Friedberg v. The Queen, 89 DTC 5115, [1989] 1 CTC 274 (FCTD)

The Associate Chief Justice: —In this action brought pursuant to subsection 172(2) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended, the plaintiff appeals reassessments for the 1978, 1979, 1980 and 1981 taxation years adjusting deductions claimed by the taxpayer for two gifts to the Royal Ontario Museum (ROM), one in 1978 and a second in 1980, and contesting the income reported by the plaintiff from trading in gold futures contracts during all the years in question. Also at issue is a late filing penalty in respect of the 1981 taxation year. The matter came on for hearing in Toronto, Ontario on February 1, 2, and 3, 1988 and oral argument was presented on March 28, 1988. As three distinct issues have been raised in this case, each will be dealt with separately.

The first issue arises out of the purported donation by the taxpayer of two substantial collections of rare antique Islamic and Coptic textiles to the ROM, the Abemayor Collection in 1978 and the Wilkinson Collection in 1980, and the deductions from income claimed respecting those donations.

In September 1977 Parliament proclaimed in force the Cultural Property Export and Import Act (CPEIA) to express the principle that Canada should protect its patrimony and preserve and secure within its territory objects of cultural and national importance. In order to attain this goal the Act sets up tax incentives so that private owners of cultural property of importance to the national heritage may find it advantageous to donate works to national and provincial institutions dedicated to conserving and exhibiting objects for educational or cultural purposes. Section 50 effects this purpose by amending subsection 110(1) of the Income Tax Act to provide that gifts to such institutions meeting the criteria of the CPEIA and certified by the Cultural Property Review Board (Review Board) are deductible from income. The eligibility for and the amount of the deduction are theoretically the responsibility of Revenue Canada, however, the two agencies agreed that the Review Board, when it issues a cultural property tax certificate, will also consider the estimated fair market value of the object in question in order to fix a deductible amount. During the relevant period, the review Board had not enunciated a specific policy regarding the valuation of cultural property for income tax purposes, though appraisals at fair market value were generally required to be submitted along with applications for certification. The Review Board was not involved in certifying the monetary value of objects, nor did the certificate issued by it contain any information regarding recent sale prices.

The plaintiff testified that he had been informed by his accountant that a Dr. Gervers from the ROM was seeking someone to purchase a collection of antique textiles for donation to the museum. When the plaintiff expressed interest, a meeting with Dr. Gervers was arranged early in 1978 and she discussed the outstanding quality and range of the collection and explained to the plaintiff the details involved in acquiring and donating it. Dr. Gervers and ROM personnel were aware that the recent proclamation of the CPEIA provided a means to encourage Canadian taxpayers to support cultural development, and the museum had prepared a fact sheet on the legislation for the information of potential donors. Dr. Gervers suggested to the plaintiff the possibility of tax deductions under the CPEIA.

Dr. Gervers passed away suddenly in the summer of 1979 shortly after the arrival of the second collection at the ROM. However, at the time in question, she was the Associate Curator of the Textiles Department at the ROM. She had her doctorate in medieval art and architecture and specialized in antique Islamic and Coptic textiles from Tiraz.

Any witness on this aspect of the trial who had come into contact with Dr. Gervers was unrestrained in their praise of this woman's qualities and of her devotion to the Royal Ontario Museum. On all accounts, she was a spectacular person who combined the best of education, skill and personal determination to bring world class collections to the museum. Indeed, there is documentary evidence that before she had been able to secure an investor for the transactions in issue here, she made a personal offer to sacrifice her own part-time income for the purpose of financing the acquisitions. It is absolutely beyond question that she was the driving force behind acquiring the collections and all other parties played their part at her request.

