O’Connor,
T.C.C.J.:—These
matters
were
heard
together
and
on
common
evidence
by
consent
of
the
parties
in
Toronto,
Ontario,
on
August
25,
1993.
They
are
appeals
pursuant
to
the
informal
procedure
of
this
Court
and
concern
the
appellants’
1987
and
1988
taxation
years.
Facts
The
appellants,
who
are
husband
and
wife,
allegedly
operated
in
partnership
an
Amway
distributorship
from
the
basement
of
their
home
in
Scarborough,
Ontario
during
the
years
1987
and
1988.
The
gross
sales,
gross
profit
(gross
sales
less
cost
of
goods
sold),
the
total
expenses
claimed
for
the
partnership
and
losses
were
as
follows:
|
1987
|
1988
|
|
Gross
Sales
|
$3,355.00
|
$1,200
|
|
Gross
Profit
|
905.00
|
212
|
|
Expenses
|
14,282.18
|
8,172
|
|
Losses
(Gross
Profit
|
($13,377.18)
|
($7,960)
|
|
less
Expenses)
|
|
The
appellants
each
deducted
from
other
income
$6,688.59
(1/2
of
$13,877.18)
in
1987
and
in
1988,
$3,980
for
Mr.
Galuego
and
$3,530
for
Mrs.
Galuego.
The
inconsistency
in
the
deduction
for
the
1988
returns
results
from
the
fact
that
Mr.
Galuego
included
in
expenses
a
sum
of
$450
for
capital
cost
allowance,
whereas
Mrs.
Galuego
did
not.
All
the
returns
were
prepared
by
accountants/advisers
allegedly
on
the
basis
of
vouchers,
receipts
and
other
data
furnished
by
the
appellants.
The
Minister
of
National
Revenue
(the"Minister")
disallowed
all
the
losses
and
imposed
penalties.
At
trial
it
was
revealed
that
penalties
assessed
on
Mr.
Galuego
had
been
waived
but
not
the
penalties
on
Mrs.
Galuego.
Issues
The
only
issues
are
whether
the
losses
have
been
properly
disallowed
and
whether
there
should
be
penalties.
Law
The
principal
applicable
provisions
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the"Act")
as
amended
for
the
1987
and
1988
years
are
subsection
9(2),
paragraphs
18(1)(b)
and
18(1)(h),
subsections
163(2)
and
230(1),
which
read:
9(2)
Subject
to
section
31,
a
taxpayer's
loss
for
a
taxation
year
from
a
business
or
property
is
the
amount
of
his
loss,
if
any,
for
the
taxation
year
from
that
source
computed
by
applying
the
provisions
of
this
Act
respecting
computation
of
income
from
that
source
mutatis
mutandis.
18(1)
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of
..
.
(b)
an
outlay,
loss
or
replacement
of
capital,
a
payment
on
account
of
capital
or
an
allowance
in
respect
of
depreciation,
obsolescence
or
depletion
except
as
expressly
permitted
by
this
Part;
(h)
personal
or
living
expenses
of
the
taxpayer,
other
than
travelling
expenses
incurred
by
the
taxpayer
while
away
from
home
in
the
course
of
carrying
on
his
business;
163(2)
Every
person
who,
knowingly,
or
under
circumstances
amounting
to
gross
negligence
in
the
carrying
out
of
any
duty
or
obligation
imposed
by
or
under
this
Act,
has
made
or
has
participated
in,
assented
to
or
acquiesced
in
the
making
of,
a
false
statement
or
omission
in
a
return,
form,
certificate,
statement
or
answer
(in
this
section
referred
to
as
a"return")
filed
or
made
in
respect
of
a
taxation
year
as
required
by
or
under
this
Act
or
a
regulation,
is
liable
to
a
penalty
of
the
greater
of
$100
and
50
per
cent
of
the
aggregate
of.
.
.
.
230(1)
Every
person
carrying
on
business
and
every
person
who
is
required,
by
or
pursuant
to
this
Act,
to
pay
or
collect
taxes
or
other
amounts
shall
keep
records
and
books
of
account
(including
an
annual
inventory
kept
in
prescribed
manner)
at
his
place
of
business
or
residence
in
Canada
or
at
such
other
place
as
may
be
designated
by
the
Minister,
in
such
form
and
containing
such
information
as
will
enable
the
taxes
payable
under
this
Act
or
the
taxes
or
other
amounts
that
should
have
been
deducted,
withheld
or
collected
to
be
determined.
Findings
At
trial
the
appellants
could
produce
no
sales
vouchers
or
receipts
and
the
auditor
for
Revenue
Canada,
Mr.
Ben
Ramerez,
testified
that
the
only
documents
produced
to
him
were
receipts
for
personal
items,
such
as
groceries,
prescription
drugs,
spirits
and
the
like.
Furthermore
the
respective
returns
for
the
appellants
show
considerable
inconsistencies.
Moreover
the
evidence
of
the
appellants
was
not
convincing
that
sales
were
actually
made
and
that
the
expenses
claimed
were
legitimate
business
expenses.
Finally
the
evidence
casts
considerable
doubt
as
to
whether
the
business
had
any
reasonable
expectation
of
profit.
For
the
foregoing
reasons
the
appeals
are
dismissed.
However,
there
shall
be
no
penalties
as
the
Court
did
not
find
that
the
conditions
of
subsection
163(2)
had
been
met.
Appeals
dismissed.
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