost at 31/12/78		$244,919
Undepreciated capital cost at
31/1		$ 38,043
31/12/78
		$206,876	$51,719

* This amount is deemed by the Department as insufficient consideration.

**The amount is supported by an outside evaluation.

[Translation.]

Concerning the CCA recapture, the appellant's 25 per cent share totalled $51,719 and, according to the respondent, was entirely taxable to the extent that the appellant claimed a deduction for the additional capital cost allowance in 1977 and 1978 since those two years formed the subject of an appeal before the Tax Court of Canada.

Consequently, the Minister of National Revenue was prepared to make certain adjustments to the assessment which formed the subject of the appeal with respect to the appellant's 1980 taxation year and to reduce the recapture by the amount of $13,811 to the extent that such a request is not made by the appellant with respect to his 1977 and 1978 taxation years.

5.11 Contrary to the respondent's claims, the appellant argued that, in addition to the written leasing agreements, there was also an oral agreement that Diréquair would pay the debts of the loan and that the company would ultimately keep the airplanes. Furthermore, according to the appellant, the sum of $25,625 was the balance of the debt to the Bank of Nova Scotia. After all, the original idea of the plan was to help Diréquair continue and not to resell to it at a high price after they had already paid the debt. Furthermore, the appellant wondered, what was the fair market value of those bush planes after those years of use? Based on his own experience, they were worth little. Does adding the price of the debt increase the market value?

The appellant argued that he had invested $5,000 in the deal and that he had been repaid only $2,500. They signed the contract of sale simply to transfer the airplanes pursuant to the oral agreement. He never received anything from the $325,000.

5.12 The company Diréquair went bankrupt in 1981 or 1982, as did Alperta Inc. The same was true of the roughly 12 shareholders who were all professionals, including two chartered accountants, two or three engineers, one pharmacist, and so on. Diréquair owed the appellant the sum of $50,000 in professional fees, which he never received.

5.13 Furthermore, Alperta Inc. never repaid the appellant a loan of $175,000 as attested by two promissory notes, one dated December 11, 1974 for $100,000, and the other dated January 16, 1975 for $75,000, at interest rates of 12 per cent and payable semi-annually. As a guarantee, 10 of the 12 shareholders in Alperta Inc. jointly and severally guaranteed the company's debt (Exhibit A-32).

5.14 As Exhibit 1-33, the respondent filed a note written by the appellant to Gaston Boulanger explaining the mechanism whereby the owners of the airplanes would be able to take the depreciation during a period and then transfer the airplanes to Diréquair in 1977. This note bears no date, but one may suppose that it was written in late 1974 or early 1975:

Gaston,

It would perhaps be good (because I haven't been able to reach Bob Laporte by telephone) to tell him that Diréquair Inc. is making a loan to B.B.D.G. only to pay the principal and interest on the airplanes. When we transfer them (the airplanes), we will do it for the balance owed. As you can see, the airplanes will be worth as much or nearly as much as when we bought them.

The difference is that we will have taken the depreciation. At that point, we will have the problem. There will be a number of solutions to take depending on what Diréquair goes [sic] (the profits).

In 1977, B.B.D.G. will owe Diréquair $161,813, and the balance owed on the airplanes $169,831.79. We will organize ourselves so that the depreciation does not exceed $161,813.14.

After all, what is important is that Diréquair operate and does not pay more than the company (Diréquair) will have to pay on the date of the sale of the airplanes since it will have paid a very large portion.

Once again, what is important is that Diréquair continue to operate, and none of us wants to put it in a precarious position. On the contrary, we have everything to gain from this. None of us wants to bleed the company, wants to put it into bankruptcy.

[Translation.]

5.15 Regarding the year 1980, the appellant contended that he was entitled to claim his share of accounts receivable totalling $75,374.45, an item that appears on the balance sheet of June 30, 1979 at the end of the appellant's accounting company with Mr. Yvan Gagnon, a company which started on November 1, 1975. This balance sheet (Exhibit A-43) reads as follows:

GAUTHIER & GAGNON, C.A.

