David L. Peters v. Her Majesty the Queen, [1993] 1 CTC 2628, 93 DTC 422

Beaubier, T.C.C.J.:—These matters were heard in Victoria, British Columbia, on September 29, 1992 and on February 9 and 10, 1993, jointly and on common evidence by consent. No. 90-3890(IT) is an appeal under the old procedure of this Court. No. 92-155(IT) is an appeal under the informal procedure of this Court.

On September 29, 1992 this matter began with one day's testimony from Mr. Peters. The original claim of the appellant, as more particularly described later, included a claim for $200,000 in deductions relating to an allowable business investment loss for 1988 and 1989. During his testimony on September 29, 1992, the appellant submitted various receipts totalling, according to his estimates, $95,000 respecting this claim. These receipts had not previously been submitted to the Minister of National Revenue and the matters were adjourned peremptorily until 9:30 a.m., February 9, 1993 in Victoria to allow the parties to review this claim. The Court also granted the appellant until December 10, 1992 to file amended appeals in these matters and in addition gave the respondent until January 20, 1993 to file amended replies. This was done and when proceedings commenced on February 9, 1993 the hearing followed the order of the amended appeals. This judgment will also follow the order of the amended appeals.

The appellant was the only witness. He is a chartered accountant who was admitted to his profession in British Columbia in 1969 and continued practising his profession at all times material to these actions.

The issues and the findings of the Court are as follows:

1984 1. (a) Fishing loss to be taken as $19,759. This has been accepted by Revenue Canada.

1985 2. (a) Fishing business loss, operating and terminal. This was not properly handled by Revenue Canada on appeal.

At the opening of trial on September 29, 1992 counsel for the Minister of National Revenue accepted the appellant’s position in respect to the loss alleged of $19,759 for 1984. The claim for 1985 was not accepted by the Minister of National Revenue.

Both of these alleged losses arise from the appellant's alleged ownership of the fishing vessel Dee-Jay. Exhibit A-27 is an agreement among three corporations to own the Dee-Jay dated June 27, 1979. The appellant filed a photocopy of a handwritten agreement between him and one of those corporations, Kispiox Enterprises Ltd. ("KEL"), as Exhibit A-15 purporting to transfer KEL's interest to the appellant. This agreement is dated September 21, 1979 and is in the handwriting of Mr. Peters. The purported transfer of KEL's interest in the Dee-Jay does not comply with paragraph 21 of Exhibit A-27 in that the other parties to Exhibit A-27 did not agree in writing to the transfer; no witness to Exhibit A-15’s signing testified.

Moreover there is no evidence that the transfer of interest alleged by the appellant was ever registered under personal property laws of the Province of British Columbia, for marine purposes, or in any other way with the usual public bodies. In particular, the Dee-Jay was the subject of litigation begun by the Canadian Imperial Bank of Commerce which eventually recovered it as security; so far as it is in evidence, that action does not show the appellant as owning any interest in the Dee-Jay. In these circumstances the appellants claim for 1985 is not allowed because there is no evidence which is acceptable to this Court that the appellant ever owned the Dee-Jay.

1984 1. (c) Expenses of Kispiox Contracting as per invoices presented to the court. This has been partly accepted by Revenue Canada.

This was a claim for the deduction of $53,996.89 in expenses which was not claimed in the appellant's 1984 income tax return. It was supported by two envelopes of invoices and various documents. The envelope filed as Exhibit A-4 consisted of 1983 invoices. The appellant states that these were not claimed by him in 1983; no accounting statements to support his 1983 deductions claimed were filed. The envelope filed as Exhibit A-2 consists of invoices and other documents, some dated 1985. No accounting statements to support any of these were filed. All of these were submitted after the audit by Revenue Canada. The onus as to these claims is on the appellant. The fact that he did not include these alleged expenses in the returns for the years in question weighs heavily against him. He bears the onus of proof. In the circumstances of this case and the testimony and documentation submitted throughout by the appellant, these claims are not accepted by this Court.

1984 1. (e) Additional rental expenses for Shelbourne Blvd. house including interest accrued on mortgage: $4,874.16

1985 2. (d) Additional expenses on Shelbourne Blvd. rental for rental for interest and other costs: $3,198.50.

