Wigmar Holdings Limited, Hans Hartwig and Diversified Holdings Limited v. Her Majesty the Queen, [1994] 2 CTC 2369, 94 DTC 1795

Beaubier J.T.C.C.:— These appeals pursuant to the General Procedure of this Court were tried together on common evidence at Victoria, British Columbia on April 5 to 9, inclusive, 1994.

The following matters were described in issue in the replies filed in these matters:

1. In paragraph 7 of the reply in Wigmar Holdings Ltd. v. The Queen:

17. The issues are:

(i) whether the fair market value of the goods and services provided by the appellant to Diversified Holdings Ltd. were not less than the cost of such goods and services to the appellant;

(ii) whether the appellant was related to Diversified Holdings Ltd. thus was deemed to deal at non-arms length with Diversified Holdings Ltd. whereby the Minister properly applied paragraph 69(1)(b) and section 251 in assessing the appellant;

[Admitted at trial.]

(iii) whether the expenses claimed by the appellant in the appellant's 1985 and 1986 taxation years as set out in paragraph 6 of the notice of appeal were incurred to produce income from the appellant's business or property;

(iv) whether the Minister of National Revenue properly applied the small business deduction in accordance with the provisions of the Income Tax Act, considering other corporations related to the appellant.

2. In paragraph 4 of the reply in Hartwig v. The Queen:

4. He submits that the issues to be decided are as follows:

(a) whether the amounts on account of the expenses which were charged to Diversified Holdings Ltd. and which that company claimed as business expenses, in respect of the K-2 Ranch in the appellant’s 1984 and 1986 taxation years were expenses that were personal to the appellant, and if so, whether they were benefits conferred on the appellant qua shareholder of Diversified Holdings Ltd., and thus properly fell to be included in computing his income for those years pursuant to subsection 15(1) of the Income Tax Act,

(b) whether the ranch house of the said K-2 Ranch that was owned by Diversified Holdings Ltd., was occupied and used by the appellant for his personal purposes, and if so, whether amounts based on the capital cost thereof, as calculated by the Minister of National Revenue, properly fell to be included in computing the appellant's income for the 1984 and 1986 taxation years as benefits conferred on the appellant qua shareholder of Diversified Holdings Ltd., within the meaning of subsection 15(1) of the Income Tax Act,

(c) whether the said Cadillac automobiles that were owned by Diversified Holdings Ltd. were made available by it to the appellant’s use qua shareholder, and if so, whether amounts based on the capital cost of the said automobiles, as calculated by the Minister of National Revenue, properly fell to be included in computing the appellant's income for the 1984, 1985 and 1986 taxation years as benefits conferred on the appellant qua shareholder of Diversified Holdings Ltd., within the meaning of subsections 15(1) and (5) of the Income Tax Act,

(d) whether the said amounts charged by the appellant on Visa cards and paid by Diversified Holdings Ltd. and for which the appellant did not reimburse that company were personal to the appellant, and if so, whether they fell to be included in computing the appellant's income for the 1984 and 1986 taxation years as benefits conferred on him qua shareholder of Diversified Holdings Ltd., within the meaning of subsection 15(1) of the Income Tax Act,

(e) whether the expenses, as set out in Appendix "A" hereto, which were paid by Diversified Holdings Ltd. and for which the appellant did not reimburse that company, were personal to the appellant, and if so, whether they properly fell to be included in computing his income for the 1984, 1985 and 1986 taxation years as benefits conferred on the appellant qua shareholder of Diversified Holdings Ltd., within the meaning of subsection 15(1) of the Income Tax Act,

[Admitted, parties settled before trial.]

(f) whether by failing to disclose the said shareholder benefits consisting of the said personal expenses, when filing his income tax returns for the 1984, 1985 and 1986 taxation years, and to include the same in computing his income for those years, the appellant knowingly or under circumstances amounting to gross negligence in the carrying out of his duty to file full and correct income tax returns and to disclose therein his income from all sources made, participated in, assented to or acquiesced in making, false statements or omissions in his said returns, and if so, whether he thereby became liable to pay the penalties for which the appellant was reassessed for those years, and

(g) whether in filing his income tax returns for the 1985 taxation year the appellant, by omitting to include any of the said shareholder benefits in computing his income for that year the appellant made a misrepresentation that was attributable to his neglect, carelessness or wilful default, within the meaning of subparagraph 152(4)(a)(i) of the Income Tax Act, so as toentitle the Minister of National Revenue to reassess the appellant for tax and penalties for that year more than three years from the day of the mailing of the notice of the original assessment for that year.

