Mercille v. The Queen, docket 91-2196-IT-G

Date: 20000201

Docket: 91-2196-IT-G

BETWEEN:

RICHARD MERCILLE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

(delivered orally from the bench on December 7, 1999 at Montréal, Quebec)

Archambault, J.T.C.C.

[1] Richard Mercille is instituting an appeal from notices of assessment made by the Minister of National Revenue (Minister) for the 1986, 1988 and 1989 taxation years. The appeals raise a number of issues. According to the parties' pleadings, the first of those issues is whether Mr. Mercille incurred legal fees of $1,500 in 1986, $17,231 in 1988 and $8,832 in 1989 for the purpose of earning income from a business or employment and whether he is entitled to deduct them in computing his income from either of those sources. The second issue is whether Mr. Mercille received business income of $67,561.75 through a nominee, André Wong. This income was apparently realized through the resale of mining securities of Ressources minières Aabarock Inc. (Aabarock). The third issue concerns the application of section 10 of the Income Tax Act (Act) to business income which Mr. Mercille earned from the purchase and sale of his securities. Lastly, in computing his income from the sale of his Aabarock securities, Mr. Mercille claims as a deduction the cost of flow-through shares purchased in 1984.

[2] At the start of the hearing, Mr. Mercille stated that he was dropping the last two issues, but he raised three new ones. First of all, he claimed that, in 1984, he did not deduct Canadian exploration expenses (CEE) of $50,000 which he had incurred in purchasing the Aabarock flow-through shares. Since he had failed to deduct them in 1984, he claimed a deduction in respect of them in computing his income for 1986. Mr. Mercille also claimed a deduction for a loss of $13,635 arising from the non-repayment of a portion of loans totalling $38,760 which he made to Mr. Wong in 1986 to enable the latter to purchase Aabarock securities. Mr. Mercille claims that he received only a sum of $25,525 from Mr. Wong. To the extent that Mr. Wong acted as a nominee for Mr. Mercille, this loss could be applied to reduce business income rather than be reported as a capital loss.

[3] The last issue which Mr. Mercille raised at the start of the hearing was the application of the penalty provided for in subsection 163(2) of the Act which the Minister assessed in respect of an amount of $156,405.39 which Mr. Mercille allegedly did not report for the 1986 taxation year. Of that amount, $148,583.89 represented gains which Mr. Mercille realized in 1986: $81,022.14 from the sale of securities held in his portfolio and $67,561.75 which he realized through Mr. Wong. The balance of $7,821.50 represents unreported interest income from the disposition of Treasury bills.

[4] To summarize, the remaining points at issue are as follows: (1) the deduction of legal fees, (2) the deductibility of the CEEs of $50,000, (3) the inclusion in business income of $67,561.75 realized by Mr. Wong as a nominee for Mr. Mercille, (4) the right to deduct a loss from loans totalling $38,760 and (5) the penalty assessed under subsection 163(2) of the Act. The first point concerns the 1986, 1988 and 1989 taxation years, while all the others concern only 1986.

FACTS AND ANALYSIS

[5] From 1983 to September 29, 1986, Mr. Mercille was a stockbroker with Bell Gouinlock. On September 29, 1986, he was dismissed because he planned to open his own office and was encouraging some of his colleagues to go with him. Mr. Mercille subsequently joined the brokerage firm Lévesque Beaubien.

[6] However, the worst was yet to come. Following an investigation by the Commission des valeurs mobilières du Québec commencing on March 23, 1987, Mr. Mercille's registration as an investment advisor on the Exchange was suspended by the Disciplinary Committee of the Montreal Exchange for two years on March 31, 1988. He had violated Regulation 4221 of the Montreal Exchange. The Disciplinary Committee found him guilty on the following seven charges:

[TRANSLATION]

1. From March 1 to October 10, 1986, Richard Mercille knowingly took part in an arrangement which limited free trading in the shares and stock purchase warrants of Ressources Minières Aabarock Inc., that is to say, an arrangement inducing the said company's principal shareholders to deposit their share certificates and stock purchase warrants with him and to undertake not to sell their shares for less than an agreed-upon minimum price.

2. He placed himself in a position of conflict of interest with his clients through an arrangement whereby his clients were invited to deposit their share certificates and stock purchase warrants with him as a mandatary and depositary for the alleged purpose of protecting the said clients from the effects of a massive sell-off of Ressources Minières Aabarock Inc. securities, whereas Mr. Mercille himself held shares and stock purchase warrants in the said company, which securities he sold while he held his clients' certificates on deposit.

3. He continued to act as the depositary of his clients' share certificates and stock purchase warrants which had been handed over to him together with the mandate agreement signed individually by the clients, the whole despite a verbal warning by the Exchange around April 18 and a written warning on April 24, 1986 that this agreement was unacceptable, and he retained the said certificates and waited until October 7, 1986 before advising the shareholders concerned by the said agreement that it was "deemed never to have existed".

4. He recommended in a letter dated August 11, 1986 that his clients enter into an arrangement whose effect was to restrict free trading in the shares and stock purchase warrants of Ressources Minières Aabarock Inc., despite written warnings from the Montreal Exchange and the Commission des valeurs mobilières du Québec dated respectively April 24 and July 16, 1986.

5. On or around August 11, 1986, Richard Mercille placed himself in a position of conflict of interest by recommending that his clients enter into an "option contract" respecting Ressources Minières Aabarock Inc.'s shares and stock purchase warrants, while assuring them that he alone was in a position to help them with respect to the said securities and that this was an advantageous offer "guaranteed" by a businessman, and not revealing that the said individual was acting as a nominee for him (R. Mercille), this despite the written warning dated July 16, 1986 which he had received from the Commission des valeurs mobilières du Québec enjoining him to exercise very great care in performing his duties as an investment advisor in matters pertaining to corporate securities which he himself held.

6. From March 1 to October 10, 1986, Richard Mercille used one of his clients as an nominee for the purposes of an account with a member firm other than the firm which employed Mr. Mercille and did so without the written consent of the latter firm.

7. Around October 28, 1986, in response to a request dated October 23, 1986 by the Exchange that he provide it with a full report on the situation respecting the arrangements concerning Ressources Minières Aabarock Inc.'s shares, Richard Mercille attempted to mislead the Exchange by informing it:

(a) that the shareholder agreement of April 1986 had never come into effect, whereas it was not until October 7, 1986 that he wrote to the persons who had submitted to him signed copies of the said agreement to inform them that the agreement was deemed never to have existed;

(b) that the purpose of the alleged option contract which he had recommended to his clients was not to replace a previous arrangement disapproved by the Exchange;

(c) that the "option contract" had been prepared by a "speculator" without saying that this person was in fact himself acting through a nominee.

It is important to note that, in reaching its decision, the Disciplinary Committee heard the testimony of a number of witnesses, including Mr. Mercille and Mr. Wong, a childhood friend of Mr. Mercille.

[7] Mr. Mercille appealed from this decision by the Montreal Exchange's Disciplinary Committee to the Exchange's Governing Committee. On June 22, 1988, the Governing Committee replaced the two-year suspension with a permanent revocation of Mr. Mercille's registration as an investment advisor.

