Graham v. R., 97 DTC 1258, [1998] 1 CTC 2333 (TCC)

Margeson T.C.J. :

It was agreed at the outset that these two cases would be heard on common evidence.

In the years 1990 and 1991, each of the Appellants sought to deduct from other income, the amounts of $57,500 and $7,500 respectively, as expenses incurred for the purpose of gaining or producing income from a business, under section 18(1 )(a) of the Income Tax Act (the Act).

By notice of reassessment dated July 19, 1993, the Minister of National Revenue disallowed the deduction and these assessments were subsequently confirmed.

It was from these assessments that these appeals were filed on July 23, 1994.

Evidence

William Stanley Hawkes testified that he had completed grade 12 and had attended university for three years. He was a shareholder in a limited company known as Island Muffler Sales Service & Manufacturing Limited and together with one Richard C. Graham owned all the shares of the corporation.

This business has been very successful for over 28 years.

In addition to his interest in this business, he and Richard Graham were partners in several other enterprises and were engaged in loaning money to individuals, in purchasing properties and providing mortgage financing to individuals in return for commitment fees and obtaining interest therefrom.

He confirmed that in the years in question he and Richard Graham advanced the amounts in issue to Otstenla Estates (1984) Limited, (hereinafter referred to as Otstenla). In March of 1990, Mr. Graham came to him with a proposal which had been referred to Mr. Hawkes by an accountant, Larry E. Ware, who was the accountant for Dr. C. Stewart Vinnels. This witness described Dr. Vinnels as the owner of Otstenla, Island Jetfoil (Canada) Corporation (hereinafter referred to as /JCC) and Island Research and Development Corporation (hereinafter referred to as IRDC). Both of the Appellants had dealt with Dr. Vinnels formerly.

The witness received a copy of a letter from Larry E. Ware, the accountant to Otstenla dated February 2, 1990. This letter was introduced by consent as part of the Appellant’s documents as Exhibit A-l (Tab 1). This letter discussed the possible sale by Otstenla of a percentage of the interest in the Boeing lawsuit.

The letter addressed the issue of deductibility of the expenditure by the investors and concluded that the costs would be considered as an adventure in the nature trade with all costs being deducted and all income being taxable. The letter did allude to the question of timing of the deductions and mentioned the possibility of these costs being carried as inventory but even then concluded that most of the costs would be deductible as they were incurred, opinion that “an aggressive investor would not even consider the ‘inventory’ issue and would write off the cost as incurred”.

The witness admitted that he did not know much about the Boeing lawsuit except that he was told that Boeing had improperly forced IJCC and IRDC into receivership and Otstenla needed money to pursue the lawsuit for damages.

The witness made no further inquiries about Mr. Ware because Mr. Graham knew who he was. He did meet with Dr. Vinnels who described the circumstances leading up to the actions being taken by Boeing which brought about the receivership of two companies and what was described as the illegal seizure of their assets, which in turn brought about the damages which would be sought in the lawsuit against Boeing. Dr. Vinnels explained that Otstenla needed funds to finance the lawsuit.

Dr. Vinnels also told him that Clifford J. Revell of Edmonton had already provided funds for such a purpose.

The amount that was to be invested was $100,000 on closing March 30, 1990, together with $15,000 for three years on December 1, 1990, December 1, 1991 and December 1, 1992. Such funds were to be used by Otstenla to pay disbursements for the legal action.

The witness was advised that the law firm was to be Owen Bird, described as a very large and prestigious law firm from Vancouver and that the firm had agreed to take the action on a “contingency basis” and Dr. Vinnels indicated that the law firm “believed that it had a great chance of success”.

The amount that might ultimately be recovered was in the neighbourhood of $150 million. The believed that he and his partner could make “a lot of money” for their investment. They believed it could take three to four years before the action was concluded but that it might be settled in three to six months. He identified Exhibit A-l, Tab 2, which was a draft copy of a proposed Assignment Agreement dated February 23, 1990 from Otstenla to the Appellants. This was never signed but the exhibit at Tab 3 dated March 30, 1990, was signed by both Appellants.

This assignment was discussed with their accountant, Richard Seabrook. He told them that he saw no reason to believe that generally accepted accounting principles would not apply to this transaction.

They also discussed the matter with a lawyer, as a friend, who declined to give them legal advice, but who as a friend indicated to them that “it was a good venture to enter into”.

He had known this lawyer for 20 years and with this information they decided to advance the funds and sign the Agreement.

This witness identified the receipts for the advances. One hundred thousand dollars came from Cedar Hill Cross Roads Estates, which was one of the partnership businesses; $15,000 came from Island Muffler Sales Service & Manufacturing Limited and a further $15,000 from Cedar Hill Cross Roads Estates. The monies advanced from the limited company were charged to the Appellants shareholders’ accounts.

The witness said that he knew that IJCC was in the business of operating jetfoils from Victoria to Vancouver and IRDC did research for marine purposes. He understood that part of the claim to be advanced in the lawsuit was for “loss of profits by IJCC”.

He admitted that there was no Schedule A attached to the agreement, which purported to be the assignment from the “trustee” to Otstenla.

The Appellants did not talk to Dr. Clifford Revell but they were advised that he had advanced money for the lawsuit.

The witness said that they were not aware of any claims being advanced by Revenue Canada against IJCC or IRDC and they did not ask any question about possible claims. They were advised of the claim of Revenue Canada against IRDC after they signed the agreement.

They were told that settlement could come at any time. They met with Dr. Vinnels from time to time about progress of the action and talked to him on the telephone. As of this date, a trial is still pending. There is a possibility of an offer of settlement being made and chances of settlement are closer than before.

He identified the letter at Tab 7 from Dr. Vinnels dated December 16, 1991, referring to the progress of the action, mentioning the security of costs matter, discovery of Boeing’s documents, the preparing of experts opinions regarding damages and the Part VIII tax reference. In spite of this reference he said that he was unaware of the tax issue.

He said that each year his businesses received financial statements. He identified the financial statements in which he claimed one half of the disputed expenses and of which his partner claimed one half.

They knew that this was a gamble but it was highly recommended to them and they stood to make “huge sums of money”.

Exhibit R-l, the Respondent’s Book of Documents was introduced by consent subject to relevance. The witness identified his income tax returns and pointed out that he had claimed the deductions in 1990 and 1991.

He was referred to Exhibit R-l, Tab 1, the opinion letter to Otstenla from Owen Bird but said that he had not seen it nor did he see the unsigned assignment agreement between the trustee, IJCC and Otstenla Estates at Tab 3; the signed assignments at Tab 6; the letter to Dr. Vinnels from Owen Bird at Tab 7 or the reply from Dr. Vinnels at Tab 8.