BALANCE SHEET

TO/UNE 30, 1979

ASSETS

SHORT-TERM ASSETS

Accounts receiv-

able and work in

progress			$75,374.45
CAPITAL ASSETS		ACCUMU	NON-
	LATED		AMORTIZED
	COST	DEPRECIATION	COST
Equipment	$13,393.22	$ 6,958.09	$ 6,435.13
			$81,809.58

LIABILITIES

SHORT-TERM

LIABILITIES

Bank overdraft		$ 3,853.02
Accounts payable		7,605.05
Line of credit		25,000.00	$36,458.07
LONG-TERM DEBT
Bank loan		$ 3,000
Miscellaneous loans		15,000	$18,000
TOTAL LIABILITIES				$54,458.07
NET ASSETS	Raymond
	Gauthier	Yvan Gagnon TOTAL
Opening balance	$18,435.75	$ 1,171.41	$19,607.16
Withdrawals	(42,933.77)	(12,554.71)	(55,488.48)
	(24,498.02)	(11,383.30)	(35,881.32)
Net revenue	$36,042.84	$27,189.99	$63,232.83
	11,544.82	15,806.69	27,351.51	$27,351.51
				$81,809.58
			[Translation.]

In 1979, the appellant included the sum of $43,612 net income in his income, as appears from his 1979 income tax return (Exhibit 1-4). The firm's total revenue was $215,986, and the net revenue $75,929, $43,279 of which to the appellant. In the revenue of $215,986 had been included the accounts receivable and work in progress of $75,374.45. The appellant contended he never received a cent of those accounts receivable, or $42,963.45, that is to say his 57 per cent share. When he filed his 1980 income tax return in 1981, he could not apply this loss since he was unaware that the accounts could not be collected. His associate, Mr. Yvan Gagnon, subsequently remitted to him a schedule to the effect that they had lost $180,000 in accounts receivable in their practice as a whole. Now that the respondent has reopened the year 1980, the appellant says he is entitled to claim this loss against income from that year added by the respondent.

6. Law — cases at law — analysis

6.01 Law

The sections of the Income Tax Act involved in the present appeal are those of general scope, that is section 3, subsection 9(1), paragraphs 18(1)(a), 18(1)(b) and 20(1)(c), section 38, and subsections 96(1) and 152(4). This last subsection is cited above (4.01). The others will be in the course of the analysis, if necessary.

6.02 Cases at Law

The case law cited by the parties was as follows:

A. Concerning subsection 152(4)

1. Patricio v. The Queen, [1984] C.T.C. 360, 84 D.T.C. 6413 (F.C.T.D.);

2. Froese v. M.N.R., [1981] C.T.C. 2282, 81 D.T.C. 240 (T.R.B.);

3. M.D. Glazier Ltd. v. M.N.R., [1983] C.T.C. 2061, 83 D.T.C. 48 (T.R.B.);

4. Leeds Manufacturing Co. v. M.N.R., [1985] 2 C.T.C. 2284, 85 D.T.C. 591 (T.C.C.);

5. Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D.);

