Bonner,
T.C.J.:—These
appeals
were
heard
together
on
common
evidence.
An
application
to
have
them
heard
in
camera
was
abandoned.
The
appellant
Russell
Boyd
Sykes
is
a
chartered
accountant.
During
1979
he
was
employed
on
a
full-time
basis
by
a
firm
of
chartered
accountants.
Subsequently,
throughout
the
remainder
of
the
years
under
appeal,
he
was
employed
as
a
tax
manager
ata
bank.
He
was
at
all
such
times
married
to
the
appellant
Shirley
Anne
Sykes
and
was
sole
shareholder
and
officer
of
the
appellant
Aditex
Development
Ltd.
(hereinafter
"the
company").
Appeals
were
taken
from
assessments
for
the
taxation
years
listed
below:
Aditex
Development
|
Shirley
Anne
|
Russell
Boyd
|
Ltd.
|
Sykes
|
Sykes
|
79*
|
|
79*
|
80*
|
80*
|
80*
|
81
|
81
|
81
|
82
|
82
|
82
|
83
|
|
The
reassessments
indicated
by
an
asterisk
were
made
in
1985
beyond
the
three-year
limit
laid
down
by
subsection
152(4)
of
the
Income
Tax
Act
("the
Act")
with
the
result
that
it
was
incumbent
on
the
respondent
to
establish
his
right
to
reassess
under
subparagraph
152(4)(a)(i)
of
the
Act.
Subsection
152(4)
provides
in
part:
152(4)
The
Minister
may
at
any
time
assess
tax,
interest
or
penalties
under
this
Part
or
notify
in
writing
any
person
by
whom
a
return
of
income
for
a
taxation
year
has
been
filed
that
no
tax
is
payable
for
the
taxation
year,
and
may
(a)
at
any
time,
if
the
taxpayer
or
person
filing
the
return
(i)
has
made
any
misrepresentation
that
is
attributable
to
neglect,
carelessness
or
wilful
default
or
has
committed
any
fraud
in
filing
the
return
or
in
supplying
any
information
under
this
Act,
or
reassess
or
make
additional
assessments,
or
assess
tax,
interest
or
penalties
under
this
Part,
as
the
circumstances
require,
.
.
.
Penalties
were
levied
under
subsection
163(2)
of
the
Act
in
respect
of
many
of
the
adjustments
to
income
which
were
made
on
reassessment.
Subsection
163(2)
reads
in
part
as
follows:
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.
.
.
It
would
not
be
useful
to
quote
the
statutory
formula
set
forth
in
the
remainder
of
the
subsection.
It
is
sufficient
for
present
purposes
to
note
that
generally
speaking
the
penalty
is
25
per
cent
of
the
amount
of
tax
on
the
overstated
expense
or
understated
revenue.
By
subsection
163(3)
of
the
Act
the
burden
of
establishing
liability
for
penalties
rests
on
the
respondent.
That
provisions
reads:
163(3)
Where,
in
any
appeal
under
this
Act,
any
penalty
assessed
by
the
Minister
under
this
section
is
in
issue,
the
burden
of
establishing
the
facts
justifying
the
assessment
of
the
penalty
is
on
the
Minister.
The
onus
thus
imposed
on
the
respondent
does
not,
however,
require
him
to
establish
that
the
amounts
added
to
declared
income
were
properly
added.*
In
assessing
Mr.
Sykes
for
tax
the
respondent
made
the
following
adjustments
and
levied
penalties
as
follows:
|
1979
|
1980
|
1981
|
1982
|
(A)
Business
losses(*)
|
$4,935.66
|
$
6,351.28
|
$19,089.00
|
$26,930.00
|
|
disallowed
|
|
(B)
Carrying
charges(*)
|
9,400.03
|
5,898.24
|
4,945.00
|
7,058.00
|
(B)
Carrying
charges(*)
|
|
|
disallowed
|
|
(C)
Allowable
business(*)
|
|
4,540.14
|
2,466.00
|
4,126.00
|
(C)
Allowable
business(*)
|
|
|
investment
loss
|
|
|
disallowed
|
|
(D)
Shareholders(*)
|
6,550.70
|
10,705.54
|
9,764.86
|
8,131.84
|
(D)
|
Shareholders^)
|
|
|
appropriations
|
|
(E)
Tuition
fees(*)
|
|
100.00
|
(E)
Tuition
fees(*)
|
|
|
duplication
|
|
(F)
Unreported
sale(*)
|
|
2,769.80
|
|
(F)
Unreported
sale(*)
|
|
|
of
shares
|
|
(G)
Additional
interest,
|
|
(999.00)
|
(G)
Additional
interest,
|
|
|
capital
gains,
|
|
|
dividend
deduction
|
|
(H)
RRSP
Premiums
(allowed)
|
|
|
disallowed
|
(633.34)
|
(218.00)
|
(3,614.00)
|
4,465.32
|
|
Section
163(2)
penalties
applied.
|
|
Mr.