He might have seen a copy of the Writ of Summons at Tab 9 after it was issued. He did not receive a copy of the opinion letter from Smith Hutchison regarding the contingency fee agreement nor a copy of the agreements at Tabs 10 and 11.

He agreed that he probably received a copy of the defence at Tab 11 but did not remember when. He did not receive a copy of the Reasons for Judgment in the application to add the receiver of IJCC as a party, shown at Tab 12; the order for security for costs at Tab 13; the reasons for the order for costs at Tab 14 or the letter from Owen Bird to Dr. Vinnels referable to the order for security for costs which is shown at Tab 15.

By consent, subject to relevance, Exhibits R-2, R-3 and R-4 a certificate of the Federal Court of Canada, Trial Division; the Statement of Claim and the Statement of Defence were admitted into evidence but the witness denied ever having received or seen them or having been made aware of them until years after he signed the agreement.

In cross-examination the witness confirmed the information contained in his income tax returns for the years in question and reiterated the source of the funds that were advanced to Otstenla. He referred to the source of funds as their financing and property businesses. He confirmed that the sources of income had nothing to do with the Boeing lawsuit although the amounts advanced for the lawsuit were netted against their income from these businesses. He admitted that the amounts advanced to Otstenla were not loans.

He said that the assignment was drafted by Mr. Hutchison and that Dr. Vinnels had some input. They were aware that the two companies were in bankruptcy but asked for no particulars of any potential claims against them. They left that up to the lawyers.

They heard from Dr. Vinnels that the damages might be in excess of $150 million and believed that this figure was determined between Dr. Vinnels and Owen Bird. They did not ask for a breakdown of the damages and they did not seek an opinion about the validity of the $150 million figure.

He confirmed that they sought independent accounting advice and not independent legal advice. He also confirmed that Schedule “A” was not attached to the agreement that they signed and that they left the paperwork up to others whom they trusted.

They did not look at the records and he did not remember what they understood by security for costs. He believed that Otstenla had been assigned all the rights of IJCC and IRDC.

He was aware that Owen Bird had agreed to take the case on a contingency basis but did not see the opinion from Smith Hutchison about the propriety of the contingency fee agreement. He believed that this agreement was legal. He was not aware of the exact fee and believed that it was to be determined at a later date.

The witness was not aware as to exactly what rights Otstenla received from the trustee under the agreement with the trustee and did not ask for an opinion on it. He received the assignment at a time when he was very busy and he left it up to Dr. Vinnels and the lawyers. The witness did not know if Mr. Hutchison brought this assignment agreement to his attention.

He was aware that Owen Bird was to receive up to 30% of the proceeds. He also knew that creditors may have had claims against IJCC and IRDC but did not know that these were large claims.

He believed that a tremendous amount of money would have been available to divide up and he placed his trust in Dr. Vinnels and the fact that Owen Bird had taken the case on a contingency fee basis. Also, Mr. Hutchison may have advised them, off the record, that all the proceeds would be available to Otstenla after the lawsuit.

They did not seek any further legal advice as they believed that Mr. Hutchison’s advice, off the record as a friend, was “greater than any advice that they might otherwise receive”. They knew that costs would be high but did not receive a figure.

He said that he may have received a copy of the statement of claim against Boeing but could not remember when. He could not say what amounts were being claimed and the $150 million figure was from Dr. Vinnels’s alone. He believed that he would receive more than he invested and that the sums would be “huge”. He did not receive an opinion from Owen Bird.

He probably received a copy of Owen Bird’s opinion some time prior to March 1995.

To date, discoveries have been held of Boeing and the case is moving on but he received no opinion from Owen Bird on its progress. He has not asked Otstenla for an accounting and no offer of settlement in writing has been made.

Richard Graham gave evidence which, to a considerable extent, mirrored that of William Hawkes. He looked after the shop and left the paperwork to Mr. Hawkes. The business is successful and they have 20 employees. They invest the profits from this enterprise into other ventures.

He knew Dr. Vinnels prior to this venture having been involved in demolition work with him. He had no difficulty with him before.

His wife worked for Dr. Vinnels’s accountant and it was through this contact that he learned of this venture. He talked to the accountant and asked for more information.

He was told that “Dr. Vinnels’s companies had gone into bankruptcy through the actions of Boeing which were illegal”.

He was aware that IJCC ran jetfoils to Vancouver. He had used the services prior to 1990 and was impressed with them. The accountant believed that this case was going to be “very good”.

He received a copy of Exhibit R-l - Tab 1 after he had talked to Mr. Ware. He then met with Dr. Vinnels and Mr. Hawkes. Dr. Vinnels told them that IJCC was a good business, it had followed to a “T” the business plan set out by Boeing. Boeing had seized the assets unlawfully and this resulted in the bankruptcy of IJCC and IRDC.

Dr. Vinnels indicated that the lawyer for the lawsuit was to be Owen Bird and that they were taking the action on a contingency basis. The impression they received from Dr. Vinnels was that damages would be in the area of $155 million. He also told them that a prominent periodontist in Edmonton, Dr. Clifford Revell was partaking in this venture and “he does not take part in anything unless he is going to make money”.

The impression that they received was that Boeing would be embarrassed to proceed and would settle, it could take three to fours years but on the other hand, it could settle on the “Courtroom steps”.

He confirmed that the draft assignment from Otstenla was received prior to March 1990 and that Schedule “A” referred to therein was not attached. There was no discussion about Revenue Canada’s claim. The agreement was signed with Otstenla but he did not know when. Before signing they talked to Mr. Hutchison over dinner. It was he who had arranged with Owen Bird to act in the lawsuit. He told them that there was a good chance of success and that Boeing had sufficient assets in Canada to cover the award contemplated.

He believed that since Owen Bird had agreed to act on a “contingency basis there must be something in it for them”.

He had not met Dr. Revell but was aware of his success in business ventures and knew him by reputation. He did not have a figure in mind as to what he would receive but believed that they would get a “very good return on their money”.

He did not take any advice except that of Mr. Hutchison and that of his accountant who discussed the proper way of recording the expenditures under generally accepted accounting principles with other accountants. He confirmed that the amounts in issue were expended.

He talked to Dr. Vinnels and believed that the lawsuit was going forward and that it could be settled quickly. He knew that monies had to be forthcoming for security for costs and that these funds were put up by Dr. Revell. He made no inquiries relative to the Part VIII tax reference.