3. In paragraph 20 of the Reply in Diversified Holdings Ltd. v. the Queen:

20. He submits that the issues to be decided in this appeal are as follows:

(a) whether in providing goods and services to the appellant having a value of not less than $561,125 for $245,000 Wigmar conferred a benefit on the appellant in the amount of the difference between the said amounts and if so, whether the said benefit fell to be included in computing the appellant’s income for its 1984 taxation year pursuant to paragraph 245(2)(a) of the Income Tax Act,

(b) whether the said amounts which were claimed by the appellant, but were disallowed by the Minister of National Revenue, as expenses in computing the appellant’s income for its 1984, 1985 and 1986 taxation years were paid or incurred by the appellant for the purpose of gaining or producing income from a business or property of the appellant, within the meaning of paragraph 18(l)(a) of the Income Tax Act, or, if they were so paid or incurred, whether they were reasonable, within the meaning of section 67 of the Income Tax Act,

(c) whether in computing its income tax for its 1985 taxation year under Part I of the Income Tax Act the appellant was entitled to deduct any amount on account of a scientific research tax credit for that year, within the meaning of paragraph 127.3(l)(a) of the Income Tax Act,

(d) whether in computing its taxable income for its 1986 taxation year:

(i) the appellant was prevented from deducting 860 Holdings Ltd.'s 1982 noncapital losses by virtue of:

(1) the operation of subsection 80(1) of the Income Tax Act,

(2) the operation of subsections 80(2) and 80(1) of the Income Tax Act,

(3) the operation of subparagraph 111 (5)(a)(i) and subsection 87 (2.1) of the Income Tax Act, or alternatively,Income Tax Act and whether as a result thereof the tax payable by the appellant for its 1986 taxation year was not less than the amount assessed by the Minister of National Revenue, or in the further alternative,

(iii) the appellant was prevented from deducting any amount on account of any 1985 noncapital losses of 860 Holdings Ltd. by virtue of tne operation of subsection 245(2) of the Income Tax Act and whether as a result thereof the tax payable by the appellant for its 1986 taxation year was not less than the amount assessed by the Minister of National Revenue, and

(e) whether the appellant was, pursuant to subsection 163(2) of the Income Tax Act, liable to pay the penalties for which the Minister of National Revenue assessed the appellant for its 1984, 1985 and 1986 taxation years.

The appellants called as witnesses Gerald Hartwig, Hans Hartwig and Kelly Bennett. The Respondent did not call any witnesses.

The appellants admitted that Wigmar Holdings Ltd. ("WH") and Diversified Holdings Ltd. ("DH") are related corporations.

Gerald Hartwig is the son of Hans Hartwig, the stepson of Hans' wife and is 37 years old. He is the president of WH which at the time of trial was owned by Brent Equipment Rentals Ltd., a corporation owned by Gerald Hartwig. At all material times WH was in the construction business and had a number of substantial contracts. DH's shares are owned by Hans Hartwig's wife, all his children except Gerald and by Gerald's children. DH is an operator of farms and is a developer of real property.

Gerald and Hans’ relationship in 1977 resulted in Gerald suing and obtaining judgment against one of Hans’ corporations in small claims court. Hans testified that in the course of raising his family all of his sons ran away from home at one time or another.

WH's shares were owned entirely by Brent Equipment Rentals Ltd. at all times material to these actions. Hans Hartwig owned 20 per cent of the shares of Brent Equipment Rentals Ltd. until December of 1984 at which time he transferred that 20 per cent to Gerald Hartwig who thereafter owned all of the shares of Brent Equipment Rentals Ltd. During the years in question and since that time both WH and DH have shared office space in Victoria where Gerald and Hans have resided during all of the years in question.

A contract respecting DH's K2 Ranch is the subject matter of all the issues in the reply of Wigmar Holdings Ltd. v. The Queen and issues 20(a) and (b) in the reply in Diversified Holdings Ltd. v. The Queen. The facts respecting these issues are as follows:

In 1984 DH asked WH to repair a house, to build a house and to repair and improve other structures and a roadway on its K2Ranch near Invermere, B.C. several hundred kilometres east of Victoria near the Alberta border in the Rocky Mountains. The K2 Ranch consists of 9,100 acres of deeded land on which DH conducts a cattle, logging and Christmas tree farm. Gerald Hartwig only visited the K2 Ranch once during the construction in question. He has not visited the K2 Ranch since.

