Martin v. The Queen, docket 97-1178-IT-G

Date: 20001103

Docket: 97-1178-IT-G

BETWEEN:

ROSS LLOYD MARTIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowie J.T.C.C.

[1] These appeals are from assessments for income tax for the taxation years 1987, 1988 and 1989. By a written agreement filed at the opening of the trial the parties have agreed that the following are the issues.

For the 1987 year:

1. The Appellant sold five condominium townhouses. Are the proceeds on income or on capital account?

2. The Appellant claims a capital gains deduction of $25,000.

3. The Minister of National Revenue has assessed a shareholder benefit of $6,456.

4. The Minister has added $43,206 to the Appellant's income in respect of the sale of a townhouse at 117 Gerrard Street East, Toronto.

5. The Appellant claims to be entitled to carry-back a net capital loss of $50,666 from the 1988 taxation year. On reassessment, the Minister has disallowed the carry-back.

For the 1988 year:

6. The Minister has added $26,034 to the Appellant's income, being the gain on the sale of a townhouse at 74 Markville Road. Is this amount on income or on capital account?

7. The Minister has assessed a recapture of capital cost allowance in the amount of $12,515 in respect of 74 Markville Road.

8. The Appellant claims an allowable capital loss of $151,990 (2/3 x capital loss of $227,985).

For the 1989 year:

9. The Appellant claims an allowable capital loss of $211,183 (2/3 x capital loss of $316,775).

[2] By the same written agreement the Minister abandoned his position with respect to issues 3 and 4, the Appellant concedes that there was a gain on the sale of 74 Markville Road, but argues that it is on capital account, and accepts that he is liable to a recapture of capital cost allowance. Issues 2 and 5 are consequential upon other issues. Issues 1, 6, 8 and 9 remain to be decided.

the townhouse sales

[3] The Appellant is a real estate broker. For many years he has carried on his business through a number of business entities. The largest part of that business has been the sale, on commission, of new subdivision housing. This has provided him with a substantial income, much of which he put back into his businesses. In addition to his real estate sales business, he has from time to time taken a minority financial interest in some residential construction projects being carried out by builders with whom he had previously had dealings. Typically, he would invest money in a project to ensure that his company obtained the sales contract for the completed houses. On these occasions he took no part in the management of the construction companies, or the projects in which they were engaged.

[4] In the early 1980's the Appellant's wife was diagnosed with a fatal illness. He made a promise to her to provide for the financial security of their children. He considered various ways that this could be done. As residential real estate was the business that he knew, and as it was generally considered to be a sound investment, he decided to invest in income-producing real estate. He did this by purchasing a total of 21 townhouse units in multiple unit residential buildings (MURBs). They were part of a project which was developed by a company called 565477 Ontario Limited, of which 25% was owned by Ross Lloyd Martin Enterprises Limited. Mr. Martin bought these units almost entirely with borrowed funds. His expectation was that they would begin to produce income for him after about ten years, at which time he would require the cash flow to pay for his children's education. In the meantime, they would incur losses which he could use to his tax advantage. The evidence was that these buildings were in a high quality project located in a good area, and that he purchased them with no intention other than to provide an income stream in the future for the benefit of his children as they grew up. The evidence was not very clear as to the exact time at which the Appellant bought these units, but it appears to have been in the period between 1982 and 1984.

[5] Unfortunately for the Appellant, some of his other business ventures did not go well, and in 1986, 1987 and 1988 he found himself under considerable pressure from the bank to meet its demands to reduce the outstanding balance of the lines of credit of his various enterprises. Increasingly, the MURBs became the only assets available to him with sufficient equity to produce the required cash, and his accountant, Mr. Rossi, advised him on many occasions that it would be necessary to liquidate them in order to satisfy the bank. The Appellant's instructions to Rossi were that the MURBs should only be sold when absolutely necessary, and only to the extent necessary, to meet demands that could not be satisfied in any other way. Nevertheless, 15 units were sold between March and December 1986, five more were sold in 1987, and one, the 74 Markville Road property, in 1988.