During the 1960s and 1970s the museum had acquired a limited number of antique Islamic textiles from a Michel Abemayor in New York. Mr. Ab- emayor's family had been collecting Islamic textiles for three generations and he himself was a dealer and collector of such items. Late in 1975 during a visit to New York, Dr. Gervers visited Mr. Abemayor's office to explore the possibility of acquiring more pieces for the museum. It was learned that Mr. Abemayor had recently passed away and that his widow could be contacted for information about antique textiles. In the spring of 1976, Dr. Gervers saw the collection of the textiles in question and was very excited about the quality of the pieces, as well as the size, some 1,178 Islamic textiles dating back to the middle ages. It was her opinion that there was no comparable collection in a public institution in North America at that time. Upon return to the ROM the possibility of acquiring the whole collection was discussed, though it was immediately clear that the museum did not have the necessary funds for a purchase, especially since it was already involved in a major fund- raising project to finance expansion and renovation. It was agreed that a donor would have to be found if Mrs. Abemayor agreed to sell the collection.

Mrs. Abemayor revealed she was willing to sell the collection but she wanted it to stay together and be placed in the museum as a memorial to her husband. After some negotiation a formal offer was made in January 1978 to sell for $67,500 which was kept open until June 1978 in order to allow the ROM time to arrange funding. Dr. Gervers recognized this to be a very good price considering the quality and extent of the collection.

Dr. Gervers' husband, Professor Gervers, who was employed part-time by the ROM, undertook the responsibility of finding someone willing to acquire the Abemayor Collection for donation to the ROM. It was at this time that the plaintiff's accountant was contacted by Professor Gervers and the connection between the plaintiff and the ROM came about. Several meetings between the Gervers and the plaintiff eventually occurred and it was finally agreed that the plaintiff and his father (not included in this proceeding) would be prepared to acquire the collection and donate it to the museum. The plaintiff stated that from the outset he intended to attempt to take advantage of the tax deductions provided for in the CPEIA, but if certification of the collection did not occur, he was willing to make a straight donation and receive a lesser tax deduction, or permanently loan the Abemayor Collection to the museum.

It was arranged that the Gervers would take the plaintiff's cheque to Mrs. Abemayor in New York and pick up and transport the textiles back to Toronto. When Dr. Gervers viewed the collection at Mrs. Abemayor's home she realized some of the most interesting pieces were missing. Mrs. Abemayor explained she and her children wanted to keep a few pieces in memory of Mr. Abemayor. Much discussion ensued and some of the missing textiles were replaced. The Gervers were concerned that the plaintiff would not be willing to purchase the collection unless it was as initially described to him, and contacted him to verify his intent despite the changed circumstances. The plaintiff relied on Dr. Gervers' judgment that the collection was still an important acquisition and agreed to complete the purchase.

The collection was taken directly to the museum and a loan contract between the plaintiff and the museum was signed pending the processing of the application to the Review Board for a tax certificate. Though prepared by the museum, the application to the Review Board is a joint application, signed by both the owner and a representative of the museum. Submitted along with the application were three different appraisals of the fair market value of the Abemayor Collection, in addition to a letter from the responsible curator supporting the evaluations. The evidence indicates that the three appraisals were carried out on an extremely professional basis and completely independent of each other, and the taxpayer. The appraisers were given very little background on the collection and were not informed that it had been recently acquired, nor told the purchase price. The amounts arrived at by the appraisers were: $528,125, $412,000 and $538,400. On the certificate application form the weighted average of the three appraisals was presented as the estimated fair market value. The application form contained no request for disclosure of the purchase price, nor did the Review Board make such a request. Since the application had been accompanied by a supporting letter from the curator, and the Review Board had no expertise in the area of textiles, the property was certified for $496,175, the amount submitted, without further comment by the Review Board.

Upon receipt of the certificate by the ROM the loan agreement was replaced by a gift form on December 8, 1978, gifting the collection to the museum. The plaintiff then received the tax certificate issued by the Review Board.