[8] On March 31, 1989, the Commission des valeurs mobilières du Québec rendered its decision on the application for review of the decisions by the Disciplinary Committee and Governing Committee. According to the Commission, the burden of proof which the Exchange's committees should have applied in assessing the evidence was that of the balance of evidence and, in view of the seriousness of the charges, that evidence had to be reliable, clear, cogent and sufficient. Having reviewed the exhibits and transcript from the Disciplinary Committee's hearing which were submitted by the parties, the Commission des valeurs mobilières du Québec upheld the Disciplinary Committee's decision respecting Mr. Mercille's guilt and that of the Montreal Exchange's Governing Committee respecting revocation of his right to practise.

[9] On May 10, 1989, Mr. Mercille appealed the decision of the Commission des valeurs mobilières du Québec to the Court of Quebec. A few weeks later, in July 1989, the Crown instituted a criminal proceeding against Mr. Mercille. On July 26, 1996, Mr. Justice Louis Legault of the Court of Quebec found Mr. Mercille guilty on the following two counts:

[TRANSLATION]

between February 26, 1986 and October 23, 1986, in Montréal, in the District of Montréal, by deceit, falsehood or other fraudulent means, with intent to defraud, did unlawfully affect the public market price of the stocks or shares of Ressources Minières Aabarock Inc. offered for sale to the public, thereby committing the indictable offence provided for in subsection 380(2) of the Criminal Code;

between March 1, 1986 and October 23, 1986, in Montréal, in the District of Montréal, did unlawfully conspire with Pascal D'Onofrio, Clément Gagnon, Bernard-Marie Gagnier and Sylvain Tremblay to commit an indictable offence, to wit to affect the public market price of the stocks or shares of Ressources Minières Aabarock Inc. offered for sale to the public, thereby committing the indictable offence provided for in paragraph 465(1)(c) of the Criminal Code of Canada.

[10] In 1997, Mr. Mercille was sentenced to a prison term of two years less a day and he did not appeal from that decision. He served only five months. Mr. Mercille does not intend to continue his appeal before the Court of Quebec from the decision rendered by the Commission des valeurs mobilières on March 31, 1989. One of his main reasons is that, having been convicted of a criminal offence, Mr. Mercille no longer believes that he will be able to work again as an investment advisor.

[11] At the hearing of these appeals, Mr. Mercille, who represented himself, objected to the filing of both the reasons for Legault J.'s judgment and the reasons for the decision by the Commission des valeurs mobilières du Québec. This objection raised the issue of the admissibility of both the decisions and their reasons and the issue of the effect of a criminal conviction in a tax appeal. After analyzing certain court decisions, I have come to the conclusion that the items in question were relevant and admissible as evidence.

[12] First of all, it is clear that Mr. Mercille's criminal conviction is not res judicata since the issue before the Court of Quebec and that before the Commission des valeurs mobilières are not identical to that in the instant appeals. It is therefore not surprising that the respondent did not raise this issue in her pleadings, in particular her reply to the notice of appeal.

[13] There is a difference at common law between res judicata and "issue estoppel", that is to say, a defence which prevents a party to an action from raising again an issue previously decided by a tribunal or agency exercising quasi-judicial functions. In Angle v. M.N.R., [1975] 2 S.C.R. 248, at page 254, Dickson J., writing for the majority of the Supreme Court of Canada, makes the following comments on this distinction and states the conditions in which issue estoppel may be pleaded.

The second species of estoppel per rem judicatam is known as "issue estoppel", a phrase coined by Higgins J. of the High Court of Australia in Hoysted v. Federal Commissioner of Taxation³, at p. 561:

I fully recognize the distinction between the doctrine of res judicata where another action is brought for the same cause of action as has been the subject of previous adjudication, and the doctrine of estoppel where, the cause of action being different, some point or issue of fact has already been decided (I may call it "issue-estoppel").

Lord Guest in Carl Zeiss Stiftung v. Rayner & Keeler Ltd. (No. 2)⁴, at p. 935, defined the requirements of issue estoppel as:

. . . (1) that the same question has been decided; (2) that the judicial decision which is said to create the estoppel was final; and (3) that the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies . . .

Dickson J. adds the following remarks at p. 255:

. . . It will not suffice if the question arose collaterally or incidentally in the earlier proceedings or is one which must be inferred by argument from the judgment. [. . .] The question out of which the estoppel is said to arise must have been "fundamental to the decision arrived at" in the earlier proceedings: per Lord Shaw in Hoystead v. Commissioner of Taxation⁸. The authors of Spencer Bower and Turner, Doctrine of Res Judicata, 2nd ed. pp. 181, 182, quoted by Megarry J. in Spens v. I.R.C.⁹, at p. 301, set forth in these words the nature of the enquiry which must be made:

. . . whether the determination on which it is sought to found the estoppel is "so fundamental" to the substantive decision that the latter cannot stand without the former. Nothing less than this will do.

[14] In Van Rooy v. M.N.R., [1989] 1 F.C. 489, at page 505, the Federal Court of Appeal recognized that issue estoppel could be pleaded in an appeal from an income tax assessment before the Tax Court of Canada.

On the basis of all of the foregoing, I am of the opinion that the Associate Chief Judge erred in concluding that issue estoppel could not apply in a civil proceeding where the estoppel is based upon a conviction in a criminal case. It therefore, becomes necessary to determine whether or not on the facts of this case, it does apply.

At pages 508 and 509, the Court of Appeal found it appropriate to look at the reasons of the criminal court judge:

I turn now to the question of the propriety of looking behind the certificate at the Judge's reasons. In a case in the Trial Division, in which the facts were altogether different, Sheridon Warehousing Limited v. The Queen (1983), 83 DTC 5095 (F.C.T.D.), my brother Mahoney J. examined the reasons of the convicting Provincial Court Judge in that case to ascertain whether that Judge, in convicting the plaintiff of tax evasion had made a V-Day fair market valuation of certain real property. Mahoney J. found that he had not and he was not called upon, therefore, to make a finding on whether issue estoppel lay in that case. The importance of the decision for purposes of the case at bar is that he did look at reasons for judgment of the criminal court in deciding a question raised in a tax appeal.

I, too, have no difficulty in concluding that it is not improper to examine the reasons for judgment to ascertain whether in fact issue estoppel is properly pleaded. It matters not, in the circumstances as I see them here, whether examining the reasons is viewed as a matter of rebuttal of the prima facie proof arising from production of the certificate of conviction or is the exercise of judicial discretion dependent on the particular facts of each case, which is the approach taken in some United States authorities. Determining the identity of issues is the object of the examination and since that is a crucial element in the applicability of the issue estoppel, regard should be had to the facts which led the Trial Judge to convict. [My emphasis.]

[15] It was therefore clearly appropriate to permit filing of the Court of Quebec's reasons for judgment and of the Commission des valeurs mobilières's decision in determining whether the issue estoppel rule could apply. The remaining question is whether this rule applies in this case. I do not believe it does. Although Legault J. found as a fact that Mr. Wong had acted as a nominee for Mr. Mercille, I do not think this determination was "so fundamental" to Legault J.'s finding that Mr. Mercille was guilty. I believe he could have come to this conclusion for other reasons.

[16] It must also be borne in mind that the criminal offence in Van Rooy, supra, was evading tax on certain income; what was involved was thus a question of law and fact much more closely related to the appeal before the Tax Court of Canada. In his judgment, however, Legault J. held that Mr. Mercille had unlawfully affected the securities market, whereas the issue here is whether certain profits realized by Mr. Wong belonged to Mr. Mercille.

