Strayer, J:—The plaintiff appeals the reassessments by the Minister of National Revenue of his income for 1973, 1974, and 1975. He also appeals the imposition of penalties on certain of the reassessed income with respect to these years. He represented himself at the trial.
In reaching the following conclusions, I have applied the rules with respect to onus of proof as provided in subsections 152(8) and 163(3) of the Income Tax Act as recently interpreted by this Court in The Queen v Wellington Taylor,  CTC 436; 84 DTC 6459. That is, the onus is on the taxpayer to establish that the Minister’s reassessment 1s wrong, whereas the onus is on the Minister to establish the degree of culpability on the part of the taxpayer required by subsection 163(3) to justify the imposition of penalties. I shall deal with these two aspects of the appeal separately.
Reassessments of Income
I have concluded that in the operations of the mortgage brokerage business and in the land transactions during 1973 and 1974 while the plaintiff and his then wife were living together, he was for all practical purposes the sole operator of the business and the sole party engaged in the real estate transactions. This was the assumption upon which the Minister reassessed his income with respect to both management fees paid by the corporation Mount Lehman Equitable Mortgage Co Ltd, and with respect to capital gains. Although there was some dispute over whether the plaintiff was sole shareholder of Mount Lehman during this time, I am satisfied he controlled the company. Although the plaintiff testified that his then wife was equally engaged in the operation of Mount Lehman, and in their real estate transactions, her testimony squarely contradicted his in this respect. While her memory seemed somewhat selective at times, and while she may have played a minor part in the conduct of these business activities particularly since the business was conducted from their home, the plaintiff did not satisfy the onus imposed on him by law to establish that the Minister’s reassessment was incorrect. The facts are clear that at the beginning of 1973 they already had one small child and the second child was born in July of that year. I accept the evidence of Mrs Parsons, as she now is, that she was almost entirely occupied with her family responsibilities at that time. I find further corroboration that she was not really engaged in the business but was only used by her husband as a nominee, from the fact that an income tax return was filed for her in 1973 without her knowledge. She denied having signed the return and it is quite apparent, from a comparison of the signature on that return with her signature on cheques which the plaintiff himself put in as evidence as having been signed by her, that it is not her signature on the income tax return. The plaintiff had subsequently relied on this 1973 return as proof that certain income was hers rather than his, asserting to Revenue Canada in a letter that “to my knowledge it is her signature and it is a valid return”. But when cross-examined about the matter in Court he was unable to say whether he had signed her name to the return or not. Apart from this, he did not produce any documentation or corroboration of his former wife’s participation in the business. He was only able to establish, by cross-examination of her, that she had viewed with him some of the land which was the subject of transactions now assessed by the Minister as creating taxable capital gains attributable to him.
On this basis, I shall deal with the reassessments for each of the years in question.
(i) 1973 — For the reasons stated above the amount of $4,703.71 reported as her income on the return filed in the name of the plaintiffs then wife should be attributed to him. This amount represented one half of the management fees paid by Mount Lehman Equitable Mortgage Co Ltd to the De Graafs. The Minister reassessed this amount as being earned in its entirety by the plaintiff and he has not shown this to be incorrect. Therefore that amount should be attributed to him as income.
The amount of $1,940 representing profits on the sale of the Adams mortgage, reported on the income tax return filed in the name of Margaret De Graaf, the plaintiffs then wife, was also reassessed as income of the plaintiff and the plaintiff presented no evidence to show that the reassessment was wrong. That reassessment should also stand.