In the spring of 1977 the Gervers became aware of a collection of Coptic textiles consisting of 145 pieces dating from the 4th to the 9th century that the owner, Mr. Charles Wilkinson, was willing to sell for $12,000. Dr. Gervers believed the collection was of excellent quality and was anxious that it be acquired by the museum. As with the Abemayor Collection, it was clear that the museum had no funds to purchase this collection outright. The Gervers once again contacted the plaintiff who agreed to purchase this collection also and donate it to the ROM. The plaintiff himself was involved in collecting antique Hebraic manuscripts and had begun to take quite an interest in the antique textile business. The Wilkinson Collection was purchased by the plaintiff and processed by the museum in 1979 in the same manner as the Abemayor Collection and an application for tax certification by the Review Board was again made. Three independent appraisals of the estimated fair market value of the collection in the amounts of $142,650, $305,000 and $240,000 were submitted with the application. The application was successful and the tax certificate was issued based on the average of the submitted appraisals without a request for further information or documentation.

Upon receipt of the tax certificates, the plaintiff claimed in his 1978 tax return a deduction of $496,175 for the Abemayor Collection, and in his 1980 tax return a deduction of $229,437 for the Wilkinson Collection. These deductions were disallowed by the Minister of National Revenue and the amounts claimed were reduced to the actual purchase price, $67,500 and $12,000 respectively.

The specific questions that have been raised by the parties are whether the plaintiff received title to the collections and was capable of donating them, and the correct amount to be deducted for income tax purposes. The plaintiff, of course, maintains he obtained title to the collections and properly donated them to the ROM, and that his deductions at fair market value were valid and permitted by law in whole. Counsel for the Minister advances that title to the collections was never held by the plaintiff and went directly to the ROM, making the purported donations sham transactions. In this vein, it is argued that the deductions should be restricted to the amount of the purchase price of the collections. In the alternative, if the plaintiff in fact donated the collections, the deductions should again be limited to the prices paid as the best indicators of the fair market value. Finally, if the deductions are to be based on the appraised values, the taxpayer can be deemed to have received a benefit under subsection 245(2) of the Income Tax Act in the amount of the difference between the appraised values and the purchase prices of the collections.

Sections 8(3)(a) and (b), 17(c), 23(3)(b) and (c), 26(1) and 27 of the Cultural Property Export and Import Act, S.C. 1974-75, c. 50, as amended read as follows:

8.(3) Where an expert examiner determines that an object that is the subject of an application for an export permit that has been referred to him is included in the Control List, he shall forthwith further determine

(a) whether that object is of outstanding significance by reason of

(i) its close association with Canadian history or national life,

(ii) its aesthetic qualities, or

(iii) its value in the study of the arts or sciences; and

(b) whether the object is of such a degree of national importance that its loss to Canada would significantly diminish the national heritage.

17. The Review Board shall, upon request,

(c) pursuant to section 26, make determinations for the purposes of subparagraph 39(1)(a)(i.1) or paragraph 110(1)(b.1) of the Income Tax Act.

23.(3) In reviewing an application for an export permit, the Review Board shall determine whether the object in respect of which the application was made

(b) is of outstanding significance for one or more of the reasons set out in paragraph 8(3)(a); and

(c) meets the degree of national importance referred to in paragraph 8(3)(b).

26.(1) For the purpose of subparagraph 39(1)(a)(i.1) or paragraph 110(1)(b.1) of the Income Tax Act, where a person disposes of or proposes to dispose of an object to an institution or a public authority designated under subsection (2), the person, institution or public authority may request, by notice in writing given to the Review Board, a determination by the Review Board as to whether the object meets the criteria set out in paragraph 23(3)(b) and (c) of this Act.

27. Where the Review Board determines that an object in respect of which a request is made under subsection 23(1) or 26(1) meets the criteria set out in paragraphs 23(3)(b) and (c), it shall provide the person, institution or public authority that made the request with a certificate to that effect in such form as the Minister of National Revenue may by order prescribe.

and sections 110(1)(b.1) and 245(2) of the Income Tax Act:

110.(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted from his income for the year such of the following amounts as are applicable:

(b.1) the aggregate of gifts of objects that the Canadian Cultural Property Export Review Board has determined meet all the criteria set out in paragraphs 23(3)(b) and (c) of the Cultural Property Export and Import Act, which gifts were not deducted under paragraph (a) or (b) and were made by the taxpayer in the year (and in the immediately preceding year, to the extent of the amount thereof that was not deductible under this Act in computing the taxable income of the taxpayer for that immediately preceding year) to institutions or public authorities in Canada that were, at the time the gifts were made, designated under subsection 26(2) of that Act either generally or for a purpose related to those objects, not exceeding the amount remaining, if any, when the amounts deductible for the year under paragraphs (a) and (b) are deducted from the income of the taxpayer for the year, if payment of the amounts given is proven by filing receipts with the Minister that contain prescribed information;

245.(2) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer's income for the purpose of Part 1,

(b) deemed to be a payment to a non-resident person to which Part XIII applies, or

(c) deemed to be a disposition by way of gift.

The evidence leaves no doubt in my mind that the plaintiff had title to the Abemayor and Wilkinson collections and was legally in a position to donate them to the ROM. It was known by ROM officials and the vendors prior to each sale that the ROM had no funding for such acquisitions and that a donor was necessary. The letter from Mrs. Abemayor offering to sell the collection indicated her understanding that the purchase required funding. The museum solicited the plaintiff's patronage on the basis of the CPEIA and it was understood that in order to get the deductions the plaintiff had to purchase the collections and could not simply make a cash donation for the amount needed for the purchase. In compliance, the plaintiff’s cheques in the amounts required to purchase the collections were made payable to Mrs. Abemayor and Mr. Wilkinson, not to the ROM. Professor Gervers testified that he and Dr. Gervers were representing the plaintiff when they delivered the cheque and received the textiles, in addition to representing the museum as the eventual owner. The phone call to the plaintiff from Mrs. Abemayor's home to verify the purchase further suggests the Gervers were the plaintiff's representatives. Finally, the most persuasive factor supporting the plaintiff's claim to title is his retention of ownership of some 30 pieces originally included in the Abemayor collection which the plaintiff has placed in the museum on loan.

The existence of a document purporting to pass title of the textiles from Mrs. Abemayor to the ROM does not change my view of the situation. Mrs. Abemayor was clearly concerned that the collection remain together and be placed in the ROM in memory of her late husband, and for her this was all that mattered. Simply because she did not concern herself with the particulars of the purchase agreement cannot change the fact that it was the plaintiff who purchased the collection and took title. In any case, in a letter dated October 1, 1987 to Revenue Canada from Mrs. Abemayor, she recognizes that the cheque paying for the textiles was drawn on the account of Friedberg and Co.

As the plaintiff had title, his donations of the collections to the museum were not “sham”, transactions as defined by the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] C.T.C. 294 at 318; 84 D.T.C. 6305 at 6325: ”. . . a sham transaction as applied in Canadian tax cases is one that does not have the legal consequences that it purports on its face to have." All museum records suggest that the plaintiff passed title to the museum by gifting the collections once the tax certificates were received, and there is no evidence going to demonstrate that the plaintiff has retained ownership of the collections and only purported to donate them, except for the above-mentioned 30 pieces. It is appropriate to note at this point for the purposes of credibility that when the plaintiff agreed to purchase the collections and donate them to the museum he was unaware that the appraised values of the collections would be considerably higher than the purchase price. He testified that he recognized the possibility that the collections would not be valued at much more than the purchase price or that the textiles might not be certified as cultural property, however, he was willing to proceed with the purchase and donation in any case. As I indicated earlier, the plaintiff was by no means the initiator of these transactions. He was simply seeking tax deductions and did everything asked of him in order to fulfil the requirements. As it turned out, the transaction was advantageous for all involved. The museum is the fortunate recipient of two truly important collections, Canadian scholars as well as the general public have been given the opportunity to study and learn from them and the taxpayer received a tax deduction for having made the donations. I see no merit in the defendant's suggestion that the transactions which occurred here were nothing more than an attempt to beat the system.