Gerald Hartwig stated that a written construction contract was signed by WH and DH for the job on a British Columbia Construction Association form with schedules attached. He also stated that the contract and WH's 1984, 1985 and 1986 files and papers were stolen from WH by Mr. Calderone and that similar papers for the same years were stolen by Sandy Pust from DH and given to Revenue Canada. This was confirmed by Hans Hartwig. As a result, none of the appellants have a copy of this contract. Gerald Hartwig stated that WH still hasn't received back all of the stolen files which he believes Mr. Calderone delivered into the possession of Revenue Canada. He also stated that at times Revenue Canada officials have denied possession of the stolen files and at other times have admitted possession or have presented WH with some of the stolen documents in the course of these proceedings. Revenue Canada officials only admit that Revenue Canada received photocopies of some of the documents alleged stolen.

The original contract is alleged by the appellants to have been for $245,000 and the final cost assessed by revenue Canada is $561,125. DH claims that it paid an additional $25,000 for a total paid of $270,000 for the work done. Gerald also disputed $39,000 in the total Revenue Canada cost figure of $561,125 as being related to plumbing fixtures for the "I.E.C. contract". The Court believes his testimony respecting this and finds that these were for the "I.E.C. contract". Therefore, the proper cost number to be assessed is $561,125—$39,000 =

$522,125.

Dominic Calderone had purchasing, hiring and subcontracting power as an employee of WH for the K2 Ranch contract. Paul Argust was the resident foreman on the job. Gerald Hartwig was involved in substantial WH contracts elsewhere in 1984. In the spring of 1984 WH sent Dominic Calderone to the K2 Ranch to discuss the proposed DH contract. There he met Hans Hartwig and Kelly Bennett, the ranch manager on K2. It was agreed that WH would construct a new house (Marius’ house), repair and improve Hans Hartwig’s house, put dormers on the manager's house, convert a log blacksmith shop to a calving barn, build a cooler for freshly killed buffalo and cattle, repair a swimming pool, build a mausoleum for Hans and Mrs. Hartwig and attend to various other jobs. All of the houses, buildings, and premises on which the construction would occur were owned by DH. Hans Hartwig is the president and operating officer of DH.

Kelly Bennett did not attend the entire meeting, but he drove Dominic Calderone to the airline terminal at Cranbrook after the meeting. During the drive Dominic told Kelly that Hanshad quoted a budget of $250,000 for the work. Setting a budget limit is exactly the way Hans controlled Kelly's management of the K2 Ranch. Kelly and Dominic discussed Kelly’s ideas respecting the cooler and the calving barn and local trades people Kelly knew. Dominic told Kelly to tell Dominic what he wanted and Dominic would make sure he had it. Kelly said Dominic told him, "The old man has lots of money — let's have fun spending it.”

The conflicts and disorder that followed as WH carried out the work from the late summer of 1984 until about February 1985 resulted in Kelly Bennett and Hans Hartwig quarrelling in the fall of 1984 whereupon Kelly quit in front of the hired hands. After training Marius Hartwig to manage the ranch Kelly and his family left on March 1, 1985. Since then he has worked elsewhere. Kelly was frank and straightforward in giving evidence. He has no interest in this matter and his testimony was not refuted on cross examination. As a result his testimony is accepted in its entirety.

Mr. Bennett testified that Dominic Calderone and Paul, the foreman on the job for WH, did not prepare plans; did sloppy, inefficient and wasteful work; and mismanaged the job throughout. Mr. Bennett gave numerous startling examples of this. These included tearing the walls of Marius’ house down at least twice and burning them in the ranch dump; building the wrong roof on Marius' house and replacing it; putting a basement in that house that wasn't wanted; building an incorrect staircase in Hans' house at great expense; designing and building the meat cooler ignorantly so that it is unusable; pouring substantial excess concrete in the calving barn and setting the building and doors so it is unsatisfactory, building an unwanted pool bubble and many other examples.

The evidence is that Hans was at the K2 Ranch off and on for about one third of the time throughout this construction, but the K2 Ranch is more than 12 square miles in size, DH had at least one other ranch nearby and Hans directs other substantial businesses. The Crown argues that Hans should have interfered. However Hans had his own businesses to run. Moreover the waste described by Kelly profited no one so it was not to DH's advantage or to its profit. Either Dominic Calderone thought WH could get away with something and over charge DH, or the whole thing was what Kelly Bennett described — a mismanaged mess. Perhaps it was both.