Sykes'
claim
to
deduct
business
losses
rested
on
the
premise
that
he
carried
on
business
as
sole
proprietor
during
the
years
1979,
1981
and
1982
and
that
he
and
his
wife
carried
on
business
in
partnership
during
1980.
He
attributed
the
losses
to
"start-up
costs".
The
respondent
assessed
on
the
basis
that
no
such
business
was
carried
on
at
all,
that
the
expenses
claimed
were
personal
or
living
expenses
and
further
that
many
of
the
expenses
claimed
were
not
incurred
at
all,
that
is
to
say,
that
frequently
two
or
more
claims
were
asserted
in
respect
of
one
outlay.
Mr.
Sykes
contended
that
he
did
indeed
carry
on
business.
The
following
extracts
from
a
schedule
attached
to
his
notices
of
appeal
serve
as
a
convenient
summary
of
his
testimony
as
to
the
background
and
nature
of
the
alleged
business
activities.
In
1975,
Mr.
Sykes
became
disenchanted
with
his
occupation
as
an
employee
and
decided
to
make
a
strategic
change
in
his
occupation.
He
was
convinced
that
he
was
not
suited
to
or
interested
in
aspiring
to
higher
employment
positions
with
large
organizations
over
the
long-term.
As
he
was
married
(his
wife
was
not
employed),
had
two
dependant
children
and
had
limited
financial
resources,
it
was
not
feasible
for
Mr.
Sykes
to
terminate
his
full-time
employment
and
commence
self-employment
activities
on
a
full-time
basis.
...
Mr.
Sykes
commenced
the
business
of
Aditex
Leasing
in
1978
and
continued
to
carry
on
this
business
until
December
31,
1979.
On
January
1,
1980,
Mr.
Sykes
formed
with
his
wife
a
partnership,
described
as
Aditex
Leasing
&
Ventures
(ALV)
/
which
was
discontinued
December
31,
1980.
On
January
31,
1981,
Mr.
Sykes
commenced
business
as
Aditex
Ventures
(Unincorporated),
referred
to
as
AV,
on
a
proprietorship
basis.
All
of
these
businesses
were
established
and
carried
on
for
the
purpose
of
gaining
or
producing
income
from
business.
.
.
.
The
activities
carried
on
by
Mr.
Sykes
were
commercial
activities
engaged
in
for
gain.
These
were
enterprises
in
which
Mr.
Sykes
showed
willingness
to
invest
time
and
money
on
future
outcome.
These
activities
were
a
principal
serious
concern
or
interest
of
Mr.
Sykes.
Mr.
Sykes
habitually
devoted
his
time,
attention,
labour
and
efforts
to
such
activities.
At
all
relevant
times,
actitivies
undertaken
by
ADL,
AV
and
ALV
were
a
regular
part
of
the
income-earning
process
in
the
type
of
business
carried
on.
There
were
specific
concepts
of
the
type
of
activities
to
be
carried
on,
an
organization
in
place
to
undertake
the
essential
preliminaries
to
normal
operations
and
a
plan
and
operating
structure
to
carry
on
the
activities.
Serious
and
continuous
efforts
were
made.
Market
surveys
were
undertaken
for
the
purpose
of
establishing
the
most
appropriate
way
or
place
to
carry
on
business.
The
businesses
involved
specific
projects
as
well
as
the
development
in
the
form
of
adventures
in
the
nature
of
trade.
The
business
activities
included
the
following
projects:
fast
food
Teriyaki
burgers,
auto
leasing
using
letters
of
credit,
fast
food
pasta,
importing
wine,
purchase
and
sale
of
a
flour
mill,
employee
job
counselling
and
relocation,
timeshare
units
and
the
purchase
and
sale
of
a
bicycle
importing
and
distribution
business.
The
business
activities
included
the
purchase
of
materials,
market
surveys/re-
search,
product
design
and
evaluation
and
analysis
of
operations
and
management.
All
activities
were
positive
and
continuous
steps
to
develop
products
or
services
for
sale
as
a
business
or
investment
package.
The
nature
of
the
business
projects
involved
required
that
studies
and
tests
be
carried
out
and
that
meetings
be
held.
The
business
activities
of
ADL,
AV
and
ALV
were
perforce
carried
on
during
evenings
and
on
weekends,
as
Mr.
Sykes
was
a
full-time
management
employee
with
large
arm's
length
employers
at
all
relevant
times.
This
imposed
serious
restrictions
on
the
manner
in
which
the
business
activities
were
carried
on.
Business
meetings
were,
therefore,
held
in
restaurants
at
a
time
and
place
convenient
to
all
persons
attending.
Mr.
Sykes
called
two
independent
witnesses
to
clarify
the
nature
of
his
activities
and
to
demonstrate
that
he
had
incurred
entertainment
and
meeting
expenses.
One
was
a
businessman
named
Cavenaugh
with
whom
Mr.