At no time had he seen Exhibits R-2, R-3 or R-4 and was not made aware of these actions. He did not see the Owen Bird opinion nor the letter from Owen Bird to Dr. Vinnels about the contingency fee agreement. He had not seen Exhibit R-l (Tabs 9 to 16). He indicated that discovery of Dr. Vinnels was held last week.

In cross-examination he confirmed the particulars of the financing business of he and his partner, the businesses that he conducted himself and the fact that he claimed one half of the disputed amounts as deductions.

He confirmed that he had not seen the Owen Bird opinion and was unaware of the figures referred to at page 32 thereof which did not mention the $142 million figure. He said that he was under the impression from Dr. Vinnels that that figure came from Owen Bird.

He was prepared to admit that the rights of the Appellants depended upon Otstenla’s rights under their assignment from the receiver but did not make any inquiries about them. He believed that Owen Bird would have done that. He knew nothing about the receiver or what it had to do with the matter.

He never sought an opinion as to the value of the claim against Boeing or its progress.

It was suggested to him that Otstenla was a “bare” trustee under the assignment from Dunwoody Limited, the trustee, but he knew nothing about that.

He was told by his accountant that there should be no problem from an accounting point of view with claiming the expenditures. He believed that they were purchasing 15% of all monies recovered by IJCC and IRDC. He did not peruse the contingency fee agreement but was aware of the sliding fee provision from 20% to 35%.

He confirmed that he might not have signed the agreement had he known of the claim by Revenue Canada.

In answer to a question by counsel he said that in 1990 or 1991, Dr. Vinnels indicated that witnesses would come forward and indicate that Boeing had a plan to “tube” IJCC and IRDC all along, suggesting that there was improper motive from the beginning in their actions.

He has not asked for any opinion about the possibility of success, how the monies are spent or if they reached Owen Bird. He has seen no settlement offer. He did not study the documents sent to him and did not try to find out anything about Part VIII tax.

He did not think that the $150 million figure was unreasonable based upon what Dr. Vinnels had told him. He knew nothing about the assets or capitalization of IJCC or IRDC nor their debts.

He did not investigate the problem between IJCC, IRDC and Boeing. He knew that Dr. Vinnels’s companies were “on the cutting edge of technology”. He knew that the success of the lawsuit depended upon wrongdoing by Boeing and relied upon what Dr. Vinnels told him about its existence.

Dr. Clifford Revell was a periodontist from Edmonton. He knew Dr. Vinnels since 1996 and had participated in successful financial ventures with him. He invested $320,000 in cash in the lawsuit against Boeing and put up bonds for security for costs in the amount of $176,000.

Before he signed the assignment with Otstenla, Exhibit A-2, he knew that three law firms had undertaken a review of the matter. He reviewed two opinions from large Vancouver law firms including that of Owen Bird. He concluded that there was a chance to recover, through settlement or trial, a substantial award and that he would receive substantial proceeds. His interest was to be 15%.

The Lyle McKercher opinion was less encouraging than that of Owen Bird.

He also received advice from his lawyer and accountant regarding the claiming of the expenses and as a result of their advice, he signed the agreement.

He was comfortable with Owen Bird as the law firm that would handle the Boeing lawsuit and knew that their retention was under a contingency fee agreement.

He was thinking in terms of a recovery in the nature of tens of millions of dollars, that it would take two to three years and would be over by 1993- 1994.

He knew that there were discussions about settlement.

After discussing with Dr. Vinnels, the reasons for judgment regarding the security for costs application, he provided funds for the costs.

He was not aware of the claims by Revenue Canada against IRDC but was not too worried about them because he believed that the research funds had been spent properly.

The deductions that he claimed in 1990/1991 and 1992 were challenged by Revenue Canada but ultimately they were allowed.

In cross-examination he said that Schedule “A” was not attached to his agreement when he signed it. He received it in May of 1990 but presumed he would have seen a copy of it.

He relied upon what Dr. Vinnels had told him about any debts of IJCC and IRDC and any documents he had been given.

He said that forensic accountants had been interviewed about the calculation of damages but the calculations had not been done. Owen Bird was less optimistic in 1994 than in their opinion of 1988 about large numbers being received as a result of a court action. The matter has been set for trial in 1997.

An offer of settlement has been made but was insufficient and was not accepted.

As a result of being shown the opinion of Owen Bird he agreed that he must have been aware of the claim of Revenue Canada. He expected to receive a higher share of the proceeds because he put up the bond for security for costs.

He opined that the Revenue Canada claim would be struck down and that the Boeing claim would be successful.

His own lawyer’s opinion was that the Boeing action could succeed, based upon the Owen Bird opinion. The figure of tens of millions of dollars came from his reading of the Owen Bird opinion.

He sought no opinion as to the rights of Otstenla under the assignment from the trustee. He did not consider the matter of interest on the Revenue Canada claim.

He did not believe that the Revenue Canada claim could be taken against the entire award as its claim was only against the interest of IRDC which was small.

He believed that the $50 million figure was more realistic although it could amount to more than $100 million depending on the trial outcome.

He made no other inquiries about debts of IRDC and IJCC except the information provided to him by Dr. Vinnels that they were around a couple of hundred thousand dollars.

He did not make inquiries as to the asset value of IRDC and IJCC but did know that revenue projections were done when the companies were incorporated.

Richard Seabrook was a chartered accountant whose firm specializes in acting for small businesses and in providing taxation and accounting services to them. His firm acted for the Appellants since the 19803.

He was qualified as an expert, entitled to give opinion evidence in the field of accounting.

He was contacted by the Appellants about becoming involved in financing the Boeing lawsuit in March of 1990. He viewed the letter of Larry E. Ware about the tax treatment of this item. Mr. Seabrook did not see this item as one of “inventory”. He advised the Appellants that they could deduct the expenditure as an expense in the year that it was made.

He said that part of the Appellants’ business was “investment”. He prepared the financial documents and taxation returns of the Appellants. He confirmed that they had mortgage interests, commitment fees for mortgages and that the expenditures in issue were deducted from the income of each Appellant in the years in question on a %o basis.

He was familiar with generally accepted accounting principles and prepared an opinion regarding the deductions in issue.

He said that the two principles involved here were: 1) matching of revenue and expenses and 2) conservatism.

He picked the one which provided the least beneficial value to the financial statements. He did not want to be overly conservative. Here, conservatism overruled matching.

He gave the opinion that if the expenditures were not taken each year, there would have been a profit in the business of the Appellants and that would not have properly reflected the transactions in the year.