6. Poulin v. M.N.R., [1987] 1 C.T.C. 2171, 87 D.T.C. 112 (T.C.C.);

7. Biron v. M.N.R., [1985] 1 C.T.C. 2014, 85 D.T.C. 121 (T.C.C.);

8. Markakis v. M.N.R., [1986] 1 C.T.C. 2318, 86 D.T.C. 1237 (T.C.C.);

9. Levy v. M.N.R., [1989] 2 C.T.C. 151, 89 D.T.C. 5385 (F.C.T.D);

10. The Queen v. MerBan Capital Corporation Ltd. et a!., [1989] 2 C.T.C. 246, 89 D.T.C. 5404 (F.C.A.);

11. The Queen v. F.H. Jones Tobacco Sales Ltd., [1973] C.T.C. 784,73 D.T.C. 5577;

12. N.D.L. Nouvelles Distributrices Ltée v. M.N.R., [1986] 1 C.T.C. 2153, 86 D.T.C. 1089 (T.C.C.);

13. Irrigation Industries Ltd. v. M.N.R., [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131;

14. Weed-Master (Western) Ltd. v. M.N.R., [1972] C.T.C. 2364, 72 D.T.C. 1296 (T.R.B.);

15. McLaws v. M.N.R., [1972] C.T.C. 165, 72 D.T.C. 6149;

16. The Queen v. Bronfman Trust, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059;

17. Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305.

Analysis

6.03.1 Appellant's credibility

It is not pointless to say that the notices of reassessment that form the subject of the present appeals were preceded by a seizure of the appellant's documents on June 1, 1977, with several thousands of his clients' files. While the latter were returned in the following months, the documents concerning the activities of the appellant were returned to the latter only in 1988. The respondent also notified the appellant's clients.

The appellant has experienced a host of financial and health problems in part as a consequence of the seizure and of the assessments issued. He suffers from angina. We had to postpone sine die on two occasions during the hearing because of the state of his health. As to the financial problems, the appellant has lost all his property, that of his spouse, that of his children. The trustee in bankruptcy has everything in hand to proceed with the bankruptcy.

The Court must say in all honesty that it does not doubt the good faith of the appellant. During the testimony, he had lapses of memory and errors in calculation and failed to understand certain exhibits, which is more than normal, particularly since the appellant had to refer to facts going back nearly 20 years in the past. On some occasions, he even made corrections the result of which were in his disfavour, and he was fully aware of that fact.

The Court therefore believes that the appellant was in good faith throughout his testimony, even though minor errors arose. The Court must say the same of the respondent's witness, Mr. Gilbert.

6.03.2 The appellant: a businessman? a lender?

One of the main questions raised was whether the appellant may be considered as a businessman whose expenses are allowable deductions and as a money lender whose interest received is taxable and interest paid deductible.

The preponderance of evidence is to the effect that the appellant was already making loans well before 1972 (4.11.4) (Georges Scanlan: $15,000 in 1964) and that he declared interest income of $38,814,57 (4.13.1) in 1978. In 1988 and 1989, he was still making loans. He even lent $140,000 to the O'Reilly brothers (4.11.4 — 12 & 13).

According to the non-exhaustive Exhibit A-34, he apparently lent at least $600,000 (4.11.4). The evidence reveals, however, that it was starting in 1973 that the businessman, he who invested in the businesses of his clients and others, lent to them, provided guarantees for them or endorsed them. Paragraphs 4.09 to 4.13 inclusive reflect the reality of the businessman of Tissus et Tapis Roy [sic] in Chicoutimi and Jonquiére, as well as Opéra Diamond, Les Immeubles R.G.H. Ltée, Ben Transport Inc., Centre du Camion Nord-Est Inc., Glen Mountain Ski Resort and many others, not to mention the investments (some bad) of a religious community. The exhibits filed to this effect corroborate and confirm each other. All this evidence also demonstrates that the appellant was trusting, no doubt too trusting, and devoted. He organized a refinancing system in various dioceses in Quebec, giving freely of time and money (travel expenses at his cost).

Based on the written evidence and testimony heard, there is no doubt, in my view, that these loans, advances, investments, guarantees were made by the appellant in order to earn income at the time these financial activities were carried out, including the investments for the religious community, which were not always made out of pure altruism. The interest he had to pay (4.16) reveals the business tie between him and the community.

6.03.3 Is all the interest paid nevertheless deductible? I would say yes. It is true that, if the source of income created by the loan no longer exists, the deduction of interest is in principle not permitted. In this case, however, the appellant had to pay the debts (principal and interest) so as not to go bankrupt and to protect his other sources of income. Furthermore, the greatest portion of interest paid is deductible because it was claimed in the year in which the loans or guarantees were made, or in the following year.