These expenses were not claimed in the income tax returns in question in the years in which the income tax returns were filed. They were submitted much later. They were supported solely by a handwritten statement of the appellant and nothing else. In these circumstances the Court questions the credibility of the appellant's handwritten document and the claims are not allowed.

1984 1. (h) $1,000 Interest deduction if needed: $1,000 in interest.

The Minister of National Revenue's response to this claim is that the payment of interest alleged by the appellant was reported in the appellant's 1984 income tax return filed as Exhibit A-1. It was disallowed on two bases: First, it was not verified and still has not been verified by the appellant. Second, if it was paid, it was paid from a corporation which was not at arm's length to the appellant and therefore was disallowed pursuant to subsection 110.1(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The appellant produced no evidence of the payment of interest from the corporation in question and did not establish that the payor corporation, if there was a payment, was at arm's length to him. The appeal of the appellant is not allowed on this point.

1984 1. (i) Removal of penalties for gross negligence. This has been accepted by Revenue Canada.

1985 2. (k) Reversal of Penalties for gross negligence — this has been accepted by Revenue Canada.

These have been withdrawn by the Minister of National Revenue.

1984 1. (j) Business Investment Losses, if determined to have occurred in 1984: $105,284.41

The appellant alleges that he is entitled to allowable business investment losses of $103,851.20 in relation to a corporation called Seabird Timber Inc. which was incorporated in March or April of 1983. The sole written evidence supporting this claim is Exhibit A-39 which is a handwritten sheet prepared and filed by the appellant himself. The evidence is clear that Seabird Timber Inc. never completed a financial statement; never filed an income tax return; and never filed a corporate return at the Corporations Office of the Province of British Columbia. There is no evidence of any bank account that was ever owned or operated by Seabird Timber Inc. The appellant was the sole source of any information at all respecting Seabird Timber Inc. and any documents filed concerning it were prepared by him or were prepared on his instructions. The appellant's claim was first made in 1988.

Seabird Timber Inc. filed T4 slips on one occasion but no taxes were ever remitted by Seabird Timber Inc. and there is no evidence before this Court except the appellant's testimony that the alleged employees were ever paid. When the Minister of National Revenue commenced action against the appellant for unpaid remissions on account of director's liability, a conveniently dated resignation was sent to Revenue Canada. Seabird Timber Inc. was struck from the Corporate Register of British Columbia.

The appellant's evidence, such as it is in this matter, lacks any substantiation whatsoever and is incredible. The claim is not allowed.

The appellant also alleges that he is entitled to allowable business investment losses of $1,433.21 respecting the corporation KEL. The evidence supporting this claim is a photocopy of a handwritten sheet again prepared solely in the handwriting of the appellant. Attached to Exhibit A-40 and part of it are two photocopies of statements in the handwriting of Mr. Peters showing contras respecting the accounting firm of Martin & Peters of which Mr. Peters was a partner. Mr. Peters testified that his contras played a major part in the breakup of the accounting firm. The accounting firm itself was the subject of receivership and major litigation between the partners.

This evidence is not accepted.

In these circumstances this claim for an allowable business investment loss is not allowed.

1984 1. (b) Aircraft loss should be increased by $386.78. This has been accepted by Revenue Canada.

1984 1. (d) Interest expense on Mortgage — 50 per cent or $5,781.90. This has been accepted by Revenue Canada.

These have been accepted by the Minister of National Revenue and judgment shall issue accordingly.

1984 1. (g) Such Capital Losses as may have been suffered.

1985 2. (h) Capital Losses as may be determined on Appeal to the Tax Court.

1985 2. (i) Capital Gain added by Appeals should be reversed.

These were abandoned by the appellant at the beginning of his cross- examination.

1984 1. (f) Medical expenses reinstated when and if expenses reduce income. This should be mechanical adjustment.

1985 2. (j) Medical expenses as permitted after revised income is determined.

These are to be recalculated by the Minister of National Revenue upon reconsideration and reassessment after judgment has issued in this matter.

1985 2. (b) Additional expenses on Kispiox Contracting Interest in FBDB mortgage: $2,297.26. Insurance on FBDB mortgage re excavator: $494.