[17] With respect to the decision by the Commission des valeurs mobilières du Québec, in addition to the fact that the point at issue was also not similar to the issue in the instant case, Her Majesty the Queen was not one of the parties. Thus one of the conditions stated by the Supreme Court of Canada in Angle, supra, namely that the parties be the same, was not met.

[18] Although the issue estoppel rule does not apply, this does not mean that the decisions of the Court of Quebec and the Commission des valeurs mobilières are irrelevant to this case. As confirmed by the Quebec Court of Appeal's recent decision in Ali c. Cie d'assurance Guardian du Canada,[1999] J.Q. No. 2526 (QL), a criminal judgment is a material juridical fact which may have compelling probative value. Thibault J.A. wrote as follows in that case, at paragraph 45:

[TRANSLATION]

A criminal judgment is a juridical fact which cannot be disregarded, is relevant and may have compelling probative value. Thus, without attributing to a criminal conviction the authority of res judicata in law or in fact, a civil judge is nevertheless free, depending on the circumstances, to make the appropriate findings and presumptions of fact.

She writes as follows in paragraph 43:

[TRANSLATION]

Depending on the circumstances, entering a guilty verdict into evidence may enable a civil judge to draw inescapable conclusions respecting the fact that the act in question was indeed committed. Where, as is here the case, there is a reasoned criminal judgment establishing that the Alis wilfully set fire to their building in order to receive insurance money, I find it hard to see how, in the absence of new evidence, a civil judge, completely disregarding this fact, could reassess absolutely identical evidence and come to an utterly contradictory determination. I find it hard to see how a civil judge, before whom fraud must be proven merely on the balance of evidence, could conclude that two persons convicted of arson in a trial in which their guilt had to be proven beyond a reasonable doubt, could, as it were, "retry" the case on identical evidence and come to a second, contradictory decision. The Alis are criminals who wilfully set a fire because they wanted to defraud their insurance company, but ultimately they did not wilfully set the fire to receive the insurance money. This is the result.

[19] It is therefore appropriate to cite Legault J.'s reasons for judgment. The fraudulent acts which that judge found Mr. Mercille committed, and which formed the basis of his finding that Mr. Mercille was guilty of unlawfully affecting the securities market, included the fact that Mr. Mercille used Mr. Wong as a nominee to buy and sell Aabarock securities. Legault J. in fact devotes 16 and a half of the 55 pages of his judgment to this question and finds, at pages 39 and 40, that it was proven beyond a reasonable doubt that Mr. Wong had acted as a nominee for Mr. Mercille:

[TRANSLATION]

Could this set of seemingly contradictory facts involving Mr. Wong in the case before this Court, including an objective examination of those facts, ultimately raise a reasonable doubt as to whether Mr. Wong was the accused's nominee?

There is no doubt as to the accused's tight control over and his interest in the whole of the dealings attributed to Mr. Wong. The seemingly contradictory facts cast no doubt on the fact that the accused used Mr. Wong and his name to achieve his own ends, which were to make the shares scarce and to withdraw a considerable number of shares from the market.

Nor does the Court have any doubt as to the truth of Mr. Wong's statements that he was the accused's messenger and that he knew nothing about the securities market, and that he never personally executed the stock market transactions done in his name. It is also clear that Mr. Wong lent his name to the accused to enable the accused to deal through him and that the accused used Mr. Wong's name to propose the August 1986 agreement and that he used the shares to force downward or moderate the stock market in September 1986.

The only remaining question concerns the ultimate nature of Mr. Wong's role. Apart from the fact that the accused used Mr. Wong and that Mr. Wong was not at all involved in the decisions concerning the offers and transactions, except as a messenger, was Mr. Wong's role as a nominee for the accused established?

Mr. Wong stated that the accused, who undertook to pay his lawyers' fees, changed his mind along the way, that Mr. Wong thereupon changed lawyers, that his new lawyer advised him to tell the truth and that he decided to do so to avoid punishment and that, although he had protected the accused at all stages prior to this criminal proceeding, he was telling the truth. Mr. Wong's credibility is confirmed in many ways by the evidence gathered establishing, beyond the fact that the accused controlled Mr. Wong, that Mr. Wong was the accused's nominee. The whole of the circumstances and facts strongly indicates that this individual, who is not very credible, could only have been telling the truth. The external facts confirm that Mr. Wong was generally excluded from the accused's dealings. The accused's statements are to such a degree qualitatively corroborated by a large number of factors external to Mr. Wong that they leave no doubt that he was, in this case, merely Mr. Mercille's instrument and thus his nominee.

[20] Legault J. also found in his judgment that the account which Mr. Wong opened at Disnat was opened for the benefit of Mr. Mercille. He writes at page 32 of his reasons:

[TRANSLATION]

The Court has no doubt as to Mr. Wong's ignorance of and lack of experience with securities. It is therefore highly unlikely that Mr. Wong opened an account at Investissements Disnat Inc. with respect to which he dispensed that brokerage firm from giving him any advice on transactions or on the nature, quality or potential of any securities. This was definitely not an agreement for neophytes such as Mr. Wong. Another individual necessarily had to bear this responsibility or have broader rights over this account. That individual could only be the accused. It was therefore for the accused that Mr. Wong opened this account at Investissements Disnat Inc.

[21] It is important to bear in mind that Legault J. reached these conclusions even though, in that criminal proceeding, Mr. Mercille had pleaded Mr. Wong's lack of credibility by drawing the court's attention to his perjury and contradictory, reluctant and vague testimony. Legault J. writes at page 26:

[TRANSLATION]

The witness the Court heard was truly very tainted and although the version he gave before the Court was relatively coherent and plausible, it would be unreasonable to accept that version unless it were solidly corroborated and confirmed by independent factors external to the accused.

In view of his uncertain credibility, to accept the substance of Mr. Wong's testimony to the effect that he acted as the accused's nominee, the Court will have to find that Mr. Wong is confirmed and corroborated by external evidence which is not ambiguous, which is specific and significant and which, taken together, admits of no other reasonable and logical interpretation.

[22] At page 35 of his judgment, Legault J. writes:

[TRANSLATION]

If Mr. Wong had had an interest in the proceeds of the large sales made in his accounts, might he not have been expected to have deposited them in his bank account? Instead, he states that he cashed the cheques in order to hand the proceeds over to the accused, and, on this matter, Mr. Wong provided a host of details and testified in a credible manner.

[23] Legault J. adds further on:

[TRANSLATION]

Another convincing factor concerning Mr. Wong's role as a nominee is the large number of share certificates deposited in the personal stock account at Bell Gouinlock. This confirms Mr. Wong's role as a nominee. And this confirmation is important since all of the 64,000 shares purchased by Mr. Wong on April 24, 1986 appeared in the accused's personal account at the start of May 1986. The evidence shows that these were clearly share certificates in Mr. Wong's name which the accused deposited to his personal account at Bell Gouinlock.

[24] In the following passage, which appears at page 39, Legault J. states that he does not believe that Mr. Mercille lent sums of money to Mr. Wong to purchase the Aabarock shares and that he believes Mr. Wong when he says he handed over the proceeds of the sale to Mr. Mercille:

[TRANSLATION]

As regards the cheque for more than $50,000 which he cashed, Mr. Wong stated that he proceeded in two stages as the bank did not have 50 $1,000 bills: first, 25 $1,000 bills, with the balance deposited to his account, and second, 25 $1,000 bills one month later, with the accused's presence and his actions being noted in detail. The inscriptions on the reverse of the cheque attest to the fact that the cheque was cashed. And what interest would an owner have in cashing a $50,000 cheque and taking it in $1,000 bills and not depositing it? This once again lends credence to Mr. Wong's version.

