Millford Development Ltd. v. The Queen, 93 DTC 5052, [1993] 1 CTC 169 (FCTD)

Rothstein, J.:—

Introduction

This is an appeal under subsection 172(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), as amended, from a decision of the Tax Court of Canada, dated March 12, 1985. A discount of $73,769.61 on the sale of a mortgage, which the plaintiff Millford Development Ltd. (formerly Nobledale Construction Ltd.) treated as an income loss, had been reassessed by the Minister of National Revenue as a capital loss. The decision of the Tax Court of Canada upheld the reassessment.

In this decision, the name Nobledale is used as this was the name of the company at the relevant time.

Facts

The facts found by the Tax Court of Canada were as follows:

The appellant was a body corporate incorporated under the laws of the Province of Ontario (Since the commencement of this appeal the Company has amalgamated and is now known as Millford Development Ltd.). At all material times Nobledale carried on the business of real estate development. It engaged in the buying and selling of raw land, the development of land for construction, and in the construction of residential housing and apartment buildings for sale or as rental properties.

In 1976 Nobledale, Frank Orsi Construction Ltd. and Golden Estates Ltd., sold a large tract of land near Aurora, Ontario to Markborough Properties Ltd. As part of the said sale transaction, the vendors took back a mortgage for a portion of the sale price. In filing its income tax return for 1976, Nobledale reported the gain realized on the disposition of the property as income. In 1980 Nobledale and the other vendors sold the mortgage receivable at a discount to Heavenly Homes Development Ltd.

Nobledale's share of the discount was $73,769.61 which amount it reported in its 1980 income tax return as being a loss on income account. By a Notice of Reassessment dated October 2, 1981 the Minister of National Revenue reassessed Nobledale for additional tax on the basis that the discount of $73,769.61 was a capital loss. Nobledale objected to the said Notice of Reassessment by filing a Notice of Objection. The said reassessment was confirmed by the Minister by a Notification dated August 20, 1982.

At page 6 of his decision, Brulé, T.C.C.J. made his findings:

Even though the appellant (Millford) accepted mortgages as part of sale transactions he entered into, the buying and selling of these mortgages was not a part of his regular business. At least no evidence was offered to this effect. His mortgage portfolio was large enough at times to require a professional manager, a normal procedure with capital investments.

There was no suggestion that if the mortgage had been held to maturity any loss might have occurred. The fact that it was sold to a company owned by the appellant's wife is perhaps of no importance but the sale did provide the needed cash. When funds were needed, no evidence was offered as to any attempt to use other methods of raising cash by the appellant and the other companies holding a portion of this mortgage.

In my opinion the mortgage involved in this case became a capital asset at the time it was accepted by the appellant and, while it arose as a result of carrying on a business, was not acquired either as a venture in the nature of trade nor as a trading asset in the appellant's business. It was a substitute for money and, until sold, was an investment which produced income to the appellant, an indication of a Capital asset. When sold it was on this basis.

At the trial of this matter in this Court, evidence was led that:

1. The taking back of mortgages by Nobledale was a usual procedure in the sale of real property. Mr. Frank Orsi, a principal of Nobledale, said that it was necessary to take back such mortgages to effect sales. Mortgages were taken back in the case of numerous sales.

2. Because mortgages were taken back to ''accommodate" sales, interest rates were usually less than bank rates.

3. Mortgages taken back, from time to time, constituted a significant portion of Nobledale's assets.

4. The proceeds of land and building sales were always treated as revenue by Nobledale even though a portion of a sale price was not paid in cash but was represented by a mortgage receivable.

5. Mortgages were pledged as collateral to the bank for financing purposes. Mr. Orsi said that mortgages were sometimes sold because of cash shortages although, except for the mortgage which is the subject of the reassessment in this case, there was no specific evidence of Nobledale selling mortgages.

6. Certain land at or near Aurora, Ontario, was acquired in the late 1960s by Mr. Orsi and three companies which he owned including Nobledale. Steps preliminary to development had taken place between 1970 and 1976 but by 1976 it was decided that further development could not be financed. Accordingly, the land was sold to Markborough Properties Ltd. and the mortgage which gives rise to the reassessment was taken back.

7. In June 1979, in order to relieve financial pressure from the Canadian Imperial Bank of Commerce, it was decided that the Markborough mort- gage be sold. Mr. Orsi received information from his accountant that the mortgage, which had a balance of principal and interest of $2,433,342.80, could not be sold for more than $2.1 million. Rather than selling the mortgage to a stranger, the mortgage was sold for $2.1 million to Heavenly Homes Development Ltd., a company owned by Mr. Orsi's wife. The sale was effected solely to accommodate the bank.

8. The Markborough mortgage which had been sold to Heavenly Homes in 1979 for $2.1 million was paid in full by Markborough in 1980. The difference between the discount price for which the mortgage was sold to Heavenly Homes and the undiscounted value of the mortgage was $333,342.80. Nobledale treated its share of the discount, $73,769.61, as a loss on income account. Heavenly Homes treated the amount of $333,342.80 as income and not as a capital gain.

There was no evidence of any inappropriate motive or other impropriety in respect of the sale of the Markborough mortgage.

My review of the evidence and the law brings me to a different result than that reached by the learned judge of the Tax Court.

The presumption of business loss arising from the charter of Nobledale

Income or loss resulting from an activity done in pursuit of an object in the Charter of a corporate taxpayer is presumed, unless rebutted, to be business income or loss.