Sykes
met
for
the
purpose
of
discussing
the
possible
acquisition
of
a
firm
which
carried
on
the
business
of
importing
and
distributing
bicycles.
He
and
Mr.
Sykes
also
had
some
conversations
about
a
flour
mill
and
two
or
three
other
"situations".
The
bicycle
business
was
the
only
one
that
Mr.
Cavenaugh
took
some
considerable
time
investigating.
Mr.
Sykes
also
met
with
a
Mr.
Yakiwchuk.
He
and
Mr.
Sykes,
in
June
of
1980,
went
to
visit
a
flour
mill
in
Camrose,
Alberta,
with
a
view
to
purchasing
it.
In
this
case
too
Mr.
Sykes
did
not
acquire
the
business
nor
any
interest
in
it.
Neither
witness
was
able
to
shed
any
light
on
what
was
spent
by
Mr.
Sykes
in
connection
with
the
meetings.
Certainly
Mr.
Sykes
did
not
do
all
the
entertaining.
Mr.
Cavenaugh
said
that
he
had
no
recollection
as
to
who
paid.
Mr.
Yakiwchuk
said
that
on
several
occasions
he
had
paid.
Apart
from
the
evidence
of
Mr.
Cavenaugh
and
Mr.
Yakiwchuk
and
generalizations
of
the
sort
set
forth
above,
there
was
virtually
no
concrete
evidence
as
to
the
nature
and
extent
of
business
operations.
No
attempt
was
made
to
distinguish
between
promotional
activities
undertaken
by
Mr.
Sykes
on
behalf
of
the
company
on
the
one
hand
and
on
behalf
of
either
Mr.
Sykes
or
the
partnership
on
the
other
hand.
There
was
no
suggestion
in
the
evidence
that
Mr.
Sykes'
activities
went
beyond
the
investigation
of
ventures
in
which
he
might
possibly
become
involved.
The
cost
of
such
activities
is,
of
course,
capital
in
nature.*
The
evidence
does
not
suggest
that
Mr.
Sykes
carried
on
any
ongoing
business.
The
only
revenue
reported
in
respect
of
either
the
proprietorship
or
the
partnership
was
car
leasing
income
received
in
respect
of
an
automobile
which
at
all
relevant
times
was
owned
not
by
Mr.
Sykes,
but
by
Aditex
Development
Ltd.
I
will
deal
with
this
matter
later.
The
partnership
agreement
between
Mr.
and
Mrs.
Sykes
reads
in
part
as
follows:
WHEREAS
we
are
interested
in
pursuing
business
development
opportunities
and
ventures
and
WHEREAS
it
is
our
intention
to
form
and
constitute
a
partnership
for
purposes
of
the
Income
Tax
Act,
Canada
and
equivalent
provincial
statutes,
we
hereby
agree
to
enter
into
a
partnership
for
this
purpose.
Such
partnership
arrangement
is
to
be
on
the
basis
of
55%
to
R.B.
SYKES
and
45%
to
S.A.
SYKES
for
purposes
of
sharing
profits
and
losses
(such
profits
and
losses
shall
be
determined
using
accounting
mutually
acceptable
to
the
partners).
It
was
terminated
after
one
year.
Mr.
Sykes,
when
asked
why
it
lasted
for
only
one
year,
stated:
.
.
.
Well,
what
happened
was
my
wife
pulled
some
money
out
of
her
RSSP,
and
we
worked
together
and
it
didn't
work
very
well.
We
weren't
able
to
get
the
venture
up
and
running.
She
was
incapable,
really,
of
doing
the
work,
and
we
have
two
children,
so
we
decided
just
to
terminate
it
at
the
end
of
the
one
year.
As
noted
previously,
the
only
revenue
reported
by
Mr.
Sykes
from
his
supposed
business
over
the
years
was
from
the
leasing
of
one
automobile.
That
automobile
was
registered
in
the
name
of
the
company.
The
company
was
insured
as
owner.
The
company
was
lessor.
The
respondent,
on
assessment,
treated
the
revenue
and
costs
of
the
leasing
operation
as
the
revenue
and
costs
of
the
company
and
not
of
Mr.
Sykes.
Mr.
Sykes
asserted
that
the
company
acted
as
his
agent
under
an
agreement
in
writing.
That
agreement
provides
in
part:
The
purpose
and
intent
of
this
agreement
is
to
operate
the
business
under
the
name
of
ADITEX
VENTURES
on
an
unincorporated
basis
for
purposes
of
the
Income
Tax
Act,
Canada
and
equivalent
provincial
statutes
and,
further,
at
no
time
is
it
intended
to
operate
on
the
basis
of
ADITEX
DEVELOPMENT
LTD.
as
principal
or
in
any
manner
on
its
own
behalf
or
account.
Mr.
Sykes
said
that
a
corporate
identity
was
more
impressive
for
marketing
purposes
and
that
cars
can
be
bought
more
cheaply
by
corporations
than
by
individuals.