To him it did not matter that it was a single purpose business activity. He believed that it was better to be conservative because of the uncertainty as to when the income would be received.

In cross-examination he said that he did not have the agreement when he gave his advice and considered that these were legal expenses of the lawsuit.

It was suggested that these expenses had nothing to do with the income that was earned from the investment and property businesses and that the expenditures in issue should not have been offset against such income. His answer was that these funds came from the businesses.

He said that if he had been told that they were not legal fees, he would have to have been told what they were. His treatment was not a mismatch. He did not believe that the expenditures were an inventory item because he believed that they were legal expenses.

In re-direct he said that they would be used for legal expenses and that the Appellants would receive a share of the award.

In response to a question of the Court the witness said that he believed that these expenditures were an expense of the “umbrella of companies” just as if it were a legal expense to defend an action against one of the Appellant’s investment properties. He did not care how it was used by “Otstenla”.

It was characterized because the source of the funds was from the umbrella of companies that the Appellants were operating.

In reply to the suggestion by counsel for the Respondent that when he is told by a client that the expenditures are legal expenses the accountant relates them to that business, he replied that he had it in his mind that the funds would go to Otstenla and not be used directly by the Appellants’ business as legal expenses.

Argument of the Appellants

Counsel for the Appellants stated that the basic question to be answered was whether or not the amounts claimed could be deducted under section 9 of the Act. Once it is established that the amounts were expended to gain or produce income that ends the matter.

His position was that the expenditure of such funds to Otstenla to finance the prosecution of the Boeing action did not amount to “champerty and maintenance” and that the agreement under which these amounts were paid was not “champerty or maintenance”.

All that happened here was that the Appellants were assigned a portion of the proceeds of a legal action, not “the right to sue”. This argument is irrelevant in deciding whether the amounts are deductible.

Further, counsel submitted that the only reason that the Respondent was arguing that there was no reasonable expectation of profit was because of the claim of Revenue Canada against the research company. But the Appellants did not know about any such claim. In any event, in spite of the claim, there was a reasonable expectation of profit. The claim was only against the research company and the ultimate amount that might be attached as a result of any such action, if it were successful, would be small.

Representations were made that IJCC was a viable operating company before the actions of Boeing and any judgement recovered by IJCC would have been of sufficient size to make the legal action against Boeing profitable.

The Appellants were armed with the legal opinion of Owen Bird. This was a very cogent factor in their decision to invest in the lawsuit. Further, they knew that Dr. Revell, a very successful investor had put money into the same action. Why would any of them invest such monies if it were not for the purpose of making a profit? Both Appellants were successful businessmen as well.

The Appellants trusted Dr. Vinnels and had worked with him before. They were told that Boeing had an ulterior motive in forcing the two companies into bankruptcy and that gave them further reason to expect success in the legal action against Boeing.

The Appellants were not informed about the legal action commenced by Revenue Canada, except the reference to the taxation matter that was contained in their agreement. They did not consider this paragraph to be important or of consequence to them. Under the circumstances here, that was not an unreasonable position to take.

Other persons more knowledgeable than they had considered documents other than those seen by the Appellants and they believed that the legal action would be successful. The Appellants considered the necessary facts in making their decision.

Later, they knew that Dr. Revell had posted the bond for security for costs.

There was no personal element involved in this enterprise. Its sole purpose was to make a profit.

Counsel referred to Symes v. R. (1993), 94 D.T.C. 6001 (S.C.C.) page 6009 and argued that the beginning point for deductibility is subsection 9(1) of the Act. Paragraph 18(1 )(c) is a limiting section only. Subsection 9(1) embodies the business test for taxable profit. Thus in a deductibility analysis, one’s first recourse is subsection 9(1).

In the context of the present case the question should be, was business their motive? Depending upon the answer one might have to go on to see if the motive was limited by paragraph 18( 1 )(«). He referred to page 6010 of the same decision where the Court indicated that the test was a “legal test” rather than an “accountancy test”.

He referred to Mattabi Mines Ltd. v. Ontario (Minister of Revenue) (1988), 53 D.L.R. (4th) 656 (S.C.C.), in reference to paragraph 18(1)(a) which he believed stood for the proposition that:

The only thing that matters is that the expenditures were legitimate expenses made in the ordinary course of business with the intention that the company could generate a taxable income some time in the future.

Counsel pointed out that it is not necessary that the outlay or expense should have resulted in a particular income, that it be in the year that it was expended or that there be a casual connection between the expenditure and a receipt. See Royal Trust Co. v. Minister of National Revenue (1956), 57 D.T.C. 1055 (Can. Ex. Ct.) , 1060.

Referring again to the matter of “champerty and maintenance” counsel referred to Fredrickson v. Insurance Corp. of British Columbia (1988), 49 D.L.R. (4th) 160 (S.C.C.), where the Supreme Court of Canada affirmed the decision of the British Columbia Court of Appeal and he likened that to the situation at bar where the Appellants were not being assigned the right to sue but merely a part of the proceeds.

Counsel argued that if there was any objective indicia that the expenditures were made for business purposes then the expenditures are deductible under paragraph 9(l)(a).

On the issue as to whether the expenditure was in the nature of a capital expenditure, counsel said that the term “business” includes an adventure in the nature of trade. Once this item was expended on an adventure in the nature of trade, it is an item of expense and not capital.

In the case at bar, what was expended was clearly on account of income and not on account of capital because that which was purchased had no enduring value, there was no possibility that it would continue to produce income nor to continue to exist.

The Appellants were acquiring a part of the proceeds of the legal action. This was an adventure in the nature of trade.

What was acquired does not “fit into capital”. It was deductible in the year it was expended.

Counsel referred to the case of Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.) , 6009 and he argued that in the case at bar there was no indication that the taxpayers were tax planning improperly, that they were attempting to deduct personal expenses or to gain a tax refund.

The Minister has no business in attempting to penalize an honest but erroneous business decision. One might say that the Appellants should have read more documents, asked more questions, acted more carefully, considered some clause of the agreement but in any event everything that the Appellants were told and upon which they relied were true or capable of being true and because they were not more prudent does not mean that the expenditures were not deductible.

Counsel further referred to the recent case of Kosowan v. R. (June 27, 1996), Doc. 96-165(IT)I, 96-166(IT)I (T.C.C.) in which Taylor, T.C.J. allowed an expenditure similar to the one in question here where the risk factor was high but where there were chances for high returns.