Atone point when Hans was in Victoria, Kelly Bennett phones him from the K2 Ranch and told him of the problems and Hans testified that he asked Gerald to fire Paul Argust, the foreman. Gerald did not. Hans testified that he had a fixed price contract and the mismanagement and waste was WH's problem. He also pointed out that there is only so much a father can do with a son.

Hans testified that eventually DH and WH signed a contractfor the entire job for $245,000 as was originally agreed by them. This corresponds with Kelly Bennett's description of the $250,000 budget which Hans imposed on Dominic Calderone in the first meeting. It is also confirmed by the fact that if Hans had actually been paying for what went on, the Court has no doubt he would have stepped in, taken over and put a stop to it. Politely described, Hans is a determined, strong and intelligent man and he is not a man who would pay without receiving full value in return.

Hans Hartwig testified that DH paid WH $25,000 for extras in satisfaction of its claim and described some claims such as one relating to the mausoleum where he was remiss and allowed costs to occur which were due to his own mistake.

The Court finds on the evidence before it that DH paid WH a a total of $270,000 pursuant to the contract and extras thereon in full satisfaction for the work WH did on the K2 Ranch. It also finds that WH received $270,000 for the work done on the K2 Ranch; the Court finds on the evidence before it that payment of the sum of $270,000 to WH by DH was a reasonable payment for the work done. It is noted that the $25,000 sum that DH paid to WH for extras is not shown by WH in its K2 Ranch receipts; the Court finds that this is because Gerald Hartwig did not want to take the $25,000 in satisfaction for the extras done on the K2 Ranch and therefore it was not recorded properly in WH's books. Gerald wants more. The Court also finds on the evidence before it that WH spent $522,125 on the work done on K2 Ranch. Finally the Court finds that much of what was spent was on wasted labour, material and services and, in addition, that DH did not ask for various construction that was done by WH. It is clear on the evidence that Paul was not a good job superintendent and it appears that either Dominic Calderone or WH expected that WH could overbill DH. It wa snot the case. Thus, the Court finds as a fact that WH entered into the contract with DH in respect to the K2 Ranch for the purposes of gaining income and that the expenses incurred in respect to that contract are deductible. In respect to DH's claim in paragraph 20(b) of its notice of appeal that the expenditure of $270,000 constituted deductible expenses, the Court finds that the $270,000 was spent for capital improvements to the K2 Ranch.

The Court finds in respect to subsection 245(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") that DH did not receive any benefit in excess of the $270,000 paid to WH for the work done, and that WH received fair market value for the work done consisting of the sum of $270,000. Costly, wasteful and useless construction work, inadequate or wrongly constructed buildings, fixtures, and a roadway, do not constitute a benefit. In the circumstances and based upon the evidence before the Court, WH received fair market value for the goods and services rendered to DH.

The argument of the parties did not include issue 7(iv) described in paragraph 7 of the reply of Wigmar Holdings Ltd. v.The Queen. In the event that there are any further findings required of the Court in respect to issue 7(iv), the parties are given leave to apply to the Court for such within 30 days from the date of this judgment.

In respect to issue 20(c) described in the reply in Diversified Holdings Ltd. v. The Queen, the Court finds:

The Minister's assumptions in paragraph 8 of the Reply in Diversified Holdings Ltd. v. The Queen are:

8. He does not admit paragraph 13 of the notice of appeal and says that in assessing the appellant for income tax for the 1985 taxation year under Part I of the Income Tax Act the Minister of National Revenue assumed:

(a) that in December, 1985, Zodiac Marine Ltd., a wholly-owned subsidiary of the appellant, issued a debenture to the appellant in the amount of $250,000, purportedly to finance scientific research activities to be carried on by Zodiac Marine Ltd.,

(b) that Zodiac Marine Ltd. failed

(i) to file with the Minister of National Revenue the form required by subsection 194(4) of the Income Tax Act within the time prescribed by subsection 194 (4) therein, i.e. by January 31, 1986, in order to effect a designation, for the purposes of Part VIII and Part I of the Income Tax Act, of an amount in respect of the said debenture, and

(ii) to file with the Minister of National Revenue the information return relating to the scientific research tax credit in respect of the said debenture, as prescribed by subsection 226(2) of the Regulations under the Income Tax Act within the time prescribed therefor by subsection 205(1) of the Regulations under the Income Tax Act, i.e. by February 28, 1986,

(c) that on or about March 3, 1987, Zodiac Marine Ltd. purported to make a late designation of an amount in respect of the said debenture, and

(d) that Zodiac Marine Ltd. failed to pay the penalty required by subsection 194 (8) of

the Income Tax Act in respect of such late designation, with the following results:

(1) there was no designation of an amount for the purposes of Part VIII and Part I of the Income Tax Act, within the meaning of subsection 194(4) of the Income Tax Act,

(2) there was no late designation of such an amount, within the requirements of subsection 194(7) of the Income Tax Act, and

(3) there was no scientific research tax credit available to theappellant in respect of the said debenture, within the meaning of paragraphs 127.3 (l)(a) and 127.3 (2)(a) of the Income Tax Act.