The $494 sum relates to insurance premiums paid by the Federal Business Development Bank ("FBDB") in the course of foreclosing upon and seizing a piece of construction equipment owned by Kispiox Contracting which business is owned personally by Mr. Peters. Mr. Peters never paid anything on account of the $494 to FBDB.

The interest claimed was never paid by Mr. Peters either. Mr. Peters argues that when a foreclosure occurs the interest accrued and expensed before May 9, 1985 can be deducted without reducing non-capital losses and without taking it into the income account. This claim will be dealt with along with the following claim — 1985 2. (e).

1985 2. (e) The allowance of an increased loss on the disposition of Shel- bourne Blvd. of this $5,366 has been accepted by Revenue Canada.

In respect to this claim the respondent has accepted the total figure of $36,376.25 as the loss incurred by Mr. Peters on the disposition of the Shel- bourne Blvd. property; thus determining this dispute.

Mr. Peters also alleges interest expenses of $818 and $2,500 to which he claims entitlement to a deduction as a consequence of his interpretation of the application of subsection 80(4) of the Income Tax Act.

The evidence indicates that the debts described in headings 1985 — 2.(b) and 2.(e) respecting the Shelbourne Blvd. property and the construction equipment owned by Kispiox Contracting Co. were extinguished after May 9, 1985. The appellant argued this matter on the basis of section 80 of the Income Tax Act to deduct the interest he claimed. It is in respect to section 80 of the Income Tax Act as it applies to the accrued and unpaid interest on such debts for the year 1985 that the following analysis is undertaken:

Section 79 of the Income Tax Act applies to determine, as far as the debtor is concerned, the tax consequences regarding the extinguishment of the principal portion of indebtedness pursuant to mortgage foreclosures, repossessions of property under conditional sales agreements and other situations where any property of a debtor is acquired or reacquired by a creditor upon the debtor's failure to pay a creditor. This is because, pursuant to subsection 248(1) of the Act, the term “principal amount" which is used in paragraph 79(c) of the Act, does not include interest.

Subsection 80(1) of the Act applies to a debtor where in a taxation year a debt or other obligation for which he was liable was settled or extinguished without any payment by him or by the payment of an amount less than the principal amount of the debt or obligation. The term” principal amount" is also used in subsection 80(1); thus, in the absence of subsection 80(4), subsection 80(1) would not apply to the extinguishment of an interest obligation.

Subsection 80(4) of the Income Tax Act was added by subsection 37(4) of Chapter 45 of the Statutes of Canada for 1985, to apply to debts and obligations settled or extinguished after May 9, 1985. It reads:

(4) For the purposes of subsection (1) and (3), an amount of interest payable by a taxpayer on a debt or other obligation shall be deemed to have a principal amount equal to the portion thereof that was deducted, or would, but for subsection 18(2) or (3.1) or section 21, have been deductible, in computing his income for a taxation year under this part.

Subsection 80(4) of the Act is a deeming clause. In essence, it provides that for the purposes of subsections 80(1) and (3), an amount of interest in respect of a debt shall be deemed to be a debt issued by a taxpayer that has a principal amount. Therefore, subsections 80(1) and (4) read together apply both to the principal amount of a debt in its ordinary sense and the amount of the debt that is made up exclusively of interest deducted or deductible by the debtor. In the present case, the principal amount of the interest obligation, pursuant to subsections 80(1) and (4) is a total of $2,500 plus $818 in respect of the Shel- bourne Blvd. property and the sum of $2,297.26 respecting the FBDB mortgage on the piece of construction equipment.

Paragraph 80(1)(e) provides, in substance, that subsection 80(1) does not apply where "section 79 is applicable in respect of the debt or obligation”. In my view, the reference in paragraph 80(1)(e) to the “debt or obligation” to which section 79 applies is a reference to the principal amount of the debt or obligation construed according to its ordinary meaning. In effect, to the extent that the debtor is involved, section 79 deals only with the tax treatment of the principal amount of his indebtedness and not with the debtor's interest liability. The deeming provision in subsection 80(4), that interest payable shall be considered as a principal amount, applies only for the purposes of subsections 80(1) and (3), and does not apply for the purposes of section 79.