In Canadian Marconi Co. v. The Queen, [1986] 2 S.C.R. 522, [1986] 2 C.T.C. 465, 86 D.T.C. 6526, Wilson, J. stated at page 468 (D.T.C. 6528):

It is frequently stated in both the English and Canadian case law that there is in the case of a corporate taxpayer a rebuttable presumption that income received from or generated by an activity done in pursuit of an object set out in the corporation's constating documents is income from a business.

At page 470 (D.T.C. 6529) after reciting the objects of Canadian Marconi, supra, Wilson, J. stated:

Thus, CMC had a specific “investment business” object and the traditional rebuttable presumption, in my view, applies in favour of its investment income being characterized as income from a business.

The Charter of Nobledale included the following object:

To purchase or otherwise acquire and to hold, sell, exchange or otherwise dispose of and deal in the property, real or personal, rights and assets of and bonds, debentures, debenture stock, shares of all classes and securities of any form or type issued by any individual, corporation or company, public or private, incorporated or unincorporated.

The acquisition and sale of securities of any form, issued by any company, is within the constating objects of Nobledale. In my view, this would include the acquisition and sale of the Markborough mortgage. As in Canadian Marconi, supra, the traditional rebuttable presumption applies in favour of the discount on the sale of the Markborough mortgage being characterized as a loss from a business as opposed to a loss from an investment.

The context in which the sale of the mortgage took place

The circumstances giving rise to the acquisition of an asset are to be considered in assessing whether a transaction is income or capital related. In Imperial Tobacco Co. (of Great Britain and Ireland), Ltd. v. C.I.R., [1942] 2 All E.R. 119, 25 T.C. 293 (C.A), a United Kingdom company acquired U.S. currency for the purpose of acquiring U.S. tobacco. Before the acquisition of tobacco could take place, the British Government required Imperial Tobacco to sell to it the U.S. currency which it had obtained. On this sale of currency, Imperial Tobacco realized a gain as a result of the devaluation of the pound sterling. Lord Greene stated at page 121 (T.C. 300):

We have here a finding of fact as to the purpose for which the dollars were bought. The purchase of the dollars was the first step in carrying out an intended commercial transaction, namely, the purchase of tobacco leaf. The dollars were bought in contemplation of that and nothing else. The purchase on the facts found was, as I say, a first step in the carrying out of a commercial transaction, which would be completed by the purchase and delivery of the leaf and payment of the dollar purchase price for it. We must decide this case having regard to the facts as

found. /n the light of those facts, the acquisition of these dollars cannot be regarded as colourless. They were an essential part of a contemplated commercial operation.

[Emphasis added.]

In this case the evidence is that the taking back of the Markborough mortgage was solely for the purpose of effecting the sale of real property to Markborough. There is no evidence that the mortgage was acquired for investment purposes. The total proceeds of the sale to Markborough (including the proceeds represented by the mortgage back) were treated by Nobledale, for tax purposes, as revenue resulting in income and not capital gain. In my view, in this case the character of the discount resulting from the sale of the mortgage is influenced by the transaction giving rise to the mortgage. That transaction was a revenue transaction resulting in income. The effect is that, when the mortgage was sold at a discount, the discount had a character related to income and not to capital.

Counsel for the Minister says that the situation in this case is different from Imperial Tobacco, supra, because in Imperial Tobacco, the foreign currency was associated with a purchase, i.e., the purchase of tobacco, whereas in this case, the mortgage was associated with a sale, i.e., the sale of real property. However, I do not think Imperial Tobacco, supra, is to be interpreted so narrowly. The test seems to be whether or not the asset, e.g., foreign currency or a mortgage, giving rise to the gain or loss, was acquired for the purpose of effecting a commercial or business transaction. The stage of the underlying transaction with which the asset's acquisition is associated does not seem to me to bear upon the issue.

In Tip Top Tailors Ltd. v. M.N.R., [1957] S.C.R. 703, [1957] C.T.C. 309, 57 D.T.C. 1232, a gain was realized on foreign exchange used to acquire woollen cloth. Rand, J., finding that the gain was income and not capital, stated at page 318 (D.T.C. 1236-37):

I agree with the learned trial judge that it was a scheme for profit-making in one necessary part of the appellant's trading operations, namely, the purchase of sterling funds and part of an integrated commercial operation being the purchase of the supplies and the payment for them in that currency.

In the case at bar, the taking back of mortgages enabled Nobledale to sell real property. It was done to "accommodate" sales. The profit from real property sales was treated as income. The mortgages were pledged or sold. Where a mortgage taken back was sold at a discount, the result would be to reduce the profit from the sale of real property. In my view, the potential sale of these mortgages is an integral part of the scheme of profit making of Nobledale of buying and selling real property. Gains or losses on such sales would therefore be income and not capital related.

In M.N.R. v. Mandelbaum, [1962] C.T.C. 165, 62 D.T.C. 1093, (Ex. Ct.), a company sold prefabricated homes and garages. The sales were paid for by purchasers, partly in cash and partly byway of mortgages in the case of homes, and conditional sales contracts in the case of garages. The bank to which the company was indebted put pressure on the company to dispose of its mortgages and conditional sales contracts since the bank felt that this was not the business of the company. The bank said it would reduce the amount it was prepared to loan to the company unless the situation was rectified. After ascertaining that the mortgages and conditional sales contracts could not be sold except at substantial discounts, the two principals of the company acquired the mortgages and conditional sales contracts at their book value less the amount of the related doubtful debt reserve in the books of the company. The principals claimed that the recovery of the doubtful debt reserve was a capital gain and not income. The Minister reassessed and the principals appealed.

