Aditex Developments Ltd., Russell Boyd Sykes and Shirley Anne Sykes v. Minister of National Revenue, [1990] 2 CTC 2358, 90 DTC 1837

Taylor, T.CJ.:—These are appeals heard on common evidence in Vancouver, British Columbia, on July 17, 1990, against income tax assessments as follows:

Aditex Development Ltd. ("Aditex")

Disallowed Expenses 1984 1985

Shareholders personal Expenses $ 8,261 $10,134 Automobile Expenses 4,138 3,973

(non-business portion)

Office Expenses 1,333 1,359

(non-business portion)

Travel Expenses duplicated 648

$13,372 $16,114

Russell Boyd Sykes ("Sykes")

Description	1983	1984	1985
A) Shareholder Appropriation	$ 8,860 $13,652 $15,466
B) Disallowed Business Loss	32,998	19,978	11,842
—Aditex Ventures
— BBC Realty Loss	—	6,032
C) Additional Capital Loss	(6,032)
D) Disallowed Carrying Charges	5,944	2,438	2,258
E) Disallowed ABIL	3,109
F) Tuition Fees disallowed	375
(duplicated)

Section 163(2) penalties were applied on all amounts with the exception of the amount of $6,032 in respect to the disallowed business loss in respect to BBC Realty and the amount of $375 tuition fees.

For Shirley Ann Sykes ("S. Sykes"), the appeals depended on the results to be determined in the appeals of Sykes since the only item regarded in dispute was the claim for child tax credit for the years 1983 and 1984, in the amounts of $692.56 and $734 respectively. The assessment for the year 7984 was struck on October 21, 1987. Reference will be made later to the 1983 taxation year.

Sykes acted for himself and as agent for Aditex and S. Sykes. In a discussion at the commencement of the trial the situation and tasks before him were established as follows:

(1) With regard to the assessment of income taxes for all three appellants, he had the primary responsibility to refute or overturn the statements of facts, or the assumptions shown by the respondent in the assessments at issue, and further detailed in the relevant replies to notices of appeals filed earlier with the Court and with the appellants. It was not the task of the respondent to "prove" the assessments of income tax but only to make clear the basis upon which the disputed assessments had been made, and this had been done by the respondent.

(2) With regard to the penalties imposed under subsection 163(2) of the Income Tax Act ("Act") and thereby added to the income taxes assessed (see (1) above) the respondent would be required to fulfil the duty of “establishing the facts justifying the assessment of the penalty" (see subsection 163(3) of the Act). For items or matters of income tax alone successfully refuted by the appellants (see (1) above) appropriate adjustments in any penalties added should be automatic.

(3) With regard to assessments for certain years challenged by the appellants as "statute-barred"—1983 for S. Sykes and 1983 for Sykes himself, the respondent had the responsibility to fulfil the requirements of subsection 152(4) of the Act to validate the assessments at issue by showing defects in the income reporting of the appellants.

Counsel for the respondent informed the Court that he had available in Court substantial documentation, together with the Revenue Canada auditor, Mr. S. Liggett, who had investigated the affairs of the appellants and prepared the information in support of opening the assessments for 1983—claimed to be statute-barred by the appellants, and also to substantiate the imposition of penalties included in the assessments at issue. Counsel also indicated that if the procedure would aid the appellants and the Court in the trial he would be prepared to advance that part of the evidence at any time, even at the start of the hearing. Sykes was not prepared in the same way with documentation or witnesses to carry out his tasks, but indicated that he had certain statements and testimony he wished to give later—when he had heard the respondent's evidence. Nevertheless he did request that counsel for the respondent proceed, which counsel agreed to do although now with considerable reservation. While originally appreciated by the Court, it rapidly became evident that because of Sykes' approach to the proceedings, the respondent's concession in bringing forward that evidence first would not be productive. It seemed to be difficult for Mr. Sykes to understand or accept his assigned role in the proceedings as an appellant and agent, nor could he put into proper focus the results of the investigation by Mr. Liggett. In brief, Mr. Liggett had been provided with only the most limited records and information, much of which was not accurate, some alleged expenses of which were duplicated or triplicated as deductions, or were taken in the wrong taxation year. It had been necessary for Mr. Liggett to perform virtually a detailed audit and to prepare a complete analysis and several comparisons over the entire period under review— particularly with regard to Aditex.

In order to make some progress it became clear to the Court that it would be necessary for Sykes to introduce his own statements, testimony and evidence demonstrating the basis for his opposition to the assessments of income tax. Mr. Liggett's testimony and evidence to that point were set aside for the moment and Sykes took the witness stand. Sykes' presentation to the Court took the form of a lengthy recital of his critical view of the methods and procedures by which Revenue Canada had reassessed the appellants, and his perspective of the real nature of his activities and affairs as well as those conducted by the other appellants, Aditex and S. Sykes, which included reference to other unincorporated proprietorships or ventures with "agency agreements", lease agreements, etc., weaving their way in and out of the transactions and records he recounted. It would serve no useful purpose in this matter to recite or quote from the presentation in great detail. There was nothing of consequence upon which counsel for the respondent needed to cross-examine other than to clear up for the record certain dates and times which could have a bearing on the imposition of penalties or the opening of statute-barred years. Sykes was informed by the Court that he had failed in even casting a serious shadow on the validity of the assessments of income tax at issue, let alone doing any serious damage to the respondent's case in that respect. There being nothing further that Sykes, on behalf of the appellants, had to offer, the Court requested counsel for the respondent to resume the evidence and testimony related to the respondent's responsibility for opening a statute-barred year and for the imposition of penalties.