Hans Hartwig was the president of both Zodiac Marine Ltd. ("Zodiac") and DH at all times material to the events respecting this claim. Zodiac's chartered accountants were also DH's chartered accountants throughout the material times. This issue arises as the result of DH advancing $250,000 to Zodiac in December of 1985 by a loan secured by a debenture to obtain a scientific research tax credit of $125,000. Revenue Canada Form T2113 respecting this transaction (Exhibit R-60) was dated February 19, 1987 and was filed on March 16, 1987. On February 19, 1987 Zodiac also paid the sum of $6,000 on account of the penalty due pursuant to subsections 194(7) and (8) of the Income Tax Act.

On April 16, 1987 Zodiac's accountants provided Revenue Canada with a copy of Form T2114 (Exhibit R-24, pp. 277-279). This is the “scientific research tax credit statement" which, in "Box E", describes the "amount designated under section 194 of the Income Tax Act". It was received by Revenue Canada in April of 1987.

Prior to this, on August 22, 1986, Revenue Canada had written to zodiac at its address shown on Zodiac's income tax return and requested a copy of Forms T2013 and T2114 (Exhibit R-47). This consisted of Revenue Canada printed form TL3 CORP referring to Form T2013 "Agreement among Associated Corporations", the box for which was "X"d, and Revenue Canada Form TL1 CORP which contained a hand printed request for Form T2114. These forms were not received by Zodiac. On November 17, 1986 Revenue Canada wrote a second request to Zodiac at its address shown on its income tax return, enclosing a copy of Exhibit R-47, and asked for a reply within 30 days (Exhibit R-49). This letter was not received by Zodiac. Exhibit R-24 pp. 277-279 from Zodiac's accountants to Revenue Canada dated April 16, 1987 refers to the enclosures as enclosures of Forms T-2114 and T-2013. This was referred to as a "typo error" during Hans Hartwig's cross-examination; it was not. The evidence before the Court is clear that Form T2113 was filed on March 16, 1987 and that Revenue Canada did not give any notice to Zodiac that it had not made a designation. The result is that the chartered accountants appear to have filed exactly what they were asked for.

The first paragraph of subsection 194(4) of the Income Tax Act describes the time for filing Form T2113, the “designation which Zodiac filed on March 16, 1987” as follows:

194(4) Corporation may designate amount.— Every taxable Canadian corporation may, by filing a prescribed form with the Minister at any time on or before the last day of the month immediately following a month in which it issued a share or debtobligation or

granted a right under a scientific research and experimental development financing contract (other than a share of debt obligation issued or a right grated before October 1983, or a share in respect of which the corporation has, on or before that day, designated an amount under subsection 192(4)) designate, for the purposes of this Part and Part I, an amount in respect of that share, debt obligation or right not exceeding the amount by which

(a) the amount of the consideration for which it was issued or granted, as the case may be. . . .

[Emphasis added.]

These timing provisions were not adhered to in the instant case.

Nor did Zodiac file with the Minister a prescribed information return, namely Form 12114, within the time that it would have been so required to file Form T2114 if Form T2113 had been filed on time.

The various arguments on each side of the timing question in respect to section 194 have been dealt with by the Tax Court of Canada in United Equities Ltd. v. M.N.R., [1989] 2 C.T.C. 2171, 89 D.T.C. 391, and by the Federal Court-Trial Division in United Equities Ltd. v. Canada, [1992] 2 C.T.C. 213, 92 D.T.C. 6572. The decision of the Federal Court Trial Division in United Equities Limited v. Her Majesty the Queen is under appeal. Judge Sarchuk of this Court has also reviewed timing requirements in respect to section 192 in 598606 Ontario Ltd. v. M.N.R., [1993] 1 C.T.C. 2001, 93 D.T.C. 142 (T.C.C.).