Thorson, P.'s description of the nature of the business in which the principals of the company were engaged in Mandelbaum, supra, is, I believe, instructive. At pages 172-73 (D.T.C. 1097-98) he states:

The evidence of the respondents puts it beyond dispute that he and his brother tried to dispose of the mortgages and agreements because they knew that they were a burden to Sunnibilt and that when they failed to do so they decided to purchase them themselves. The respondent was also specific in his statement that their purpose in making the purchase was to relieve Sunnibilt from the pressure that the Bank was putting on it. . . . It would, in my opinion, not be unreasonable to find that the respondents would not have purchased the mortgages and agreements at all if the Bank had not criticized Sunnibilt for its method of doing business and threatened it with a curtailment of credit if it continued its policy of selling its products on a deferred payment basis and put pressure on it to dispose of its mortgages and agreements. The respondent and his brother were concerned as Sunnibilt’s managers with its unsatisfactory accounts receivable position and the Bank's adverse criticism of it and it was in the course of their management of Sunnibilt that they acted as they did in trying to sell the mortgages and agreements and finally deciding to purchase them themselves. Their actions were all in the course of their business as such managers and the profit realized by them was profit from such business activity on their part. It was the fact of such business that put them in the way of making the purchase from which they realized their profit. Their transaction was entered into in the course of their business as managers of Sunnibilt and the profit realized by them from it was profit from such business and as such subject to income tax.

Although in Mandelbaum, the business of the principals was the management of their company, Thorson, P. found that it was in the course of such management that the company's mortgages and conditional sales contracts were purchased by them. Here the sale of the Markborough mortgage was effected because of pressure from Nobledale's bank. I am of the view that in this case, if business banking arrangements led to the sale of a mortgage taken in the ordinary course of business by Nobledale, the sale should be considered as being made as part of the business of the company as well.

In my opinion, the Minister's position in this case fails to take account of the context in which the Markborough mortgage was acquired and sold. The proceeds of the sale of real property represented by the Markborough mortgage was treated by Nobledale, for tax purposes, as revenue resulting in income. When the mortgage had to be sold at a discount, the net effect was to reduce the proceeds of the sale of real property received by Nobledale. This reduction in proceeds reduced Nobledale’s income. Acceptance of the position that the sale of the Markborough mortgage at a discount was an entirely separate and distinct transaction from the sale of real property and the taking back of the Markborough mortgage, would result in the Minister receiving tax from Nobledale on income Nobledale did not receive. This unfair result is avoided if it is recognized that the purchase and sale of the real property, the taking back of mortgages and the sale of mortgages were all part of the business activity of Nobledale. In my view, such an approach is more consis- tent with business reality than one that attempts to treat each component as separate and distinct.

Intention

Evidence of intention is relevant in determining whether to treat the gain or loss on the sale of an asset as related to income or capital. In Mandelbaum, supra, Thorson, P. dealt with intention at page 170 (D.T.C. 1096):

The evidence relating to the intention of the respondents in purchasing the mortgages and agreements is important. The respondent stated that their purpose in making the purchase was to relieve Sunnibilt from the pressure that the Bank was putting on it. And when he was asked whether it was their intention to make an investment his answer was that their original intention was not for the interest but to relieve the pressure put on them by the Bank. It is clear that they did not consider their purchase as an investment.

In the case at bar, the evidence is similar. The taking back of mortgages by Nobledale was to "accommodate" sales. There is no evidence that they were taken for the purpose of investment even though interest was earned on them. The evidence was that the taking back of the mortgage in the Markborough transaction was to make a sale of real property to Markborough. The subsequent sale of the mortgage was obviously not intended for the purpose of incurring a loss but to relieve pressure put on Nobledale by the bank. The evidence of intention with respect to the acquisition and disposition of the Markborough mortgage is that they were related to business requirements and not to investment purposes.

The effect of a one-time transaction

In Atlantic Sugar Refineries v. M.N.R., [1949] S.C.R. 706, [1949] C.T.C. 196, 49 D.T.C. 602, profits obtained in the futures market were taxed as income. At page 201 (D.T.C. 603) Kerwin, J. states:

Even if it were the only transaction of that character, it should be held, in the light of all the evidence, that it was part of the appellant's business or calling and therefore a profit from its business within section 3 of the Act.

This case was cited by counsel for the plaintiff in support of the proposition that it is not the number of transactions but rather, whether a transaction is part of the business, that determines its treatment as an income or a capital transaction. The fact that in this case the only evidence of the sale of a mortgage was that of the Markborough mortgage does not disqualify the transaction from being treated as an income transaction. Indeed, in Mandelbaum, supra, the purchase of mortgages by the principals in that case was a one-time transaction and the gain on the recovery of discounts was found to be income.

Authorities cited by the Minister

Counsel for the Minister cited a number of cases in which discounts had not been allowed as deductions from income. The learned Tax Court judge stated that in the cases introduced by counsel for the Minister before him, sales of assets were not deemed to be in the ordinary course of business and therefore were treated as capital transactions.

In Heating and Plumbing Finance Ltd. v. M.N.R., 11 Tax A.B.C. 257, 54 D.T.C. 415 (T.A.B), a company was being wound up. The evidence was that the sale of notes was not part of the usual business of the company, i.e., the sale occurred because it was being wound up. The discount was found to be a capital loss.