And in fact Mr. Wong signed over to the accused a cheque for $25,000 dated June 26, 1986. Was this in repayment of an additional $19,000 loan mentioned on the reverse of Mr. Wong's cheque dated March 10, 1986? The Court believes this was simply a transaction by the accused to conceal the actual situation. Mr. Wong gave details and was convincing as regards the fact that he had acted as though the bank account belonged to the accused.

[25] Mr. Mercille contends that Legault J.'s findings of fact should be set aside because the judge only had Mr. Wong's version of things, as Mr. Mercille had decided on his lawyer's recommendation not to testify at the criminal trial. First, it is important to note that, although Mr. Mercille did not testify at the trial, a portion of his version of events was adduced in evidence. It may be noted in particular that Mr. Mercille allegedly lent the sum of $38,760: the words "personal loan" appear on the reverse of two of the three cheques totalling this amount. I have also cited Legault J.'s comments on this claim above.

[26] It also becomes relevant and important to cite certain passages from the decision of the Commission des valeurs mobilières du Québec, which rendered its decision based not only on Mr. Wong's testimony, but also on that of Mr. Mercille. The Commission's three commissioners found that Mr. Wong had acted as a nominee, that the actual holder of the Disnat account was Mr. Mercille and, lastly, that, when Mr. Wong made the offer of an option to certain shareholders in August 1986, he did so as a nominee for Mr. Mercille. Relevant passages from the Commission's reasons are cited below:

[TRANSLATION]

The provisions of Article 7409 of the rules of the Montreal Exchange prohibit an investment advisor from "holding, either in his own or another person's name, a securities account . . . with respect to which he directly or indirectly has authority to control or trade, in a member firm or related corporation other than the member or related company that employs him . . ., without the written consent of his employer . . . ." The purpose of this article is to facilitate the employer's exercise of auditing powers over the investment advisor's personal accounts. This right of examination is aimed at ensuring that investment advisors comply with their obligations toward their clients.

On January 29, 1986, an account signed by Richard Mercille was opened in the name of André Wong at Bell Gouinlock Ltée (Exhibit P-11). The information on the account application form states that the investment advisor, Richard Mercille, had no direct or indirect interest in the account. It also indicates that the client's net assets were at least $50,000. An account application form (Exhibit P-5) was also completed in the name of André Wong for an account at Investissements Disnat Inc. on May 2, 1986. The facts and circumstances establishing the relationship between Richard Mercille and these two accounts in André Wong's name are set out as follows in the brief by counsel for the Montreal Exchange:

(a) on the day before settlement, that is, on March 11, 1986, of the debit balance of $18,950 in Wong's account at Bell Gouinlock, Mercille made out a certified cheque to him for $19,000 (Exhibit P-24);

(b) on June 26, 1986, the cheque from Disnat for $25,125.12 (Exhibit P-7) in payment of the credit balance in the Wong account was endorsed by Wong and then by Mercille;

(c) on May 15, 1986, Mercille deposited to his Bell Gouinlock account 58,300 shares, virtually all of which were represented by the same certificates as those issued to Wong for Bell Gouinlock on April 16, 1986. The delivery receipts (Exhibits P-10 and P-13) and the comparative table (Exhibit P-14) establish this link beyond dispute.

When questioned as to his certified cheque for $19,000 mentioned above, Richard Mercille answered that this amount represented a loan which he had made to André Wong to help him buy a cake and pastry business for himself. We find it curious that Richard Mercille negotiated such an agreement without any guarantee whatever, whereas, in 1985, he had deemed it essential that the conditions of a loan to the same person for a smaller amount be drafted before a lawyer in the form of an agreement including guarantees. We find his claims all the more implausible in view of undisputed documentary evidence that, on May 15, 1986, Richard Mercille deposited to his account at Bell Gouinlock Ltée 58,000 shares of the corporation, virtually all of which corresponded with the same share certificates as those issued to André Wong by the same brokerage house on April 16, 1986 (Exhibits P-10, P-13 and P-14; testimony of David Archibald, January 13, 1988, Vol. 1, pp. 60 to 62). We are convinced on the whole of the evidence that Richard Mercille used his childhood friend André Wong as a nominee in order to use an account at a brokerage firm other than his employer and that he did so without his employer's consent. In our view, the evidence is sufficient in this regard and we maintain his guilt on the sixth count.

[27] Mr. Mercille first testified to provide me with his version of the facts. He then called as a witness Mr. Robert, a lawyer who had advised him on procedural matters relating to his appeals from the decision rendered by the Montreal Exchange's Disciplinary Committee and who had also assisted Mr. Wong when he was the subject of an investigation conducted by the Commission des valeurs mobilières du Québec. Mr. Robert indicated at the start of his testimony that he had destroyed his files and that he had to rely on the transcript of his testimony before the Court of Quebec in testifying before me.

[28] Lastly, Mr. Mercille asked Mr. Wong to testify. His objective was clearly to discredit the version of events that Mr. Wong had given before the Montreal Exchange's Disciplinary Committee and before the Court of Quebec at the criminal trial. His tactic was to establish all the possible contradictions between Mr. Wong's testimony in the instant case and the testimony he gave in the disciplinary and criminal proceedings.

[29] First of all, I do not intend to comment on all the contradictions, whether with or without foundation, which I observed at the hearing of these appeals, which was originally to last only two days but stretched out over more than seven days. Furthermore, before I comment on some of the statements made by each of the protagonists, it would be useful to describe each man's personality. In presenting his evidence and in his testimony to the Court, Mr. Mercille appeared to me to be a methodical and meticulous, although often punctilious person. He had clearly prepared his appeals very well. He always demonstrated considerable self-control and displayed no emotion. He was moreover very respectful toward the witness Wong, counsel for the respondent and me.

[30] Mr. Wong, on the other hand, is a very talkative person (who constantly had to be reminded to limit his answers to the questions put to him), often emotional and impetuous, with little concern for detail. I was not surprised to learn that he had not carefully and prudently administered his financial affairs and that he spent all the money he earned, which at the time was a military cook's salary of approximately $26,000. He even spent more than he earned, which should explain in large part why he declared bankruptcy at least twice, once in 1989 and another time a few years later.

[31] There was clearly a great deal of animosity between Mr. Wong and Mr. Mercille. Accusations flew in all directions. Mr. Mercille accused Mr. Wong of blackmail, while Mr. Wong accused Mr. Mercille of intimidating him and sexually assaulting his sister. He even accused him of having killed her. This woman apparently committed suicide shortly before the hearing of the criminal proceeding brought against Mr. Mercille for sexual assault. Mr. Mercille was found not guilty for lack of evidence.

[32] Messrs. Wong and Mercille testified with a great deal of conviction. Each appeared to believe firmly in his version, but both gave me incorrect descriptions of certain facts. However, Mr. Wong consistently stated that he did not have sufficient knowledge of securities, and of stock market transactions in particular, that he did not have the necessary money to invest in the stock market and that he had agreed to do a childhood friend a favour by acting as a nominee for the purchase and sale of Aabarock securities. It was as a nominee that he had opened an account at the savings bank in Longueuil to allow the purchase of the Aabarock securities and it was because he was a nominee that the money necessary to purchase them was provided to him by Mr. Mercille. In addition, Mr. Wong signed blank cheques to enable Mr. Mercille to pay for the shares.