Suffice it to say that the Court finds that the plain meaning of the Act invokes strict time requirements. By that means the taxpayer receives a form of relief or benefit. In practice, whether that of taxpayers, or of solicitors or accountants in private practice, or of the officers of the Minister of National Revenue, there are obvious difficulties that would ensue to all concerned if those time limits were not adhered to as the result of the multitude of parties that are affected by the filings required in section 194 and of the timing of those filings which are required to take advantage of the income tax relief granted. The reasons for the time limits are apparent and are intended for the benefit of taxpayers.

On the basis of the plain meaning of the words contained in subsection 194(4), the Court does not allow this claim by the appellant.

In respect to subparagraph 20(d) of the reply of Diversified Holdings Ltd. v. The Queen, paragraph 16 of the reply reads as follows:

16. In the further alternative, he says that:

(a) 860 Holdings Ltd.’s business came to an end upon the said sale of its real property in its taxation year ended on October 31, 1985,

(b) all the shares of 860 Holdings Ltd., and therefore its control, were acquired by Diversified Holdings in 860 Holdings Ltd.'s taxation year ended on October 31, 1985,

and

(c) 860 Holdings Ltd.’s business was therefore thereafter not carried on by Diversified Holdings or the appellant,

with the result that the deduction of 860 Holdings Ltd.'s 1982 noncapital loss by the appellant in computing its 1986 taxation year was prohibited by subparagraph 111(5)(a)(i) and subsection 87(2.1) of the Income Tax Act.

Exhibit A-128 was filed by the appellant as an exhibit because in the appellant's view this résumé of events prepared by Revenue Canada contained the best description of the time sequence of the transactions respecting this claim of DH. Exhibit A-128 follows in photocopy form [not reproduced].

The Crown argued that when the mortgage was discharged, the debt was settled or extinguished; however the Court finds that the debt continued despite the discharge of the mortgage which merely represented security on account of the debt. In the alternative, the Crown argued that if the indebtedness remained owing by 860 after the discharge, then it was owing to DH because DH provided the funding for and directed the transactions between 173235 B.C. Ltd., Central Trust Company, and 860, thus 173235 played no substantive part in those transactions; however the Court finds that in fact the transactions were real and were substantial and, so far as they are in evidence before the Court, they were documented to accord with the facts of the situation. While the transactions were undoubtedly planned, DH did not direct them. Indeed, deals had to be made, such as the one with Central Trust. Therefore 173235 was not an agent or nominee for DH and the indebtedness was not deemed to be extinguished by virtue of subsection 80(2) of the Income Tax Act.

As a further alternative the Crown argued that as a result of the transactions and events, Central Trust Company acquired the beneficial ownership of the property from 860 in consequence of 860's failure to pay all or any part of the amounts owing on the mortgage; however the property was sold and was not foreclosed. Thus the Court does not accept this argument.

The Crown further argued in paragraph 15 that:

(a) 173235 B.C. Ltd. and 860 Holdings Ltd. were not dealing with each other at arm’s length in fact, within the meaning of paragraph 251 (l)(b) of the Income Tax Act, in that they were not acting in their commercial self-interest, but rather on thedirection of Diversified Holdings or the said Hans Hartwig,

(b) it was not intended that 173235 B.C. Ltd. would enforce or collect such indebtedness, and it did not in fact attempt to enforce or collect such indebtedness, and 173235 B.C. Ltd. did in fact forgive the indebtedness, amounting to $1,140,061, upon the discharge of the said mortgage,

(c) 173235 B.C. Ltd., Diversified holdings or Hans Hartwig thereby conferred a benefit on 860 Holdings Ltd., and hence on the appellant, and were deemed to have made a payment to 860 Holdings Ltd., and hence to the appellant, equal to the amount of that benefit, within the meaning of subsection 245 (2) of the Income Tax Act. .. .

In cross-examination, Hans Hartwig, president of 173235 B.C. Ltd., stated that the indebtedness might yet be enforced even though it is outstanding, there is no interest on it, and there has been no payment on the indebtedness. (There is no evidence as to whether or not there has been any written acknowledgment of the indebtedness between the parties.) Mr. Hartwig stated that the debt might still be collected. Crown counsel pointed out what he considers to be the serious tax consequences in the event of the collection of the debt and thus, the unlikelihood of collection. However the Income Tax Act has been known to change and serious tax consequences of one day may very well prove to be benefits of another day. As a result, the Court finds that the debt might very well be collected some day depending on the circumstances of each of the parties and, perhaps, the tax consequences of the collection.

