Kempo,
T.C.J.:—These
appeals,
on
consent
application,
were
heard
on
common
evidence.
Thirteen
issues
were
originally
raised
by
the
two
appellants
on
the
pleadings.
Four
have
been
resolved
by
settlement
as
set
out
in
the
concluding
portion
of
these
reasons.
The
parties
have
also
agreed
that,
in
respect
of
the
settled
issues,
there
should
be
no
costs
awarded.
The
remaining
issues
are
briefly
described
as
follows.
The
Appellant,
Miksa
Marton
("Marton")
was
reassessed
for
tax
and
penalties
for
his
1980
taxation
year
with
respect
to
an
alleged
appropriation
of
corporate
funds
of
$5,407
which
had
been
received
by
him
in
cash
from
a
customer
during
a
business
trip
to
Italy.
For
his
1981
taxation
year
the
reassessment
was
predicted
on
an
alleged
appropriation
of
corporate
funds
in
the
amount
of
$500,000
in
pursuance
of
an
attempted
buy-out
of
a
minority
shareholder.
The
corporation
above
referred
to
is
the
other
appellant,
Dualflex
Company
Limited
("Dualflex").
It
was
reassessed
tax
and
penalties
for
its
1980
taxation
year
by
the
inclusion
of
the
above
mentioned
$5,407
into
its
income
as
an
unreported
sale.
As
to
its
1981
taxation
year,
a
$400,000
bonus
expensed
by
Dualflex
was
disallowed.
For
its
1982
taxation
year
the
reassessment
was
with
respect
to
an
alleged
understatement
of
sales
regarding
a
credit
issued
in
favour
of
one
of
its
trading
customers
in
the
amount
of
$147,629,
to
an
alleged
overstatement
of
cost
of
sales
regarding
obsolete
inventory
writedown
in
the
amount
of
$50,672,
and
to
an
alleged
overstatement
in
general
expenses
of
$5,000.
Further,
a
separate
appeal
has
been
brought
for
its
1982
taxation
year,
being
court
file
number
86-2128(IT).
This
was
instituted
as
a
procedural
caution
to
ensure
jurisdiction.
It
concerns
a
notice
of
détermina-
tion
of
a
loss
whereby
the
respondent
determined
the
capital
loss
claimed
by
Dualflex
for
that
year
respecting
the
aforementioned
alleged
appropriation
of
$500,000
by
the
appellant
Marton
to
be
nil.
Background
Miksa
Marton
was
born
in
Hungary.
His
formal
schooling
consisted
of
four
grades.
Following
his
involvement
in
the
Hungarian
revolution
he
emigrated
to
Canada
and
obtained
employment
in
an
auto
body
shop
as
a
used-car
conditioner.
He
is
to
this
date
functionally
illiterate
in
that
he
is
unable
to
read
or
write
in
any
language.
Additionally
he
is
not
able
to
recall
specific
dates
or
times.
Any
kind
of
written
document
must
be
prepared
by
others
and
read
to
him,
including
written
communications,
cheques,
etc.
Through
his
employment
experience
Marton
devised
a
new
and
unique
sanding
system
which
he
patented.
The
system
has
been
successfully
marketed
to
major
auto
manufacturers
both
in
North
America
and
in
Europe,
and
is
now
a
source
of
business
that
represents
the
major
part
of
the
operations.
Dualflex
was
incorporated
as
a
private
company
in
1967
under
the
Canada
Corporations
Act
to
carry
on
the
business
developed
by
Marton.
The
allotted
shareholdings
at
the
times
relevant
to
these
appeals
was
68
to
Marton,
2
to
his
brother
George
and
30
to
Max
Weidtman
("Weidtman")
out
of
the
total
100
issued.
Mr.
Weidtman
became
a
shareholder
in
1976.
He
was
its
vice-president
and
was
responsible
for
developing,
overseeing
and
maintaining
its
business
and
sales
in
Europe.
In
addition
to
his
shareholdings
in
Dualflex,
Weidtman
also
owned
30
per
cent
of
Marton's
business-related
patents
and
30
per
cent
of
the
American
company,
Dualflex
Company
Inc.
Mr.
Marton
owned
the
land
and
buildings
occupied
by
Dualflex.
Dualflex
grew
and
prospered.
It
produced
and
sold
sanding
systems,
sandpaper
and
machines,
back-up
pads
and
dust
collecting
devices,
its
driving
force
being
essentially
derived
from
the
patented
processes,
business
acumen
and
hard
work
of
Marton.
He
made
all
the
company's
decisions,
financial
dealings,
bonus
payments
and
the
choice
of
the
company's
professional
advisors.
He
received
a
salary
of
approximately
$40,000
per
year
as
well
as
substantial
bonuses
of
$39,000
in
1978,
$136,850
in
1980
and
$160,000
in
1982.
His
brother
George
was
a
director
and
worked
in
the
factory,
earning
a
salary
and
receiving
bonuses
of
$2,000
in
1978,
$10,000
in
1981
and
$20,000
in
1982.
Following
his
separation
from
his
wife,
Marton
lived
with
a
Ms.
Meloche
who
travelled
extensively
with
and
assisted
him
during
his
business
trips
abroad,
receiving
a
$20,000
bonus
in
1980
and
$8,888
in
1982.
Mrs.
Marton
had
also
worked
at
the
plant
and
had
received
a
bonus
of
$20,000
in
1979.
Mr.
Weidtman
never
received
a
salary
from
Dualflex.
He
was
only
reimbursed
for
travel
expenses
until
1978,
there
being
the
probability
that
he
may
have
neglected
to
submit
any
more
after
then.
He
received
one
bonus
of
$18,900
in
1980
in
respect
of
the
1979
taxation
year.
During
1980
his
frustration
in
not
having
received
adequate
remuneration,
and
Marton's
obtuseness
and
equivocation
in
this
regard,
caused
him
to
want
to
be
bought
out
of
all
three
interrelated
ventures.
Discussions
ensued
as
to
his
proposed
overall
price
of
$600,000,
with
$500,000
to
be
in
cash
and
the
balance
to
be
either
paid
out
or
applied
to
retention
of
a
small
equity
position.
In
1980
Marton
and
his
wife
separated.
A
written
separation
agreement
had
been
signed
on
October
31,
1980
whereby,
inter
alia,
Marton
bought
his
wife
a
house,
and
was
to
pay
her
$1,500
per
month
for
the
support
of
herself
and
the
two
children.
They
had
attempted
to
divorce
in
Hungary
but
learned
that
was
not
recognizable
for
Canadian
purposes.
Mrs.
Marton
was
unhappy
with
the
agreement.
She
had
not
received
independent
legal
advice
before
its
execution
and
had
been
subjected
to
considerable
pressure
by
Marton
to
sign
it.
She
retained
a
lawyer
and
then
dismissed
him
because
of
her
husband's
pressure
tactics.
She
also
returned
to
work
at
the
company
plant
for
a
short
time.
Following
this
she
retained
another
lawyer
and
commenced
formal
legal
action
in
the
early
spring
of
1981
for
a
property
settlement
under
Ontario’s
family
law
legislation.
The
final
notation
to
be
made
by
way
of
background
is
with
respect
to
Marton's
illiteracy
and
the
resulting
innumerable
evidentiary
difficulties
thereby
presented.
The
respondent's
counsel
had
compiled
and
filed
as
Exhibit
R-1
a
book
of
some
100
documents,
using
these
as
sources
for
the
foundation
of
much
of
her
cross-examination
of
Marton.
Needless
to
say
many
of
his
answers
gave
the
appearance
of
having
been
uncertain,
confusing,
self-serving
and
generally
evasive.
A
clear
example
of
this
was
as
asserted
by
respondent's
counsel
thusly:
In
recounting
the
facts,
Miksa
Marton
has
sought
to
thrust
responsibility
for
what
happened
and
why
it
happened
on
those
around
him
—
his
bookkeeper,
accountants,
bank
manager
and
lawyers,
disclaiming
any
recollection
or
knowledge
of
critical
facts.
He
testified
that
the
only
thing
he
knew
was
inventing
things
and
designing
production
for
the
plant,
and
that
he
knew
nothing
of
office
work.
The
evidence
makes
clear,
however,
that
it
was
he
who
controlled
events
and
made
the
decisions.
However,
after
having
observed
the
manner
and
demeanour
of
Marton
over
the
two
days
of
his
examination
and
cross-examination,
and
after
having
heard
the
testimony
of
the
authors
of
the
many
and
diverse
documents
tendered
during
the
course
of
the
trial
of
which
Marton
would
have
had
some
direct
verbal
input
and
knowledge,
I
would
adopt
the
following
reflections,
observations
and
submissions
of
appellant’s
counsel
to
be
a
more
generally
accurate
commentary
of
the
circumstances:
[Statements
made
.
.
.
[in]
the
respondent's
written
submission
ignore
the
difficulty
that
Mr.
Marton
had
in
dealing
with
the
documents
on
which
he
was
questioned
because
of
his
inability
to
read
them.
In
most
cases,
while
he
was
unable
to
identify
these
documents
because
he
could
not
read
them,
he
testified
that
if
the
documents
stated
a
certain
state
of
affairs,
that
must
be
the
actual
state
of
affairs.
Far
from
avoiding
the
questions
put
to
him,
he
attempted
to
answer
to
the
best
of
his
ability,
an
ability
that
clearly
was
hampered
by
his
difficulty
in
understanding
some
of
the
questions.
He
did
not
seek
to
avoid
the
acknowledgment
or
consideration
of
the
documents
produced,
but
because
of
his
inability
to
read
was
unable
to
do
so.
With
regard
to
the
full
presentation
of
evidence,
the
testimony
indicated
that
Mr.
Marton
had
instructed
his
staff
to
provide
Revenue
Canada
with
whatever
they
wanted.
.
.
.Certain
documents
that
were
produced
by
the
Respondent,
were
not
available
to
the
Appellant.
.
.
.Mr.
Marton
held
back
nothing,
although
it
is
clear
that
because
he
could
not
read,
a
review
of
the
documents
by
him
would
not
be
productive
of
further
evidence.