Further,
he
said
that
the
company
held
title
to
the
car
to
enable
him
to
avoid
the
liability
which
may
be
imposed
upon
the
owner
of
a
motor
vehicle.
In
my
view
the
business
of
leasing
the
car
was
in
fact
carried
on
by
the
corporation
which
ostensibly
carried
it
on.
Nowhere
in
the
agreement
between
Mr.
Sykes
and
the
company
did
Mr.
Sykes
expressly
appoint
the
company
as
his
agent
to
carry
on
the
car
leasing
business.
The
profit
from
a
business
is
the
income
of
the
person
who
carries
on
the
business.
In
Lagacé
v.
M.N.R.,
[1968]
C.T.C.
98
at
107;
68
D.T.C.
5143
at
5149
Jackett,
P.
stated:
The
most
significant
feature
of
the
appellant’s
contention
in
this
Court,
as
it
strikes
me,
is
that
it
is
inherent
in
the
contention
that
profits
that
would
otherwise
have
accrued
to
the
appellants
have
ended
up
in
the
name
of
a
company
controlled
by
them,
not
because
of
bona
fide
business
transactions
between
the
appellants
and
such
company,
but
because
of
transactions
that
have
been
arranged
between
them
to
implement
a
contract
between
the
appellants
and
a
third
person
to
accomplish
objects
desired
by
the
third
person.
In
other
words,
the
contention
is
based
on
the
assumption
that
profits
of
the
appellants'
business
operations
were
put
into
the
hands
of
the
company
by
a
device
and
that
the
profits
were
not
the
result
of
the
company
having
embarked
on
business
transactions.
In
my
view,
therefore,
the
short
answer
to
the
contention,
even
assuming
the
facts
to
have
been
established,
is
that,
for
purposes
of
Part
I
of
the
Income
Tax
Act,
profits
from
a
business
are
income
of
the
person
who
carries
on
the
business
and
are
not,
as
such,
income
of
a
third
person
into
whose
hands
they
may
come.
This
to
me
is
the
obvious
import
of
sections
3
and
4
of
the
Income
Tax
Act
and
is
in
accord
with
my
understanding
of
the
relevant
judicial
decisions.
The
so-called
business
expenses
claimed
by
the
appellant
were
analyzed
by
Sam
Liggett
and
Terry
Ching,
both
employees
of
Revenue
Canada.
At
the
hearing
of
the
appeals
they
gave
evidence
as
to
their
findings.
The
preliminary
work
was
done
by
Mr.
Liggett.
He
received
from
Mr.
Sykes
lists
of
the
expenses
which
had
been
claimed
by
the
three
appellants
together
with
the
supporting
vouchers.
He
examined
the
material
and
arrived
at
the
conclusion
that
the
expenses
were
personal
or
living
expenses
and
had
nothing
to
do
with
any
business
activity
carried
on
by
any
of
the
appellants.
He
produced
copies
of
the
supporting
vouchers
which
had
been
obtained
from
Mr.
Sykes.
Mr.
Ching
testified
that
he
had
reconciled
the
expenses
from
the
general
ledger
to
lists
of
expenses
claimed
and
that
he
examined
the
supporting
vouchers.
He
too
concluded
from
his
examinations
of
the
vouchers,
copies
of
which
were
entered
in
evidence,
that
they
represented
personal
or
living
expenses
of
Mr.
Sykes
and
of
his
family.
The
vouchers
covered
expenditures
which
certainly
appear,
at
least
at
first
blush,
to
be
of
a
personal
nature.
They
include
clothing,
liquor,
dry
cleaning,
meal
costs
of
all
kinds
from
first-class
restaurant
meals
to
food
from
fast
food
and
take-out
establishments,
air
travel
including
a
trip
from
Winnipeg
to
Vancouver
and
return
for
Mr.
Sykes'
mother,
travel
related
to
the
activities
of
the
hockey
team
of
the
Sykes
children,
tickets
to
entertainment
events
such
as
movies,
theatre,
hockey,
soccer
and
ice
shows,
groceries,
liquor,
eyeglasses,
a
wrist
watch,
prescriptions,
a
television
repair
bill
and
a
haircut.
Mr.
Ching
testified
that
the
expenses
were
frequently
overstated.
He
pointed
to
specific
examples.
Credit
card
charge
slips
and
restaurant
stubs
covering
one
single
expenditure
were
often
treated
as
evidence
of
separate
expenditures
and
claimed
two
times.
In
some
cases
different
amounts
for
tips
were
shown
on
the
VISA
slip
and
the
corresponding
restaurant
stub
in
an
apparent
attempt
to
conceal
the
duplication.
Another
method
of
duplication
involved
using
both
billing
statements
and
original
vouchers.
Duplication
was
also
achieved
by
using
photostats
of
the
original
invoice
and
the
original.
On
occasion
the
same
expenditure
was
claimed
both
as
a
cost
of
the
proprietorship
business
and
as
a
cost
of
the
business
of
Aditex
Development
Ltd.