[33] It was also as a nominee that he opened the Disnat account through which he sold the Aabarock securities for Mr. Mercille. Mr. Wong also contended that he had turned over to Mr. Mercille all the amounts he had cashed following the sales of Aabarock securities in 1986, with the exception of certain small amounts, including, in particular, an amount of $125 and $1,000 to cover possible legal fees.

[34] The investigation by the Commission des valeurs mobilières du Québec provided most of the exhibits which the respondent filed with this Court. They included three cheques totalling $38,760 payable by Mr. Mercille to Mr. Wong: one for $12,860 dated January 21, 1986 bearing the words "personal loan" on the reverse, one for $6,900 dated February 11, 1986 with no inscription on the reverse and, lastly, one for $19,000 dated March 10, 1986 bearing the inscription "additional personal loan". The cheques were handed over to Mr. Wong to enable him to purchase a total of 120,750 Aabarock shares at a total cost of $36,985. The balance of $1,760 was paid to Mr. Wong, who did not remember the purpose for which this amount was used.

[35] The exhibits filed by the respondent also include three cheques totalling $106,321, which amount was paid by Disnat to Mr. Wong. These included a cheque dated May 20, 1986 for $6,000, a second dated June 26, 1986 for $25,125.12 and a third dated October 31, 1986 for $75,196.63. Mr. Wong did not remember the first cheque. Examination of the second reveals that it was endorsed by Mr. Wong and by Mr. Mercille. Mr. Wong moreover confirmed that he had received it and deposited it to his bank account. When I questioned Mr. Wong as to the delivery of the third cheque, he gave me two contradictory versions in the space of five minutes.

[36] First of all, he said that he and Mr. Mercille went to the National Bank on Lagauchetière Street in Montréal, Disnat's bank branch, to cash the cheque. The bank paid him $50,000 and the balance was transferred to his bank account in Loretteville. He then turned over the $50,000 to Mr. Mercille that same day or the day after. He then returned to Québec and, when back in Montréal one month later, gave Mr. Mercille the balance, less the aforementioned $1,000. Intrigued by the fact that he had not been able to hand the money over to Mr. Mercille until the next day, I asked Mr. Wong for details on the circumstances in which the cheque for $75,196.63 was cashed. He then told me that he had received the full amount of $75,196.63 and that he turned it over to Mr. Mercille the next day because, for a reason of which Mr. Wong was unaware, Mr. Mercille had not followed him outside the National Bank. As it was approximately 2:00 p.m.—this being the time inscribed on the reverse of the cheque—Mr. Wong thought that Mr. Mercille had returned to his office. This was a rather intriguing situation for someone who, as Mr. Wong claimed, had accompanied his nominee to cash his cheque.

[37] When counsel for the respondent asked him in cross-examination to explain this contradiction in his testimony, and after counsel showed him the transcript of the testimony he had given at previous hearings, Mr. Wong confirmed that the bank had not had enough $1,000 bills to enable him to cash the total amount of the cheque for $75,196.63. Only 50 bills were available. The balance was transferred to his bank account in Québec.

[38] Mr. Wong then filed a copy of this cheque as well as the stub and a National Bank slip confirming the deposit of $25,097.33 to his Loretteville account on October 31, 1986. On the back of the cheque, it can be seen that the National Bank teller called Disnat to confirm that the cheque had been issued and to identify the beneficiary. The teller also communicated with a National Bank representative in Québec. Also appearing on the reverse of the cheque are Mr. Wong's social insurance number, a credit card number, an inscription concerning the existence of a Department of National Defence photo I.D. providing Mr. Wong's date of birth and height. All these actions were thus consistent with the care that a bank teller would take before handing over a large amount of cash.

[39] This contradiction in Mr. Wong's testimony may be explained by the fact that it is not easy to remember minor events that occurred more than 13 years prior to the hearing of these appeals. It should also be borne in mind that Mr. Wong did not appear to have taken the same care in preparing for his testimony as Mr. Mercille had done, which was only natural.

[40] Although Mr. Mercille took a great deal more care in preparing for his testimony, this did not prevent him from also providing an incorrect version of certain facts. He stated under oath that, in computing his income for 1984, he had not deducted an amount of $50,000 as CEEs after purchasing $50,000 worth of flow-through shares in Aabarock. Although these flow-through shares were subscribed on November 26, 1984, Mr. Mercille contended that his income for December 1984 was less than he had expected—as the December income was realized instead in January 1985—and that he did not have enough income to deduct the CEEs of $50,000 from his subscription of Aabarock shares.

[41] It is important to note that Mr. Mercille, like the Minister, had destroyed his 1984 income tax return. All that was filed in evidence was a computerized statement providing a summary of the 1984 return. Under the heading "Other Deductions" appeared an amount of $89,629. When I asked Mr. Mercille how I could satisfy myself that his CEEs of $50,000 were not part of this amount of $89,629, he answered that the $50,000 was not deducted because he wanted to keep it as the ACB of his shares.

[42] When I asked him to indicate which expenses might have been included in the $89,629, he answered that this amount included CEEs from Golden Knight. He added, however, that he could not tell me how many shares of that corporation he had purchased. After observing that Mr. Mercille had deducted resource expenditures of $159,733 in 1986, I suggested that he must certainly have used the deductions from 1984 and 1985. Even though he was a broker specializing in flow-through shares, he then said he did not know he could carry over these deductions to another year.

[43] Mr. Mercille gave this testimony during the first two hearing days, on August 30 and 31, 1999. When the hearing resumed on November 22, 1999, counsel for the respondent showed Mr. Mercille a copy of the 1984 income tax return that he had filed with the Quebec Department of Revenue. Mr. Mercille first objected to the fact that this document had been filed, but I overruled his objection.

[44] In the income tax return in question, it could be seen that Mr. Mercille had deducted the sum of $95,470 as deductions in respect of resources arising from the purchase of flow-through shares or from similar investments. Included in this amount were not only CEEs from Golden Knight, representing the small amount of $1,878, and an amount of $7,500 in CEEs from a geologist named Jacques Grenier, but also CEEs of $50,028 from Aabarock providing entitlement to an amount of $83,380, that is, 166% of the CEEs which Aabarock had waived in Mr. Mercille's favour. So Mr. Mercille remembered in August 1999 that he had deducted CEEs from Golden Knight (amounting to only $1,878) in 1984, but could not remember deducting the CEEs from Aabarock (which amounted to $50,028), and this is quite surprising.

[45] A calculation of the corresponding deductions allowed under the federal legislation resulted in a total of $89,629, exactly the amount that appears on the computerized statement for 1984. Mr. Mercille then admitted that he had in all likelihood deducted the $50,028 of CEEs which Aabarock had waived in his favour. He therefore withdrew this ground of appeal.

[46] It should also be added that a document written in Mr. Mercille's hand provides a breakdown of the $95,470 which he claimed as a deduction in his provincial return of income and shows a balance on hand as a "reserve (CEQ) for future years". Counsel for the respondent thus confronted Mr. Mercille over the testimony he gave at the hearing held in August 1999 in which he stated that he did not know he could carry over CEE deductions to subsequent years. Mr. Mercille tried to explain that he was aware that carry-overs were possible for provincial purposes, but did not know that they were also possible for federal purposes. And yet a tax information slip prepared by Aabarock for 1984 and attached to Mr. Mercille's provincial income tax return clearly states that amounts not deducted in a given year may be deducted in any subsequent year for both provincial and federal purposes.