In Borenstein v. M.N.R., 10 Tax A.B.C. 394, 54 D.T.C. 263 (T.A.B.), the sale of receivables at an amount less than their book value was found to be a capital discount. However, this was the case of a sale of assets of a proprietorship to a company, not a sale in the ordinary course of business.

In Rosevale Apartments Ltd. v. M.N.R. (1962), 29 Tax A.B.C. 393, 62 D.T.C. 411 (T.A.B.), a mortgage held by a company was sold to the shareholders at a forty per cent discount. The sale of the mortgage was voluntary and there appeared to be no rationale justifying the discount. It was held that there was a "negotiated lessening of the appellant's profit”. Board member Fordham stated at page 395 (D.T.C. 412):

What had occurred was nothing more than the voluntary parting with a capital asset by the appellant, for reasons of its own, for a sum considerably below its face value. Moreover, the disposal of this second mortgage was not a part of the original transaction embracing the sale and purchase of the apartment building, but occurred subsequently thereto and was an entirely separate matter.

These cases all involve what appear to be unusual situations not associated with the ordinary course of business. They arose on the winding up of a company, sale of receivables by a proprietor to a company incorporated by him and the sale of a mortgage for an unusually large discount for no apparent business reason. In the case at bar, the sale of the Markborough mortgage was effected because of pressure from the bank. This, in my view, is a business purpose having to do with the ongoing operation and business of Nobledale. There was no suggestion in this case that the discount was unduly large or that there was an attempt to improperly reduce income taxes payable.

A further case cited by counsel for the Minister was Vancouver Pile Driving & Contracting Co. v. M.N.R., [1963] C.T.C. 10, 63 D.T.C. 1007 (Ex. Ct.). In that case, government bonds were purchased to be used as security for the performance of a contract made in the course of trading. Subsequently, the performance obligation was released and the government bonds were returned to the company. The company sold the government bonds at a loss. At page 16 (D.T.C. 1010) Thurlow, J. (as he then was) stated:

Nor can I see on principle any satisfactory reason for so classifying such a purchase for, barring the case of a purchase which is itself made in the course of a venture in the nature of trade, the purchase of property of a kind not ordinarily involved in the taxpayer’s trading activities appears as nothing but a mere investment and the depositing of the property as a mere setting aside of capital to answer an obligation if it arises and is not otherwise discharged and the property itself becomes involved in the trading process only if and when resort is had to it for that purpose. The fact that the bonds in the present case were purchased solely for the purpose of providing the security deposit required by the particular contract accordingly in my opinion does not affect the result and I have therefore come to the conclusion that the transaction in which the bonds were purchased was a capital transaction, that the bonds themselves were a capital as opposed to a revenue asset of the appellant’s business and that the loss through depreciation in their sale value was a loss of capital within the meaning of paragraph 12(1)(b) of the Act.

I consider the facts in that case distinguishable from those in the case at bar. In that case it appears that the company was required to post a performance bond. The company chose to acquire government bonds in order to earn interest while the performance bond was required to be in place. The acquisition of government bonds was not made in the ordinary course of the taxpayer's trading activities. The government bonds were thus acquired as an investment.

By contrast, in this case, the Markborough mortgage was taken as a mortgage back to effect the sale of property to Markborough. This was a regular business practice of Nobledale and had been done on numerous occasions to effect sales of real property. In my opinion, the Markborough mortgage was taken in the ordinary course of Nobledale’s trading activities. It was not acquired as an investment in the way that government bonds were purchased in Vancouver Pile Driving, supra. The acquisition of the Markborough mortgage in my view was well within the trading activity of Nobledale. I therefore do not find Vancouver Pile Driving applicable.

Paragraph 21 (n) Income Tax Act

Submissions were made respecting paragraph 21(n) of the Income Tax Act, in part, at my request. On reflection, I do not consider that the fact that Nobledale had taken reserves pursuant to this provision to be of assistance in deciding this case.

Conclusion

In my view, in the case at bar, had the Markborough mortgage been disposed of immediately after the sale of real property to Markborough, and a loss had been incurred because of the necessity to discount the mortgage, it would be apparent that it would be unfair to treat the sale price of the real property represented by the mortgage as revenue resulting in income but the loss occasioned on the sale of the mortgage as a capital loss. That the mortgage had to be disposed of a few years later should make no difference. The result is that the net amount received by Nobledale for the sale of real property to Markborough was reduced by the mortgage discount.

To separate the sale of the Markborough mortgage from the ordinary business activity of Nobledale is, in my view, unduly restrictive and does not reflect the reality of the business of the company. The sale of mortgages was an activity within Nobledale's constating objects. In following the rationale in Imperial Tobacco, supra, I find that the sale of the Markborough mortgage was not colourless. The mortgage was acquired in the normal trading activity of Nobledale and not as an investment and this influenced the treatment of the loss arising on the sale of the mortgage. In my view, the taking back of the mortgage, bank financing and the sale of the mortgage were inextricably linked to the ongoing business activities of Nobledale. In my opinion, treating the discount as a loss on income account rather than a capital loss was appropriate for a company in the circumstances of Nobledale.

In the result, I would allow the appeal with costs.

Appeal allowed.