The Minister also reassessed the plaintiffs income for 1973 to include a capital gain of $11,851.75 on the disposition of what may conveniently be referred to her as Lot 3 which was part of a parcel described as Lot 1, LS 13, NW /4 Section 31 TP 17, Plan 42418, which I shall refer to as Lot 1. I accept that Lot 1, which was purchased in the name of the plaintiffs then wife in 1972, was really held under his control and for his benefit. His former wife when testifying denied any involvement in this investment other than the signing of papers when told to do so. Although she was the mortgagor of the property in order to finance the purchase, the plaintiff guaranteed the mortgage and he seems to have had effective control over the property. He produced no evidence to substantiate his former wife’s role as beneficial owner. I am therefore satisfied that any capital gains arising from the disposition of Lot 1 should be attributed to him. I am not satisfied, however, that there was a “disposition” of the property in 1973. According to the Minister, and it was not denied by the plaintiff, Lot 1 was subdivided into Lots 2 and 3 and 3 was transferred to Axis Diversified Investments Ltd on October 3, 1973, for the amount of $30,000 (the whole of Lot 1 having been purchased in 1972 for $11,500). At the time of this transfer to Axis Diversified, that company was jointly owned by the plaintiff and his then wife. The Minister has taken the position in his reassessments that all such transactions, whether carried out in the name of the plaintiffs wife or by his companies, were essentially the transactions of the plaintiff because he was the controlling force throughout and the beneficiary of these transactions. It appears to me that, on this basis, by virtue of subparagraph 54(c)(v), a “disposition” for the purposes of establishing taxable capital gains “does not include ... any transfer of property by virtue of which there is a change in the legal ownership of the property without any change in the beneficial ownership thereof...” I am unable to see, on the basis of the Minister’s own thesis, that there was a change of beneficial ownership in the transfer of registered ownership from Mrs De Graaf to Axis Diversified in October of 1973. In my view the disposition occurred on March 8, 1974 when Lot 3 was deeded by Axis Diversified to Peter John Haide, also for the amount of $30,000. The plaintiffs appeal for 1973 with respect to this amount of $11,851.75 is therefore allowed.
(ii) 1974 — The Minister reassessed the plaintiffs income to include $26,541.79 said to have been received by him from Mount Lehman Equitable Mortgage Co Ltd as management fees. The plaintiff has asserted that one half of these fees were earned by his wife. For the reasons stated earlier I confirm the reassessment by the Minister that this amount should be attributed to the plaintiff for 1974.
With respect to capital gains, I should deal first with the disposition of Lots 2 and 3, the parcels into which Lot 1 referred to above was subdivided. Lot 2 was deeded on February 18, 1974 by Margaret De Graaf to Peter John Haide for $30,500. On that sale the Minister assessed a taxable capital gain by the plaintiff in the amount of $12,101.75. I confirm that reassessment. While I have noted above that Lot 3 was also actually disposed of by Axis Diversified to Peter John Haide on March 8, 1974 and that that event represented the “disposition” attracting capital gains tax, the Minister has not sought, and I cannot grant, an incease in his assessment for 1974.
The Minister also reassessed as part of the plaintiffs 1974 income, a taxable capital gain of $6,478 arising from the sale of Lot 10, of District Lot 95 and 230, Gp 2, Plan 36656, NWD. I understand from the evidence that this property when acquired was registered in the name of the plaintiff's then wife and was sold to a third party in 1974. Mrs Parsons, the plaintiff's former wife, in her evidence denied having met the vendor from whom she acquired the property. One document put in evidence, Exhibit D-6, indicates that the plaintiff was involved in planning a possible subdivision of the property. The evidence is generally such that I would equally conclude here that the plaintiffs wife, Margaret De Graaf as she then was, was only the nominal owner of the property for the benefit of the plaintiff and any capital gain realized was properly attributed to him.
The Minister also in his reassessment included the amount of $14,708 in the plaintiff's 1974 income representing a taxable capital gain from the sale of property described as N /: of Lot 97, Section 24, TP 19, Plan 4211, NWD. I have examined the deeds in respect of this land covering the transactions in question and they make no mention of Margaret De Graaf. The plaintiff acquired the land in his own name, then transferred it to Axis Diversified after he had become sole shareholder of that company, and Axis Diversified disposed of it in December of 1974. There was nothing to suggest that this was other than a disposition by and for the sole benefit of, the plaintiff and the reassessment in this respect must be confirmed.