[47] At the very least, this part of Mr. Mercille's testimony relating to his claim for a $50,000 deduction in respect of CEEs reveals that it is easy to make a mistake in testimony, even for Mr. Mercille. It is also quite surprising that a stock broker specializing in flow-through share sales and the financing of mining companies can claim to be unaware that a CEE deduction not claimed in a given year can be carried over to subsequent years.

[48] Two interpretations come to mind to explain the inaccuracies in Mr. Mercille's testimony. Either he honestly believed he had not deducted the $50,000 in CEEs in 1984 and erred in good faith on this point, or he knew that he had previously deducted them and lied under oath, thus perjuring himself. I cannot decide this question here and it is not essential that I do so. However, it must be acknowledged that, as Legault J. stated with regard to Mr. Wong, Mr. Mercille is a tainted witness. In addition to being found guilty by Legault J. of having by fraudulent means unlawfully affected the securities market, Mr. Mercille was also found guilty of using a false name and of having defrauded the welfare system and legal aid by concealing his income. It is therefore not inconceivable that Mr. Mercille lied.

[49] However, returning to the issue of the nominee and of the alleged loans totalling $38,760, in his testimony, Mr. Mercille gave a version that was quite different from that of Mr. Wong. According to Mr. Mercille, Mr. Wong acted for himself, not as a mandatary or nominee for Mr. Mercille. Mr. Mercille would have liked to help Mr. Wong get started in business. The latter had in fact been considering leaving the army for some time. Mr. Wong admitted that he had considered buying a cake and pastry business worth $16,000 with one of his co-workers at the Valcartier military base. According to Mr. Mercille, Mr. Wong had to take all the steps required to buy the business and secure financing, including subsidies. Again according to Mr. Mercille, in order to obtain a subsidy, Mr. Wong had to show that he had a certain amount of capital.

[50] While waiting for this acquisition to materialize, Mr. Mercille apparently suggested to Mr. Wong in January 1986[1] that he speculate in junior mining stocks. He suggested that Mr. Wong make an offer to Aabarock's shareholders to purchase their holdings for $0.20 a share. Some of these shares had been issued a few months previously, in September 1985, at $0.40. Why offer Mr. Wong such an opportunity? Mr. Mercille said that he wanted to compensate Mr. Wong for the loss he had incurred in certain stock market transactions in 1984. And yet, as will be seen, this loss was not a heavy one. In 1984, Mr. Wong had decided to open a self-directed RRSP account which, on Mr. Mercille's recommendation, he used to purchase shares in a junior mining company at a total cost of $2,167.73. A few weeks later, Mr. Wong resold them for $1,332, thus incurring a loss of $835.

[51] When Mr. Wong made the Aabarock share purchase offer in January 1985, that company was a privately held corporation whose shares would not be listed on the stock exchange until February 26, 1986. Thirteen shareholders responded to Mr. Wong's offer and he purchased 58,700 shares for $12,650. On February 14, 1986, he purchased 17,500 more shares for $5,330.85. Once the shares were listed on the Exchange, Mr. Wong purchased 45,500 more shares for $18,950. This gave him a portfolio of 122,550 shares for a total of $36,985.

[52] In explaining the fact that, as of February 11, 1986, the investment loans that he had made to Mr. Wong totalled $19,760 and that this amount was increased by another $19,000 on March 19, 1986, Mr. Mercille mentioned another investment project that Mr. Wong was considering, namely the purchase of a manor house for approximately $200,000. The manor was to contain seven businesses. Mr. Mercille testified that Mr. Wong was to take the steps to obtain the financing needed for the purchase, including obtaining subsidies.

[53] Apart from the inscription "loan" on the back of two cheques, there is no written contract confirming these two loans or their terms and conditions. Mr. Mercille said that there was a verbal agreement between Mr. Wong and him whereby Mr. Mercille would receive a 10% interest in the projects in exchange for his help with financing.

[54] And yet when he lent Mr. Wong $11,471—a far smaller amount than the loans totalling $38,760—in February 1985, Mr. Mercille took care to have a written contract stipulating an interest rate of 14.4% per year with an undertaking not to borrow from anyone else signed before his lawyer, Mr. Robert. The purpose of this undertaking was to limit Mr. Wong's borrowing and to provide Mr. Mercille with some form of guarantee. The $11,471 loan was to serve to consolidate Mr. Wong's personal debts, including some owed to credit card companies. As the three commissioners of the Commission des valeurs mobilières noted at page 23 of their reasons, this was a curious situation. Why require a written contract written by a lawyer for an $11,471 loan, when no loan contract was prepared for three loans totalling $38,760?

[55] Mr. Wong denied that he was to take the necessary steps to obtain financing and subsidies. He said he had no competence in such matters; Mr. Mercille was the expert in this area. It should also be mentioned that, according to Mr. Wong, the projects were not sufficiently advanced for them to have discussed the interest that Mr. Mercille would receive in exchange for his financial assistance. Need it be added that these projects were never carried out?

[56] The link that Mr. Mercille tried to establish between the loans totalling $38,760 and the purchase of a cake and pastry business or the manor house, it seems to me, would deceive no one. Mr. Mercille is apparently indulging in wishful thinking. Furthermore, I find the idea that Mr. Mercille lent $38,760 to enable Mr. Wong to speculate in the shares of a junior mining company as surprising as it is implausible. This meant taking a great financial risk so that Mr. Wong could make up an $835 loss incurred in 1984.

[57] It should be kept in mind that Mr. Wong was earning a salary of only approximately $26,000 as a cook on the military base and that he had considerable trouble managing his finances and living within his means. It should also be added that Mr. Wong had no knowledge of securities and even less of mineral resources. Lastly, it should be recalled that Mr. Wong's first experience in these fields had been a disappointment for him.

[58] Mr. Mercille claims that Mr. Wong transferred his portfolio from Bell Gouinlock to Disnat in May 1986 because relations had cooled between Mr. Wong and him. However, according to his own testimony, Mr. Mercille continued to provide Mr. Wong with financial information and to advise him. Mr. Wong claims that the account was transferred because Mr. Mercille was planning to leave Bell Gouinlock and his relations with his employers had deteriorated. Mr. Mercille argues that this makes no sense because he still had his own personal account at Bell Gouinlock in September 1986 when he was dismissed. On this point, I believe Mr. Mercille is right.

[59] However, Mr. Wong contends that he opened the account at Disnat at Mr. Mercille's request and the fact that he was mistaken as to the reason for the account's transfer from Bell Gouinlock to Disnat does not necessarily mean that he was mistaken when he said he held the account for Mr. Mercille's benefit and that the account belonged to Mr. Mercille.

[60] When the account was opened at Disnat on May 2, 1986, the address given by Mr. Wong was that of the Valcartier base. However, starting in June 1986, Mr. Wong's address on the statements of account was P.O. Box 623, Exchange Tower. Mr. Wong stated that this post office box at the Exchange Tower had been rented at Mr. Mercille's request. Mr. Wong also claimed that he gave the key to the post office box to Mr. Mercille shortly thereafter. Mr. Mercille vehemently denies that he had control of the post office box.