According
to
Marton,
he
had
no
option
but
to
trust
people
to
accurately
reflect
what
he
had
said
in
anything
that
had
to
be
reduced
to
writing.
And
according
to
Ms.
Poupard
(Dualflex’s
bookkeeper
and
office
manager)
Marton
wanted
to
know
everything
that
was
going
on,
that
he
made
all
of
the
important
decisions
and
that
she
relied
upon
him
for
the
facts.
Finally,
it
should
not
pass
unnoticed
that
there
are
numerous
instances
given
in
the
evidence
establishing
that
Marton
had
indeed
conducted
a
great
deal
of
his
business
and
other
matters
in
Canada,
Europe
and
else-
where
by
face-to-face
contact
and
telephone
calls.
As
Mr.
Weidtman
so
candidly
put
it,
there
had
been
many
in-person
meetings
and
telephone
calls
between
them
over
many
matters
over
the
years
and
that
it
would
have
been
pointless
to
present
or
deluge
Marton
with
any
written
documents
confirming
discussions,
negotiations
or
interim
agreements
that
had
been
made.
He
said
he
trusted
Marton,
that
Marton
was
mentally
brilliant
in
his
field
and
that
he
had
been
prepared
to
stay
on
with
him
in
his
ventures
on
a
minimal
equity
basis
because
there
was
a
great
future
business
potential
here.
At
present
Weidtman
retains
his
30
per
cent
equity
in
all
three
matters
with
sporadic
discussions
still
going
on
between
them
for
a
possible
buyout.
The
price
is
now
considerably
higher
due
to
the
company's
prosperity
which
is
in
the
main
attributable
to
Marton's
inventive
ingenuity.
Dualflex
Funds
Received
by
Marton
During
a
Trip
to
Italy
-
$5,407
Mr.
Marton
testified
that
in
1980,
an
eight-week
business
trip
in
Italy
required
the
assistance
of
an
interpreter
who
was
fluent
in
Italian.
During
the
time
he
was
there
he
received
cash
from
Spea
Trading
Company
("Spea")
in
payment
for
two
invoices
of
Dualflex.
Marton
claims
to
have
turned
these
two
amounts
totalling
$5,407
over
to
the
interpreter
as
payment
for
his
services
and
as
reimbursement
for
his
expenses.
No
amounts
had
been
billed
to
Dualflex
either
by
the
interpreter
or
by
way
of
an
expense
account
rendered
by
Marton.
There
is
sufficient
evidence
supporting
a
conclusion
that
this
was
not
merely
an
oversight
on
Marton's
part.
The
two
invoices
for
which
the
cash
had
been
received
were
subsequently
noticed
to
be
arithmetically
erroneous.
Following
several
telexes
they
were
corrected.
Spea
specifically
requested
correcting
adjustments
to
be
recorded
by
appropriate
accounting
documentation,
but
Marton
resisted.
Appellant’s
counsel
sought
to
label
Marton's
actions
as
being
merely
unconventional
and
that
at
the
end
of
the
day
the
alleged
expenditure
to
the
translator
would
have
offset
the
income
sales
amount
in
any
event.
While
this
position
is
deserving
of
some
consideration,
the
better
one
is
as
submitted
by
respondent's
counsel,
thusly:
At
trial,
the
Appellants
alleged
that
the
amount
was
paid
in
respect
of
travelling
expenses
of
an
interpreter.
This
conflicts
with
the
testimony
of
Linda
Poupard
who
testified
it
was
company
practice
to
pay
travelling
expenses
of
Miksa
Marton,
employees
or
others
who
performed
services
on
behalf
of
the
company,
that
the
company
kept
track
of
travelling
expenses,
that
an
amount
would
not
have
been
recorded
only
if
she
did
not
know
about
it
and
that
if
Miksa
Marton
paid
travelling
expenses,
he
would
have
been
reimbursed
by
the
company
on
the
basis
of
receipts.
No
proof
has
been
offered
by
Miksa
Marton
to
substantiate
his
claim
—
he
has
admitted
receiving
$5,407.00
in
cash
on
behalf
of
Dualflex
from
Spea
for
goods,
that
he
did
not
know
whether
it
was
reported
or
not
and
that
there
is
no
record
as
travelling
expenses
for
an
interpreter.
He
provided
no
proof
goods
were
actually
sent
no
charge.
As
the
telexes
reveal,
Spea
paid
cash
for
goods.
Spea
wanted
proper
documentation,
but
Miksa
Marton
did
not
and
it
was
he
who
prevailed.
From
the
whole
of
the
evidence
it
is
not
possible
to
test
or
objectively
determine
with
any
acceptable
degree
of
accuracy
or
assurance
that
any
of
the
sum
or
sums
that
may
have
been
paid
to
a
translator
in
1980
were
indeed
for
the
purposes
of
gaining
or
producing
income
for
the
business.
The
appellants
have
the
evidentiary
onus
of
establishing
this
in
any
corroborative
way
they
can
and
in
this
case
none
has
been
presented.
The
decision
not
to
ensure
an
accurate
recording
of
events
was
that
of
Mr.
Marton
and,
being
the
author
of
his
misfortune
in
this
regard,
he
must
bear
the
consequences.
Also,
prior
jurisprudence
has
negated
fiscal
acceptability
of
informal
setoffs:
see
Samuel
Tobis
v.
M.N.R.,
[1981]
C.T.C.
2161;
81
D.T.C.
125
(T.R.B.)
and
Luney
Bros.
&
Hamilton
Ltd.
et
al.
v.
M.N.R.,
33
Tax
A.B.C.
63
419;
D.T.C.
920
(T.A.B.).
As
to
the
penalties
assessed
upon
each
of
the
appellants,
they
are
to
be
sustained.
Given
all
of
the
circumstances
of
this
case,
particularly
where
Marton
was
repeatedly
asked
to
set
the
records
straight
and
he
refused
to,
I
am
satisfied
the
respondent
has
established
gross
neglect
pursuant
to
subsection
163(2)
of
the
Income
Tax
Act
(the
'Act")
as
defined
in
the
case
law.
To
use
the
words
of
Mr.
Justice
Strayer
in
Venne
v.
The
Queen,
[1984]
C.T.C.
223;
84
D.T.C.
6247
found
at
page
234
(D.T.C.
6256):
.
.
.
there
seems
to
be
a
certain
element
of
subjectivity
recognized
in
the
case
law
with
respect
to
assessing
the
knowledge
or
gross
negligence
of
a
taxpayer
with
respect
to
misstatements
in
his
returns:
"Gross
negligence”
must
be
taken
to
involve
greater
neglect
than
simply
a
failure
to
use
reasonable
care.
It
must
involve
a
high
degree
of
negligence
tantamount
to
intentional
acting,
an
indifference
as
to
whether
the
law
is
complied
with
or
not.
Consulting
Fee
of
$5,000
This
has
been
claimed
by
Dualflex
for
its
1982
taxation
year.
Mr.
Marton
testified
that
it
was
paid
to
Intercooperation
Ltd.
for
trade
promotion
in
Budapest,
Hungary
to
bring
Dualflex
together
with
other
business
people
in
Hungary.
The
evidence
respecting
this
payment
is
somewhat
out
of
sync
as
the
written
contract
that
was
entered
into
between
the
parties
called
for
a
payment
of
$5,000
in
U.S.
funds
and
athe
amount
claimed,
and
disallowed,
was
$5,000
in
Canadian
funds.
Its
journal
entry
was
posted
as
a
“general
expense".
The
written
contract
itself
acknowledges
that
as
of
its
signing
date
a
payment
of
$5,000
had
already
been
made
by
Dualflex.
Intercooperation
Ltd.
did
attempt
to
verify
same,
but
in
U.S.
funds,
by
telex
that
was
requested
of
them
which
was
dated
October
27,
1983.
Notwithstanding
these
inconsistencies,
I
find
that
they
do
not
in
and
of
themselves
compel
any
adverse
or
negative
inferences.
In
my
view
the
evidence
is
supportive
of
a
positive
inference
that
the
claimed
expenditure
was
for
this
purpose
and
it
is
therefore
allowable
under
paragraph
18(1)(a)
of
the
Act.
Dualflex
—
Understatement
of
Sales
(1982
year)
Re
credit
of
$147,629.00
to
Spea
Trading
Since
October
of
1979
Dualflex
had
a
written
contract
with
Spea
Trading
Company
("Spea")
for
the
latter
to
act
as
exclusive
distributors
of
Dualflex's
goods
in
Italy
and
Spain.
The
contract
provided
for
a
minimum
annual
purchase
of
goods
by
Spea
from
Dualflex
of
$400,000
U.S.
for
a
period
of
three
years
which
term
was
automatically
renewable
for
three
years.
Contrary
to
the
assertions
of
Dualflex
as
advanced
in
both
the
notice
of
objection
and
notice
of
appeal,
Spea
had
not
been
given
any
right
to
adjust
their
payables
to
Dualflex
if
the
purchased
goods
could
not
be
sold.
Rather,
Mr.
Marton
indicated
in
his
testimony
that
he
had
warned
them
of
this
danger
ahead
of
time
and
that
they
should
ensure
that
they
have
a
written
purchase
order
from
their
customers
before
they
ordered
the
goods.
Apparently
the
Fiat
car
plants
in
Italy
had
switched
their
sanding
methods
leaving
Spea
holding
a
large
and
unsaleable
supply
of
certain
types
of
sanding
materials.
According
to
Mr.
Marton,
Spea
had
ordered
a
lot
of
these
materials
which
kept
piling
up
on
them.
Apparently
Spea
had
kept
them
in
the
hope
that
they
could
be
sold
later
on.
At
a
meeting
held
between
the
parties
on
September
18,
1981,
Spea
indicated
that
the
unsaleable
goods
amounted
to
approximately
$150,000.
Dualflex
did
not
want
them
back
because
they
were
not
worth
the
shipping
costs
nor
were
they
saleable
in
Canada.
The
parties
realized
that
the
only
way
Spea
could
reclaim
the
duty
that
they
had
paid
on
the
goods
was
to
ship
them
out
of
the
country.