[6] The value of residential real estate had increased substantially during the short time that the Appellant owned these units, and so they were sold for considerably more than their original purchase prices. The sale of five units in 1987 and one in 1988 produced gains of $194,736 and $26,034, respectively. Given the nature of the Appellant's business, his stake in the company that developed the project, the 100% financing of the purchases and the relatively short time for which he owned the units, it should surprise no one that the Minister assessed these gains as income. Notwithstanding these facts, I have concluded that the Appellant purchased these townhouse units as an investment, and that he liquidated them only because of the pressure that was exerted on him by the bank, and only when he had no practical alternative.

[7] The Appellant was not challenged on cross-examination as to the reasons for the initial investment. Counsel for the Respondent attempted to show that there were other assets available to satisfy the bank's demands, but I accept the evidence of Mr. Rossi that there was no significant equity in those assets, and I accept the Appellant's evidence as to his reluctance to sell the MURBs. The Respondent did not advance a case of secondary intention. Her case was based entirely on an invitation to disbelieve the Appellant. I accept the Appellant's evidence on this issue, and I find that he bought the MURBs with the sole intention of holding them as an investment for the long term, and that he sold them only under the practical duress that arose out of the unexpected need of his other ventures for cash. The Appellant therefore succeeds on issue 1, on issue 2, which is consequential on it, and on issue 6.

the capital losses

[8] The capital losses that the Appellant claims to have suffered in the 1988 and 1989 taxation years are said to arise from certain investments in real estate made by him in the United States; specifically, from payments made as a result of certain loan guarantees given by him in connection with those investments. The payments fall into two categories; those made to lawyers to defend actions brought to enforce the guarantees, and those made to the creditors by way of compromise settlement of the actions.

[9] During the relevant years the Appellant's business interests were carried on through a number of corporate entities. 695542 Ontario Limited (695) was a holding company with two classes of shares. One class was held entirely by 694978 Ontario Limited (694), and the other by the Ross Lloyd Martin Family Trust (the trust). All the shares of 694 were owned by the Appellant personally. The trust was established for the benefit of the Appellant's children. While the evidence as to the nature of the two classes of shares of 695 held by 694 and by the trust was less than precise, I am satisfied that they were such that profits accrued to each of them. I was given no evidence as to the identity of the trustees of the trust.

[10] 695 held 100% of the shares of Splendorbranch Investments Limited (Splendorbranch), and it owned 100% of the shares of Alpha-Mar Corporation (Alpha-Mar), which in turn held 100% of the shares of Genesis Investment, Inc. (Genesis). Alpha-Mar and Genesis both appear to have been U.S. corporations. Genesis held a 20% interest in the Orion Partnership (Orion). The other partners in Orion were Mohammad Safdar, Robert T. Sims, Ken Shamburger and William J. Shepherd Jr., each of whom owned 20%.[1]

[11] Enchanted Bays Section Four Joint Venture (Enchanted Bays) was formed by Orion (62.5%), Frank Vecera (12.5%), and the Palmnold-McMillan Joint Venture[2] (25%). Orion was formed in July 1984, and Enchanted Bays was formed soon after that to develop a parcel of about 22.5 acres of real property near Houston, Texas for residential and associated purposes. Before long the Appellant found himself under some pressure from his partners in the U.S. to contribute more and more funds to Orion. The project required very significant amounts to be expended and, according to Exhibit A-12, by February 1988 the Appellant's capital contribution to Orion exceeded the share required of him according to the partnership agreement by some $900,000.

[12] Lone Star Contracting Corporation (Lone Star) of Texas was engaged by the joint venture under a contract to perform earthmoving and similar work. By June 1986, the indebtedness of Enchanted Bays to Lone Star under this contract had reached $1,518,286, and was secured by a promissory note made by Enchanted Bays in favour of Lone Star in that amount, and guaranteed by Sims, Shamburger, Safdar and the Appellant personally. In May 1987, Lone Star began proceedings in the District Court in Texas to recover under the contract, the note, and the guarantees, naming all the joint venturers, including the Appellant and Genesis, as defendants. It also brought action against the Appellant and Genesis in the Ontario Court. The Appellant instructed counsel to defend both the Texas and the Ontario actions vigorously on his own behalf, and on behalf of Genesis. Again the evidence is unclear, but it does not appear that any of the other partners took any steps to defend themselves in these actions. This is not surprising, as they all appear to have been judgment-proof by that time. In October 1989 a compromise settlement was concluded between Lone Star and the Appellant. Under its terms the Defendants were to pay $425,000(U.S.), of which the first payment in the amount of $200,000 was to be paid by October 13, 1989, the second payment in the amount of $50,000 was to be paid by January 3, 1990, and the balance by monthly payments of $5,833.33, beginning on February 2, 1990. The Appellant's position is that he paid one-half of the very substantial legal fees incurred to defend these actions, and one-half of the first and second payments of the settlement amount. It is these amounts, together with the legal fees expended to defend actions brought to enforce two guarantees given by him to the InterFirst Bank Fort Worth, N.A. Fort Worth, Texas, that are claimed by him as capital losses suffered in 1988 and 1989. The InterFirst guarantees relate to the purchase of land by the Park Lake Joint Venture, in which the Appellant was a participant.