As had been indicated earlier by counsel for the respondent the work of Mr. Liggett was detailed and descriptive. The assertions made by the respondent in imposing penalties required the establishment of something greater than simply normal errors or mistakes on the part of Aditex and Sykes (no penalties were imposed on S. Sykes). The conclusions reached by the respondent and recorded in the reply to notice of appeal for Aditex below are typical of the results obtained. I adopt these statements by the respondent as well substantiated and note that in general terms they cover the deficiencies in the income tax reporting of Sykes himself also:

— that the expenses disallowed were not made or incurred for the purpose of gaining or producing income from the business or property;

— that the said disallowed expenses were personal and living expenses within the meaning of section 18(1)(h) and the definition of "personal or living expenses" in section 248 in that the expenses disallowed were of a personal nature and many of the expenses were paid for portrait costs, restaurant and car rental costs incurred in Hawaii, wine and liquor purchases in B.C. Liquor Stores, airline tickets to Winnipeg, local restaurant bills unidentified as to client or clients entertained, cosmetic and other purchases from London Drugs, monthly parking fees on behalf of the shareholder in proximity to his place of employment in downtown Vancouver and the purchase of cook books, plumbing and houseware and other personal expenses;

— that many of the expenses disallowed were duplicated, and/or improperly vouched;

— that the Appellant knowingly, or under circumstances amounting to gross negligence assented to or acquiesced in the making of false statements in his return of income within the meaning of subsection 163(2) of the Act;

— that the Minister did allow general expenses in the amount of $1,372.17, auto expenses of $1,800 and office expenses of $139.25 in the 1984 year and general expenses of $1,941.78, auto expenses of $1,800 and office expenses of $149.75 in 1985; but that any amounts in excess of those amounts allowed by the Minister were, in the circumstances, not reasonable and therefore, not deductible within the meaning of section 67 of the Act.

With regard to the opening up of the 1983 taxation year for Sykes, while there were several items recounted and substantiated by Mr. Liggett which would serve the purpose of subsection 152(4) of the Act, I would note as particularly flagrant the convoluted efforts of Sykes to charge off as deductible the interest on a loan used to acquire his personal residence under the guise that it was for the purchase of preferred shares of his own company Aditex, as an income producing property—in my view a totally specious proposition. Dealing with opening up the 1983 taxation year for S. Sykes, the simple fact is that it was never opened up by the respondent. The 1983 return of income for

S. Sykes was accepted by the respondent as filed (obviously now in error), the claimed refund of $692.56 (including interest) was paid to S. Sykes, and no reassessment ever struck in an attempt to recover the amount. That year is now clearly "statute-barred", but that makes no difference at this point in time. In the end analysis the appeals of all three appellants for all years in issue are dismissed and the penalties imposed are upheld.

Before ending I believe it is incumbent upon me to note that similar issues for earlier taxation years covering the same three appellants came before this Court and were decided in July of 1988 ([1988] 2 C.T.C. 2113; 88 D.T.C. 1497). That published record was of course available to the respondent and to the Court, but it was not raised or relied upon either in evidence by the respondent or in this judgment by the Court, although it was referenced repeatedly in comments by Sykes. This instant matter was dealt with solely on its merits. However, in deference to my learned colleague, Judge Bonner of this Court, who heard and decided the earlier appeals, and the significant efforts of counsel for the respondent not only to be co-operative and objective in this trial, but also to separate it from the earlier trial, I do wish to note and reject any implication contained in two paragraphs of the submission given in his evidence by Mr. Sykes:

The Institute of Chartered Accountants is in the process of expelling me as a result of the July 1988 Tax Court decision (without waiting for the Federal Court appeal decision). The Institute has informed me that it intends to impose penalties and an order that I never be readmitted as a Chartered Accountant. I have been a member in good standing of the Institute of Chartered Accountants of British Columbia, Manitoba and Quebec since 1964.

The cumulative effect of the reassessments issued is that Revenue Canada, Taxation is claiming against me amounts exceeding $230,000. As a result of action taken by Revenue Canada, Taxation in June 1990, I was forced to file bankruptcy documents on June 22, 1990 and am currently an undischarged bankrupt. The entire claim of Revenue Canada is dischargeable by bankruptcy. I am pursuing these appeals and the appeals to the Federal Court in order to repair the damage done to my personal and professional reputation.

It is my view, based on my appreciation of the testimony and evidence provided at this trial, that these appellants were not dealt with unfairly or harshly, but rather generously and with consideration by the respondent. I saw nothing which would lead me to the conclusion that the difficulties of Sykes or his operations and activities should be ascribed to external forces or unwarranted examination and review by either Revenue Canada or this Court as he seemed to contend. The appeals are dismissed.

Appeals dismissed.