Hereafter
the
facts
are
crucial.
I
agree
with
the
respondent's
counsel
that
the
documents
which
chronicle
the
negotiations
and
ensuring
events
are
to
be
preferred.
As
noted
earlier,
one
of
Mr.
Marton's
difficulties
was
his
inability
to
recall
dates
or
times.
The
sequence
of
events
are
as
follows.
They
are
extrapolated
almost
entirely
from
respondent's
counsel's
written
submissions
and
are
hereby
adopted
as
an
accurate
summation
of
the
events
as
they
occurred:
On
September
18,
1981,
a
meeting
was
apparently
held
by
Rolain
Levy
of
Spea
with
Marton
in
the
Dualflex
offices
in
Windsor
regarding
certain
materials
inappropriate
for
the
Italian
and
Spanish
territories.
That
meeting
opened
the
discussion
regarding
the
goods
but
nothing
was
resolved.
As
Marton
testified,
he
wanted
to
see
what
they
wanted
returned
so
no
final
agreement
was
reached
as
to
what
was
to
be
done.
Pursuant
to
that
meeting,
Rolain
Levy
sent
a
telex
to
Marton
dated
September
23,
1981
in
which
he
outlined
the
full
list
of
material
that
Spea
wanted
Dualflex
"to
consider”.
The
telex
listed
certain
articles
and
quantities,
which
it
identified
as
unfit
for
the
Spanish
and
Italian
markets.
No
specific
relief
was
requested
and
no
agreement
was
reached
as
to
what
was
to
happen
to
the
material.
Spea
was
awaiting
a
response
from
Marton
and
Dualflex.
It
was
not
until
July
20,
1982,
after
Dualflex’s
1982
year
end,
that
Rolain
Levy
sent
to
Dualflex
a
full
list
of
material
with
quantities
and
prices.
The
opening
words
of
that
telex
seem
to
suggest
that
Rolain
Levy
assumed
Dualflex
would
take
back
the
goods.
Dualflex’s
immediate
response
to
Rolain
Levy's
request
came
July
21,
1982
denying
any
agreement
to
take
back
material
save
for
certain
specific
paper
which
could
be
returned
for
credit
once
it
was
checked
and
counted.
Linda
Poupard,
the
company
bookkeeper,
indicated
that
she
could
not
accept
anything
else
until
Mr.
Marton
personally
saw
and
approved
the
list
and
that
he
was
not
expected
back
for
one
and
a
half
months.
She
closed
the
correspondence
by
pointing
out
a
number
of
errors
in
Rolain
Levy's
list.
She
reaffirmed
at
trial
that
this
was
the
position
adopted.
Both
Levy's
list
and
Dualflex's
response
were
sent
after
Dualflex’s
1982
year
end
which
was
May
31,
1982.
Accordingly,
as
at
July
21,
1982,
the
credit
situation
had
not
been
resolved
as
the
telexes
show.
The
accuracy
of
these
telexes
was
not
denied
by
Mr.
Marton.
Discussions
then
continued.
By
telex
dated
July
23,
1982
Rolain
Levy
apologized
for
the
errors
and
agreed
to
await
Marton's
return.
It
was
not
until
October
1982
that
a
resolution
was
apparently
reached.
By
telex
dated
October
14,
1982
Marton
instructed
Rolain
Levy
to
ship
the
material
to
Budapest
(as
per
the
list
of
July
1982),
and
after
the
shipment
was
received,
$50,000
worth
of
merchandise
would
be
given
immediately
and
material
later
shipped
to
cover
the
balance
of
the
credit.
No
material
was
to
be
shipped
against
a
credit
by
Dualflex
until
Levy
shipped
the
material
to
Budapest
and
Dualflex
had
notice
it
was
there.
All
material
had
to
accord
with
the
list
of
July
1982.
These
terms
were
accepted
by
Rolain
Levy
on
October
19,
1982.
To
reiterate
the
terms
of
the
credit
arrived
at
in
October
1982:
1.
Spea
must
ship
the
material
to
Budapest;
2.
it
must
accord
with
the
list
of
July
1982;
3.
upon
receipt,
Spea
would
be
shipped
$50,000
of
material
and
then
so
much
material
at
a
time
to
cover
the
credit
of
$147,629.20;
4.
no
material
was
to
be
shipped
against
the
credit
until
the
material
was
sent
to
Budapest
and
Dualflex
received
notice
it
was
there.
In
his
cross-examination,
Marton
admitted
that
this
was
definitely
the
agreement
he
made,
but
later
he
stated
he
could
not
tell
the
exact
date
he
agreed
to
it.
It
was
not
until
October
1982
that
any
agreement
appeared
to
have
been
reached
with
respect
to
a
credit
—
almost
six
months
after
the
May
1982
year
end
in
which
this
credit
was
claimed.
As
the
telexes
made
clear,
certain
conditions
precedent
applied.
The
telexes
show
that
the
primary
condition
imposed,
the
return
of
goods,
had
not
been
satisfied
by
November
1982.
It
was
not
until
February
15,
1983,
that
Spea
apparently
received
the
Dualflex
credit
note
dated
as
of
May
31,
1982
and
suggested
that
it
be
changed
to
reflect
what
was
agreed
to,
providing
specific
details
of
the
credit.
Objection
was
taken
to
this
proposal
by
Marton
who
telexed
Rolain
Levy
with
instructions
detailing
how
the
credit
should
read
and
requesting
that
he
"send
a
new
telex
to
[Dualflex]
exactly
as
I
have
dictated
below".
He
directed
Rolain
Levy
to
state:
I
received
the
$50,000.00
US
dollrs
[sic]
worth
ogoods
[sic]
from
Dualflex
Co.
Ltd.
of
Canada.
The
balance
of
$97,629.20
US
dollars
credit
is
completely
wiped
out
from
Dualflex
Co.
Canada.
I
loaned
this
difference
to
Mr.
Marton
personally
and
he
will
settle
with
me
from
Hungarian
Co.
in
Budapest.
This
completely
clears
the
Canadian
Com.
from
this
Credit.
This
direction,
bearing
no
relationship
to
the
facts,
was
disavowed
by
Miksa
Marton
at
trial
(Apparently,
the
alternative
was
ultimately
rejected
as
the
credit
still
showed
in
Dualflex's
books
as
at
May
31,
1984).
The
documents
reveal
that
no
agreement
had
been
reached
and
no
credit
note
had
been
issued
on
or
before
October
1982,
although
a
credit
note
dated
May
31,
1982
was
prepared
and
a
credit
was
claimed
as
a
closing
entry
in
the
company's
books.
The
only
invoice
issued
that
correctly
reflected
the
facts
was
that
issued
by
Spea
referencing
its
telex
of
July
20,
1982,
and
Marton's
telex
of
October
14,
1982.
The
Spea
telex
identified
the
terms
of
the
credit
as
“credit
in
our
favour
to
be
used
against
coming
shipments
orders
to
be
made
on
our
behalf.
Credit
value:
Delivery
date
to
you
in
Hungary."
The
list
of
materials
in
this
Spea
invoice
ties
in
exactly
to
the
list
of
materials
sent
by
Spea
after
the
adjustments
made
by
Dualflex.
These
events,
long
after
the
1982
year-end
did
not,
however,
conclude
the
matter.
As
late
as
September
1983,
the
whole
matter
was
still
in
dispute
and
Dualflex’s
apparent
denial
of
responsibility
was
being
contested
by
Rolain
Levy.
[On
cross
examination]
Mr.
Marton
was
asked
about
his
telex
dated
September
6,
1983.
[He
conceded
that
as
at
that
date
the
documents
indicated
the
whole
matter
was
still
not
settled.]
Gary
Denys,
Dualflex’s
accountant,
testified
that
the
Spea
Credit
was
properly
taken
in
the
1982
taxation
year
because
the
sale
had
occurred
during
the
year,
the
sale
had
been
recorded
and
"whether
or
not
the
credit
note
was
issued
made
no
difference
at
all
to
the
accounting
valuation
of
the
accounts
receivable,
because
the
credit
was
to
be
issued
and
the
goods
were
damaged."
He
went
on
to
say
the
goods
in
question
were
actually
sold
to
Spea
in
1982.
He
admitted
on
the
cross
that
he
based
his
assumption
that
the
credit
was
to
be
issued
on
statements
made
by
Marton
and
when
the
goods
were
sold
based
on
statements
by
Marton.
He
went
on
to
admit,
after
reviewing
the
documents,
that
the
telexes
indicated
that
the
goods
had
been
sold
in
1979,
that
Marton
did
not
inform
him
of
the
discussions
and
agreements
that
had
been
reached
after
the
year
end,
he
never
saw
the
invoice
issued
by
Spea
and
had
no
knowledge
of
the
specific
terms
of
agreement
arrived
at
by
Marton
and
Spea.
He
admitted
that
an
accountant's
views
are
only
as
strong
as
the
information
he
had.
The
thrust
of
the
appellant’s
position
was
that,
for
accounting
purposes,
once
the
necessity
of
giving
a
credit
is
known,
it
must
be
reflected
by
reduction
in
the
accounts
receivable
whether
or
not
the
formalities
of
the
credit
have
been
completed.
Further
on
it
was
urged
that
"the
clearly
legal
obligation
to
issue
this
credit
was
established
when
the
goods
were
found
to
be
unsaleable".
The
latter
submission
ignores
the
absence
of
any
such
legal
obligation
in
the
contract
between
Spea
and
Dualflex.
However,
if
such
entitlement
arose
because
of
some
subsequent
enforceable
arrangement
having
been
made
between
them,
then
it
is
incumbent
on
Dualflex
to
establish
that
point
in
time
in
which
they
became
saddled
with
this
obligation
as
a
legal
obligation.
The
factual
scenario
belies
this
as
having
occurred
as
at
Dualflex's
1982
year-end.
The
appellant
relies
on
the
principles
advanced
by
Mr.
Justice
Jackett
in
Associated
Investors
of
Canada
Limited
v.
M.N.R.,
[1967]
C.T.C.
138;
67
D.T.C.