A further alternative argument of the Crown is that, pursuant to subparagraph 111 (5)(a)(i) and subsection 87(2.1) of the Income Tax Act, 860’s business came to an end upon the sale of its real property in its taxation year ended October 31, 1985 and that business was not thereafter carried on. The evidence is that DH is in the business of developing property, selling property, and renting property. 860 was, at the time of the loss, in the business of developing a MURB and, when that could not be carried out successfully, it was in the business of developing the property for commercial purposes. It remained registered as a corporation, litigated the foreclosure, dealt with Central Trust, negotiated with parties respecting the sale of property and with Canada Trust respecting the discharge of the mortgage security. 860 directed its efforts to keep the company in business. It should be noted that the transactions prior to the end of October 1984 resulted in a reduction of the corporate debt by a substantial sum. The hiatus of the short year after October 31, 1984 is for a period of only 60 days. For a corporation in the development business, this is not a long period of time for matters to be in some abeyance. Thus, the Court finds that the business of 860 was substantially the same both before and after the amalgamation with DH, and so far as there is evidence before the Court, DH has always carried on the business of developingproperty, selling property and renting property. 860’s business did not come to an end in the particular year in which the loss was claimed by DH.

Therefore DH's appeal is allowed in respect to this issue.

Issue 20(b) contained in the reply of Diversified Holdings Ltd. v. The Queen refers to expenses claimed by DH and whether they were valid under paragraph 18(l)(a) or reasonable within section 67 of the Income Tax Act. In respect to t is matter, the Court finds:

With respect to issues 4(a) and (d) described in the reply contained in Hartwig v. The Queen, the Court notes that the evidence is that expenses deducted by DH (other than those described in Appendix "A" to the reply to the notice of appeal of Hartwig v. The Queen, which were admitted by the appellant before trial) were not in any way verified by Hans Hartwig by means of annotations made simultaneous with the expenses incurred despite the fact that he was audited respecting similar expenses twice in previous years. Moreover in the course of cross examination Hans Hartwig, in response to queries concerning his failure to diarize his expenses and whether or not he had a problem with his expenses replied, with a self-satisfied grin on his face, "I had a problem whenever I got audited.” This reply, and the manner in which it was given, conveyed to the Court Mr. Hartwig’s cavalier attitude towards these claimed expenses and cast doubt on the truth of his subsequent written recollections respecting his unsubstantiated claims for business expense deductions and on the nature of the alleged expenses themselves. Some of these later recollections referred to expenses claimed for staying at a hotel in Invermere while work was done at the ranch house. The evidence presented by Mr. Hartwig to the Court respecting these expenses is not satisfactory. Given his history of previous audits, the fact that despite those audits he did not make simultaneous notes respecting the expenses claimed, and his attitude towards claims for expenses, the Court does not find his evidence credible. The appeals respecting these items are dismissed in their entirety.

The expenses alleged as personal in respect to the K2 Ranch for the years described were a flat percentage of 25 per cent in respect to the K2 Ranch, grouped as follows:

Upon reviewing some of the detail, the Court notes that 25 per cent of the insurance charges does not adequately reflect the proper insurance premium on the house. The ranch house occupied by the Hans Hartwig family would require substantially more than 25 per cent of the heating costs of the entire ranch. Likely almost all of the property taxes would relate to the ranchland. Similar comments either way can be made in respect to the other itemized totals. Based upon the assumptions and the unsatisfactory evidence presented by the appellant respecting this claim, the Court finds that the total amounts of expenses attributed as personal to Hans Hartwig in 1984 and 1986 are correct and that those sums are not deductible to DH.

In respect to subparagraph 4(b) of the reply in Hartwig v. The Queen:

The Court finds that the ranch house at the K2 Ranch was a handsome, luxurious, very large ranch house, with an adjoining swimming pool and tennis courts. By comparison the house occupied by Kelly Bennett and his family was an old and rather ordinary farm house with "bunk house" quarters on the second floor for the ranch hands. DH built a handsome home for Marius Hartwig to occupy. If Hans Hartwig required accommodation solely for business purposes, he could have stayed in the bunk house or in some accommodation which was substantially less ostentatious than the ranch house and allocated himself a small office space. The Court finds that the ranch house at the K2 Ranch was occupied and used by the appellant for his personal purposes. The ranch house was always available for the use of Hans Hartwig and his family. Kelly Bennett testified that he would have asked permission to use the swimming pool. There is no evidence before the Court that any members of the ranch staff except Hans and Marius Hartwig ever used the ranch house for residential purposes. Moreover there is no detailed evidence of any kind indicating that any person other than a member of the Hartwig family ever used the ranch house for accommodation. Based upon the evidence as to the nature of the ranch house itself, the swimming pool and the tennis courts, the Court finds that the amounts determined by the Minister of National Revenue as attributable to personal use are correct. Given the size and quality of the ranch house premises, the amounts assessed by the Minister of National Revenue, whether they be regarded as rental or as a reflection of capital investment, are reasonable, and were not upset by the appellant's evidence. The appeal respecting this matter is dismissed.