In
one
instance
a
membership
fee
of
$360
from
the
Institute
of
Chartered
Accountants
of
British
Columbia
was
claimed
as
a
business
expense
in
the
proprietorship
and
again
claimed
as
professional
dues
on
the
second
page
of
Mr.
Sykes'
tax
return.
Mr.
Sykes
did
not,
when
giving
evidence,
offer
any
explanation
for
the
duplications
other
than
innocent
mistake.
The
frequency
with
which
attempted
deception
of
the
sort
just
described
took
place
negatives
that
explanation.
On
cross-examination
as
to
the
nature
of
some
of
the
expenditures
he
offered
explanations
which
were
contrived
or
vague
or
both.
For
example,
as
to
the
movie
tickets,
he
said:
.
.
.
There
is
one
client
that
I
have,
he's
a
famous
artist
.
.
.
he
loves
movies
.
.
.
when
I
was
promoting
with
him
we
would
go
to
movies
and
have
our
discussions
In
relation
to
his
mother's
air
travel
from
Winnipeg
to
Vancouver
and
back,
the
cost
of
which
was
claimed
as
a
business
expense
of
the
company,
he
said:
..
.
Well,
there
was
a
time
when
my
wife
and
I
were
planning
to
do
something
and
we
were
going
to
take
a
trip
and
I
had
to
do
some
kind
of
a
report.
.
.
and
instead
of
getting
a
housekeeper,
we
were
going
away
on
business,
I
asked
my
mother
if
she
would
come
out
and
so
I
paid
the
airfare
instead
of
incurring
the
cost
of
an
independent
babysitter
.
.
.
The
evidence
as
to
the
nature
of
the
alleged
business
operations
was
vague
and
created
an
impression
that
descriptions
used
by
Mr.
Sykes
were
intended
to
conceal
rather
than
to
reveal.
The
evidence
as
to
the
nature
of
the
business
expenses
claimed
suggests
that
they
were,
for
the
most
part,
personal
and
wholly
unrelated
to
any
business
activity.
The
evidence
as
to
multiple
counting
of
the
same
expense
suggests
that
Mr.
Sykes
deliberately
set
out
to
claim
fictitious
costs.
Mr.
Sykes
appeared
evasive
when
testifying.
From
time
to
time
he
contradicted
himself.
I
cannot
rely
on
anything
he
says.
Mrs.
Sykes
was
not
called
as
a
witness.
It
seems
that
her
income
tax
return
for
1980,
the
year
of
the
partnership,
was
prepared
by
Mr.
Sykes.
It
contained
a
claim
to
deduct
a
share
of
partnership
losses
which
losses
were
composed
of
personal
expenses
and
were
swollen
by
multiple
counting.
Nevertheless
she
signed
it.
The
same
pattern
is
to
be
found
in
the
computation
of
the
company’s
expenses
and
reported
losses.
In
filing
that
return
Mrs.
Sykes
made
misrepresentations
attributable
to
neglect.
It
must
have
been
evident
to
her
that
the
partnership
did
virtually
nothing
and
could
not
in
consequence
have
incurred
expenses
of
the
magnitude
claimed.
Obviously
the
position
of
the
company
and
of
Mr.
Sykes
can
be
no
better.
I
therefore
find
that
the
respondent
has
discharged
the
subsection
152(4)
burden
in
relation
to
the
assessments
of
Mr.
Sykes
and
of
the
company
for
1979
and
1980
and
of
Mrs.
Sykes
for
1980.
The
appeals
of
Mr.
and
Mrs.
Sykes
and
of
the
company
with
respect
to
the
disallowance
of
business
losses
must
all
fail.
The
expenses
were
personal.
They
do
not
meet
the
test
laid
down
by
paragraph
18(1)(a)
of
the
Act.
The
respondent,
on
assessment,
disallowed
claims
by
Mr.
Sykes
to
deduct
interest
on
borrowed
money
which,
according
to
Mr.
Sykes,
was
used
to
acquire
shares
of
the
capital
stock
of
the
company.
The
respondent
assessed
on
the
basis
of
a
finding
or
assumption
that
the
borrowed
money
was
used
by
Mr.
Sykes
to
acquire
a
personal
residence.
In
June
of
1978
Mr.
Sykes
wrote
to
the
bank
with
a
view
to
securing
a
$75,000
loan.
A
memorandum
accompanying
the
letter
expressed
an
intention
to
use
the
borrowed
money
for
the
purpose
of
subscribing
for
75,000
$1
redeemable
preference
shares
of
Aditex
Development
Ltd.
The
letter
went
on
to
explain
that
the
company
planned
to
use
the
$75,000
proceeds
to
repay
demand
notes
due
to
Mr.
Sykes
and
to
make
shareholder's
loans
and
that
Mr.
Sykes
would
use
the
$75,000
together
with
proceeds
from
his
RHOSP
to
acquire
a
personal
residence.