5096
as
supportive
of
its
first
submission.
In
that
case
the
company
employed
commissioned
salesmen
to
sell
investment
certificates
to
the
public.
Advances
were
made
to
their
salesmen
which
were
then
set-off
by
commissions
payable
to
them.
One
employee's
advances
far
exceeded
his
commissions
and
for
two
subsequent
years
the
company
adjusted
the
face
value
of
these
receivables
downward.
The
Court
upheld
the
deduction
on
the
basis
that
the
advances
were
not
deductible
in
the
year
they
were
made
because
the
possibility
then
existed
that
they
would
be
repaid.
Only
when
a
business
determination
had
been
made
that
the
advances
were
unrecoverable
was
a
cost
incurred
and
a
deduction
required.
The
relevant
passages
(including
the
footnote)
relied
upon
are
found
at
pages
146-47
(D.T.C.
5100).
The
situation
was
therefore
that,
at
the
time
that
the
advance
was
made,
the
appellant
had
exchanged
its
money
for
a
"right"
that
was,
from
a
businessman's
point
of
view,
of
equal
value.
It
had
substituted
one
asset
in
money
for
another
of
equal
amount.
As
of
that
time,
therefore,
the
making
of
the
advance
did
not
affect
the
overall
value
of
the
appellant's
assets.
The
advance
cannot,
therefore,
as
of
that
time,
be
regarded,
from
a
businessman's
point
of
view,
as
having
affected
the
appellant's
profit
from
his
business.
Similarly,
if
the
advance
was
entirely
repaid,
there
was
again
a
substitution
of
one
asset
for
another
of
equivalent
value
and
there
was
no
overall
effect
on
the
appellant's
asset
position.
When,
however,
the
choice
in
action
depreciated
in
value,
there
was
an
effect
on
the
appellant's
asset
position
and
accordingly,
at
that
time,
for
the
first
time,
the
advance
transaction
resulted
in
the
appellant
having
sustained
a
loss.*
As
that
loss
arose
out
of
a
transaction
in
the
course
of
the
appellant’s
current
business
operations,
it
must
be
taken
into
account
in
computing
the
profits
from
the
appellant’s
business
or
they
will
be
overstated.
In
my
view,
it
must
be
so
taken
into
account
in
computing
the
profit
from
the
business
for
the
year
in
which
the
appellant,
as
a
“businessman”,
recognized
that
the
loss
had
occurred.
It
cannot
properly
be
taken
into
account
in
computing
the
profit
for
a
previous
year.
There
is
no
sound
basis
for
taking
it
into
account
in
computing
the
profit
for
a
subsequent
year.
*Just
as
a
“receipt”
from
a
sale
of
stock-in-trade
in
the
course
of
business
that
is
of
dubious
value
should
only
be
included
in
computing
profit
for
the
year
of
the
sale
at
a
valuation,
and,
in
some
circumstances,
it
may
be
that,
if
it
cannot
be
valued,
it
should
not
be
brought
into
account
until
it
is
realized
(see
John
Cronk
&
Sons,
Ltd.
v.
Harrison
(1935),
20
T.C.
612;
compare
Absalom
v.
Talbot
(1944),
26
T.C.
166,
and
C.I.R.
v.
Gardner
Mountain
&
D'Ambrumenil,
Ltd.
(1947,
29
T.C.
69),
so
an
expenditure
that
is
made
in
the
carrying
on
of
the
business
and
that
may
or
may
not
result
in
an
actual
cost
of
operation
should
only
be
charged
against
the
receipts
of
the
business
in
the
year
when
the
contingency
is
realized,
and
then
only
to
the
extent
of
the
net
outlay
involved
at
that
time.
I
do
not
read
the
above
passages
as
being
fiscally
supportive
of
the
appellant,
as
a
businessman,
being
able
to
in
effect
back-date
the
realization
of
the
contingency
(to
employ
the
words
used
in
the
footnote)
from
one
fiscal
year
to
another.
At
best,
the
September
1981
discussions
between
Spea
and
Dualflex
were
no
more
than
discussions
followed
by
a
unilateral
submission
of
specific
goods
as
listed
in
the
September
23,
1981
telex
which
Spea
wanted
Dualflex
"to
consider".
The
facts
support
the
respondent's
position
aforesaid
that
"[i]t
was
not
until
October
1982
that
any
agreement
appeared
to
have
been
reached
with
respect
to
a
credit
—
almost
six
months
after
the
May
1982
year-end
in
which
this
credit
was
claimed”.
Before
the
31st
of
May
1982
an
adjustment
in
the
form
of
credits
to
Spea
was
no
more
than
merely
anticipatory.
The
arrangements
had
not
coalesced
into
what
may
be
characterized
as
a
“realization
of
a
contingency"
until
much
later
into
the
1983
year.
Accordingly,
the
appellant
has
not
shown
the
respondent
has
erred
in
this
matter
for
its
1982
taxation
year.
Du
al
fl
ex:
1982
Inventory:
Writedown
$50,672
The
physical
inventory
of
Dualflex
had
been
tabulated
in
the
normal
way
under
the
supervision
of
its
auditors.
In
the
first
instance
certain
items
known
to
be
unsaleable
were
listed
on
the
count
at
nil
value.
All
other
listed
items
were
valued
at
cost
and
the
total
value
was
computed.
Subsequently,
the
inventory
was
again
reviewed
and
a
determination
was
made
that
certain
of
the
listed
items
were
obsolete
or
unsaleable.
This
was
established
in
the
main
by
Marton
who
was
the
most
knowledgeable
person
to
do
so
because
of
his
knowledge
of
the
markets
and
the
technological
developments
in
his
field.
This
opinion
was
said
to
have
been
supplemented
by
the
opinion
of
Dualflex's
production
manager
and
by
the
inspection
of
this
stock
by
the
auditor,
Mr.
Denys.
During
the
course
of
the
audit
conducted
by
Revenue
Canada
it
was
discovered
that
subsequent
to
the
1982
year-end
certain
items
included
by
Dualflex
in
its
obsolete
listing
(as
having
zero
value)
had
been
shipped
to
its
warehouse
in
Hungary,
the
auditor,
Mr.
Pearson,
did
not
disallow
the
reduction
of
all
inventory
that
was
declared
obsolete
but
only
that
portion
that
had
been
shipped
to
Hungary.
The
rest
had
been
thrown
away
according
to
Marton.
By
comparing
an
invoice
in
respect
of
the
goods
shipped
(Tab
99
of
Exhibit
R-1)
with
the
documents
listing
inventory
as
obsolete,
Mr.
Pearson
determined
that
goods
with
a
cost
of
$50,672
had
been
characterized
as
obsolete,
yet
had
been
shipped
to
Hungary
for
sale.
He
therefore
made
an
adjustment
to
increase
Dualflex’s
net
income
for
the
1982
year
by
this
amount.
The
auditor
used
cost
because
it
had
been
established
at
the
time
the
inventory
had
been
physically
taken
at
year-end.
Notwithstanding
an
invitation
to
do
so,
Dualflex
provided
no
alternative
values
but
has
maintained
its
stance
that
(1)
no
shipping
costs
were
incurred
as
a
result
of
the
shipment
to
Hungary,
(2)
the
material
was
not
saleable
in
Canada
but
had
the
possibility
of
some
sale
or
trade-in
value
(i.e.,
salvage
value),
or
some
other
possible
utilization
in
Hungary,
all
of
which
was
based
on
a
prudent
business
decision,
(3)
the
stock
was
considered
to
have
no
net
realizable
value
and
could
be
considered
to
have
value
only
if
and
when
it
was
sold
from
the
Hungarian
warehouse
(which
never
happened),
(4)
the
decline
in
the
value
of
the
stock
in
question
had
been
sustained
prior
to
the
end
of
the
fiscal
year,
(5)
that
Dualflex
was
not
anticipating
losses
by
doing
what
it
did
and
that
(6)
by
assigning
a
value
to
the
goods
that
were
shipped
to
Hungary,
goods
which
had
no
resale
value
in
Canada,
it
was
arguable
that
Revenue
Canada
was
attempting
to
force
Dualflex
to
anticipate
profits
that
in
fact
were
never
realized.
Finally,
the
appellant
submits
that
it
has
established
that
the
goods
had
no
market
value
and
the
fact
that
attempts
were
made
to
realize
some
salvage
value,
attempts
that
involved
little
or
no
cost,
does
not
endow
them
with
a
value
they
do
not
otherwise
have.
While
appreciating
the
merits
of
the
above
submissions,
it
is
my
view
that
the
correct
approach
and
answer
is
found
in
the
respondent's
counsel's
written
submission
which
reads
as
follows:
That
the
goods
had
a
value
was
acknowleged
in
Dualflex's
Notice
of
Objection
and
by
Miksa
Marton
at
trial.
In
the
Notice
of
Objection
the
company
stated
that
the
goods
could
have
a
sale
or
exchange
value.
This
was
acknowledged
by
Miksa
Marton.
It
is
submitted
that
Dualflex
would
not
have
shipped
these
goods
to
Hungary
if
it
did
not
believe
the
goods
had
value,
were
saleable
and
that
it
could
earn
income
from
it.
Gary
Denys,
an
accountant
called
by
Dualflex
on
this
issue,
testified
that
he
assumed
the
goods
shipped
to
Hungary
had
a
nil
value
because
that's
what
Marton
told
him.
But,
if
the
goods
were
capable
of
being
sold
or
exchanged,
he
indicated:
They
would
be
valued
at
the
lesser
of
cost
on
the
market
so
that
if
there
were
a
selling
price
that
could
be
obtained
in
a
free
and
open
market,
and
if
that
selling
price
was
less
than
the
original
cost
of
producing
the
goods,
then
that
was
the
value
that
was
still
on
them.
Dualflex
did
not
seek
to
establish
at
trial
what
the
net
realizable
value
was
and
if
it
was
less
than
cost.
The
repackaging
of
goods
for
resale
under
a
different
label
or
in
a
different
market
is
a
reality
of
business
life,
providing
a
company
with
a
chance
to
make
money
outside
of
its
usual
sphere
of
activities
where
the
goods
do
not
suit
the
taste
or
style
of
its
normal
clientele.