Swarn Kumar Bahl v. Her Majesty The Queen

[Indexed as: Bahl (S.K.) v. Canada]

Federal Court-Trial Division (Cullen, J.), January 14, 1993 (Court File No. T-206-89), on appeal from a decision of the Tax Court of Canada, unreported.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63)—9(1), 18(1)(a), (h), 67, 230, 248(1) “motor vehicle"—Commission salesman’s

The plaintiff appealed the amount of automobile and other expenses which were disallowed by the Minister for the 1980, 1981 and 1982 taxation years and which the Tax Court of Canada found for the Minister. Vouchers, records and written evidence were sparse and largely lacking. In 1980 the expenses claimed amounted to 88 per cent of the taxpayer's gross commissions, 86 per cent in 1981 and 85 per cent in 1982. The appellant claimed that the expenses which were disallowed were incurred both by himself and by the sales people whom he supervised. They included expenses for parking charges, car washes and meals in donut and coffee shops. The Minister contended that the disallowed expenses were of a personal nature and not reasonable in the circumstances.

HELD:

The plaintiff showed remarkable negligence and was fortunate that the Minister made any allowance for the expenses claimed. He was not a credible witness. His claims were beyond any reasonable amount; those for automobile expenses were ridiculously high. An explanation that vouchers had been stolen from his house while he was on a trip in 1983 or 1984 was not convincing. Appeal dismissed.

The appellant appeared on his own behalf.

A. Christina Tari for the defendant.

Cases referred to:

Schwarz v. M.N.R., [1987] 2 C.T.C. 12, 87 D.T.C. 5274;

Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182;

Deutsch v. The Queen, [1979] C.T.C. 217, 79 D.T.C. 5145;

Plante v. The Queen, [1983] C.T.C. 341, 83 D.T.C. 5378;

Blunden v. M.N.R., [1979] C.T.C. 3079, 79 D.T.C. 839;

Olympia Floor & Wall Tile (Quebec) v. M.N.R., [1970] C.T.C. 99, 70 D.T.C. 6085.

Cullen, J.:—Given the fact that the plaintiff was not represented by counsel, I prepared a pre-trial statement for each party to read before the trial hoping that the trial might proceed more expeditiously. The parties accepted this statement and it is repeated here:

This is an appeal by way of Statement of Claim from a decision of the Tax Court of Canada, delivered orally on September 16, 1988, dismissing the plaintiff's appeal from Notices of Reassessment issued by the Minister of National Revenue (M.N.R.) in respect of the plaintiff's 1980, 1981 and 1982 taxation years. In the reassessments, the M.N.R. disallowed:

1. $13,497 of the $30,371 claimed as expenses by the plaintiff in respect of his 1980 taxation year;

2. $18,851 of the $37,724 claimed as expenses by the plaintiff in respect of his 1981 taxation year; and

3. $28,912 of the $50,289 claimed as expenses by the plaintiff in respect of his 1982 taxation year.

The amounts disallowed are the subject of this appeal.

Background

The plaintiff was employed as a commissioned salesman with Provincial Products Company (Provincial Products), a division of Stormguard Ltd., from 1978 until 1983. Provincial Products, among other things, sold and installed siding and insulation products. Stormguard Ltd. made an assignment under the Bankruptcy Act on August 25, 1983.

The plaintiff held the position of sales manager and as sales manager, he not only sold products and services directly to customers, but was also responsible for supervising and training other salespeople. The plaintiff received a commission on his own sales plus one per cent override commission on sales made by those persons under his supervision. According to the plaintiff, at any given time he supervised an average of 20 to 24 salespeople. The plaintiff also indicated that he spent fifty per cent of his time supervising and training and the other fifty per cent selling.

Provincial Products supplied the plaintiff's car through a lease agreement and made payments directly to Grant Brown Leasing. According to the plaintiff, Provincial Products agreed to reimburse him for all expenses incurred by him and for applicable expenses paid by him on behalf of other salespeople. The plaintiff stated that as Provincial Products did not reimburse him for expenses, he claimed the expenses as deductions from his income during the taxation years at issue.

With respect to the 1980 taxation year, the plaintiff reported earning a gross commission income of $34,219.42 against which he deducted expenses in the amount of $30,370.87 resulting in a net commission income of $3,848.55. By notice of assessment dated July 10, 1984 the M.N.R. reduced the expenses the plaintiff deducted from $30,370.87 to $16,873.62, a disallowance of $13,497.25. The specifics of the amounts claimed and disallowed are set out below:

	1980 TAXATION YEAR
Items	Claimed Claimed	Allowed	Disallowed
Auto Expense	$18,329	$10,253.02	$8,076.75
Other Travel	6,405.50	2,640	3,765.50
Entertainment/Sales:
Dinners	560	560
Gifts	700	700
Stationery	615	615
Telephone	1,955	1,000	955
Pager	405.60	405.60
Office in home	1,400	1,400
Total	$30,370	$16,873.63	$13,497.25

With respect to the 1981 taxation year, the plaintiff reported earning a gross commission income of $43,618.22 against which he deducted expenses in the amount of $37,737.97 resulting in a net commission income of $5,894.25. By notice of assessment dated July 16, 1984 the M.N.R. reduced the expenses the plaintiff deducted from $37,723.97 to $18, 873.22, a disallowance of $18,850.75. The specifics of the amounts claimed and disallowed are set out below:

	1981 TAXATION YEAR
Items	Claimed Claimed	Allowed	Disallowed
Automobile Expense	$22,181.62	$11,560.12	$10,621.50
Other Travel	8,429.75	2,640	5,789.75
Dinners	720	720
Gifts	1,090	1,090
Stationery	995.50	995.50
Telephone	2,350	1,000	1,350
Pager	457.10	457.10
Office	1,500	1,500
Total	$37,723.97	$18,873.22	$18,850.75