The
memorandum
explained
that
the
loan
would
not
adversely
affect
Mr.
Sykes’
net
worth
or
cash
flow
because
rent
then
being
paid
by
him,
which
was
non-deductible
for
income
tax
purposes,
would
be
eliminated
and
the
saving
would
be
used
to
service
the
new
bank
loan,
the
interest
on
which
would
be
tax
deductible.
On
August
29,
1978,
Mr.
Sykes
and
his
wife
signed
an
interim
agreement
to
purchase
the
house
which
is
now
their
personal
residence.
On
September
21,
1978,
the
bank
loaned
$73,000
to
Mr.
Sykes.
I
note
at
this
point
that
Mr.
Sykes
did
say
that
$50,000
of
the
sum
borrowed
was
used
to
refinance
a
loan
of
$50,000
made
a
short
while
before
with
a
view
to
providing
the
company
with
money
to
acquire
development
property.
Whether
$50,000
had
previously
been
borrowed
or
not,
Mr.
Sykes
did
admit
on
cross-examination
that
in
fact
the
company
never
did
acquire
any
development
property
but,
rather
that
it
loaned
the
borrowed
money
to
him
to
purchase
the
residence.
Mr.
Sykes
is
entitled
to
deduct
the
carrying
costs
in
issue
if
the
test
laid
down
in
paragraph
20(1)(c)
of
th
Act
is
satisfied,
that
is
to
say,
if
the
interest
was
paid
pursuant
to
an
obligation
to
pay
interest
on
borrowed
money
used
for
the
purpose
of
earning
income
from
property.
There
was
no
evidence
at
all
as
to
the
dividend
rate,
if
any,
established
for
the
preference
shares.
Indeed,
there
is
no
evidence
that
the
shares
were
ever
issued.
There
is
no
evidence
that
the
company
was
likely
to
pay
dividends.
The
events
which
did
transpire
point
to
a
conclusion
that
Mr.
Sykes
borrowed
the
money
with
a
view
to
carrying
out
a
transaction
generally
similar
to
that
outlined
in
the
June
26,
1978,
letter.
The
purpose
of
the
borrowing
was
clearly
to
acquire
the
house.
The
shares,
if
any
were
in
fact
issued,
entered
the
transaction
only
as
a
cloak
and
disguise.
The
paragraph
20(1)(c)
test
is
not
met
and
this
branch
of
Mr.
Sykes'
appeals
therefore
fails.
In
reassessing
tax
for
Mr.
Sykes'
1980,
1981
and
1982
taxation
years
the
respondent
disallowed
claims
to
deduct
allowable
business
investment
losses
amounting
to
$4,450.14
in
1980,
$2,466
in
1981
and
$4,126
in
1982.
The
deductions
sought
were
said
to
be
half
of
the
adjusted
cost
base
of
debts
due
to
Mr.
Sykes
from
the
company.
The
theory
underlying
the
claim
was
that
Mr.
Sykes
incurred
expenses
on
behalf
of
the
company
in
conducting
its
business
and
thereby
advanced
money
to
the
company;
that
the
resultant
debts
became
bad;
that
there
were
deemed
dispositions
by
virtue
of
subsection
50(1)
of
the
Act
giving
rise
to
business
investment
losses
within
the
meaning
of
paragraph
39(1
)(c)
of
the
Act
and
giving
rise
to
a
deduction
of
the
allowable
amount
under
section
3
of
the
Act.
In
my
view
the
respondent
properly
disallowed
the
deductions.
It
is
unlikely
that
Mr.
Sykes
advanced
to
the
company
any
amount
even
close
to
the
amounts
claimed.
In
this
regard
I
refer
to
Mr.
Sykes'
tendency
to
exaggerate
expenditures
and
to
claim
personal
costs
as
business
expenditures.
Further,
section
50
does
not
operate
to
deem
a
disposition
to
have
taken
place
except
in
respect
of
a
debt
which
has
been
established
to
have
become
a
bad
debt
in
the
year.
There
was
no
reason
why
any
indebtedness
owing
by
the
company
to
Mr.
Sykes
could
not
have
been
discharged
by
setoff
against
the
debt
owing
by
Mr.
Sykes
to
the
company
on
the
house
loan.
Mr.
Sykes'
reasoning
was:
.
.
.
Now,
at
this
point
it
was
simply
a
one
man
company
and
I
could
have
walked
away,
I
could
have
started
a
new
corporation,
and
then
the
following
year
I
could
have
set
up
another
corporation,
collapsed
that
one
and
then
gone
on
and
done
each
year,
set
up
a
brand
new
corporation
to
cover
that
particular
year's
business.
He
could
have
done
that.
It
was
not
shown
that
he
was
likely
to
do
that.
I
find
the
argument
unpersuasive.
This
branch
of
Mr.
Sykes'
appeal
therefore
fails.
In
assessing
tax
for
Mr.