Dualflex
is
a
company
dealing
with
many
foreign
customers
and
participating
in
the
world
marketplace.
While
the
goods
may
not
have
been
suited
for
North
American
customers
or
the
customers
for
whom
they
were
originally
made,
they
were
saleable.
The
company
itself
recognized
these
goods
as
saleable
and
capable
of
generating
income
for
the
company
for
it
put
them
in
containers
and
shipped
them
to
Hungary
for
sale.
There
was
no
indication
that
the
company
would
do
this
for
any
reason
other
than
to
make
money
and
clearly
the
company
recognized
that
the
money
to
be
made
from
the
sale
of
these
goods
in
the
secondary
market
more
than
compensated
for
the
time,
energy,
cost
and
risk
of
shipping
the
goods
for
sale.
Thus,
the
inventory
is
not
without
any
value
at
all
as
the
company
asserts.
The
correct
valuation
of
inventory
is
critical
to
the
accurate
determination
of
income
and
thus
essential
to
the
accurate
determination
of
tax
liability
on
a
year-
by-year
basis.
Inventory
is
a
current
asset
on
the
balance
sheet
at
the
value
indicated
by
the
taxpayer.
It
also
comes
into
play
in
the
Income
Statement
in
determining
the
cost
of
sales.
Cost
of
sales
is
normally
calculated
as:
1.
value
of
inventory
on
hand
at
the
beginning
of
the
year
plus
2.
cost
of
purchases,
minus
3.
the
value
of
inventory
on
hand
at
the
end
of
the
year.
Incorrect
valuation
of
inventory
can
distort
business
income.
If
closing
inventory
is
overvalued
compared
with
opening
inventory,
profits
will
be
overstated.
If
closing
inventory
is
undervalued
as
compared
with
opening
invoices,
income
will
be
understated.
The
latter
is
the
problem
here.
By
valuing
the
goods
at
nil,
the
income
will
be
understated.
As
a
result
of
the
interplay
of
subsection
10(1),
and
regulation
18
of
the
Income
Tax
Regulations,
a
taxpayer
has
three
choices
in
valuing
inventory:
(a)
valuing
each
item
in
the
inventory
at
the
lower
of
cost
or
fair
market
value;
(b)
valuing
the
entire
inventory
at
cost;
or
(c)
valuing
the
entire
inventory
at
fair
market
value.
The
cost
of
inventory
is
readily
determinable.
The
question
of
what
is
fair
market
value
for
inventory
purposes
was
considered
in
Sellers-Gough
Fur
Co.
Ltd
v.
M.N.R.,
[54
D.T.C.
1170]
wherein
the
Exchequer
Court
indicated
the
value
to
be
placed
on
stock-in-trade
at
a
particular
time
is
entirely
a
question
of
fact
(p.
1171).
In
Sellers-Gough,
the
Appellant
company
was
a
retail
furrier,
selling
fur
coats
and
accessories.
At
issue
was
the
correct
market
value
of
the
inventory.
.
.
.The
Court
suggested
that
depending
on
the
circumstances,
market
value
means
either
replacement
cost
or
the
estimated
realizable
value
less
an
allowance
for
a
usual
and
reasonable
profit.
.
.
.[T]he
Court
determined
that
it
was
not
possible
to
ascertain
the
replacement
market
value
on
the
evidence
before
it
and
so
it
considered
net
realizable
value.
(It
held
that
one
could
not
use
a
combination
of
both).
In
applying
net
realizable
value,
the
Court
[at
p.
1174]
cautioned
against
taking
into
account
future
losses:
.
.
.
Now
it
seems
to
me
that
in
taking
into
account
the
reductions
in
sale
prices
which
he
would
possibly
or
even
probably
have
to
make
during
the
next
year
(or
perhaps
over
a
longer
period)
and
thus
forecasting
the
future,
he
was
in
fact
taking
into
account
losses
in
inventory
which
had
not
been
sustained
in
the
taxation
year
1946,
but
which
might
be
suffered
in
a
subsequent
year
or
years,
thereby
setting
up
what
amounted
to
an
inventory
reserve.
It
is
of
paramount
importance
to
keep
in
mind
that
the
object
of
the
computation
in
which
the
closing
inventory
values
constitute
one
element,
is
to
determine
as
precisely
as
possible
the
actual
balance
of
the
profits
and
gains
in
each
year
of
the
company's
operations;
and
that
only
those
elements
of
loss
or
expense
enter
into
the
computation
which
are
suffered
or
incurred
during
the
taxation
year
in
question.
These
principles
were
stressed
by
the
Lord
President
(Clyde)
in
Collins
&
Sons
Ltd.
v.
Commissioners
of
Inland
Revenue,
12
T.C.
773,
the
head
note
of
which
reads:
Held,
that,
as
the
loss
was
only
an
apprehended
future
one
and
had
not
been
suffered
in
the
accounting
period
in
question,
the
deduction
claimed
was
inadmissible.
..
.
.
and
at
page
1175
of
Sellers-Gough:
.
.
.
Notwithstanding
the
evidence
of
Mr.
Pettit
that
it
was
accepted
as
a
sound
principle
in
accounting
circles
to
take
into
account
in
valuing
inventory
the
losses
which
inventory
might
sustain
in
a
subsequent
year,
I
do
not
think
that
principle
can
be
used
when
applying
the
provisions
of
the
Income
War
Tax
Act
to
the
ascertainment
of
the
profits
or
gains
of
a
taxation
year.
.
.
.
My
conclusion
on
this
point
is,
therefore,
that
when
establishing
the
“market
value”
of
an
inventory
on
the
basis
of
estimated
realizable
value,
it
is
not
permissible
to
take
into
account
losses
in
inventory
value
which
for
the
subsequent
year
are
merely
anticipated
and
have
not,
in
fact,
been
suffered
or
sustained
in
the
taxation
year
under
consideration.
In
other
words,
the
estimated
realizable
value
of
the
inventory
must
be
taken
as
it
appears
to
be
on
the
date
of
taking
the
inventory
and
not
as
it
might
be
by
forecasting
the
future
with
all
its
uncertainties.
To
the
extent,
therefore,
that
these
factors
entered
into
Mr.
Gough's
fixation
of
inventory
values,
the
inventory
was
undervalued.
The
Canada
Tax
Service
[at
Vol.
2,
pp.
10-119]
only
recommends
net
realizable
value
as
appropriate
where
there
is
no
normal
wholesale
market
and
no
normal
retail
market
available
because
of
its
theoretical
nature:
Net
realization
value
is
the
estimated
selling
price
of
the
property
at
the
retail
level
less
the
cost
of
completion
and
selling.
It
is
normally
used
for
goods
which
are
unsaleable
in
the
ordinary
course
of
business
because
of
obsolescence,
damage,
imperfections,
shop
wear,
changes
in
style,
odd
or
broken
lots
or
other
similar
causes.
See
below
under
“Obsolete
Goods".
As
a
further
illustration,
a
company
might
own
a
quantity
of
goods
no
longer
saleable
in
Canada
which
it
knows
can
be
disposed
of
in
Europe.
In
such
a
case
the
company
would
be
justified
in
valuing
the
goods
at
the
selling
price
in
Europe,
less
the
cost
of
getting
the
goods
there.
.
.
.In
the
instant
case,
the
evidence
shows
that
Dualflex
reasonably
believed,
at
the
date
of
taking
the
closing
inventory,
that
the
goods
in
question
could
be
sold
or
exchanged
abroad
for
money
or
money's
worth.
Nonetheless,
it
valued
these
goods
at
nil,
which
does
not
accurately
reflect
their
fair
market
value
at
year
end.
In
doing
so,
it
sought
to
take
into
account
losses
that
were
merely
anticipated,
amounting
to
an
inventory
reserve.
While
this
may
be
acceptable
for
accounting
purposes,
it
offends
the
basic
principles
of
taxation
as
the
case
of
Sellers-Gough,
cited
supra,
indicates.
The
Respondent
has
assumed,
on
the
basis
of
the
best
available
evidence,
that
the
inventory
should
be
valued
at
cost.
To
show
the
reassessment
to
be
incorrect,
the
onus
thus
lies
on
the
taxpayer
to
show
that
the
fair
market
value
of
the
goods
is
less
than
cost
and
what
that
value
is.
This
the
taxpayer
has
failed
to
do.
Accordingly,
it
is
my
view
that
Dualflex
has
not
shown
at
trial
either
error
or
the
extent
of
error
on
the
part
of
the
respondent.
Alleged
Appropriation
by
Marton
of
Funds
re:
Attempted
Shareholder
Buy-out
&
Loss
Deduction
to
Dual
flex
-
$500,000
In
its
pleadings
the
respondent
disclosed
the
basis
of
the
reassessments
in
this
respect
and
confirmed
same
through
the
viva
voce
evidence
of
the
auditor,
Mr.
Pearson.
The
basis
on
which
the
pleadings
were
founded
was
that
Marton
intended
to
purchase
Weidtman's
shares
on
his
personal
account
but
to
have
Dualflex
finance
the
transaction;
that
Marton
arranged
for
Dualflex
to
borrow
the
money
from
the
Bank
to
finance
his
personal
purchase
of
the
shares;
that
the
cash
funds
went
missing
while
in
Marton's
possession
and
that
thereby
the
borrowed
cash
amount
of
$500,000
was
appropriated
by
Marton
pursuant
to
subsection
15(1)
of
the
Act
and
was
accordingly
disallowed
as
a
loss
to
the
Company.
The
appellants’
pleadings
basically
allege
that
Dualflex
was
to
have
purchased
all
of
Weidtman's
shares;
that
Dualflex
negotiated
a
bank
loan
which
required
Marton's
personal
guarantee
and
pledges
of
personal
property
for
repayment;
that
the
$500,000
loan
proceeds
were
taken
in
cash
by
Marton
from
Dualflex's
bank
account
to
pay
for
the
shares
at
a
planned
meeting
which
was
subsequently
delayed;
that
the
cash
was
stored
in
the
basement
of
Marton's
home
and
that
when
he
discovered
it
was
missing
he
concluded
it
was
stolen
and
reported
the
theft
to
the
police.