With respect to the 1982 taxation year the plaintiff reported earning a gross commission income of $58,606.69 against which he deducted expenses in the amount of $50,289.64 resulting in a net commission income of $8,317.05. By notice of assessment dated July 16,1984 the M.N.R. reduced the expenses the plaintiff deducted from $50,289.64 to $21,377.69, a disallowance of $28,911.95. The specifics of the amounts claimed and disallowed are set out below:

	1982 TAXATION YEAR
Items	Claimed Claimed Allowed		Disallowed
Automobile	$26,030.64	$11,928.69	$14,101.95
Travel	12,090	2,640	9,450
Dinners	1,230	1,230
Gifts	2,500	2,500
Stationery/Postage	1,340	1,000	340
Telephone	3,470	1,000	2,470
Pager	479	479
Wages to Spouse	1,400	1,400
Office in Home	1,700	1,700
Total	$50,289.64	$21,377	$28,911.95

By notice of objection dated August 27, 1984, the plaintiff objected to all three reassessments.

By notice of confirmation dated May 23, 1985, the M.N.R. confirmed the reassessment for the 1980 taxation year and by notice of confirmation dated August 23, 1985, the M.N.R. confirmed the reassessments in respect of the 1981 and 1982 taxation years.

The plaintiff appealed the reassessments to the Tax Court of Canada. By a judgment delivered orally on September 16, 1988 the Tax Court dismissed the plaintiff's appeal and found that the M.N.R. was justified in disallowing the expenses claimed.

In reassessing the plaintiff, the M.N.R. made the following assumptions and findings of fact:

1. at all material times, the plaintiff was a self-employed commission salesperson;

2. the plaintiff earned gross commission income of $34,219.42 in his 1980 taxation year, $43,618.22 in his 1981 taxation year and $58,606.69 in his 1982 taxation year;

3. the plaintiff did not incur more than $16,873.62 in expenses during his 1980

taxation year for the purpose of gaining or producing commission income;

4. the plaintiff did not incur more that $18,873.22 in expenses during his 1981

taxation year for the purpose of gaining or producing commission income;

5. the plaintiff did not incur more than $21,377.69 in expenses during his 1982

taxation year for the purpose of gaining or producing commission income;

6. the plaintiff did not submit, at any time, any receipts, vouchers, log books or records to substantiate any of the expenses claimed; and

7. expenses in excess of those amounts allowed, if incurred at all, were not reasonable in the circumstances and were personal expenses of the plaintiff.

Counsel for the defendant added to the memo the fact that the defendant was also relying on the provisions of section 67 of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

Issues

The issues in this appeal are fairly straightforward and involve a determination of whether the plaintiff is entitled to deduct the disallowed expenses totalling $13,497, $18,850.75 and $28,911.95 in the 1980, 1981 and 1982 taxation years respectively, under paragraph 18(1)(a) of the Act and whether the disallowed expenses were considered to be personal or living expenses and therefore not deductible under paragraph 18(1)(h) of the Act.

Plaintiff's position

The plaintiff's position is that the amounts in question were incurred for the purpose of gaining and producing commission income and were properly deducted in computing income in accordance with paragraph 18(1)(a) of the Income Tax Act and were reasonable in the plaintiff's circumstances. The plaintiff maintains that in addition to supplying the plaintiff's car through a leasing agreement, Provincial Products agreed to reimburse him for all expenses he incurred and for the applicable expenses of other salespeople. Unfortunately, there is no record in writing of such an agreement. According to the plaintiff, he kept receipts for the expenses he incurred and submitted them regularly to Provincial Products. He indicated that he did not keep copies of these receipts, but did keep a record of the expenses at his home for income tax purposes. It is suggested that after filing his return, the plaintiff's notes were stolen. Provincial Products failed to reimburse the plaintiff for expenses and therefore the plaintiff deducted the expenses from his income when he filed his returns.

Defendant's position

The defendant submits that the amounts in question were properly disallowed as they were not incurred for the purpose of gaining and producing income and therefore were not deductible pursuant to paragraph 18(1)(a) of the Act. Further, the amounts in question were also properly disallowed as expenses as they were the plaintiff's personal expenses and therefore not deductible pursuant to paragraph 18(1)(h) of the Act. The defendant also submits that the amounts in question were properly disallowed as the expenses were not reasonable in the circumstances and therefore not deductible in the computation of income by virtue of section 67 of the Act.

Discussion

It should be noted that the present appeal, although an appeal from a decision of the Tax Court of Canada, is a trial de novo and the onus is on the plaintiff to show that the reassessments were in error.

The provisions of subsection 9(1) and paragraphs 18(1)(a) and (h) are reproduced below:

9. (1) Subject to this part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

GENERAL LIMITATION

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income for the business or property;

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business.

In order to pass the “test of deductibility" under paragraph 18(1)(a), the expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing or maintaining income from a business or property. The determination of whether the expenditure in question falls within paragraph 18(1)(a) of the Act is a question of fact. Further, as the onus is on the taxpayer to establish that an expense was incurred to produce income, the plaintiff must adduce evidence at trial that the amounts claimed were incurred for the purpose of gaining or producing income.