Exhibit A-33 (4.11.3, 4.11.5) issued by the National Bank of Canada is conclusive to this effect. Even considering the schedule of interest paid for the years 1975 [4.13.2(b)], 1976 [4.13.2(c)], 1977 [4.13.2(c)], 1978 [4.13.2(d)], the creditors rarely came back more than two years in a row.

6.03.4 Can the investments and advances made be considered as running expenses and therefore deductible in the year in which the outlays were made?

The investments as such, that is to say those which consisted in purchases of shares of companies (4.12): it must be said that, according to the appellant, these investments sometimes began as non-repaid loans, which subsequently took the form of a transfer to him of actions in the said company as payment. Furthermore, can the outlays made with respect to Prodimpex be considered an investment? What was the nature of the activities of Prodimpex? A small group of persons formed an association in an attempt to profit from the" petrodollar madness" [translation], to use Mr. Léonce Harvey's expression. The projects were numerous, the competitors as well. The testimony of Mr. Léonce Harvey (4.09) was quite representative of these persons who went into business in a particular sector little known to them. The hundreds of thousands of dollars seem, at first glance, easy to earn. One invests all one's heart, a great deal of time and often much money. Some groups succeed, others not.

The difference between the two is not great. Very little is often required for a deal to fail. The deal with Syria concerning the bulldozers is a good example [4.09.4(3)]. In addition, it is sometimes difficult to prevent large interests from moving in and taking the pie. The Bagdad deal [4.09.4(4)] is typical.

In perspective, every deal became stimulus for the group: they incurred expenses. If one or more deals had succeeded, the expenses, which were all running expenses (travel, telephone, rent, etc.) (4.09.6 and 4.10.2), would have been deductible and the profit, of course, taxable.

One problem arises. A company was incorporated under the name Pro- dimpex. Although it is not known exactly in what year, this company apparently existed at least on paper. Mr. Harvey said :

I never saw any minute books or shares. There were never any meetings. We operated more like associates. (4.09.5)

[Translation.]

Although not a common fact, this was not an unusual fact, and the Court believes that, in the case of Prodimpex, this was an association of persons and that each provided his share: one his time, another his money, another his knowledge and another his contacts. Whether the money spent came directly out of the taxpayer's pocket or whether it was borrowed from a bank, that money is deductible in the calculation of income.

That, following the end of the company, the end of the source of income, the interest on moneys borrowed is no longer deductible in the calculation of the income of the person who then pays that interest, is another matter. But the sums spent (borrowed or not) must be allowed in the calculation of income for the year in which the expense was incurred.

I refer to the F.H. Jones Tobacco Sales Ltd. [6.02(11)] and N.D.L. Nouvelles Distributrices Ltée [6.02(12)] cases. In the latter case, reference is made, inter alia, to the following cases at law, at page 2160 (D.T.C. 1094):

1. In determining whether an expense is capital in nature, one cannot use a rigid or predetermined test and must take into account several factors that may have led to the expense (Algoma Central Railway, supra).

2. In making such a determination it is necessary to adopt the viewpoint of a businessman and rely on ordinary commercial principles and business practices (FH. Jones Tobacco Sales Co., supra; Halstroms Pty Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634, 8 A.T.D. 190; Associated Investors of Canada Ltd. v. M.N.R., [1967] C.T.C. 138, 67 D.T.C. 5096).

3. A capital outlay contributes to the acquisition of an asset or a permanent advantage or to the creation of a stable structure for doing business (British Insulated and Helsby Cables Ltd. v. Atherton, [1926] A.C. 205).