Sykes'
1979,
1980,
1981
and
1982
taxation
years
the
respondent
added
to
declared
income
as
funds
of
the
company
appropriated
to
Mr.
Sykes
as
its
sole
shareholder
the
amounts
set
forth
in
the
table
on
page
3
of
these
reasons.
The
respondent
relied
on
subsection
15(1)
of
the
Act.
The
calculation
of
the
amounts
in
question
is
set
forth
in
schedule
I
to
the
reply
to
the
notice
of
appeal.
The
respondent's
assessing
action
rests
on
a
finding
or
assumption
that
Mr.
Sykes
treated
personal
expenditures
such
as
restaurant
meals,
liquor,
clothing
and
groceries
as
outlays
made
on
behalf
of
the
company
and
credited
them
to
the
shareholder's
loan
account.
The
evidence
previously
outlined
establishes
that
that
is
exactly
what
happened.
This
branch
of
Mr.
Sykes'
appeals
therefore
fails.
In
1982
the
respondent
disallowed
a
$100
tuition
fee
deduction
claimed
under
paragraph
60(f)
of
the
Act.
The
statutory
provision
expressly
excludes
deductions
in
respect
of
fees
paid
which
had
been
.
.
included
in
the
calculation
of
a
deduction
under
this
section
for
a
preceding
taxation
year
.
.
.
Mr.
Ching's
evidence
and
Exhibit
R-8
confirm
that
the
fee
covered
by
the
applicable
invoice
had
already
been
claimed
in
1981.
This
branch
of
the
appeal
fails.
Reference
was
made
in
Mr.
Sykes'
notice
of
appeal
to
the
disallowance
of
deductions
with
respect
to
R.R.S.P.
contributions
and
to
an
unemployment
insurance
overpayment.
Neither
of
these
matters
was
pursued
at
the
hearing.
No
relief
will
therefore
be
granted.
The
1980
inclusion
in
income
of
$2,769.80
in
respect
to
the
unreported
gains
on
the
sale
of
shares
was
not
referred
to
in
the
evidence.
In
the
absence
of
any
evidence
as
to
the
circumstances
surrounding
the
failure
to
report
the
gain
the
penalty
must
by
virtue
of
subsection
163(3)
of
the
Act
be
deleted.
The
inclusion
in
income
must,
however,
remain
undisturbed.
I
turn
next
to
the
penalties
imposed
on
the
first
five
of
the
inclusions
in
the
income
of
Mr.
Sykes.
The
circumstances
giving
rise
to
the
assessing
actions
have
already
been
outlined.
The
inevitable
inference
from
all
of
the
evidence
is
that
Mr.
Sykes
who,
after
all,
was
a
chartered
accountant
and
who
personally
was
responsible
for
the
preparation
of
the
financial
records,
statements
and
returns
of
income
knowingly
set
out
to
understate
his
income
in
the
amounts
specified
in
A
to
E
in
the
table
on
page
3.
The
penalties
in
respect
of
those
items
were
properly
imposed.
In
the
result
the
appeal
of
Mr.
Sykes
from
the
assessment
for
the
1980
taxation
year
will
be
allowed
and
the
assessment
will
be
referred
back
to
the
respondent
to
delete
the
penalty
in
respect
of
the
gain
on
the
unreported
sale
of
shares.
All
other
appeals
of
Mr.
Sykes
will
be
dismissed.
No
costs
will
be
awarded.
In
her
return
of
income
for
the
1980
taxation
year
the
appellant
Shirley
Anne
Sykes
claimed,
as
previously
mentioned,
a
business
loss
of
$5,196.50
being
45
per
cent
of
the
total
business
loss
of
the
Aditex
partnership.
She
claimed
a
child
tax
credit
for
that
year
and
for
the
1981
and
1982
taxation
years
as
well.
On
assessment
the
deduction
of
the
1980
loss
was
disallowed
and
a
subsection
163(2)
penalty
was
imposed
in
respect
of
the
claim
to
deduct
the
loss.
Further,
the
child
tax
credits
for
all
three
years
were
adjusted
in
relation
to
the
limit
of
five
per
cent
of
the
amount
by
which
family
income
exceeds
$18,000,
that
is
to
say,
the
limit
imposed
by
paragraph
122.2(1)(d)
of
the
Act.
I
have
already
dealt
with
the
deductibility
of
the
supposed
loss.
As
noted
previously,
the
evidence
established
that
the
return
of
income
for
Mrs.
Sykes'
1980
taxation
year
was
prepared
by
her
husband
but
signed
by
her.
In
Cyrus
C.
Udell
v.
M.N.R.,
[1969]
C.T.C.
704;
70
D.T.C.
6019,
Cattanach,
J.
considered
the
meaning
of
subsection
56(2)
of
the
former
Act,
the
predecessor
of
subsection
163(2).
At
page
713
(D.T.C.