Counsel concluded that the appeal should be allowed with costs. Argument of the Respondent

Counsel argued that in order for the expenditures in issue to be deductible here, they must be found to be business expenses. He took the position that they were not because:

1) paragraph 18( 1 )(a) prevents them from being so considered;

2) if they were business expenses they were not deductible in the years in question because they were capital and paragraph 18(l)(/z) prevents their deduction;

3) if they were expenses and were not capital they should have been accounted for by using the inventory method of accounting. Therefore, only a portion would have been deductible in the years in question and the Appellants have failed to establish what portion was attributable to the years in question.

4) the agreement under which they were expended was void since it amounted to “champerty and maintenance”

Counsel argued that in order for an expenditure to be deductible in computing income it must meet two tests: 1) was it made for the purpose of gaining or producing income, within the meaning of paragraph 18(1 )(tz) of the Act and if it was, was it an income expense or a capital outlay under paragraph 18(1)(b).

in order for it to have been made or incurred for the purpose of gaining or producing income, it must have been made or incurred for profit or with a reasonable expectation of profit. See Quebec (Deputy Minister of Revenue) v. Lipson, [1979] C.T.C. 247 (S.C.C.) at 250; Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.) at 5215; and Molony v. Minister of National Revenue (1990), 90 D.T.C. 1394 (T.C.C.), at 1398.

Whether there was a reasonable expectation of profit is an objective test and not a subjective one. Thus, if the activity that was engaged in was not one that a businessman would have engaged in, there cannot be a reasonable expectation of profit. See Hammond v. Minister of National Revenue (1971), 71 D.T.C. 5389 (Fed. T.D.), at 5391 and Molony, supra, at page 1398.

Counsel further argued that the case of Tonn, supra, does not say that the test is a subjective one. In that case there was still a large element of objectiveness to the test.

It is not important what Dr. Revell thought in the present case because the Appellants did not meet him. They did not know what his motivation was.

The type of expenditures in this case were not part of the investment business of the Appellants up to the time that they made them. Any expertise that they had gained in business before would not have been utilized in making their decision here because this venture was completely different.

The expenditures made here were not legal expenses of the Appellants’ businesses as Mr. Seabrook was told. They were allegedly made to acquire rights. But that could not be so because Otstenla obtained no rights under its assignment. All funds went to IJCC and IRDC, after expenses. Otstenla was only an agent of the trustee in bankruptcy to collect the money, a bare trustee as can be seen from Exhibit R-2, Tab 14.

If the Appellants were duped, what did they pay for? It might be a promise of the trustee through the principles of agency to turn over some of the money. They may have made outlays with the hope of benefiting from settlement even though they would not benefit from the agreement. They may have acquired a cause of action against Otstenla for false representation but under any theory it could have been obtaining nothing more than “a hope of gain”. This was not a reasonable expenditure for profit.

There was no corroboration of the amount that the Appellants believed that the lawsuit would make available. Dr. Revell talked in terms of tens of millions of dollars, not hundreds of millions.

The Appellants never sought a copy of the legal opinion before they signed the agreement. They were aware of the fact that IJCC and IRDC were in receivership but they sought no information about the size or nature of the claims against these companies. They could have obtained such information.

A valid business assessment requires a risk assessment. If a person expended the funds on one thousand lottery tickets with the hope of winning money he could not expect to write off the expenses. It would make no difference that a mathematician said that there was a good chance of winning.

No assessment had been made of the prospects of profitability of IJCC or IRDC so that the expected amount of damages would be reasonably calculable.

The Appellants were aware of the Owen Bird opinion but they did not receive from that opinion any basis for the amounts that they believed might be recovered.

The Appellants took no steps to monitor the lawsuit. They relied upon what Dr. Revell told them.

A reasonable businessman does not rely on that alone.

Counsel argued that there were no indicia of an adventure in the nature of trade as referred to in Minister of National Revenue v. Taylor (1956), 56 D.T.C. 1125 (Can. Ex. Ct.), at 1139. They were not entering into a transaction that they knew was the same kind as that carried on in the same way by an ordinary trader or dealer in such property.

They blindly trusted Dr. Vinnels. It was nothing but a gamble or dream that what Dr. Vinnels had told them was true.

They were not involved in a business because there was no reasonable expectation of profit.

If the expenses were business expenses they were capital in nature. It does not matter whether they are tangible or intangible property. The expenditures were capital in nature because the Appellants intended to exploit their right at a later time.

He referred to the case of British Insulated & Helsby Cables Ltd. v. Atherton (1925), [1926] A.C. 205 (U.K. H.L.), at 213; Strick v. Regent Oil Co., [1965] 3 W.L.R. 636 (U.K. H.L.); Mandrel Industries Inc. v. Minister of National Revenue (1966), 65 D.T.C. 5142 (Can. Ex. Ct.), at 5146, 5147; and R. v. Vineberg (1973), 74 D.T.C. 6055 (Fed. T.D.), at 6059 in support of his position.

The Appellants said in Court that Mr. Hutchison told them that the chances of recovery were good. That is contrary to what was contained in the agreement with Otstenla.

If the Appellants had been duped they could have refrained from making any further payments after the initial $100,000 payment. They did nothing.

Counsel for the Appellants argued that there was no personal element involved in the Appellants’ action. That may be so but that does not automatically mean that there was a reasonable expectation of profit. Symes, supra, as referred to by counsel for the Appellants did not examine the quality of the judgment being made as to whether it was a good business decision. It is true that the expenditure need not produce a profit but in this case there was no connection between the expenditure in question and the Appellants’ other businesses.

Counsel again referred to the capital expenditure argument and said that where an expenditure is made once and for all to bring into existence an amount (or an advantage) of a lasting nature, that is a good indication that it was capital.

If the Appellants did acquire such a right or advantage it need not last forever. What is required is the ability to generate income over a number of accounting periods.

Finally, counsel for the Respondent argued that the property acquired by the Appellants here should be treated as inventory under the Act and under Regulation 1801 the property must be valued at the lower of cost or market value.

The term “property” as defined under the Act is very broad and encompasses what the Appellants acquired here. Therefore, expenditures to acquire that property cannot be written off in particular years prior to their disposition and must be accounted for by employing the inventory method.

The onus is on the Appellants to quantify the income tax deduction to establish the fair market value. If that is not accomplished, the deduction cannot be allowed in computing the taxpayer’s income.

According to the accountant for the Appellants, fair market value was not very great and no valuation was made of it. It is therefore impossible for the Court to know what the value of the property was in the years in question. The deductions cannot stand.