[61] I find Mr. Wong's version the more likely. Why would Mr. Wong have rented a post office box at the Exchange Tower when he was living on the military base at Québec. If he had to use a post office box, it would certainly have been more efficient to have had it in the Québec area near the military base. It is therefore more likely that the post office box was obtained to enable Mr. Mercille to control more effectively, and secretly, the account at Disnat and the monthly statements that were sent to that post office box.

[62] Mr. Mercille also explained that the reason some of Mr. Wong's securities found their way into his account, as Legault J. noted in his reasons, was that Mr. Mercille had acquired them in exchange for stock purchase warrants which he held. If Legault J. had understood this, he might have come to different conclusions on the nominee issue.

[63] First of all, I find it quite surprising that Mr. Wong, who knows nothing about securities transactions, would have agreed to exchange shares for stock purchase warrants. Mr. Mercille said that he did so in order to speculate more freely. I do not believe that Mr. Wong was enough of a speculator to embark on this kind of venture. The purchase warrants were about to expire and might thus disappear, which is what in fact occurred. This exchange is not inconsistent with Legault J.'s finding that Mr. Wong was Mr. Mercille's puppet and that he was following his mandator's instructions.

[64] Mr. Mercille claims that the cheque for $25,125.12 which he received from Mr. Wong represents partial repayment of the loans totalling $38,760 which he made to Mr. Wong. As for the sums represented by the cheques from Disnat for $6,000 and $75,196.63 which were given to Mr. Wong, Mr. Mercille claims that he did not receive them. Once again, it is Mr. Wong's word against that of Mr. Mercille.

[65] Which version should be accepted depends in large part on the answers to the following questions: did Mr. Wong act as a nominee for Mr. Mercille, did the Disnat account belong to Mr. Mercille and did Mr. Mercille exercise control over that account? If the answer to all these questions is yes, it will be easier to believe that Mr. Mercille took the necessary steps to ensure that the sums paid by Disnat were remitted to him.

[66] If Mr. Mercille decided when to sell the Aabarock shares and if he received the cheques and statements from Disnat at the Exchange Tower post office box, there is also reason to believe that he received the proceeds from the sale of the Aabarock shares. Furthermore, if Mr. Mercille was lying or at the very least was mistaken in stating that Mr. Wong did not act as his nominee, that he (Mr. Mercille) was not the actual holder of the Disnat account and that he did not exercise control over the post office box, it can easily be believed that he was also lying or mistaken in claiming that he never received the amounts withdrawn from Disnat.

[67] Let us now review each of these elements. It should be noted first of all that the Minister assumed in making the assessment that there was a nominee relationship between Mr. Mercille and Mr. Wong at the time of the purchase and sale of the Aabarock shares and that Mr. Wong had handed over the three cheques totalling $106,321.75 to Mr. Mercille. The burden was on Mr. Mercille to refute the facts on which the Minister relied in making his assessment. Mr. Mercille had to show on the balance of probabilities that Mr. Wong had acted for himself and not for Mr. Mercille and that he had made genuine loans to Mr. Wong totalling $38,760. I believe for a number of reasons that Mr. Mercille failed to discharge this burden.

[68] First of all, the decisions of the Court of Quebec and the Commission des valeurs mobilières showed, in the case of the former beyond a reasonable doubt and in the case of the latter on the balance of evidence—even after considering Mr. Mercille's version, just as was done by the Exchange's Disciplinary Committee and Governing Committee—that Mr. Mercille used Mr. Wong as a nominee. In addition, the Court of Quebec and the Commission des valeurs mobilières established that the Disnat account belonged to Mr. Mercille. These decisions by the Court of Quebec and the Commission des valeurs mobilières cannot be considered as having the authority of an irrebuttable presumption; rather they have the authority of a presumption of fact which Mr. Mercille also had to rebut by adducing, in particular, new facts.

[69] Before me, Mr. Mercille had the opportunity to present again his version of the facts and, contrary to what had happened before the Court of Quebec, to testify himself. His testimony and explanations did not satisfy me that the Minister had incorrectly assumed that Mr. Wong was a nominee for Mr. Mercille. Nor did he convince me that the Court of Quebec and the Commission des valeurs mobilières were mistaken in their findings of fact on these issues.

[70] Furthermore, I do not believe Mr. Mercille when he says that he lent Mr. Wong $38,760, that he was not exercising control over the post office box at the Exchange Tower and that neither the Disnat account nor the Bell Gouinlock account belonged to him. I have already spoken of the weakness of Mr. Mercille's version with respect to these matters.

[71] Instead I believe Mr. Wong when he says that he acted as a nominee for Mr. Mercille, that he opened the bank account on Mr. Mercille's instructions, that he signed blank cheques to enable Mr. Mercille to purchase Aabarock shares and that he held the accounts at Bell Gouinlock and Disnat for Mr. Mercille's benefit. Lastly, I believe Mr. Wong's assertion that he handed the three cheques from Disnat over to Mr. Mercille, less an amount of $1,000.

[72] In conclusion, the revenue from Mr. Wong's share purchases and sales on behalf of Mr. Mercille amounted to $67,561.75. As Mr. Wong admits having received $125 for his services and having withheld $1,000 to help him pay his future legal fees, I believe it is appropriate to allow $1,125 as an expense for fees paid to Mr. Wong for his services as a nominee. The net income earned from these activities thus amounts to $66,436.75.

Penalty

[73] The Minister assessed a penalty under subsection 163(2) of the Act in respect of an amount of $156,405.39, consisting of unreported business income of $148,583.89 and unreported interest income of $7,821.50 from the disposition of Treasury bills. The amount of $148,583.89 consists of two parts: the profit of $81,022.14 realized by Mr. Mercille on securities sales which he made himself and profits of $67,561.75 realized on the sale of Aabarock securities by Mr. Wong.

[74] The burden is on the Minister to show that Mr. Mercille knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his return of income.

[75] Mr. Mercille explained that he did not report the amount of $81,022.14 because he considered these gains to be capital gains and believed he would be entitled to the capital gains exemption announced in the 1985 budget. Mr. Mercille said he was not familiar with the statutory requirement that the capital gain be reported in his income tax return. Subsection 110.6(6) of the Act provides that a taxpayer is not entitled to a capital gains deduction if he knowingly or under circumstances amounting to gross negligence fails to report the capital gain in his return of income. As for the amount of $67,561.75, Mr. Mercille's position is obviously that this income belonged to Mr. Wong.

[76] I am prepared to admit that Mr. Mercille may have believed that the gains he realized and the losses he incurred in his securities portfolio might constitute capital gains or capital losses and that he might have believed he was entitled to the capital gains exemption. It must be borne in mind that the legislation establishing this exemption was not passed until February 13, 1986. Furthermore, the 1986 guide which Mr. Mercille may have used for help in preparing his return of income, was not produced. I do not know to what extent taxpayers were informed of the importance of reporting capital gains in order to take advantage of the "capital gains deduction", which has often wrongly been described in public as a "capital gains exemption", which might have misled certain taxpayers. The respondent failed to discharge her burden respecting this part of the assessment.

[77] However, different considerations apply to the other amounts subject to the penalty provided for in subsection 163(2) of the Act. In logical terms, the same reasoning could have applied in respect of the $67,561.75 gain realized through Mr. Wong. Although it might be concluded that Mr. Mercille attempted to conceal this income, he may have believed it was a capital gain which could also have been eligible for the capital gains exemption.