For
purposes
of
clarification,
respondent's
counsel
at
trial
reiterated
that
the
alleged
appropriation
by
Marton
was
not
premised
on
anything
other
than
the
fact
that
the
money
went
missing.
Evidence
was
heard
from
five
investigating
police
officers
essentially
to
deny
the
appellant's
allegation
of
theft.
Counsel,
in
her
written
submissions,
asserted
that
"[t]hese
witnesses
were
not
called
to
prove
Miksa
Marton
committed
a
crime
but
rather
to
testify
as
to
admissions
made
by
Miksa
Marton
in
the
course
of
the
investigation,
to
provide
testimony
as
to
the
events
that
transpired
in
the
spring
and
summer
of
1981
and
to
rebut
certain
statements
made
by
Miksa
Marton”.
She
then
suggested
the
Court
may
draw
its
own
conclusions
based
on
the
evidence
as
to
whether
Marton
himself
took
the
funds.
In
any
event,
she
continued,
the
primary
basis
of
reassessment
was
that
of
appropriation
of
funds
which,
as
defined
in
Century
21
Ramos
Realty
Inc.
and
Ramos
v.
The
Queen,
58
O.R.
(2d)
737
at
752;
[1987]
1
C.T.C.
340
at
349
(Ont.
C.A.),
is:
1.
to
make
over
to
any
one
as
his
own
.
.
.
2.
to
take
for
one's
own,
or
to
oneself.
.
.
and
that
no
act
of
theft
or
fraud
need
be
proved.
I
agree
with
respondent's
counsel
that
criminality
is
not
relevant
to
the
determination
of
the
issue
in
this
case.
Therefore
neither
the
respondent
nor
the
appellants
have
any
onus
to
establish
or
disprove,
respectively,
matters
involving
elements
of
criminality
by
way
of
theft,
fraud
or
otherwise.
As
to
the
facts
surrounding
this
matter,
the
appellants'
counsel
has
laid
them
out
rather
succinctly
in
his
written
submissions.
The
following
portions
are
adopted
as
an
accurate
factual
scenario
of
the
circumstances.
My
own
interjections
are
indicated
in
square
parentheses.
Max
Weidtman,
at
the
time
he
first
came
into
contact
with
the
taxpayers
in
these
cases,
was
a
landed
immigrant
in
Canada.
According
to
his
evidence
he
became
a
Canadian
citizen
in
1981
or
1982.
He
is
now
resident
in
Germany,
having
returned
there
to
manage
his
father’s
estate.
Prior
to
again
becoming
resident
in
Germany,
he
spent
considerable
time
in
Europe
on
business
trips.
In
fact,
in
at
least
one
of
those
years,
there
was
a
question
as
to
whether
he
was
resident
in
Canada,
because
it
was
not
clear
whether
he
had
spent
180
days
in
this
country.
He
first
came
into
contact
with
Miksa
Marton
and
Dualflex
Company
Ltd.
through
an
independent
third
party.
.
.
.[Discussions
led
to
the
acquisition
by
Mr.
Weidtman,
from
Mr.
Marton,
in
April
1976,
of
30%
of
the
outstanding
shares
of
Dualflex
Company
Ltd.
As
part
of
the
same
transaction,
Mr.
Weidtman
acquired
a
30%
interest
in
the
American
company,
Dualflex
Company
Inc.,
and
in
the
patents,
interests
that
the
parties
saw
as
following
or
tied
to
the
interest
acquired
in
the
Canadian
company.
Closely
connected
with
the
purchase
of
the
shares
was
the
appointment
of
Mr.
Weidtman
as
vice-president
of
the
company
and
the
assumption
by
him
of
the
responsibility,
among
others,
for
sales
to
Europe
and
other
export
sales.
No
formal
arrangement
was
made
at
that
time
for
Mr.
Weidtman's
compensation.
Mr.
Weidtman,
in
the
early
1980s,
had
become
disillusioned
with
the
treatment
he
had
received
from
Dualflex
Company
Ltd.
In
spite
of
what
he
saw,
and
what
Mr.
Marton
acknowledged,
to
be
a
major
contribution
to
the
company's
prosperity,
he
had
received
little
compensation.
In
1979,
he
had
received
a
bonus
of
$18,900,
but
had
received
no
other
compensation
with
respect
to
his
efforts
on
behalf
of
the
company.
Although
this
question
was
discussed
with
Mr.
Marton
on
a
number
of
occasions,
at
the
time
in
question,
1980,
no
resolution
had
been
achieved.
Mr.
Weidtman
told
Mr.
Marton
that
he
wished
to
sell
his
interests
in
the
organization
and
negotiations
were
started.
The
final
price
agreed
upon
was
$600,000
of
which
$500,000
was
to
be
paid
in
cash
and
$100,000
was
to
be
paid
later
in
a
manner
not
at
that
time
decided.
According
to
Mr.
Weidtman's
testimony
it
was
his
impression
at
that
time
that
he
was
dealing
with
the
company
with
respect
to
the
purchase
of
the
shares,
although
he
was
frank
to
admit
that,
because
of
his
concern
and
preoccupation
with
the
illness
of
his
father,
he
was
not
really
concerned
with
the
question
of
whether
the
purchase
would
be
made
by
Mr.
Marton
personally,
or
by
Dualflex
Company
Ltd.
What
he
was
concerned
with
was
that
the
shares
would
not
be
resold
for
a
higher
price
than
that
paid
to
him.
This
concern,
at
least
in
part,
arose
from
the
transaction
by
which
he
acquired
his
shares
originally.
[Counsel
for
Marton
has
conceded
that
Marton
was
at
all
times
material
very
concerned
with
his
wife's
legal
action
to
set
aside
the
October
1980
agreement.
The
evidence
establishes
that
between
the
22nd
and
30th
days
of
April
1981
he
had
discussed
those
concerns
with
his
lawyer
and
that
he
had
been
served
with
a
statement
of
claim
and
writ
which
he
discussed
with
his
lawyer
on
May
21,
1981.
Marton
testified
he
didn't
want
Weidtman
to
get
involved
in
this
mess.
Weidtman
was
aware
of
these
events
and
accordingly
was,
for
these
and
all
the
other
reasons,
anxious
to
be
bought
out.]
What
were
Mr.
Marton's
actions
with
respect
to
the
proposed
purchase
that
have
a
bearing
on
the
question
of
who
the
purchaser
of
the
shares
was
to
be?
It
is
not
entirely
possible
to
be
sure
of
the
exact
sequence
of
all
the
events,
but
we
do
know
that
the
following
events
took
place:
(1)
Mr.
Marton
met
with
Mrs.
Holsey
[manager
of
the
subject
local
branch
of
the
Toronto-Dominion
Bank]
to
discuss
the
possibility
of
obtaining
a
bank
loan
of
$500,000
to
finance
the
purchase
of
the
shares.
Mrs.
Holsey
then
prepared
an
application
for
credit
dated
May
26,
1981
(Respondent's
Document
6A)
to
the
head
office
of
the
Toronto-Dominion
Bank.
In
that
document
Mrs.
Holsey
wrote:
The
details
regarding
the
tax
benefits
in
borrowing
the
money
personally
or
through
the
company
had
not
been
discussed
with
Marton's
auditors;
however,
he
has
requested
that
we
obtain
approval
for
the
full
amount
to
be
borrowed
by
Dualflex
Company
Ltd.
(2)
Mr.
Marton
spoke
to
Mr.
Larry
Goddard
on
the
telephone
twice
on
May
25,
1981
[i.e.,
the
day
before]
with
respect
to
the
purchase
of
Mr.
Weidtman's
shares.
Mr.
Goddard
was
the
partner
of
Thorne,
Riddell,
at
that
time
the
auditors
of
the
company,
in
charge
of
the
audit
of
Dualflex
Company
Ltd.
Mr.
Goddard,
as
was
his
practice,
made
a
note
in
his
diary
of
the
fact
of
the
calls
and
their
subject
matter.
In
the
first
call
from
Mr.
Marton
to
Mr.
Goddard,
Mr.
Marton
told
Mr.
Goddard
that
he
was
thinking
about
buying
out
Mr.
Weidtman's
30%
interest
in
the
company.
Mr.
Goddard
testified
that
he
suggested
that
Mr.
Marton
consider
having
the
company
buy
back
the
shares
rather
than
Mr.
Marton
buying
them
personally.
He
pointed
out
to
Mr.
Marton
that
it
was
much
more
costly
for
him
to
buy
the
shares
personally
because
he
would
have
to
make
payment
out
of
after-tax
dollars
whereas
the
company
could
pay
for
them
out
of
pre-tax
(that
is
pre-individual
income
tax)
dollars.
In
his
testimony,
Mr.
Goddard
said
that
the
difference
in
cost,
if
the
individual
rather
than
the
company
bought
the
shares,
would
depend
on
the
method
used
by
the
individual
to
obtain
the
funds
from
the
company.
If
he
took
the
money
out
in
the
form
of
salary,
he
would
have
to
take
out
two
dollars
of
salary
to
have
one
dollar
to
apply
to
the
purchase
price.
In
other
words,
an
individual
paying
$500,000
for
shares,
would
have
to
receive
$1,000,000
in
salary,
to
have
$500,000
after
tax
to
pay
for
the
shares.
Mr.
Goddard
estimated
that,
if
the
individual
obtained
the
money
from
the
company
by
way
of
dividend,
out
of
each
$100
of
dividends
he
received
he
would
have
$75
available
to
apply
on
the
purchase
price.
Mr.
Goddard
further
testified
that
when
he
pointed
out
these
facts
to
Mr.
Marton,
Mr.
Marton
thought
that
Mr.
Goddard's
suggestion,
i.e.
that
the
company
rather
than
Mr.
Marton
buy
Mr.
Weidtman's
shares,
"was
a
good
idea
and
that
he
was
very
much
in
favour
of
it”.
Mr.
Goddard
suggested
that
approval
of
Mr.