[13] The basis upon which the Appellant claims to have paid the amounts which make up the losses claimed is that the payments to lawyers and plaintiffs in the United States were initially made by way of cheques issued by Genesis Marketing Organization Limited (GMO), and that the amounts paid by GMO were charged equally to Splendorbranch and to the Appellant, by way of his loan account. The Appellant claims a right of subrogation as against his U.S. partners, whose debts were extinguished, or at least reduced, as a result of these payments. The other partners were all insolvent by the end of 1998, and so the Appellant is deemed by subsection 50(1) of the Income Tax Act to have disposed of the debts owing from them for no consideration at year end. GMO was one of the Canadian companies through which the Appellant's real estate business was conducted, and presumably it was chosen to make the payments because it had positive cash flows which allowed it to do so.

[14] The Respondent takes issue with a number of elements of the Appellant's theory, but I need only deal with one of them. Counsel for the Respondent did not seriously challenge the assertion that the amounts of $374,371.12 and $316,775.43 had been paid by GMO during the 1988 and 1989 years to the various lawyers, and under the terms of the settlement negotiated with Lone Star. He did, however, challenge vigorously the Appellant's assertion that one-half of these amounts had been reimbursed to GMO by a charge to the Appellant's loan account. The assumptions underlying the assessments appealed from include the following, pleaded at paragraph 8 of the Reply:

8(vii) the Appellant did not honour the guarantees;

(viii) the Appellant did not incur the alleged legal expenses in the 1988 or 1989 taxation years;

After a close examination of the evidence, I have concluded that the Appellant has failed, on a balance of probabilities, to displace these two assumptions, and that the appeals therefore cannot succeed on this issue.

[15] The Appellant called as a witness Mr. Peter Douglas Holt, C.A., a partner in the firm of Hilborn Ellis Grant, chartered accountants. During 1988 and 1989 the Appellant's group of companies had its own internal accounting staff who did the day-to-day bookkeeping and financial management. Hilborn Ellis Grant was engaged as auditors of the various companies in the group, and to handle income tax matters for the Appellant and his corporations. Mr. Holt started his career with the firm as a student in the early 1980's. By 1988 he was a junior chartered accountant in the firm, and among other duties he was engaged in the audit of the Martin group of companies.

[16] Mr. Holt testified that the working papers of the firm for the years under appeal were not available because they had been destroyed after six years, in accordance with the normal practice of the firm. This seems remarkable, considering that there were, to the knowledge of the firm, outstanding tax appeals of the Appellant for these two years. However, I accept Mr. Holt's evidence as to this, and I attribute no fault to the Appellant with respect to the missing working papers. Mr. Holt was then asked to testify as to the transactions in question. He identified photocopies of printouts of parts of the general ledger of GMO for each of the years 1988 and 1989. Those parts included an account #1510 called "Orion Partnership". He explained that the amounts paid to the lawyers to defend, and to the plaintiffs to settle, the U.S. lawsuits were charged to that account throughout each of the 1988 and 1989 years. He also identified an almost illegible photocopy of a schedule which he said that he had prepared at the 1988 year end. That schedule did two things; it converted the amounts charged to the Orion account from U.S. dollars, in which the account was maintained, to Canadian dollars, by the addition of exchange to each month's subtotal, and it divided the resulting year end total of the charges by two. This, he said, was done so that one-half of the balance could be charged to Splendorbranch, and one-half to the Appellant, in the course of the year-end adjustments. His evidence-in-chief on this was as follows:

Q. This schedule at the last page at tab 15, do you know who prepared this schedule?

A. I did.

Q. So can you take the court through now how this schedule reads, and particularly speak about the notation at the bottom where you write "Mr. Martin's shares", and it says 50%. Can you speak on that?