The above conclusions lead to the necessity of determining the fair market value of each of the collections for income tax deduction purposes. Counsel for the Minister argues that the purchase price can be taken as the fair market value, however such an approach is not supported by the jurisprudence. In Conn v. M.N.R., [1986] 2 C.T.C. 2250; 86 D.T.C. 1669, after a lengthy review of the authorities the judge stated at page 2262 (D.T.C. 1677):

Fair market value does not seem to pay any attention to cost of acquisition, only what might be obtained in the market at the time of disposition. Costs of acquisition can vary greatly, as has been illustrated, even for the same item, and such a cost or an adjusted cost base might affect income tax but in my opinion does not affect fair market value.

In an article on fair market value determinations, Richard M. Wise [1] writes that for interpreting the provisions of the Income Tax Act that require a determination of fair market value, the Courts have accepted the following definition of such value:

The highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between informed and prudent parties, acting at arm's length, neither party being under any compulsion to transact.

As the Review Board required estimates of the fair market value, it must be considered whether the appraisals submitted for the collections are a reflection of the above definition. Two appraisers of the Abemayor Collection and one appraiser of both the Abemayor and Wilkinson collections testified that they employed price lists from various auction houses and compared pieces from the collections to pieces in the auction catalogues to fix a relative value on the collection pieces. In addition, they were provided with all the prices the museum had previously paid for similar textiles. These pieces and their prices were also compared to those in the collections as an aid in setting a value. The appraisers revealed that knowledge of the prices paid for such material was difficult to acquire since comparable items were not available on the open market on a regular basis. I conclude that the methods used by the appraisers in a less than perfect situation were more than adequate to determine a fair market value. Auction prices provide an excellent basis for determining fair market value since auction sales occur in an open and unrestricted setting where both purchaser and vendor can be assumed to be informed, prudent and acting at arm's length.

Finally, pursuant to subsection 245(3) of the Income Tax Act, subsection 245(2) applies to tax benefits only where the transaction did not occur at arm's length. As there is no suggestion that any of the transactions here were not at arm's length, this part of the defendant's argument also fails.

Turning now to the reassessments for the 1978, 1979, 1980 and 1981 taxation years based on the plaintiff's reported income from commodity trading in gold futures. The plaintiff argues that his trading activities and the losses incurred were not artificial or in contravention of subsection 245(1) of the Act, and that he is entitled to arrange his affairs in order to minimize tax liability. Further, he submits that the Income Tax Act does not provide that his accounting method is inappropriate, inapplicable or unacceptable, and that in the years 1978 to 1981 there was a diversity in Canada and the United States regarding accounting principles applicable to speculative commodities futures trading. In response, counsel for the Minister argues that the accounting method used by the plaintiff in his trading activities was improper and resulted in an artificial reduction of income contrary to subsection 245(1) of the Act, and the plaintiff incurred no liability or at most a contingent liability in the amounts claimed as losses. Further, it is submitted that the accounting method in question defeats the object and spirit of subsection 9(2) of the Act by permitting a synthesized loss, delay, or other tax saving device.

The plaintiff is a general partner of Friedberg Mercantile Group, a firm of commodity brokers representing a few hundred clients. He has spent his working career as a trader of commodities futures contracts, trading for clients and on his own account. At the time of trial, he was the president of the Toronto Commodities Exchange and a member of the London, England International Commodity Brokers Association.

A futures contract in commodities is a bona fide agreement for the purchase or sale of a commodity where the delivery of the commodity is fixed for a future date and under which price and quantity are also fixed. In recent years, the commodities market has become quite sophisticated. In addition to the traditional buy and sell of commodities futures carried on by many businessmen attempting to ensure either the future delivery of a commodity at a fixed price or a future sale of a commodity at a fixed price, a futures contract is considered to have inherent value and the buying and selling of commodities futures contracts has developed as a method of speculative trading. In reality, the holder of any futures contract would be required to take delivery of the commodity if he is on the buy side of the contract or make delivery of the commodity if he is on the sell side of the contract. However, for those trading in the contracts themselves, this rarely occurs as the contracts are usually re-sold prior to the delivery date. The trading activity by which an investor buys a futures contract is referred to as "going long”. Conversely, selling a futures contract is referred to as "going short".