Reply

In reply, counsel for the Appellants took issue with counsel for the Respondent’s contention that it was irrelevant that Dr. Revell had a reasonable expectation of profit. Dr. Revell had a legal opinion and other information including information about the question of damages. Therefore, this was relevant.

Counsel further took the view that even if there were problems with the legal documents, the trustee knew that the Appellants had expended funds to advance the legal action and if the action resulted in damages being recovered, the Appellants would be entitled to share in the proceeds.

Insofar as the quantum of damage is concerned a figure in excess of $100 million was not far fetched in light of Dr. Revell’s testimony about his conversations with Dr. Vinnels when a figure of this nature was discussed.

The Appellants possessed more than a “mere dream of recovery”. They trusted Dr. Vinnels and had a business relationship with him.

It is not the duty of Revenue Canada to become involved in making business decisions nor that of the Court. The Appellants knew the risks and were prepared to take them.

No unfavourable inference should be drawn against the Appellants because Mr. Hutchison was not called.

The Appellants said in Court that Mr. Hutchison believed that the lawsuit would succeed.

The argument raised by the Respondent that the item involved here was inventory was not pleaded.

Counsel referred to Friesen, supra, and said that that case did not deal with expenditures. It dealt with the write-down valuations under section 10 of the Act. In the case at bar the taxpayers do not seek to take advantage of section 10.

In surrebuttal, counsel for the Respondent addressed the argument of “champerty and maintenance” again. He argued that the assignment to Ot- stenla from the trustee was invalid because Otstenla had no pre-existing rights. It was a shareholder in the bankrupt companies but shareholders have no rights in the property of the company whose shares it owns. The assignment was invalid. Otstenla could not assign anything. Therefore, the expenditure of the Appellants was on account of a dream only.

In response to this argument, counsel for the Appellants argued that under Fredrickson, supra, the Appellants need not have a proprietary interest, an ancillary interest is sufficient.

Analysis and Decision

As a result of the evidence and argument of counsel, the following issues have become apparent.

(1) Was the agreement (or agreements) under which the amounts in question were expended, void as amounting to champerty and maintenance?

(2) Were the amounts in question business expenses under paragraph 18(1)(a)?

(3) If they were business expenses under paragraph 18(1 )(a), were they capital in nature and therefore not deductible because of paragraph 18(1)(b)?

(4) If they were expenses and not capital in nature, should they have been accounted for by using the inventory method of accounting enabling only a portion to be deductible in the years in question?

(5) Have the Appellants met the burden of establishing the proper amount to be deducted in the years in question?

I) Champerty and Maintenance

In this issue the Court must consider the agreement between Dunwoody Ltd., the trustee of the Estate of IRDC and IJCC, the American company and Otstenla Estates (1984) Ltd.

This agreement purported to assign to Otstenla all the right, title and interest of the Estates of IRDC and IJCC in and to the action including the right to bring the actions in the names of IRDC and IJCC.

But it is clear from the other clauses of the agreement that the reason for the assignment was the inability of the trustee to proceed with the action due to financial restraints. Further, paragraph (g) makes it clear that all of the proceeds of any action, subject to legal fees, costs and expenses incurred by Otstenla would be paid to the trustee in payment of the claims of the creditors of IRDC and IJCC so that the subject matter of the legal action was not being assigned but merely a facility to allow the action to proceed for the benefit of the trustee. This was not a case where the action in tort was based on a personal wrong, such as an assault, libel or personal injury where the assignee could have no legitimate property or commercial interest in recovery. Here the assignee was a shareholder in IRDC and IJCC and had an indirect interest in IJC. This was a case where the assignee had a legitimate commercial interest in the recovery, if not a legitimate, property interest.

Surely the assignee was commercially interested in the outcome of the lawsuit since it could very well profit in the event that the lawsuit was successful, the claims against IJCC and IRDC being paid out, thus enhancing the value of its shares in those companies.

This was the type of commercial interest that is contemplated in Trendtex Trading Corp. v. Credit Suisse, [1980] Q.B. 629 (Eng. C.A.), subsequently affirmed in the House of Lords.

It is not necessary that the assignee have a property interest in the lawsuit. See Ellis v. Torrington, [1920] 1 K.B. 399 (Eng. C.A.). A property interest to which the cause of action is ancillary is sufficient and that existed here.

It has also been held that a cause of action may be assigned even where the assignee has no ancillary property interest. If the assignment constitutes a bona fide business arrangement, that is sufficient. See Performing Rights Society Ltd. v. Thompson (1918), 34 T.L.R. 351 (Eng. K.B.). If there is “a genuine interest in the litigation”, that may suffice. See Martell v. Consett Iron Co., [1955] Ch. 363 (Eng. C.A.) or if the assignee had a “genuine and substantial interest in the success of the litigation” as in Trendtex, supra.

The interest of the assignee here was real, genuine and legitimate and was not “champertuous”.

The second assignment that must be considered was the assignment to the Appellants from Otstenla. This assignment did not offend the law against champerty and maintenance because the assignment was clearly not of the cause of the action but of a part of the fruits of the action and is assignable. See Glegg v. Bromley, [1912] 3 K.B. 474 (Eng. C.A.).

But in any event this assignment clearly meets the bona fide business arrangement test, the legitimate business reasons test and the genuine and substantial interest in the success of the litigation test.

There is nothing in the cases to suggest that this interest must have existed before the agreement was signed.

The Court finds that this agreement did not offend the law against champerty and maintenance.

2) Were the expenditures business expenses?

It is accepted that in order for the expenditures to have been deductible as business expenses, they must have been expended for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act. They must have been made or incurred for profit or with a reasonable expectation of profit.

The Court is satisfied that the expenditures in question here were made by the Appellants with the intention of making a profit and they fully expected to make a profit.

There was no evidence to suggest that the expenditures were tainted in any way with a personal element. There was no indication that the taxpayers were attempting to avoid tax liability by an inappropriate structuring of their affairs as referred to in Tonn, supra.

This Court does agree that it should not seek to “discourage or penalize, honest but erroneous business decisions as discussed in Tonn, supra. How- ever, the Court does not agree that Tonn, supra, stands for the proposition that the test to be employed in determining the deducibility of the expense is any different than that employed in Moldowan, supra, or that Tonn, supra, could have the effect of modifying or replacing the rule in Moldowan, supra, so that it could be argued that the test to be employed is not completely objective and so as long as the taxpayer acted with the intent of making a profit and there was no personal element involved, even the most foolhardy of enterprises could be entered upon and all of the expenses incurred therein would be deductible.