It is therefore apparent that paragraph 80(1)(e) of the Act would exclude a debt or obligation from the application of section 80 only to the extent that the debt or obligation fell within the purview of section 79. Thus, the treatment applicable to the accrued but unpaid interest in respect of a principal amount to which section 79 applies is left open and by virtue of the operation of subsection 80(4), is dealt with by section 80.

I am therefore of the opinion that, by virtue of subsection 80(4), subsection 80(1) applies to the extinguishment of the outstanding accrued interest, whether or not such interest obligation related to a principal obligation dealt with in section 79 or in section 80.

For the purposes of conducting this review of sections 79 and 80, the Court had reference to the judgment of Garon, T.C.C.J. in the informal case of Moysey v. The Queen, [1992] 2 C.T.C. 2655, 92 D.T.C. 1861; that matter was conducted under the informal procedure of this Court and is not binding upon me, however the reasoning described herein is adopted from his decision.

In these circumstances none of the claims by Mr. Peters for 1985 as described in paragraphs 2(b) and 2(e) are allowed.

1985 2. (c) Income reduced to amount originally reported from Martin & Peters partnership. In any event, the amount at issue was $19,102, after adjusting the receipts on account for the loss on the sale of partnership assets as agreed by Revenue Canada.

This claim arises from a reassessment by the respondent of the appellant as a consequence of the receivership of the Martin & Peters accounting partnership. Once the receivership occurred the appellant did not report any further income from the partnership, and did not treat the receivables as either doubtful debts or bad debts. In fact the receivers did collect on the receivables. They were paid to Canadian Imperial Bank of Commerce as a result of an action against Mr. Peters by Canadian Imperial Bank of Commerce. Mr. Peters did not supply any figures as to what the receivables should be and never treated them as either doubtful or bad debts. As a result, the appeal respecting this matter is dismissed.

1985 2. (f) The deduction of losses of other properties. This has been accepted by Revenue Canada in the amount of $6,174.

1985 2. (g) Interest on house mortgage for business purposes: $1,363.64. This has been accepted by Revenue Canada.

These have been accepted by the Minister of National Revenue and judgment shall issue accordingly.

1986 3. (a) Rental properties — terminal loss $31,457.

This has been accepted by the Minister of National Revenue and judgment shall issue accordingly.

1986 3. (b) An available business investment loss occurred in 1986 upon the loss by me of Seabird Timber Incorporated shareholders loans.

This claim is not allowed for the reasons described by the Court in relation to the 1984 claim 1(j) relating to "Seabird Timber Inc.”

1987, 1988 and 1989

Two 1988 claims for tuition of $456 and a political donation of $5 were accepted by the Minister of National Revenue; judgment shall issue accordingly.

The remaining claims in these years relate to alleged carryforwards relating to the claims for "Seabird" and “KEL” alleged allowable business investment losses which have already been dealt with in this judgment and which are not allowed.

The appellant was not a credible witness. He was evasive and changed his testimony from time to time to suit his purposes and his convenience. Moreover many of the records filed were solely in his handwriting and were prepared on lined paper with no way available to corroborate the dates on which they were prepared. The documents supplied usually had no supporting outside documents to verify them. A great many had never appeared during the Minister of National Revenue's audit of the appellant.

An example of the appellant's attitude towards documentation and testimony under oath was the fact that, after his cross-examination, in the process of submitting evidence in rebuttal, he attempted to file into the income tax returns he had filed for the years in question, which had been filed in Court as exhibits, various documents as schedules to the returns. When the Court told him that this simply was not permissible, he suggested that it was an appropriate course having regard to the concepts associated with the informal procedure of this Court. The Court pointed out to him that such behaviour dia not constitute “informal procedure". These comments had no effect whatsoever on the appellant and it was apparent that he did not appreciate how wrong his proposed acts were.

This attitude was reflected in the changing nature of the appellant's sworn testimony as he moved his case from one approach to another and submitted his handwritten documents to support his testimony. It is the opinion of the Court that many of these handwritten documents were made long after the events and do not reflect the truth of what actually happened. It is in the light of these kinds of experiences which occurred throughout the trial of this matter that the findings of this Court are made.

These matters are referred to the Minister of National Revenue for reconsideration and reassessment in accordance with this judgment.

Appeal dismissed in the most part.