[78] However, for various reasons, it was in Mr. Mercille's interest to conceal the gains realized through Mr. Wong, first in order to maximize his capital gains deduction, which could not exceed $500,000. It is important to note that Mr. Mercille purchased a large number of flow-through shares. He bought approximately $59,000 worth of these securities in 1984 alone, and his resource investments amounted to approximately $107,000 in 1985. It should be kept in mind that the ACB of flow-through shares is nil and that the entire proceeds of disposition of those shares when they are eventually disposed of is therefore treated as a capital gain. The context in which the transactions in question were conducted should also be noted. Those transactions enabled Mr. Mercille unlawfully to affect the securities market and were to remain secret.

[79] In my view, on the balance of probabilities, Mr. Mercille knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his return of income, that is to say an omission respecting the shares purchased and sold through Mr. Wong, which Mr. Mercille did not include in his income.

[80] Mr. Mercille claimed to believe that the interest income of $7,821.50 he failed to report had to appear in the T5s prepared by Bell Gouinlock, the brokerage firm where he held his Treasury bills along with his bonds and other similar investments. However, in 1987 it was a well-known fact among stockbrokers and investors who purchased Treasury bills that brokerages were not required to prepare information slips such as T5s for transactions involving these bills.

[81] This was in fact so well known that the Minister of Finance had to announce new measures to encourage taxpayers to report this type of interest. In his white paper on tax reform made public in June 1987, the Minister of Finance announced new measures to require brokerages to prepare information slips for this type of transaction. Section 230 of the Income Tax Regulations, which deals with security transactions was added by P.C. 1989-2156, SOR/89-519, dated October 26, 1989 and applicable after December 31, 1990. Brokers are now required to issue T5008 slips to clients purchasing Treasury bills.

[82] I therefore cannot believe Mr. Mercille's assertion that he did not know that interest on Treasury bills was not included in T5 slips. Lastly, it is important to add that this amount of $7,821 represents more than one third of the interest income he should have reported in his return of income.

Legal Fees

[83] Mr. Mercille testified that the amount of $1,500 claimed as a deduction for 1986 was for legal fees which he incurred for the purpose of starting a new business. Mr. Mercille, it will be remembered, hoped to be able to open his own securities business and Rimco Capital Inc. was moreover incorporated as a result of his efforts to open such a business. However, as a result of Mr. Mercille's problems with the Montreal Exchange and the Commission des valeurs mobilières, the corporation was never really operated actively. Mr. Mercille contends that the said corporation never repaid the $1,500 in fees and that these represent an expense incurred for the purpose of earning income.

[84] In my view, even if it is admitted that this expense was incurred for the purpose of earning income, it was a capital expenditure the deduction of which is prohibited under paragraph 18(1)(b) of the Act. Mr. Mercille may have considered this $1,500 expense as being part of the cost of the shares of Rimco Capital Inc. which he acquired. However, I do not have to decide this question.

[85] The evidence showed that the legal fees disallowed by the Minister for the 1988 and 1989 taxation years were paid for professional services rendered by lawyers who represented Mr. Mercille before the Montreal Exchange's Disciplinary Committee and Governing Committee, before the Commission des valeurs mobilières du Québec and in the criminal proceeding before the Court of Quebec.

[86] Mr. Mercille testified that it was important to defend himself against the charges before each of these bodies since, if he failed, he would temporarily or permanently lose his right to carry on his profession as an investment advisor registered with the Exchange. The fees were thus an expense incurred for the purpose of maintaining his right to receive employment income. Mr. Mercille even contends that he would have negotiated a settlement with the prosecution if he had not feared that pleading guilty would have resulted in the loss of his right to carry on his profession.

[87] The only ground given by counsel for the respondent for disallowing these legal fees as an expense was that, in his view, they were not incurred for the purpose of earning income. In support of his argument, he cited the decision in No. 666 v. M.N.R. (1959), 23 Tax A.B.C. 208, in which Board member Fordham held that a taxpayer was not entitled to deduct legal fees incurred to defend in a proceeding under the Securities Act of Ontario.

[88] In my view, this decision is not consistent with the current state of the law. A number of court decisions have recognized that such legal fees can be deducted in circumstances similar to those of Mr. Mercille. I note in particular the following decisions: Lavoie v. M.N.R., 82 DTC 1291 and M.N.R. v. Eldridge, 64 DTC 5338. In the latter, the Exchequer Court recognized that the legal fees incurred to carry on illegal activities could constitute deductible expenses. There are other decisions, such as St-Germain v. M.N.R., 83 DTC 36, in which the Tax Review Board allowed the deduction of expenses incurred by a physician to defend in a proceeding for criminal negligence. In Vango (T.) v. Canada, [1995] 2 C.T.C. 2757, my colleague Judge Bowman came to the same conclusion respecting the expenses incurred by a broker employed by a brokerage firm to defend himself against a charge laid by the Toronto Stock Exchange. See also M.N.R. v. L.D. Caulk Co. Ltd., 54 DTC 1011 (S.C.C.) and Rolland Paper Co. Ltd. v. M.N.R., 60 DTC 1095. In this last decision, the Exchequer Court held that legal fees incurred to defend against a charge under the Criminal Code were deductible, even though the company charged was in fact found guilty.

[89] In my opinion, the legal fees incurred by Mr. Mercille were incurred for the purpose of earning income from employment and are deductible under paragraph 8(1)(f) of the Act. It should be noted that counsel for the respondent raised no issue with respect to the other conditions set out in this paragraph of the Act.

[90] Having decided that Mr. Mercille did not grant Mr. Wong loans of $38,760, it follows that Mr. Mercille may not claim the deduction of a loss for the non-repayment of a portion of those alleged loans. In any case, as I believe Mr. Mercille received a sum of $105,196 from Mr. Wong, it follows that Mr. Mercille did not incur a loss. In view of this conclusion, it is not necessary to add anything further.

[91] For these reasons, Mr. Mercille's appeals are allowed and the assessments for the 1986, 1988 and 1989 taxation years are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis of the following facts: (1) an amount of $66,436.75 represents business income for Mr. Mercille for the 1986 taxation year; (2) the penalties assessed under subsection 163(2) apply only to this amount of $66,436.75 and to the Treasury bill interest of $7,821.50 for the 1986 taxation year; (3) Mr. Mercille is entitled to deduct legal fees of $17,231 for the 1988 taxation year and $8,832 for the 1989 taxation year.

[92] Costs are awarded to the Minister. Although Mr. Mercille was partly successful, by far most of the proceedings concerned the nominee issue and Mr. Mercille lost on this question. He also lost on the application of the penalty to the amount of $74,258.25 and on his claim for a deduction in respect of a loss of $13,635 on his alleged loans. He also admitted, after the respondent proved it, that the Minister, in his assessment, correctly disallowed the deduction for the CEEs of $50,000. I am satisfied that, if the proceedings had been limited to the issues of legal fees and the penalty on the income of $81,022.14, they would have lasted less than one hearing day, instead of over seven. I also believe that the respondent deserves her costs all the more when one considers that Mr. Mercille insisted on needlessly arguing the entire nominee issue, which had been decided by two committees of the Montreal Exchange, the Commission des valeurs mobilières du Québec and the Court of Quebec.

Signed at Ottawa, Canada, this 1st day of February 2000.

"Pierre Archambault"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Traduction certifiée conforme ce 23^e jour de février 2000.

Erich Klein, réviseur

---