6025),
he
stated:
Accordingly
there
remains
the
question
of
whether
or
not
section
56(2)
contemplates
that
the
gross
negligence
of
the
appellant's
agent,
the
professional
accountant,
can
be
attributed
to
the
appellant.
Each
of
the
verbs
in
the
language
"participated
in,
assented
to
or
acquiesced
in”
connotes
an
element
of
knowledge
on
the
part
of
the
principal
and
that
there
must
be
concurrence
of
the
principal's
will
to
the
act
or
omission
of
his
agent,
or
a
tacit
and
silent
concurrence
therein.
The
other
verb
used
in
section
56(2)
is
“has
made".
The
question,
therefore,
is
whether
the
ordinary
principles
of
agency
would
apply,
that
is,
that
what
one
does
by
an
agent,
one
does
by
himself,
and
the
principal
is
liable
for
the
actions
of
his
agent
purporting
to
act
in
the
scope
of
his
authority
even
though
no
express
command
or
privity
of
the
principal
be
proved.
In
my
view
the
use
of
the
verb
“made”
in
the
context
in
which
it
is
used
also
involves
a
deliberate
and
intentional
consciousness
on
the
part
of
the
principal
to
the
act
done
which
on
the
facts
of
this
case
was
lacking
in
the
appellant.
He
was
not
privy
to
the
gross
negligence
of
his
accountant.
This
is
most
certainly
a
reasonable
interpretation.
In
the
present
case
the
evidence
does
not
support
a
conclusion
that
"deliberate
and
intentional
consciousness”
was
present
in
Mrs.
Sykes.
The
burden
of
establishing
liability
for
the
penalty
rests
on
the
respondent.
He
has
failed
to
discharge
it
and
accordingly
the
assessment
of
the
penalty
must
be
deleted.
Since
the
respondent's
findings
as
to
the
income
of
both
Mr.
Sykes
and
Mrs.
Sykes
during
the
relevant
years
have
not
been
found
to
be
wrong,
it
follows
that
the
section
122.2
credit
has
not
been
miscalculated.
The
appeal
of
Mrs.
Sykes
from
the
assessment
for
1980
will
therefore
be
allowed
without
costs
and
the
assessment
will
be
referred
back
to
the
respondent
for
deletion
of
the
penalty.
The
appeals
from
the
assessments
for
1981
and
1982
will
be
dismissed.
I
turn
next
to
the
appeal
of
Aditex
Development
Ltd.
In
assessing
tax
for
the
1979
to
1983
taxation
years,
the
respondent
made
the
following
adjustments:
Item
|
1979
|
1980
|
1981
|
1982
|
1983
|
Expenses
|
|
Disallowed
|
$5,941.08
|
$2,187.44
|
$9,114.46
|
$8,196.32
|
$9,825.15
|
Added
Auto-Gas
|
|
Refund
|
|
55.96
|
65.07
|
214.23
|
Auto-Leasing
Income
|
|
reallocated
from
|
|
Russell
B.
Sykes
|
|
5,964.00
|
5,964.00
|
I
have
already
dealt
with
the
first
item.
There
is
no
evidence
showing
that
the
Minister
erred
in
including
in
the
computation
of
income
rebates
received
by
the
company
from
the
government
of
the
Province
in
respect
of
gasoline
tax.
I
have
also
previously
dealt
with
the
reallocation
of
the
auto-leasing
income.
This
branch
of
the
appeals
fails.
Mr.
Sykes
made
frequent
complaints
with
respect
to
a
failure
on
the
part
of
the
respondent
to
allow
capital
cost
allowance.
Under
paragraph
1100(1)(a)
of
the
Income
Tax
Regulations
deductions
are
permitted
equal
to
”.
.
such
amounts
as
he
may
claim
in
respect
of
property
.
.
.
”.
The
evidence
of
Mr.
Ching,
which
I
accept,
was
that
the
capital
cost
allowance
which
had
in
fact
been
claimed
was
allowed.
This
complaint
therefore
fails.
Finally,
I
turn
to
the
question
of
the
penalties
imposed
on
the
company.
The
evidence
of
Mr.
Liggett
as
to
the
analysis
of
the
disallowed
expense
amounts
and
an
examination
of
the
vouchers
entered
as
Exhibit
R-2
clearly
supports
a
conclusion
that
the
amounts
disallowed
were
personal
expenses
of
Mr.
Sykes
and
his
family
which
had
been
falsely
claimed
by
the
company
as
business
costs.
Mr.
Sykes'
assertion
of
innocent
mistake
is
patently
incredible
having
regard
to
the
nature
of
the
expenses
and
to
the
practice
of
claiming
the
same
expense
more
than
once.
In
the
circumstances
it
is
clear
that
the
company
knowingly
made
false
statements
in
its
returns
of
income
and
thus
became
liable
to
subsection
163(2)
penalties
in
the
amounts
specified
in
paragraph
13
of
the
reply
to
notice
of
appeal.
The
appeals
of
the
company
therefore
fail.
Appeals
allowed
in
part.