4. In certain cases non-repayable loans or guarantees exercised and paid can be regarded as expenses incurred for the purpose of gaining or producing income (Scott v. M.N.R., [1963] S.C.R. 223, [1963] C.T.C. 176, 63 D.T.C. 1121; Mac-Ynnes, [1963] S.C.R. 299; M.N.R. v. Carlett, [1967] S.C.R. 280, [1967] C.T.C. 62, 67 D.T.C. 5058).

5. One of the factors that will be taken into consideration in the case of a loan or a guarantee will be the fact the loan has been made or the guarantee given for the purpose of having the borrower contribute to the production of income from the lender's current operations (Henry Freud).

I am therefore of the view that the loss of $84,441 for the period from July 1, 1974 to June 30, 1975, as well as the loss of $16,219 for the period from July 1, 1975 to June 30, 1976 (4.10.1), must be considered as actual losses in those years, and that those losses may be claimed by the appellant.

He was then the sole valid borrower, who subsequently had to repay the principal and interest. It should be noted that the interest paid by the appellant on the Prodimpex debt in the years 1977, 1978 and 1979, and totalling more than $8,000, is not deductible (4.17.6) since the source of income had not existed since 1976.

Consequently, of the $84,441 loss for the period from Jul 1, 1974 to June 30, 1975, $42,220.50 applies to 1974 and $42,220.50 to 1975. As for the period from July 1, 1975 to June 30, 1976, of the loss of $16,219, $8,108 applies to 1975 and $8,108 to 1976.

6.03.5 Are the years 1972 to 1975 statute-barred?

Following the study of the evidence concerning these years and the above conclusions (6.03.3, 6.03.4), it remains to be determined whether there is any real basis for the additional income established by the respondent.

6.03.5(1) 1972

Additional income by respondent ($12,583.34)

Deductions according to the evidence:

(a) Reserve for doubtful accounts (4.05.1)	$10,931.25
(b) Repayment by André Gagnon (4.05.3)	$	952.30
(c) Taxes paid for the Arvida house (4.06)	$	377.54
(d) Principal payment received (4.07.1 to 4.07.6)	$ 1,000
(e) Payment of expenses and salaries in cash (4.08)	$	416.75
Total deductions:	$13,677.84
Less additional income of the respondent:	$12,583.34
Reduction of income:	$ 1,094.50

6.03.5(2) 1973

Additional income by the respondent (1-3) ($3,455.02)

Deductions according to the evidence:

(a) Repayment by André Gagnon (4.05.3)	$4,448
(b) Principal received — Chicoutimi house (4.07.1 to 4.07.6)	$1,000
(c) Payment of salaries and expenses in cash (4.08)	$2,169.80
Total deductions:	$7,617.80
Less additional income of the respondent:	$3,455.02
Reduction of income:	($4,162.78)

Furthermore, let us add to this income the reserve for doubtful accounts of the previous year: $10,931.25, less the new reserve, that is to say less the sum of $7,287.50, which, as we know, will become a bad debt (4.05.1). There therefore remains $3,643.75 to be added to the reduction of income of $4,162.78. The calculation is as follows: ($4,162.78) + $3,643.75 ($518.97) reduction of income.

6.03.5(3) 1974

Reduction of income established by the respondent ($3,050.69)

Deductions according to the evidence:

(a) Repayment by André Gagnon (4.05.3)	$ 3,926.66
(b) Principal received — Chicoutimi house (07.1 to 4.07.6)	$ 1,000
(c) Repayment of advance by L. Harvey (4.14.3)	$ 6,000
(d) Business expenses (5.03.4 and 4.10.1)	$42,220.50
Total deductions based on the evidence:	$53,147.16
Add reduction of income:	$ 3,050.69
Total reduction of income:	($56,197.85)

If the revised net income of $19,854.37 is subtracted from this total income, the result is a net loss of $36,343.48, which may be applied to other years (paragraph 111(1)(a) of the Act).