A. Well, what it appears is that the re-allocation of the account went 50% to Mr. Martin and 50% -- I believe it ends up in Splendorbranch Investments for the other 50%.

Q. So this total is – what does it say, it's 227,000; right?

A. That ends up being, I'm assuming, Mr. Martin's share.

Q. So –

A. After including the exchange.

Q. After including the exchange, okay. So the $227,985.50 is Mr. Martin's share. Now what does that mean by "Mr. Martin's share"?

A. Well, that means that that is the amount that would have been charged to Mr. Martin's shareholder account.[3]

[17] What we have here is supposition on the part of Mr. Holt, which he was later willing to convert to certainty in response to leading questions from counsel. I am satisfied that he had no personal recollection that the shareholder account of the Appellant was ever debited with this $227,985.50. In fact, it was not established that he made any of the adjusting entries at the 1988 year end. Given the amount of time that had passed since 1988, it is not surprising that he had no personal recollection.

[18] Mr. Holt's evidence with respect to the 1989 year was no more precise, insofar as his own recollection was concerned. The extract from the general ledger for that year included account #1085 Splendorbranch Investments, as well as the Orion account. The Orion account shows two credit entries at year end, each in the amount of $316,775.45. One carries the notation "charge Splendorbranch", and the other "charge to s/hy". Because the Splendorbranch account is included in the exhibit, it is possible to verify that there is a corresponding debit entry in that account at December 31 for $316,775.45, with the notation "Orion payments 1989". Again, however, neither the journal entry nor the general ledger account to which the other amount of $316,775.45 was posted is in evidence. In fact, the Appellant was not himself a shareholder of GMO at December 31, 1988 or 1989. His group of corporations was reorganized in 1987, following which all the shares of GMO were owned by 695; all of its shares were owned by 694 (1,000,000 class A) and the trust (100 c/s).[4] Mr. Holt's explanation when asked about this was that it would be a director's account rather than a shareholder's account, because although Mr. Martin was no longer a shareholder, he would have continued to be a director.

[19] Mr. Albert Rossi, C.P.A., also gave evidence on this issue. Mr. Rossi was an auditor with the firm Hilborn Ellis Grant in the early 1980's. In 1984 he left the firm to join Mr. Martin's corporate group as Comptroller and Vice-President – Finance, a position he held until leaving the firm in 1990 to work in Texas. In that capacity he was the person responsible in 1988 and 1989 for the financial records and statements of the companies in the Martin group. Clearly, he recalled well the financial troubles that Mr. Martin and his companies went through at the end of the 1980's, due at least in part to the collapse of the real estate market in Texas. He recalled the lawsuits which had to be defended, and the fact that he had to find funds with which to pay the law firms engaged for that purpose. He said that it was on his recommendation that the decision was taken by Mr. Martin to allocate these costs between himself and Splendorbranch on a 50/50 basis. He also said that on his recommendation a bonus would be paid to Mr. Martin each year which would be sufficient to eliminate any debit balance in his loan account at year end. During his evidence-in-chief the following appears:

Q. All right. So you would make an entry then re-allocating 50% of the total account to Mr. Martin and 50% to Splendorbranch?

A. That's what we did, yes.

Q. When I say re-allocate it to Mr. Martin, what do you mean – what account specifically as opposed to Mr. Martin's share?

A. In Genesis Marketing Mr. Martin had a shareholder account and he always had a very large credit balance in his shareholder account. Every year we would pay Mr. Martin a bonus. And, because of the cash, we were always in need of cash, our capital was always very tight, he loaned the money back to the company. So there would be a large credit balance on the books of Genesis Marketing which would be due to shareholder, it was a due to shareholder and it would be an amount on it.

The entry I would make is, I would debit this account to basically wipe this account, and credit – I'm sorry, credit this account and debit Mr. Martin's shareholder account for half of the expenditure for that year.

Q. Let me show you the financial statements for the corporation. This is Exhibit A-3 Your Honour. Exhibit A-3 and Exhibit A-2 and A-3, the audited financial statements for Genesis Marketing Organization Limited.