(Hi) 1975 — It should first be noted that the Minister’s reassessment with respect to the plaintiffs deduction for alimony paid in 1975 has been withdrawn as has the plaintiffs contention that the deduction should have been larger than he first claimed. The deduction which he originally claimed in the amount of $5,058.63 is therefore confirmed.
The only matter in issue for 1975 is that of a business loss in the amount of $47,410.65 which the plaintiff originally claimed for 1975 in respect of the disposition of premises at 13508 - 106th Avenue in Surrey, BC, hereinafter referred to as the “Surrey property”. The Minister reassessed the plaintiffs income in this respect by disallowing the claim for business loss and asserting that the plaintiff had in fact made a gain of $2,668.26 on this disposition. At the time of trial both parties were prepared to modify their positions. The plaintiff claimed a loss of only $38,383.42 and characterized it as a capital loss rather than a business loss. The defendant asserted that the gain was only $1,271.21. The defendant has denied the particulars of the plaintiffs expenditures, at least beyond those which the defendant has taken into account in reaching the conclusion that there was a gain, and has put the plaintiff to the strict proof of all the expenditure items in dispute. The plaintiff in his evidence and in the documents which he submitted was unable to provide very convincing evidence with respect to a number of the expenditures. Moreover, there is one substantial amount, some $35,850.19, which is in dispute with respect to its deductibility in the taxation year in question, 1975. Because of outstanding liens placed on the property at the time a building was constructed thereon, the plaintiff had had to place a certain amount of money in court for the payment thereof. As I understand it, the amount of $35,850.19 remained in court until some time after 1975. The plaintiff claims this amount as part of his expenditures which he has deducted from the proceeds of sale of the property in 1975 in order to show a loss. The defendant argues that this is a contingent reserve which by virtue of paragraph 18(l)(e) of the Income Tax Act is not a deductible expense. This paragraph would only be applicable if the alleged loss in issue is a business loss and not a capital loss. The Minister has assessed this as a business loss and the plaintiff has not introduced adequate evidence to demonstrate that the transaction in question was in the nature of a capital transaction rather than a business transaction. Such might have been the case but he has done nothing to demonstrate the circumstances in which the property was acquired or disposed of. The jurisprudence seems amply clear that a reserve for the possible future payment of liens is contingent because it is impossible to know, until matters are finally settled, how much will actually be owing and therefore money held in reserve for such purposes is not deductible as an expense until the amounts actually owing are ascertained: see J L Guay Ltée v MNR,  CTC 686; 71 DTC 5423 (FCTD); affirmed  CTC 97; 75 DTC 5094 (SCC); Western Tractor and Equipment Company Limited v MNR (1955), 14 Tax ABC 48; 55 DTC 576 (TAB). Therefore even though some or all of the amount of $35,850.19 might be regarded as a business expense, and potentially part of a business loss, in some taxation year, it could not properly be so regarded in 1975. The deletion of this amount as a business cost in 1975, included as it is in the plaintiffs calculation of a business loss totalling $38,383.42 on the Surrey property that year, leaves at best the possibility of a business loss of $2,533.23. To the extent that other expenses claimed totalling this amount or more are not established, the claimed business loss would disappear and the gain now alleged by the Minister, in the amount of $1,271.21 might be established in whole or in part. Whether a greater gain might be established is of no concern since the Minister is not claiming a gain of any more than $1,271.21. I am of the view that the plaintiff has failed to prove several items in his alleged expenditures disputed by the Minister. One need go no further than the interest costs which he claims in the amount of $16,934.91. The Minister disputes most of this amount as the statement submitted on his behalf appears to recognize interest costs of less than $3,000. The documentation provided by the plaintiff in this respect was quite inadequate and much of it was of a hearsay nature. Again he has not discharged the onus upon him to demonstrate that the reassessment was wrong and I therefore cannot recognize his assertion that there were interest costs attributable to this project in excess of $16,900. This being the case, he has failed to establish a business loss of $38,383.42. I need not go into other items of alleged expenditure, but will only note that with respect to various specific expenditures he was only able in one case to produce a receipted invoice with respect to the expenditures attributed to this project.