Subparagraph 4(c) of the reply in Hartwig v. The Queen was abandoned by counsel for Hans Hartwig in the course argument. Therefore the appeal of Hans Hartwig in respect to this matter is dismissed.

Given the review of the evidence in respect to DH and Hans Hartwig and the expenses claimed by DH as being deductible, the Court finds that the assessments of DH respecting the deduction of these expenses described in paragraph 4(d) in the reply inHartwig v. The Queen and described in paragraph 20(b) in the reply respecting Diversified Holdings Ltd. v. The Queen are confirmed. The appeals of both Hans Hartwig and DH Ltd. respecting the assessments relating to personal expenses assessed on Hans Hartwig and denied to Diversified Holdings Ltd. are denied.

In respect to subparagraph 4(f) of the reply in Hartwig v. The Queen:

The Court has already described its findings in respect to previous audits by Revenue Canada of Hans Hartwig concerning personal expenses alleged as expenses of DH and concerning the attitude of Hans Hartwig as to these expenses. The appellant is a sophisticated businessman. He has previously been audited on two occasions respecting personal expenses. He is advised by chartered accountants and lawyers. Given his knowledge and experience, and his obvious attitude towards these matters demonstrated in Court, which in the eyes of the Court bordered on the contemptuous, the Court finds that the appellant knowingly or under circumstances amounting to gross negligence failed in the carrying out of his duty to file full and correct income tax returns and to disclose therein his income from all sources and that he made, participated in, assented to or acquiesced in making, false statements or omissions in his said returns, and he thereby became liable to pay the penalties for which he was reassessed for those years. The appellant’s appeal in respect to this assessment is dismissed.

In respect to subparagraph 4(g) of the reply in Hartwig v. The Queen:

These penalties relate to the charges which Hans Hartwig admits were personal, to life insurance premiums that were personal, to air fare for an individual which air fare was personal to Hans Hartwig and to various monies paid out to Hans Hartwig and minor, miscellaneous amounts. All of these were admitted by Hans Hartwig. For the year 1985, the Minister of National Revenue reopened his assessments on the basis of subparagraph 152(4)(a)(i) of the Income Tax Act alleging Hans Hartwig’s neglect, carelessness, or wilful default. Given Mr. Hartwig's attitude towards the expenses claimed as already described, the obvious personal satisfaction expressed on his fact during the course of that quote, and the fact that he was audited twice before and the volume and variety of shareholder benefits which are the subject matter of the assessment in question for 1985, the Court finds that for the 1985 taxation year the appellant, in filing his income tax returns omitted to include the said shareholder benefits in computing his income for that year and made a misrepresentation that was attributable to his neglect, carelessness of wilful default, within the meaning of subparagraph 152(4)(a)(i) of the Income Tax Act, so as to entitle the Minister of National Revenue to reassess the appellant for tax and penalties for that year more than threeyears from the day of the mailing of the notice of the original assessment for that year.

In respect to subparagraph 20(e) of the reply in Hartwig v. The Queen the Court finds:

These penalties were assessed by the Minister of National Revenue in respect to expenditures deducted by DH on account of personal expenditures of Hans Hartwig, which have already been found subject to penalty on the part of Hans Hartwig. In view of the fact that Hans Hartwig was also the president of DH, was its operating officer at the time in question, and was fully cognizant of these expenditures, of the fact that Hans Hartwig made them, and of the purposes of these expenditures, the Court confirms the assessment of these penalties pursuant to subsection 163(2) of the Income Tax Act based upon the evidence already described. The levying of penalties pursuant to the British Columbia Income Tax Act, R.S.B.C. 1979, c. 190 is not within the jurisdiction of the Tax Court of Canada, therefore the assessment of those penalties is not dealt with by this Court.

Wigmar Holdings Ltd. is awarded its party and party costs on the basis that the Wigmar Holdings Ltd. matter constituted 2 /z days of hearing. The Crown is awarded party and party costs in respect to the appeal of Hans Hartwig on the basis that this matter constituted five days of hearing. No costs are awarded in respect to the appeal of Diversified Holdings Ltd.

Order accordingly.