THE WITNESS: '88, '89?

MR. MORRIS: Q. Yes.

A. Yes, these are the audited statements for Genesis for the year 1988 and for the year 1989.

Q. Now you say that Mr. Martin had a substantial, you said, a credit balance in his loan account?

A. Yes. He would normally have a large credit balance in his loan account.

Q. Would he have that large credit balance at the year end?

A. To be more specific, which year are you talking about? Because this is all year by year.

Q. Okay. Well, let's look, in 1988, when you look at the financial statements, does it indicate to you as to whether Mr. Martin had a credit balance in his account, in his loan account?

A. No, in 1988 it shows that there is no balance owing to Mr. Martin.

Q. Okay. Did Mr. Martin owe any money to the corporation?

A. No, it doesn't show that there's any money owing either.

Q. Well, how would that work then? Why was there – how could it be? You said that you would charge his loan account. How would there be no balance owing or payable?

A. We would bonus Mr. Martin at the end of each year an amount that sometimes it was an amount that would reduce the taxes down in the company, and other times it was just to make his account to zero. So we would bonus it out, bonus him an amount that he would pay tax on personally to keep that shareholder account from being in a debit balance.

Q. I have Mr. Martin's tax returns here for 1987, '88 and '89. Your Honour, they appear in the Respondent's book, Your Honour, at, I believe, tab 1, 2 and 3. And, Mr. Rossi, you indicated that you would bonus from the corporation to Mr. Martin?

A. Yes.

Q. So could you show me in his personal tax return how that bonus was accounted for or how I would see that bonus that you are talking about?

A. Sure. Mr. Martin received a pay cheque, like every other employee, through Ross Lloyd Martin Enterprises. That pay cheque, he would get a T4 on that one there. Genesis Marketing, we did not have a payroll account for Genesis Marketing other than Mr. Martin. And so we would give a T4 slip to him that we would work that out with the auditors at the end of the year. And so if you look at his tax return, if you look at the –

Q. You are looking at the 1987 tax return now?

A. Yes, this is the 1987. I will just see where the summary of the T4s are. All right. There's a – it's page 28. And if you look at – it's a summary of the T4.

Q. Just give us a minute so everyone can get there. How do you know – oh, yes, it's pen written in. It's marked on the bottom of the right-hand corner. Yes.

A. It says page 28.

Q. What is that schedule?

A. This is a summary of his T4s and you will see that he has – the Ross Lloyd Martin Enterprises, that is his regular pay that he would receive like every other employee.

Q. That's 120,000?

A. 120,000. And in Genesis Marketing you will see a $316,000 T4. That would have been the bonus for that year.

Q. Did you – would you write a cheque for Mr. Martin for $316,000?

A. We didn't have the money to do that.

Q. Did you write a cheque to Mr. Martin for the $316,000?

A. No, we did not.

Q. How would you record that? You didn't write a cheque, so what type of accounting would you do for that $316,000?

A. Just the exact what I would do when we would pay an expense on his behalf. I would debit the wage expense in Genesis Marketing's books by 316, and then I would credit the shareholder account for $316,000.

Q. Now would that then offset what you had just charged him?

A. Correct.

Q. I see. Can you continue on then to tab 2 in 1988, and then to tab 3 in 1989 and explain to us what was done at that time?

A. In 1988 there was no bonus declared for Mr. Martin.

Q. Okay.

A. It looks like it was just his regular wage from Ross Lloyd Martin Enterprises, 120,000, and his tax return shows only $130,000. So there was no bonus, no need for a bonus in 1988.

Q. Okay. What was the position – what was the balance of his loan account at the end of 1988? I will just refer you again to the financial statement. I don’t know if you recall, but you can have a look.

A. In 1988?

Q. Yes.

A. I don't see a balance of any kind from Mr. Martin in 1988.

Q. What would be – in the course of reviewing Mr. Martin's loan account, that would be something that would be done with the auditors, is that ---

A. The audit procedure would be a summary of all transactions that have gone through Mr. Martin's account, there would be a schedule prepared. I would prepare it, the auditors would audit it, and the partner in charge would review it with Mr. Martin.