This Court agrees that section 67 must be considered as well and indeed, as the Federal Court of Appeal appeared to be saying at page 6009, in Tonn, supra, when referring to the decision of Bowman, J.T.C.C., in order for an expense to be deductible it must not only be made with the intent of making a profit, there must be a reasonable expectation of profit, but in addition the expense that is claimed must also be reasonable.

This Court has always concluded that the test in Moldowan, supra, has to be considered first, then the effects of section 67 must be taken into account but this does not mean that either Tonn, supra, or Bowman, J.T.C.C. were attempting to replace the Moldowan test with a reasonableness test under section 67.

it appears to this Court that the “reasonable” in the “reasonable expectation of profit test” goes to the general nature of the enterprise. More simply put, looking at this enterprise as described by the evidence given, could one reasonably have expected to make a profit from this type of activity? If the answer is yes, then that test is met. Then, one must look to the specific expense to see if it was reasonable, as Bowman, J.T.C.C. appeared to be doing in Cipollone v. R. (1994), [1995] 1 C.T.C. 2598 (T.C.C.).

That being said, what indicia were there in the evidence presented in this case that would lead a reasonable businessman to conclude that the expenditures here would lead to a profit?

The Appellants were introduced into the venture through an accountant, Larry Ware, but his information to them was basically of an accounting nature and would not have been a reasonable basis for believing that they might make a profit.

The first information that the Appellants received about the lawsuit was from Dr. Vinnels who obviously was familiar with all the facts leading up to the lawsuit. The Appellants believed what he had told them, that IJCC had been operating successfully, had good future prospects for profit, had been forced illegally into bankruptcy by Boeing, that there were very substantial damages that could be recovered in the lawsuit but his company did not have the funds to proceed nor did the trustee.

The Appellants were aware that Dr. Vinnels was a successful businessman in his own right and had been involved in various successful ventures himself. Further, another successful businessman and professional, Dr. Clifford Revell had also invested a considerable amount into the lawsuit.

The investment to be made was very small in comparison to the expected recovery and if successful, the Appellants would certainly recover substantially more than they invested.

Further, one of the Appellants had some knowledge of IJCC and its operation having travelled on one of their jetfoils and had been very impressed with the operation to the extent that he believed at the earlier time that it was on the leading edge of technology and would have been very successful had it continued to operate.

In addition, they were aware of the legal opinion from a prestigious law firm, which, to say the least was very optimistic about the chances of success. Even by a casual reading of the opinion, they could reasonably have expected that if the lawsuit was successful, they would have at a bare minimum made a substantial profit.

The potential claim of Revenue Canada against IRDC was discussed in the opinion and even a casual reader would have been left with the belief that there was possibly a good defence to this action and in spite of that claim and the possible claims of other creditors including Boeing, there would still be a substantial sum left over in which the Appellants would be entitled to share.

it is also to be noted that the Revenue Canada claim had not proceeded, that a defence has been filed and that the claim was against IRDC only while that company’s share in the recovered damages might not be too substantial, therefore still leaving substantial funds available in which the Appellants would share.

it is true that J. Michael Hutchison, Q.C. declined to give or be bound by any advice he gave to the Appellants, since he was acting for other parties involved but he did prepare the assignment for the Appellants and Otstenla. Further, the Appellants told the Court that as a friend he told them that “it was a good venture to enter into” and that he may have advised them off the record that “all the proceeds of the lawsuit would be made available to Otstenla after the lawsuit”.

The Appellant, Richard Graham, talked to the accountant, Larry Ware, who told him that “this case was going to be a good one”. This witness had business dealings with Dr. Vinnels before and he had no reason to disbelieve him.

Both Appellants met with Dr. Vinnels personally who told them that the business of IJCC had been good, it had followed the business plan of Boeing “to a tee”, that Boeing had seized their assets illegally, causing the bankruptcies. He told them that the lawyer was going to be Owen Bird and that they were taking the action on a “contingency fee basis” which they would not do if they were not fairly confident that the action would be successful.

The Appellant, Richard Graham said that before signing the agreement he had talked to Mr. Hutchison, he had told them that he had arranged for Owen Bird to take the case, that there was a good chance of success and that Boeing had sufficient assets in Canada to cover the award contemplated.

The Court has no reason to doubt that Michael Hutchison told the Appellants, as a personal friend, what they repeated in Court. There is no evidence to the contrary and if this were not true, it was open to the Respondent to be able to rebut it.

The Appellants believed from information received from Dr. Vinnels that witnesses would come forward and corroborate the basis for the claim against Boeing and that they believed that Boeing would settle.

Dr. Clifford Revell confirmed that he expended considerable funds on this lawsuit on the basis of several legal opinions and his successful business relationship with Dr. Vinnels. He had concluded that there was a good chance of recovery through settlement or through trial, of substantial proceeds and that his 15% of those net proceeds would be substantial. His deductions had been allowed after a dispute with Revenue Canada.

He believed that the claim of Revenue Canada would be struck down and that the claim against Boeing would be successful. He did not believe that the claim of Revenue Canada could be taken against the whole award as it was only against IRDC.

It is true that the type of expenditures made here were different from the type of expenditures that the Appellants had made in other businesses but the Court does not agree that the prevents the Appellants from applying the expertise that they had gained in other business ventures to the facts of this venture to determine whether it could reasonably be expected to be profita- ble and they obviously did bring their general business acumen into play when considering whether or not they would invest in this enterprise.

The Court does not accept the argument of counsel for the Respondent that these expenditures could not be business expenses of the Appellants on the grounds that Otstenla acquired no rights under the assignment from the trustee Dunwoody Limited under its assignment.

It may be that Otstenla was a bare trustee for the purposes of carrying the action, but the assignment provided that once funds were received and forwarded to the trustee, they were to be applied, “firstly to the payment of all legal fees, costs and expenses incurred by Otstenla in the prosecution of the actions” which also included the costs incurred by Otstenla up to the date of the assignment.

By any reasonable interpretation of that clause, in conjunction with the various clauses that recognized the inability of the trustee to proceed with the actions due to financial restraints and that the actions would be financed by Otstenla, one would reasonably expect that the expenditures made by the Appellants to bring about the recovery would entitle them to share in the fruits of the lawsuit in accordance with the agreement that they had made.

This agreement did not place any restriction on how Otstenla would obtain the funds. The funds need not be those of Otstenla.

Otstenla had all the implied authority, at least, to enter into agreements with others to obtain this financing. This included the right to obtain funds to finance the legal fees, costs and expenses in the prosecution of the action.