As noted by the defendant, the plaintiff did not submit receipts, vouchers or records to substantiate the expenses claimed. Although there is no legal requirement that vouchers and receipts be kept for all expenses, section 230 of the Act requires taxpayers to keep adequate books and records. Adequate is not defined in the Act, but it would seem that these" records” should support whatever the taxpayer is claiming for taxation purposes. The lack of any documentation made the plaintiff's task a difficult one, especially as the onus is on the taxpayer to prove that the M.N.R.'s assumptions and assessments are wrong. In Schwarz v. M.N.R., [1987] 2 C.T.C. 12, 87 D.T.C. 5274 (F.C.T.D.), (under appeal), Strayer, J., after quoting from Johnston v. M.N.R. [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182, points out that the onus is on the taxpayer to prove wrong the M.N.R.'s reassessment, as the taxpayer is in a better position to provide information as to what actually occurred. Strayer, J. also appears to allude to the fact that if a plaintiff taxpayer makes some effort to corroborate the claims made and if the oral evidence is credible, it might be possible to find in the taxpayer's favour even in the absence of any vouchers, receipts or other records.

In Deutsch v. The Queen, [1979] C.T.C. 217, 79 D.T.C. 5145 (F.C.T.D.), the taxpayer's deductions for car and travel expenses were reduced on assessment as records were either fragmentary or non-existent. The Court found it reason- able to allow part of the deductions and held that a portion of the expenses claimed had been established on a balance of probabilities, as expenses which could legally be claimed as incurred for the purposes of earning income in accordance with the Act.

Expenses in dispute

In order for the Court to be satisfied that the expenses claimed fell within the provisions of paragraph 18(1)(a), the plaintiff had to explain how the expenses Claimed related to the earning of his commission income.

Automobile expenses

The largest portion of expenses claimed by the claimant and disallowed by the M.N.R. are in respect of automobile expenses. Generally, automobile expenses include such items as gas, oil, cost of repairs and insurance.

In respect of the plaintiff's 1980 taxation year, the M.N.R. disallowed the following amounts claimed by the plaintiff for automobile expenses:

1. $6,782 of the $9,650 the plaintiff claimed for gas and oil ;

2. $564 of the $980 the plaintiff claimed for car washes;

3. $730.75 of the $1,250.75 claimed by the plaintiff for parking.

In respect of the plaintiff's 1981 taxation year, the M.N.R. disallowed:

1. $8,400 of the $11,830 claimed for oil and gas;

2. $816 of the $1,284 claimed for car washes;

3. $1,405 of the $1,925.50 claimed for parking tolls.

In respect of the plaintiff's 1982 taxation year, the M.N.R. disallowed:

1. $10,830 of the $14,830 claimed for oil and gas;

2. $1,160 of the $1,680 claimed for car washes;

3. $2,110.75 of the $2,630.75 claimed for parking tolls.

Also, it should be noted, and it was strongly emphasized by the plaintiff, that the amounts included what the plaintiff spent on his own behalf as well as on behalf of other salespeople.

Generally, where a "motor vehicle” (as defined in subsection 248(1) of the Act and includes an automobile) is owned or leased by an individual and is used by that individual to earn income from a business, expenses such as the cost of gasoline, fuel, maintenance, licences, insurance, normal repairs and certain leasing costs are deductible as ordinary operating expenses of the business, as long as the amounts claimed are reasonable and are supported by vouchers, receipts or by some record of expenditure. If the automobile is used partly in the course of business and partly for personal transportation, the portions of each have to be proved and the expenditures apportioned accordingly. In Plante v. The Queen, [1983] C.T.C. 341, 83 D.T.C. 5378 at page 347 (D.T.C. 5383), Walsh, J. notes:

One other issue remains, namely the disallowed car expenses of Reynald Plante. The Minister in his reassessment which is under appeal reduced the portion of allowable expenses of the automobile from 40 per cent to 30 per cent. In order for plaintiff to establish a very small percentage of use made by him for personal reasons as against business use he should have kept some sort of mileage log; instead in evidence he merely referred in general to the long distance from his farm to where most of his clients are located. He gave no figures as to these distances and was vague as to the number of calls he made on each of them.

In the case before me, there was no dispute that the claimant was eligible to claim these expenses as a self-employed commissioned salesperson. The question becomes whether the amounts disallowed fall within paragraph 18(1)(a) of the Act. As indicated earlier, this is a question of fact that must be determined based on the evidence presented. None of the amounts claimed were supported by vouchers or any type of record. However, it should be noted that the M.N.R. did allow the amounts the plaintiff claimed with respect to insurance, the cost of tires, repairs, licence, auto club membership fees, spare parts, and lease payments.

Other travel

The Tax Court indicated that "other travel” included meals in restaurants and money spent in donut and coffee shops.

Entertainment expenses

At the time relevant to this appeal entertainment expenses which a taxpayer could prove as being reasonable and necessarily incurred for the promotion or furtherance of the taxpayer's business were permitted as a deduction from income. Under the heading of “entertainment” the M.N.R. disallowed amounts the plaintiff claimed for gifts and a portion of the amounts claimed for telephone expenditures and postage expenses. The telephone calls were made from pay telephone stations with cash, no credit cards were used and as such the plaintiff had no record of the cost of the calls.