Keep in mind that we had a 316, whatever the charge was for 1988, that we had to say got charged to his account.

Q. So if a debit balance showed up on Mr. Martin's account, meaning that he owed the company money, what would you do?

A. I would bonus him so that he wouldn't have – I wouldn't leave a debit balance on the books. My concern has always been to ensure that we are in compliance with the rules that Revenue Canada sets forth. That is why I decided – that's why we decided, not I – I keep saying "I" but it's really, it's not just myself, it was the audit partner, Jack Hilborn, who was very close to Mr. Martin and we worked together.

But we didn't want to do anything that would – could be challenged by Revenue Canada. We were aware of penalties and, you know, there's no point in doing something and having a debit balance, and then having penalties and interest on that and be treated as a share. You know, they would treat that as a wage.

You might as well just declare a bonus and pay the tax and be done with it.

Q. In 1989 now, in 1989 there was a capital loss also declared by Mr. Martin in 1989. Was there a bonus declared – we will come back to how it was created. But was there a bonus? Or what happened in 1989?

A. In 1989 Mr. Martin's total income was 616,000 and I could see that his income from Ross Lloyd Martin Enterprises --

Q. What page are you on?

A. Page 15. His income from Ross Lloyd Enterprises was 140. I can't read it. I can't necessarily read the rest of the numbers, but about 140,000. And the company 698042 had a $463,050 T4, which that would be the bonus that was calculated for that year.[5]

[20] The financial statements of GMO for 1986, 1988 and 1989 (with comparative numbers for 1987 included in the 1988 statements) were entered into evidence by the Respondent. They show that at December 31, 1986 the balance owing to shareholders was $326,065,[6] and that the balance owing to a director was reduced during 1987 by the same amount.[7] For the years 1988 and 1989, the Statements of Changes in Financial Position show no change in amounts owing to either shareholders or directors, and the balance sheets show no year end balance either owing to or due from shareholders or directors. The position taken by the Appellant's witnesses as to this was that there would be no change in the amounts due to or from directors, and the year end balance in the loan account could be nil each year, if the total of all amounts charged to the account during the year were exactly offset by a bonus in the same amount credited to the account at the year end. In other words, if the debits and credits during the year were equal, this would be consistent with the financial statements.

[21] Mr. Martin's personal income tax returns for the years 1987, 1988 and 1989 were also put into evidence by the Respondent. They show that Mr. Martin received a bonus from GMO during 1987 of $316,000, he received no bonus in 1988, and he received a bonus of $463,050 in 1989, not from GMO but from 698042 Ontario Limited, a company wholly owned by the trust for his children. None of the witnesses testified that a bonus paid to Mr. Martin by any company other than GMO had become a credit in his GMO loan account. I was not referred to any evidentiary link between the bonus paid to the Appellant by 698042 Ontario Limited in 1989 and the Orion account, or a shareholder or director loan account in GMO; nor have I been able to find one. Typical of the vague and speculative nature of the Rossi's evidence on this issue is the following:

HIS HONOUR: Two things you might clear up for me just before Mr. Morris re-examines you.

I have got a note here that you said early in your evidence that Mr. Martin's credit balance in the shareholder loan account of Genesis would be large throughout this period of time. Did I get that correctly?

THE WITNESS: Well, I was basing that on -- I look at his credit -- if you look at the financial statement, you see in 1986 he has a large credit balance. And then if you look at the bonuses that he received in three years accompanying that, you've got over $1 million in bonuses. And I can't imagine -- and it could be that Mr. Martin's shareholder account isn't shown there. It might have been in the numbered company, but there could not have been a debit balance in those things. That's what I'm saying.

HIS HONOUR: But if he had a credit balance, the company owes him money.

THE WITNESS: Yes.

HIS HONOUR: How do you wipe that out by giving him a bonus, which would require the company to give him more money?

THE WITNESS: It may have been recorded in another company later. In that re-organization you might see that the shareholder account would be in another company.

HIS HONOUR: Well, of course, we can't see it because we don't have it; right?

THE WITNESS: Yes.[8]

[22] In giving his evidence as to the year-end entries which he said were made to charge half of the U.S. payments to Mr. Martin, Mr. Rossi, like Mr. Holt, was not testifying on the basis of what he knew to have happened, but rather on the basis of what he thought should have happened. His evidence is not borne out by the statements prepared under his supervision at the time, or by the T4 information slips attached to the Appellant's tax returns.