Weidtman
would
be
required
for
this
procedure
to
be
adopted.
Mr.
Goddard
testified
that
he
made
a
call
to
Mr.
Marton
later
in
the
same
day
and
suggested
that
he
check
with
the
company
lawyer
to
make
sure
whether,
since
the
company
was
a
Canadian
corporation,
it
could
redeem
its
own
shares.
(3)
Mr.
Marton
contacted
Mr.
Grant,
the
company
solicitor,
on
May
26,
1981
and
indicated
to
him
that
he
wished
the
shares
of
Mr.
Weidtman
be
purchased
and
asked
him
whether
Dualflex
Company
Ltd.
could
purchase
its
own
shares.
Mr.
Grant
testified
that
at
that
time
he
was
quite
clear
that
an
Ontario
corporation
could
do
so,
but
that
he
told
Mr.
Marton
that
he
would
have
to
verify
whether
a
federal
corporation
had
the
same
power.
He
also
discussed
with
Mr.
Marton
the
tax
advantages
that
would
accrue
with
respect
to
a
purchase
of
the
shares
by
the
company,
in
contrast
with
a
purchase
by
an
individual,
provided
that
the
company
was
able
to
make
such
a
purchase
under
the
law
of
its
incorporating
jurisdiction.
[By
letter
dated
June
1,
1981
as
evidenced
by
Respondent's
Document
6A,
the
Toronto-Dominion
Bank
granted
its
approval
of
the
loan
noting,
inter
alia,
that
“it
is
understood
that
the
marital
separation
will
not
effect
withdrawals
from
the
company.
We
understand
he
has
already
given
his
wife
a
$65,000.00
house
and
also
pays
her
$18,000.00
a
year,
which
he
has
been
doing
for
some
time
now."
These
comments
appear
to
reflect
only
the
circumstances
of
the
1980
separation
agreement.
I
was
not
able
to
find
any
reference
in
any
documents
prepared
in
or
about
this
time
that
the
Bank
had
been
actually
made
aware
of
the
current
marital
situation
and
legal
action
being
taken.
This
information
makes
its
appearance
for
the
first
time
in
banking
letters
and
documents
dated
October
6,
1981
as
evidenced
in
Respondent's
Documents
6
and
18.]
(4)
On
June
8,
1981,
Mr.
Grant
informed
Mr.
Marton
that
there
were
no
impediments
under
the
Canada
Corporations
Act
to
the
purchase
of
the
shares
by
the
corporation
as
opposed
to
Mr.
Marton
purchasing
the
shares
from
Mr.
Weidtman
personally.
(5)
Sometime
prior
to
June
8,
1981,
Mr.
Grant
had
been
advised
that
there
would
be
a
loan
from
the
Toronto-Dominion
Bank
and
had
been
instructed
by
the
bank
to
prepare
security
documentation,
collateral
security
on
Mr.
Marton's
personally
owned
real
property.
During
his
discussions
with
Mr.
Marton
on
June
8,
he
pointed
out
to
Mr.
Marton
that
the
loan
from
the
Toronto-Dominion
Bank
to
Dualflex
Company
Ltd.
would
require
the
approval
of
the
Board
of
Directors,
and
that
appropriate
notice
of
a
Board
meeting
called
for
that
purpose
would
have
to
be
given
to
Mr.
Weidtman.
A
notice,
presumably
drafted
by
Mr.
Grant,
was
sent
to
Mr.
Weidtman
by
telex.
At
the
same
meeting,
a
draft
of
the
Minutes
of
the
director's
meeting,
approving
the
loan
from
the
Toronto-Dominion
Bank
was
prepared.
[Mr.
Grant
said
he
omitted
any
reference
in
the
Minutes
he
drafted
as
to
the
purpose
of
the
loan
for
the
reason
that
it
had
been
drawn
solely
for
banking
purposes
and
that
he
anticipated
documents
would
have
to
be
drawn
later
to
record
the
step-purchase
transactions
that
would
ensue.]
(6)
A
telex
was
sent
by
Max
Weidtman,
to
Dualflex
Company
Ltd.
on
June
10,
1981,
indicating
his
inability
to
attend
the
meeting
on
June
11,
and
approving
the
matter
in
principle,
on
the
condition
that
the
loan
was
to
be
used
only
for
the
purpose
of
financing
the
major
part
of
the
purchase
price
of
his
shares.
(7)
Mr.
Grant
was
contacted
by
Mr.
Bernhardt,
a
Toronto
solicitor
who
acted
for
Mr.
Weidtman.
Mr.
Bernhardt
was
concerned
as
to
Mr.
Weidtman's
position
as
guarantor
of
the
company's
bank
loans
and
expressed
the
desire
that,
on
the
purchase
of
his
shares,
he
should
be
released
from
all
responsibility
under
his
guarantees.
According
to
Mr.
Grant's
testimony,
Mr.
Bernhardt
was
concerned
that
the
acquisition
of
the
shares
might
be
for
the
purpose
of
resale
to
a
third
party
but
that
he
expressed
no
concern
as
to
the
method
of
purchase,
whether
through
the
company
of
Mr.
Marton
directly.
Mr.
Grant
assumed
that
the
transaction
proceeded
as
a
purchase
of
the
shares
by
the
company.
He
testified
that
he
was
of
the
opinion
that
the
purchase
was
to
be
by
the
company
thusly:
Q.
Do
you
recall
whether
you
were
informed
whether
it
was
the
company
that
was
purchasing
these
shares?
A.
My
recollection
is
that,
and
again
I
go
back
to
those
notes
on
it,
the
discussions
were
only
about
the
corporation
borrowing
the
money,
or
the
corporation
borrowing
the
money
and
acquiring
the
shares.
I
can
recall
no
discussions
[that]
would
lead
one
to
think
that
a
decision
was
going
contrary
to
the
normal
way
that
one
would
endeavour
to
complete
the
transaction
once
I
had
reviewed
the
provisions
of
the
relevant
Act
and
found
that
it
was
possible
under
that.
It
is
common
ground
that
the
loan
was
approved
on
June
10,
1981
and
credited
to
the
company
bank
account
on
that
date.
The
credit
to
the
company
bank
account
on
that
date
was
a
paper
entry
only
and
the
funds
were
not,
at
that
time,
removed
from
the
bank
by
the
company
or
by
Mr.
Marton.
The
funds
were,
however,
invested
on
behalf
of
the
company
in
the
short-term
money
market,
and
as
the
various
short-term
sécurités
matured
the
proceeds
were
deposited
and
again
removed
for
reinvestment.
The
proceeds
of
the
short
term
money
market
investments
were
back
in
the
company
account
on
June
17,
1981.
Mr.
Marton
had
arranged
that
the
loan
proceeds,
$500,000,
were
to
be
made
available
in
cash.
Since
the
branch
did
not
have
that
amount
of
cash
on
hand,
arrangements
had
to
be
made
to
ship
the
cash
from
Toronto.
The
cash
was
available
by
June
17,
1981.
It
had
been
planned
that
Mr.
Weidtman
was
to
arrive
in
Canada
and
the
$500,000
was
withdrawn
from
the
bank
immediately
before
his
expected
arrival.
The
withdrawal
was
made
in
the
form
of
$100
bills,
placed
by
Mr.
Marton
in
a
briefcase
for
transportation
purposes.
Mr.
Marton
had
a
number
of
reasons
for
using
cash
for
the
transaction.
Among
these
were
the
following:
(1)
He
took
the
offer
of
Mr.
Weidtman
to
the
company
to
sell
his
shares,
embodied
in
the
telex
of
June
10,
1981
(Respondent's
Document
#8),
wherein
the
price
was
described
as
“five
hundred
thousand
cash
and
balance
later”,
literally.
Because
of
his
background,
his
other
dealings
in
cash,
etc.,
he
took
the
reference
to
cash
to
mean
just
what
it
said.;
(2)
Dealing
with
cash,
even
in
large
amounts,
was
not
an
unusual
occurrence
for
Mr.
Marton.
He
pointed
out
that
in
Europe,
where
he
grew
up,
it
was
normal
to
deal
in
cash,
and
cheques
were
unheard
of.
In
his
testimony,
he
gave
an
example
of
such
a
dealing
by
him
with
respect
to
carrying
cash
to
Hungary
to
pay
off
a
substantial
loan
received
by
Dualflex
Company
Ltd.
from
a
lender
in
that
country.
(3)
Mr.
Marton
and
the
company
had
previous
experiences
where
interest
parties
had
negotiated
contracts
with
the
company
without
cash
being
put
up.
The
effect
of
these
negotiations
had
been
to
tie
the
company
up,
without
the
benefit,
because
the
parties
had
eventually
dropped
the
negotiations
without
substantial
cash
up
front.
This
influenced
his
attitude
with
respect
to
the
negotiations
with
Mr.
Weidtman.
In
addition,
he
was
convinced
that
making
the
payment
in
the
form
of
cash
would
have
some
influence
in
persuading
Mr.
Weidtman
to
complete
the
deal.
(4)
Mr.
Marton
was
concerned
with
the
marital
problems
he
was
experiencing.
He
was
concerned
that
the
actions
being
taken
at
the
time
by
his
wife
might
cause
the
bank
to
freeze
the
company
funds
and
make
it
impossible
for
the
deal
with
Mr.
Weidtman
to
be
completed.
Even
if
he
had
had
a
certified
cheque
prepared
for
Mr.
Weidtman
it
was
his
opinion,
based
on
information
that
he
had
requested
from
his
lawyer,
that
such
a
cheque
could
be
cancelled
by
the
bank.
By
withdrawing
the
money
in
cash,
he
thought
that
these
problems
would
be
avoided.
[Marton's
credibility
had
been
challenged
in
this
respect
because
the
evidence
gave
the
appearance
that
the
Bank
had
been
fully
aware
of
the
current
marital
state
of
affairs.
As
I
have
already
observed,
supra,
that
does
not
appear
to
have
been
the
case.]
The
money,
in
$100
bills,
was
withdrawn
from
the
bank
on
June
17,
1981,
by
Mr.
Marton.