6.03.5(4) 1975

Additional income calculated by the respondent ($45,788.17)

Deductions according to the evidence:

(a) Repayment by André Gagnon (4.05.3)	$ 3,926.66
(b) Principal received — Chicoutimi house (4.07.1 to 4.07.6)	$ 1,000
(c) Miscellaneous amounts falsely included in income by the
respondent (4.14.4)	$22,581.26

(d) Repayment of advances by B.B.D.G. (4.14.5)	$ 2,500
(e) Interest paid	$ 7,025.28
(f) Charitable donation (4.24)	$	250
(g) Business expenses	$50,338.50
$42,220.50 + $8,108 (6.03.4 and 4.10.1)
Total deductions according to the evidence:	$87,621.70
Less additional income of the respondent:	$45,788.17
Total reduction of income:	($41,833.53)

If the previously taxed net income of $21,578 is subtracted from this total income, the balance of $20,205.50 constitutes a net loss.

6.03.5(5) Conclusion on the statute-barred years

It therefore appears from this information concerning the years 1972, 1973, 1974 and 1975 that the appellant cannot be reproached for having made "a misrepresentation [through] carelessness or wilful default” within the meaning of subsection 152(4) of the Act, cited above (4.01), particularly since the respondent's main reproach was that the Act was not applied with respect to the accounts receivable. Furthermore, I am of the view that, although the conclusion was reached that the appellant's advances to Prodimpex did not constitute running expenses, one could not reproach it to the appellant under subsection 152(4) which relates to negligence, etc., just as one could not do so for a taxpayer who would have considered the business profit resulting from the disposition of a property as a capital gain. These years 1972, 1973, 1974 and 1975 are therefore statute-barred, and the reassessments must be set aside.

6.03.6 The years 1976,1977 and 1978 should now be considered following the same results of the evidence method [sic].

6.03.6(1) 1976

Additional income calculated by the respondent ($14,964.78)

Deductions according to the evidence:

(a) Principal payment by Gagnon (3.06)	$ 3,926.66
(b) Chicoutimi house (4.07.6)	$ 1,000
(c) Arvida house [4.12.7(5)]	$ 2,231.80
(d) Loan repayment by Rock Fortin (4.14.4)	$	500
(e) Interest $17,615.71 $21,390.22 - $3,774.31 [4.13.2(b)]
(f) Business expenses	$ 8,108
(4.10.1, 6.03.4)
Total deductions according to the evidence:	$33,382.17
Less additional income of the respondent:	$14,964.78
Reduction of income:	$18,417.39

6.03.6(2) 1977

Additional income of the respondent ($25,206.86)

Deductions according to the evidence:

(a) Arvida house [4.12.7(5)]	$ 1,115.90
(b) Interest paid [4,13.2(c)]
($33,987.25 ($37,750 — $3,762.75 = $33,987.25)
(c) Spousal exemption (4.15)	$ 1,990
(d) Depreciation (4.15)	$ 1,687
Total deductions according to the evidence:	$38,780.15
Less additional income of the respondent:	$25,206.86
Total reduction of income:	$13,573.29

6.03.6(3) 1978

Additional income of the respondent ($37,479.09)

Deductions according to the evidence:

(a) Interest paid [4.13.2(d)]

$38,026.27 — $4,183.22	$33,843.05
(b) Calculation of tax (4.23)	$	75
Additional income of the respondent:	$37,479.09
Less deductions based on the evidence:	$33,843.05
Taxable income:	$3,636.04
Less: capital cost allowance [6.03.7(2)]	$3,636.04
Taxable income:		nil

6.03.7 Year 1980

6.03.7(1) The appellant claimed capital cost allowances on the airplanes of $20,295 in 1975 and $17,613 in 1976 [2.02B reply to the notice of appeal, 4(n)]. These allowances taken were reflected in the reassessment of 1980 by the recapture of $51,719 (5.10).