[23] The evidence of both Mr. Holt and Mr. Rossi on the crucial issue of the year-end entries by which they said the amounts making up the capital loss claims were charged to the Appellant's loan account was clearly based on their interpretation of the general ledger extracts for the Orion account, and not on any personal knowledge. In both cases it came more from speculation than from recollection. Conspicuously absent from the evidence for both years is the Appellant's loan account in the general ledger of GMO to which the amounts in question are said to have been debited.

[24] The only explanation for the failure to produce this highly relevant part of the general ledger is in the Appellant's own evidence. The following was his evidence-in-chief on the subject:

Q. And you heard earlier yesterday morning Mr. Holt tell us that the books and records for the corporation, for your group of companies, were destroyed, he said, in the ordinary process. When did you learn that the books and records of your group of companies had been destroyed?

A. When we -- I guess approximately a year ago. A year ago we came before this court and it was postponed 'til February. And in February, or it would be prior to February we started to prepare and that's when we found out that they had been destroyed. And then after February the date was extended. It was extended by Revenue Canada to today.

And then we went back and we tried to have them take another look, do whatever, was there a mistake, was there anything kept because it came as a surprise to us because their person, Margaret Riggins, had filed the original Objection and would -- we thought they would have kept them.

Now, we were no longer a client. We thought they would have kept the material, or at least let us know. But that's when we found out that material had been destroyed in their usual course.

Q. Okay. Where are the books and records for the Lloyd Martin group of companies now? We've been looking, and you've heard me speak, and we've been looking to extracts. Where are your original books of entry?

A. Unfortunately those companies, Ross Lloyd Martin, Genesis, the Canadian companies, were forced into receivership. I said that in my, you know, my examination, that they were forced into receivership.

Q. When?

A. This is back in '92.

Q. 1992. Okay.

A. '92 they were forced into receivership. And all the records were taken, everything was taken. Like it was just an immediate come in and take everything, and that was it.

Q. Did you contact the receiver in an effort to locate or obtain ---

A. Yes.

Q. I was just going to finish, obtain the books?

A. I'm sorry. I -- we searched high and low for every piece of information we can get. And we contacted the receiver, and the receiver said the records are no longer there.[9]

Mr. Holt had not testified that the books and records were destroyed. His evidence went only to the auditors' working papers.[10] The Appellant did not call the receiver to give evidence as to the missing records, nor offer any explanation for the failure to do so. Nor was any explanation given for the fact that the Appellant was able to produce the extracts from the ledger for each of 1988 and 1989 on which he relies so heavily, while not producing the parts which contain the loan account to which the amounts in question are said to have been debited. This is made all the more incredible by the Appellant’s Supplementary List of Documents filed June 7, 1999 which contains these two items in Schedule "A" as documents in the possession, control or power of the Appellant:

Yearly General Ledger Report of the Genesis Marketing Organization Limited together with working papers from January 1988 to December 1988.

...

Yearly General Ledger Report of The Genesis Marketing Organization Limited from January 1989 to December 1989.

These are not described as extracts, or otherwise indicated to be incomplete. No documents are listed in Schedule "B" as being documents of which the Appellant has knowledge but which are not in his possession, control or power.

[25] Mr. Martin in his evidence could add nothing to that of Mr. Holt and Mr. Rossi on the subject of the loan account. I have no doubt that his practice was to accept the advice he was given by Mr. Rossi and Mr. Hilborn in such matters, and then leave them to attend to the details of execution. I have already referred to the frailties in the evidence of Mr. Holt and Mr. Rossi, and to the apparent conflict between their evidence and the financial statements of GMO which were audited at the time. I find that the Appellant has failed to establish that the amounts which are claimed as a capital loss were charged to his loan account, or even that he had a loan account on the books of GMO at 1988 and 1989. The appeals fail as to issues 8 and 9.

[26] The appeals for the 1987 and 1988 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons. The appeal for the 1989 taxation year is dismissed. Success being divided, I make no order as to costs.

Signed at Ottawa, Canada, this 3rd day of November, 2000.

"E.A. Bowie"

J.T.C.C.

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