The Minister has assessed penalties under subsection 163(2) with respect to the taxable capital gain of $11,851.75 assessed by him in respect of 1973, with respect to all the taxable capital gains totalling $33,287.78 assessed by him with respect to 1974, and the management fees of $26,541.79 unreported by the plaintiff which were assessed by the Minister in respect of 1974.
In essence, for a taxpayer to be liable to a penalty under subsection 163(2) he must have been responsible for a misstatement or omission in his return, made by or for him knowingly or through his gross negligence. As I have noted elsewhere, the jurisprudence seems to recognize an element of subjectivity in the application of these tests, even to the point of accepting ignorance of the law as excusing misstatements in income tax returns: see Venne v The Queen,  CTC 223 at 233-36; 84 DTC 6247 at 6255. It must also be kept in mind, as noted above, that the Minister has the onus of proof in establishing that the requisite state of mind existed to justify the imposition of penalties.
The plaintiff is obviously an intelligent person with a responsible education. He is a graduate of Grade 13 in Ontario and was admitted to studies at the University of British Columbia. He did not continue long with his studies there.
He worked briefly for a finance company and then went into business on his own. He caused the incorporation of, and was a principal officer and sole or principal shareholder of, several corporations. One must therefore attribute to him a relatively high degree of understanding of basic taxation principles, and the awareness and confidence to choose competent professional advisers and to insist on achieving a basic understanding of work done on his behalf. I have kept the foregoing factors in mind in determining whether the imposition of penalties is justified.
With respect to 1973, the only item on which a penalty was assessed by the Minister was the capital gain which I have now found was not properly attributable to that year. Therefore there can be no penalty in respect of it.
With respect to 1974 I find that the penalty was properly assessed with respect to the taxable capital gain in the amount of $14,708 representing the gain from the sale of property described as N /: of Lot 97 etc. As indicated, this transaction was completely the plaintiffs own with no involvement of his wife. It is inconceivable that he could have believed that the gain was not taxable in his hands. With respect to the other taxable capital gains assessed by the Minister with respect to 1974 and arising out of the sale of Lot 2 of the Mission property as described above, and out of the sale of Lot 10 of District Lots 95 and 230 also as described above, the taxable capital gains having been assessed by the Minister at $12,101.75 and $6,478.03 respectively, there might be some basis for questioning the culpability of the plaintiff in not reporting these capital gains as his own. In both cases the land was registered in the name of his then wife prior to its disposition in 1974 and there might have been some reasonable belief on his part that the capital gains were not attributable to him. The true nature of his state of mind, however, is indicated by his evidence that these gains were not reported to his accountant and thus not reported in respect of his wife’s income either. I am unable to accept that the plaintiff, who was effectively in charge of these transactions and the accounting services provided for his various enterprises, could have unknowingly or without at least gross negligence overlooked the fact that the profits made on these transactions were not being reported as the income of anyone. He has produced no evidence to suggest that he took any care whatsoever in this regard. He simply insists it was not his intention to evade payment of income tax thereon, but thought it would be payable at some future time. In other words, he does not even say that he was relying on professional advice in failing to report these capital gains as income. Therefore I find that the penalties were properly applied to these two transactions as well.
The Minister has applied no penalties with respect to 1975.
The appeal must therefore be dismissed except with respect to the taxable capital gain of $11,851.75 included by the reassessment of the Minister in the plaintiffs 1973 income and penalties thereon, and except in respect of the plaintiffs 1975 alimony claim which will be confirmed in the amount of $5,058.63. The defendant will be entitled to costs.
Appeal allowed in part.