Furthermore, given the income reduction amounts of $41,833.53 in 1975 [6.03.5(4)] and $18,417.39 in 1976 [6.03.5(5)] which the Court has reached, the appellant was thus in a position to choose not to take depreciation, and the Court acts in accordance with the expressed desire, which reduces the reduction of income to $21,538.53 ($41,833.53 - $20,295) in 1975 and to $804.39 ($18,417.39 — $17,613) in 1976. This eliminates the recapture of $37,908 claimed by the respondent in 1980. Furthermore, the respondent contended that the appellant could, if he wished, claim the sum of $13,811 in 1977 and in 1978 as capital cost allowance, and the recapture would thus be $51,719 (2.02B [sic], 4(p) and 5.07). Furthermore, it is this recapture amount of $51,719 which the respondent added to the income of 1980 (5.10).

6.03.7(2) In fact, in 1977, contrary to what the respondent assumed [2.02B [sic], 4(p)], the appellant did not need to claim the capital cost allowance because of the reduction of income which the Court reached [6.03.6(2)]. In 1978, it was enough for him to claim the sum of $3,634.04 [6.03.5(7)] to reduce the taxable income for that year to nil. The consequence of this claim is a recapture of the same amount of $3,634.04 in the year 1980. The whole is subject, of course, to the price of disposition of the three airplanes sold that year being greater than the undepreciated capital cost established at $38,043 (5.07).

6.03.7(3) The respondent contended that the value of the three airplanes in 1980 was $325,287, and that the said amount was supported by an outside valuation (5.07). However, this proof of outside valuation was never filed in Court.

6.03.7(4) According to the appellant, the three airplanes, including the Beaver built in 1941, could not have this fair market value. The four airplanes, including two Beavers built in 1941 and purchased in 1975, had cost $356,144. It is difficult to believe that only three airplanes were still worth $325,287 five years later. These were in fact bush planes.

However, neither did the appellant present a valuation of the fair market value of the said airplanes.

The Court can only have a very great doubt as to the accuracy of the respondent's presumed valuation. The burden of proof was nevertheless on the appellant. The appellant’s taxable capital gain fixed by the respondent stands at $10,046 (2.02B [sic], 4(l) and 5.07).

6.03.7(5) In any case, the primary goal in this entire matter, according to the appellant, was to help Diréquair continue operating and subsequently to remit the airplanes to it. The appellant spoke of an oral agreement to this effect (5.11). This agreement was confirmed in substance by Exhibit I-33 (5.14). [W]hat is important is that Diréquair operate and does not pay more than the company (Diréquair) will have to pay on the date of sale of the airplanes since it will have paid a very large portion” [translation]. In testimony, the appellant contended that the sum of $25,625 was the balance of the debt to the Bank of Nova scotia (5.11).

6.03.7(6) Regardless of this point, the appellant, referring to the balance sheet of June 30, 1979 (Exhibit A-43) and to his income tax return (Exhibit 1-4), contended that he was entitled to claim a loss of $42,900 in 1980 (5.15). The Court is of the view that this claim is in large part justified, considering the earlier information on the accounts receivable and the facts resulting from the seizure of the clients' records.

Another deduction claimed by the appellant is that, of his $5,000 investment in B.B.D.G., he received only $2,500, thus being entitled to claim the loss on the balance.

6.03.7(7) From the revised taxable income of $54,806 for 1980, according to the T7WC form (5.10), there must be subtracted, in respect of the recapture, $48,085 ($51,719 — $3,634) [6.03.7(4)] and a substantial portion of the accounts receivable loss, which I assess at easily more than $25,000.

Thus, the total deduction of more than $70,000 exceeds the revised taxable income of $54,806, even if the valuation of the airplanes made by the respondent were justified and a recapture of $3,634 were added for the capital cost allowance taken in 1978.

7. Conclusion

The appeals are allowed, with costs, for the years in issue 1972, 1973, 1974, 1975, 1976, 1977, 1978 and 1980, and the matter is referred back to the respondent for reconsideration and reassessment in accordance with the foregoing reasons.

Appeal allowed.