An investor can take various stances in his tradings of futures commodities contracts. In this case, we are concerned only with the spread position taken by the plaintiff in his trading of gold futures. A commodity spread position involves simultaneously going long (buying) and short (selling) in an equivalent number of futures contracts of a commodity for delivery in different months at different prices. For example, on February 1, 1988, an investor buys ten contracts of August 88 gold at $500 and sells ten contracts of October 88 gold at $525 (the month indicates the delivery date). Each of these transactions are referred to as "legs", that is, the spread position is composed of a long (buy) leg and a short (sell) leg. Whenever an investor goes long or short on a particular futures contract, there must be a corresponding short or long leg for that contract in order to close it out and prevent the investor from being forced to either take delivery or deliver the commodity. Each leg can be “closed out" separately at any time by either selling the contracts obtained on the long leg or buying contracts to cover those sold on the short leg. In this way, the investor has the opportunity to play market fluctuations both ways as any losses in buying can often be offset by gains in selling or vice versa. This situation can be illustrated by continuing the above example. After having transacted on February 1, 1988, the investor can close out those contracts on July 1, 1988 by going short (selling) on the ten contracts of August 88 gold he bought at $500, and going long (buying) to cover the ten contracts of October 88 gold he sold at $525. If the market is at $400 and the ten August gold is closed out at $400 and the ten October gold at $415, the investor has lost on the long side of the transaction because he bought the ten August gold at $500 and only sold it at $400, but he has gained on the short side because he bought it for $415 and sold it for $525.

As occurred in the above example between February and July, the prices of the futures contracts can change from month to month (intermonth price differentials) as a result of the following forces affecting the market: changes in the interest rates, the cash value of the commodity itself, the premium that someone is willing to pay to ensure the immediate availability of a commodity, fluctuations in the value of the American dollar, international crises, and the volume of trading. It is by trying to predict the influence of these factors on the intermonth price differentials or the spread and buying and selling futures contracts in accordance with those predictions that the investor engaged in spread trading activities experiences gains or losses. Generally, the greater the amount of time between the two legs of a spread the greater the influence these factors will have on the intermonth price differential and the greater the risk to the investor.

All commodity futures trades are margin transactions which means that the investor must deposit a certain percentage of the value of his investments with the broker handling his trading as a guarantee that he can make good on the contract if required. Each commodities exchange stipulates the rate of margin required depending on the position of the investor. In order to ensure the adequacy of margin from their customers on a daily basis, brokers calculate changes in the net value of all positions held by a customer (i.e. any losses or gains) based on the settled closing prices of every contract on the exchange at the end of each trading day. In this manner, the broker has a daily figure of the net value of all of his clients. This calculation is called marking to market. If there has been a net decrease on a particular trading day, the account is debited that amount and the broker may require additional margin from the customer. If the customer does not meet the additional margin requirements the contracts are liquidated and an obligation to cover any losses arises. Where a net increase occurs the account is credited and the customer is entitled to withdraw from his brokerage account such amount as exceeds his margin requirement.

As the plaintiff was involved in futures contracts trading on his own account, such a calculation was done on a daily basis with respect to his activities in order to ensure his market positions were adequately covered. However, for the purposes of calculating his personal income tax liability for the years in question, the plaintiff employed a different accounting method. It is referred to as the lower of cost or market method, and it requires that a gain in trading be recognized as income only when the contract is finally closed out and sold, whereas unrealized losses are immediately accounted for and debited from income. It is not disputed that in each of the taxation years in question here, the plaintiff closed out the losing legs on his spread positions, but deferred closing out those that were showing a profit until after the end of his tax year and thereby did not have to recognize as income gains that would have been income under the "mark to market" method.