Gifts

With respect to the amounts the plaintiff claimed for gifts, it is my understanding that the amounts represented the cost of bottles of wine which the plaintiff gave to customers for having referred other potential customers to him. In Blunden v. M.N.R., [1979] C.T.C. 3079, 79 D.T.C. 839, gifts in the amount of $2,325 claimed by the taxpayer as having been given to tipsters providing leads to prospective customers were not allowed as deductions. In that case, the taxpayer was a commission car salesperson, who claimed deductions for automobile, gift, meal and home office expenses. J.B. Goetz, Q.C. of the Tax Review Board found that the 25 per cent deduction from automobile expenses claimed and allocated to personal use by the Minister was correct, that the Minister's assessment of the home office expenses was upheld as the taxpayer directed no evidence relating to the office expenses and that the disallowance of meal expenses by the Minister should stand. With respect to the gift expenses, the Tax Review Board noted that the taxpayer would not provide the names of his "tipsters" and held that in order to come within the provisions of paragraph 18(1)(a) of the Act, the taxpayer must establish that the entertainment expenses claimed by him could be substantiated. At page 3082 (D.T.C. 841) of the decision J.B.Goetz stated that:

It is ruled that the mere tendering of liquor receipts and, secondly the fact that no records were kept of any monetary expenditure being made to the tipsters, force us to the position, that, because of his refusal to identify the recipients of his entertainment expenses and the absence of any relevant records, he fails to come under section 18(1)(a). For this reason the disallowance of the gift expense in the relevant taxation year is upheld.

However, in Olympia Floor & Wall Tile (Quebec) v. M.N.R., [1970] C.T.C. 99, 70 D.T.C. 6085 (Exch. Ct.) the Court allowed the taxpayer to deduct as an expense annual donations of between $8,000 and $10,000 made to charitable organizations. In that case the taxpayer was able to show a direct relationship between the gifts and sales that resulted because of the goodwill generated in the business community.

It should also be noted that with all expenses claimed, where there is an element of a personal nature or use demonstrated together with a business aspect, that portion representing a personal use will be disallowed.

Personal or living expenses

Paragraph 18(1)(h) of the Act prohibits the deduction of personal or living expenses, except travelling expenses incurred by the taxpayer while away from home in the course of carrying on a business. It appears that in this case, as in most cases, personal and living expenses cannot be deducted in any event because of paragraph 18(1)(a) of the Act which prohibits the deduction of an expense or outlay except to the extent that it was made or incurred for the purpose of gaining or producing income from a business or property. However, as I found, the expenses in dispute were properly disallowed under paragraph 18(1)(a) as being personal in nature, therefore it is redundant to disallow the same expenses under paragraph 18(1)(h) of the Act.

Reasonableness of the expenses

At the time relevant to this appeal, section 67 of the Act provided that:

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

The reasonableness of any of the plaintiff's expenditures has to be determined based on the facts and circumstances relevant to this specific plaintiff and his appeal.

Conclusions and decision

Having heard the testimony and arguments advanced by the plaintiff, I am left to wonder why the Department of National Revenue was so generous in allowing the expenses that they did. There were no vouchers for any claimed expenses for 1980, 1981 or 1982. No log book was kept of the distances travelled by the plaintiff. His claimed expenses were well beyond any reasonable amount for this taxpayer. The defendant has it right in the Statement of Defence when she states: (h) expenses in excess of those amounts allowed, if incurred at all, were not reasonable in the circumstances and were personal expenses of the plaintiff".

The plaintiff claimed his vouchers/receipts were stolen in 1983 or 1984 during a break-in at his house when he was visiting in India. That does not explain his failure to provide any vouchers, receipts, log books or records to substantiate any of the expenses claimed.

On the other hand, consider the fairness of the Department of National Revenue and its auditor Mr. Larry Francis Shepherd (Shepherd) and only a couple of examples are necessary. With no receipts and no guidance from Bahl, he decided to allow for the 1980 taxation year $10 per day for other travel for the 264 working days in the year amounting to $2,640. On gifts, he questioned Bahl who couldn't remember or wouldn't divulge who received these alleged gifts and yet claimed $700 in 1980, $1,090 in 1981 and $2,550 in 1982 which were quite properly disallowed.

The claims made by Bahl for automobile expenses can only be described as ridiculously high, and it is an effrontery to challenge the amounts allowed as too low.

Shepherd allowed amounts of $1,400 in 1980, $1,500 in 1981 and $1,700 in 1982 for office at home, again despite Bahl's failure to provide any guidance or vouchers about how he arrived at these figures.

The $1,000 allowed by Shepherd for telephone calls in each of the taxation years was arrived at by allowing for 1,000 calls at 10¢ a call and is in my view not only reasonable but quite generous in the circumstances here. Consider the

Shepherd wrote to Bahl in early 1984 with a careful analysis of the expenses allowed and those reduced, inviting Bahl to come in to discuss the matter and make whatever representation he cared to make. If the “theft” of vouchers, etc. took place in 1984 as Bahl suggested as a possibility, he would have had the vouchers he claimed to have and would have brought them in to refute expenses not allowed. Bahl took his time about going in and, other than a declaration that he had made the expenses claimed, offered no proof and certainly no log book(s) which he stated he never kept.

For a businessman Bahl showed remarkable negligence and in my view was fortunate that any of these expenses were allowed. But for the sense of fairness exhibited by Shepherd his plight would have been a sadder one indeed. Bahl was not a credible witness even seeking to deny that he had made a trip to India until reminded that he said his trip to India meant a vacant house resulting in a break-in and loss of the receipts and vouchers.

Based on the evidence relating to the expenses in dispute, the M.N.R. was correct in disallowing the expenses in dispute and the assessments shall stand. As an aside, I agree with the Tax Court judge's comment that in respect to expenses allowed, the Minister of National Revenue was quite generous.

Costs are to be awarded to the defendant. I thought very seriously about awarding them on a solicitor-and-client basis but in the final analysis I was dissuaded due to the plaintiff's circumstances.

Appeal dismissed.