The Court is satisfied that the amounts expended by the Appellants, which were forwarded to Otstenla to enable the lawsuit to continue were legal expenses of Otstenla and the percentage that Otstenla had agreed to pay to the Appellants who had supplied the funding would be costs and expenses of Otstenla.

It matters not that Otstenla had no rights to the funds other than for the purposes set out in the assignment.

The reasons for judgment given in the application for security for costs which recognized this fact, were recited by counsel for the Respondent but were nothing more than a recognition of the fact that the plaintiff in itself had no means to satisfy the costs in the event of the failure of this action. Such reasons did not detract in any way from the rights conferred upon Otstenla by the assignment, above referred to.

It may be that the Appellants could have been more cautious before they embarked upon this enterprise, that they might have been well advised to have made more inquiries, to have more closely scrutinized the documents they did have or obtain more documents, but the question 1s, did they do enough under the circumstances to satisfy paragraph 18(1 )(a)?

The Court is satisfied that they did. They were not “duped” as counsel for the Respondent suggested. They were aware of what they were doing, had obtained considerable advice, had considered important factors and as reasonable businessmen were prepared to “take this chance”.

To conclude that a reasonable businessman would have decided otherwise, on these facts, would be tantamount to allowing Revenue Canada to substitute its decision for that of the Appellants, to refuse to consider the economic situation facing the Appellants at the time they made their decision or to penalize honest business decisions that have not, to this date, been shown to have been erroneous.

Indeed, all the evidence that was given would seem to indicate that the legal actions might very well be successful and one offer of settlement has already been made.

The next question to be answered under question 2 is whether or not expenditures were ‘reasonable’ under section 67 of the Act?

The Court is satisfied that they were reasonable both in quantum and when one considers the purposes for which they were made.

The investment was to finance the legal action being contemplated, the expenditure would lead directly to the profit if the action was successful and the quantum of the expense was unsubstantial in light of the possible recovery.

That recovery need not have been $50 million as suggested or $150 million as some persons thought possible but need only be sufficient for the Appellants to have reaped a “reasonable profit”.

There was more than a mere “hope of gain” as suggested by counsel for the Respondent.

The Court is satisfied that this expenditure was a reasonable expenditure for profit, having due regard to all of the facts established by the evidence.

It is true that the Appellants never sought a copy of the actual legal opinion before they signed the agreement, sought no confirmation of the amounts of debt against IJCC and IRDC but if they had studied the legal opinion, which did consider such matters, they would have had reason to believe that these matters had been taken into account and their decision to get involved could not have been detrimentally affected in the end result because of that opinion.

The Appellants in Court said that they may have acted differently had they obtained more information, read the legal opinion, known the exact nature of the debts, but those opinions were given by the Appellants after the suggestion was made to them that there might be considerable claims out there that would eat up the proceeds of the legal action, but no such evidence exists and much of the evidence suggests that the contrary is true.

Such conclusions also pre-suppose that after a reading of the legal opinion the Appellants would have decided that a good result might not have been attainable, whereas the legal opinion itself suggests otherwise.

it would have made no difference if the Appellants had monitored the lawsuit once they signed the agreement. They were bound by its terms. They could not refuse to contribute their funds, absent evidence of fraud or misrepresentation by Otstenla or Dr. Vinnels and there was no such evidence before this Court.

The Court answers question 2 in the affirmative and finds that the expenditures were legitimate business expenses under paragraph 18( 1 )(a).

3) Were the business expenses capital in nature under paragraph 18(l)(h)?

The Court accepts the argument of counsel for the Respondent that the expenses might be capital in nature be they tangible or intangible property. What the Appellants were obtaining for their expenditure was a right to share in the proceeds of the lawsuit if it was successful. That certainly was the purchase of a proprietary right. It does not matter in the context of the facts here whether it was a “tangible” or “intangible” right.

The Court does not accept the argument that the expenditures were capital in nature because the Appellants intended to exploit those rights at a later time. The Appellants’ evidence, as well as the evidence of Dr. Revell was that a settlement could have come at any time. It has not come yet but when the Appellants signed the agreement they believed that a “settlement would be forthcoming at any time”.

The fact that the proceeds were not realized in the year that the expenditures were made does not make them capital in nature.

Counsel for the Respondent argued that the “property” acquired here was intended to generate income over several accounting periods. The evidence is to the contrary.

If there was to be income it would be generated only when a settlement was reached or when the action concluded. It would be expected that the Appellants would then receive their 15% interest.

The Court is satisfied that the Appellants did not acquire a right or advantage of a “lasting nature”. The right existed only until such time as the action was settled or the judgment rendered. This was not an indication of a capital item.

The fact that the right might continue for several years does not alter that conclusion and indeed the belief was that the right would be terminated possibly even in the year that the funds were expended.

The Court answers question 3 in the negative and finds that the expenditures were not capital in nature.

4) Should the expenses have been accounted for in the year they were expended or by using the inventory method?

The Court is satisfied that the amounts in question could not be and need not be accounted for by using the inventory method.

The Appellants’ accountant gave evidence as an expert and indicated that the method of accounting that the Appellants used was in accordance with generally accepted accounting principles.

He considered also the opinion of the accountant Larry E. Ware in making his decision as well as the opinions of other accountants. He may have to a certain extent mischaracterized the expenditures as “legal expenses” of the Appellants. They were clearly not that.

The expenditures were legal costs or expenses of Otstenla and were provided by the Appellants but all they represented insofar as the Appellants were concerned were the cost of the right that they had acquired to share in the proceeds of the legal action against Boeing.

From all of the evidence it is clear that the accountant considered the expenditure as a part of the expenses of the “umbrella of businesses in which the Appellants were engaged” similar to any of their other expenditures and that they could be deducted against all of their other business income in the year that the monies were expended. They were clearly not inventory to him.

in giving his opinion as to the characterization of the items he considered the matching principle and the principle of conservatism. He did not want to be overly optimistic and conservatism overruled matching and this treatment properly reflected the transactions in the year.

There was no evidence offered to contradict his findings and the Court can find no fault with his reasoning.

The Court finds that it would be impossible on the facts of this case to value the “property” or “rights” obtained annually. They had no fair market value at any time that was reasonably ascertainable. They had no value at all until judgment was obtained or a settlement reached and even if the accountant had all the existing information and documents before him in any one year, he could not have valued the right, be it tangible or intangible property.

The Court answers this question in the negative.

That having been decided, question 5 is moot.

i the end result, the appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the expenditures claimed were business expenses and deductible in the years that they were claimed.

Appeal allowed.