The basic issue to be determined therefore is whether the accounting method employed by the plaintiff for tax purposes was appropriate. Except for specific legislative provisions which modify accounting principles, the computation of income for tax purposes is based largely on generally accepted accounting principles and commercial usage. This principle was clearly enunciated in M.N.R. v. Publisher's Guild of Canada Ltd., [1957] C.T.C. 1 at 17; 57 D.T.C. 1017 at 1026:

. . in the absence of statutory provision to the contrary, the validity of any particular system of accounting does not depend on whether the Department of National Revenue permits or refuses its use. What the Court is concerned with is the ascertainment of the taxpayer's income tax liability. Thus the prime consideration, where there is a dispute about a system of accounting is, in the first place, whether it is appropriate to the business to which it is applied and tells the truth about the taxpayer's income position and, if that condition is satisfied, whether there is any prohibition in the governing income tax law against its use. If the law does not prohibit the use of a particular system of accounting then the opinion of accountancy experts that it is an accepted system and is appropriate to the taxpayer's business and most nearly accurately reflects his income position should prevail with the Court if the reasons for the opinion commend themselves to it.

There is no provision in the Income Tax Act requiring a particular accounting method for commodities traders comparable, for example, to the regulations enacted some years ago denying lawyers the option of reporting income on either a cash or accrual basis. In the absence of such a regulation denying this kind of a choice to the commodity trader, I see no reason why the taxpayer should not be able to conduct his affairs as he did here. Expert accounting witnesses agreed that both the marked to market or lower of cost or market methods of accounting were in use in Canada and the United States for speculative trading in futures contracts in the years in question, and that there were no standard principles requiring the use of one method as opposed to the other. Academic articles on accounting methods outlined both systems and noted a diversity in practice, and numerous public American and Canadian companies that used the lower of cost or market method for their futures contracts transactions all employed large internationally recognized accounting firms. Based on the diversity of practice at the time and the authoritative literature, it was the opinion of one expert that accounting based on the lower of cost or market method in this case was consonant with generally accepted accounting principles. I accept this evidence and conclude that it would have been appropriate for the plaintiff to choose either of the accounting methods discussed here in calculating his taxable income.

During this aspect of the trial, I questioned chartered accountants who gave evidence regarding the proper accounting methods involved here. They confirmed that, just as any other trader, the plaintiff, in closing one leg of the transaction is committed to a position on the other leg, and that at some time the matter will have to be fully resolved. In other words, the plaintiff by closing out those transactions which reflected a loss in the final days of his tax year, before too many months had gone by in the following year, had to resolve the other leg of the transaction, which would normally result in a gain. The income reporting methodology of the lower of cost or market system requires recognition of the gain at this point, just as the loss was recognized when that leg was closed off. Clearly then, income under this system is the same as it would be if the market to market system were applied, the only difference being the year in which it is realized and reported.

I also reject the defendant's argument that the plaintiff's accounting method resulted in artificial reduction of income. The only difference between the two accounting methods is the timing of reporting income, so any reductions could only have ensued from changes in the marketplace affecting the gain position. I also reject any suggestion that the losses incurred by the plaintiff were fictitious. These were real transactions in the financial marketplace and the consequences, whether gains or losses, were borne by the taxpayer.

The third and final issue arises out of the allegation that the plaintiff's 1981 tax return was filed after the April 30th deadline. The basis for the Minister’s contention in this regard was a standard Revenue Canada envelope bearing a cancellation stamp of May 7, 1982, but in the evidence there was a complete failure to make any connection between this envelope and the plaintiff's actual return. There is, therefore, no direct evidence of late filing. On the plaintiff's side of this issue, there was evidence that the return had been prepared in the usual fashion by his accountants, brought to him for a signature, and then hand-delivered to the Revenue Canada office along with a number of other returns of his corporate officers, all on April 30, 1982. The evidence confirms that there would be no reason for the plaintiff's return to ever be put in a postal box or have any stamps affixed to it for that purpose. After considering all of this evidence, I am not satisfied that the taxpayer was late in filing his return, therefore, his appeal from the imposition of the penalty for late filing is allowed.

For the reasons given above, the appeal by the taxpayer on all issues is therefore allowed, with costs.

Appeal allowed.