He
had
taken
a
shotgun
with
him
to
the
bank
for
whatever
protection
was
necessary.
The
money
was
placed
in
a
briefcase
for
transportation
and
Mr.
Marton
locked
it
in
the
trunk
of
his
car.
He
drove
around
the
corner
to
where
his
daughter
and
estranged
wife
lived,
talked
to
his
daughter
and
showed
her
the
money
which
he
described
to
her
as
the
money
to
purchase
Mr.
Weidtman's
shares.
He
apparently
said
to
his
wife
that
she
would
not
"see
a
penny
of
it”.
Mr.
Weidtman
was
scheduled
to
arrive
in
Canada
the
day
after
the
withdrawal
of
the
money
from
the
bank
and
was
to
receive
payment
of
the
$500,000
at
that
time.
Because
of
his
father’s
illness,
Mr.
Weidtman
contacted
Mr.
Marton
and
indicated
that
his
trip
would
have
to
be
postponed.
[Weidtman
testified
the
delay
was
on
a
day-to-day
basis
and
that
his
suitcase
was
packed
but
that
he
could
not
leave
his
father’s
bedside.]
At
that
time
it
was
thought
that
the
trip
would
only
be
postponed
for
a
short
time,
and
Mr.
Marton
was
faced
with
the
problem
of
dealing
with
the
cash
in
the
meantime.
He
did
not
want
to
return
the
money
to
the
bank,
since
he
was
still
concerned
that,
because
of
his
trouble
with
his
wife,
the
bank
might
renege
on
the
loan.
He
considered
putting
it
into
the
company
safe,
but
discarded
that
idea
because
the
company
had
only
a
light
safe
and
no
burglar
alarm
protection.
His
house,
however,
in
his
opinion,
was
much
better
protected.
Although
he
had
experienced
a
number
of
break-ins,
the
police
had
installed
a
burglar
alarm
system
connected
directly
to
the
police
station,
and
since
the
installation
of
that
alarm,
he
had
had
no
further
trouble
with
intruders.
He,
therefore,
concluded
that,
for
the
short
period
necessary,
at
that
time
thought
only
to
be
a
day
or
two,
the
best
and
safest
place
to
store
the
money
was
in
his
house.
Accordingly,
he
removed
the
money
from
the
briefcase,
placed
it
in
a
double
garbage
bag,
and
placed
it
in
a
basement
cool
room,
covered
by
old
summer
chairs.
The
illness
of
Mr.
Weidtman's
father
caused
continual
postponements
of
his
trip
to
Canada.
It
is
not
clear
whether,
at
some
point,
it
was
decided
that,
instead
of
Mr.
Weidtman
coming
to
Canada,
Mr.
Marton
would
travel
to
Europe
to
complete
the
transaction.
In
any
event,
Mr.
Marton
became
concerned
with
the
continued
presence
of
the
money
in
the
house,
and
on
July
2,
1981,
he
contacted
a
manager
of
Canada
Trust
to
determine
whether
he
would
accept
a
deposit
of
$500,000
cash.
The
manager
agreed
to
do
so,
but
other
events
intervened.
On
July
3,
1981,
Mr.
Marton
was
phoned
by
the
police
who
informed
him
that
they
wished
to
remove
the
alarm
system.
He
asked
that
it
be
left
in
for
a
little
while
longer,
but
the
police
indicated
that
they
were
unable
to
do
so
because
it
was
needed
elsewhere.
The
police
arrived
a
short
time
later
to
remove
the
system.
According
to
their
testimony,
the
alarm
had
been
activated
prior
to
their
arrival,
and
they
were
unable
to
tell
how
long
prior
to
their
arrival
it
had
been
triggered.
The
police
assumed,
but
were
unable
to
verify,
that
it
had
only
been
activated
a
short
time
before
they
arrived
because
a
police
car
drove
up
while
they
were
there.
No
investigation
of
the
premises
was
made
at
that
time.
Sergeant
Prystanski,
accompanied
by
Detective
Evans,
proceeded
to
remove
the
alarm
system.
Sometime
later
that
same
day,
Mr.
Marton
went
down
to
the
basement
to
remove
the
money.
He
said
he
then
discovered
that
it
had
disappeared
along
with
some
gold
and
jewellery.
He
said
he
panicked.
According
to
what
he
told
the
police,
and
testified
in
this
Court,
he
searched
for
the
money
in
other
parts
of
the
house,
asked
June
Meloche
if
she
knew
anything
about
the
money,
and
phoned
various
relatives.
In
addition,
we
know
from
Linda
Poupard's
testimony
that
he
visited
the
plant.
July
3,
1981
was
the
date
that
the
Canada
Day
holiday
was
celebrated
in
Windsor
that
year,
but
Mr.
Marton,
as
was
his
custom
on
Canadian
holidays,
had
asked
for
a
volunteer
to
work
in
the
office
that
day
in
case
orders
or
queries
were
received
from
foreign
customers.
Linda
Poupard
volunteered
and
was
alone
in
the
office.
[She
testified
that
Marton
was
very
upset
when
he
came
in
and
was
frantically
searching
the
office
for
what
he
said
was
the
money
for
Mr.
Weidtman.
He
called
people
on
the
phone
and
was
very
upset
because
the
money
was
missing.]
The
police
were
notified
of
the
disappearance
of
the
money.
There
is
some
difference
in
the
testimony
as
to
how
long
after
the
discovery
that
the
money
was
missing
that
the
notification
was
made.
[At
trial
Marton
said
immediately
after
its
discovery.
Constable
Bishop
testified
that
the
call
arrived
in
the
police
station
at
3:20
p.m.,
that
he
was
dispatched
to
the
house
at
3:45
p.m.
and
that
he
arrived
there
at
4:06
p.m.
being
45
minutes
after
Marton's
call.
He
also
testified
that
Marton
and
Ms.
Meloche
had,
after
some
questioning,
agreed
the
disappearance
had
been
discovered
about
10:30
a.m.
and
not
after
lunch
or
1:30
p.m.
as
Marton
indicated
at
trial.
In
response
to
his
questioning,
Marton
told
Constable
Bishop
the
delay
was
because
he
was
trying
to
contact
his
lawyer,
his
brother
and
his
sister.]
In
any
event,
Officer
Bishop
and
Constable
Stewart
of
the
Windsor
Police
Department
arrived
at
Mr.
Marton's
home
in
the
late
afternoon
of
July
3,
1981.
Information
was
then
gathered
with
respect
to
the
source
of
the
money,
details
of
the
stolen
jewellery,
and
the
location
in
which
the
money
and
jewellery
had
been
stored.
Officer
Bishop
said
that
Mr.
Marton
was
extremely
upset
when
they
arrived,
but
he
gave
his
opinion
that
the
upset
was
due
to
their
late
arrival
rather
than
to
the
loss
of
the
money.
Mr.
Marton
showed
Officer
Bishop
the
location
where
the
money
had
been
stored,
indicated
that
the
chairs
which
had
covered
the
money
did
not
appear
to
have
been
disturbed
and
agreed
with
him
that
there
was
no
sign
of
forcible
entry
or
other
disturbance
of
the
premises.
Officer
Bishop
testified
that
this
lack
of
disturbance
would
suggest
that
either
there
was
no
theft
or
that
the
person
who
took
the
items
knew
exactly
where
to
look.
While
Constables
Bishop
and
Stewart
were
still
there,
Staff
Sergeant
Saunders
arrived
and
later
Sergeant
Perton.
Staff
Sergeant
Saunders
again
went
over
the
circumstances
and
purposes
of
Mr.
Marton
obtaining
the
money
and
reviewed
his
domestic
situation.
Apparently,
little
else
was
done
by
Saunders
at
this
time,
He
returned
to
Mr.
Marton's
residence
on
Sunday,
July
5,
1981.
At
that
time
with
Mr.
Marton's
consent
he
searched
the
premises,
finding
nothing.
He
then
proceeded
to
the
premises
of
Dualflex
Company
Ltd.
and
again
with
the
consent
of
Mr.
Marton
searched
these
premises
without
result.
Apparently,
the
next
contact
made
by
the
police
was
when
Detectives
Bishop
and
Larkin
met
with
Mr.
Marton
in
his
office
at
Dualflex.
Detective
Bishop
testified
that
he
attempted
to
make
Mr.
Marton
angry
and
was
successful
in
this
attempt.
He
accused
Mr.
Marton
of
taking
the
money
himself,
eliciting
an
irate
response
from
Mr.
Marton.
At
that
point,
Mr.
Marton
refused
to
respond
to
Detective
Bishop,
and
in
particular,
refused
to
take
a
lie
detector
test.
Later
on
the
same
day,
Mr.
Marton,
accompanied
by
Mr.
Gates
of
the
legal
firm
of
Bartlet
&
Richardes
met
with
Staff
Sergeant
Saunders
at
the
offices
of
the
Criminal
Investigation
Division
of
the
Windsor
Police
Department.
Mr.
Marton
again
refused
to
take
a
lie
detector
test.
The
police
investigation
that
took
place,
other
than
the
meetings
already
described,
apparently
consisted
of
inquiries
to
persons
known
to
Mr.
Marton
and
persons
in
his
immediate
neighbourhood.
[As
noted
earlier
Officer
Bishop's
view
was
that
the
lack
of
visible
damage
would
suggest
either
that
there
was
no
break-in
or
that
whoever
stole
the
money
knew
exactly
where
to
look.]
On
July
7,
1981,
Mr.
Marton,
accompanied
by
Ms.
Meloche,
left
on
a
trip
to
Europe,
a
trip
which
had
been
scheduled
for
some
time,
They
were
met
at
the
airport
by
Staff
Sergeant
Saunders
who
informed
Mr.
Marton
that
he
had
a
warrant
to
search
him
and
Ms.
Meloche
and
their
baggage.
This
search
also
was
carried
out,
without
result.
As
testified
to
by
Staff
Sergeant
Saunders,
the
investigation
was
confined
to
inquiries
of
persons
known
to
Mr.
Marton,
and
to
enquiries
of
Mr.
Marton's
bankers.
[It
also
included
Mr.
Marton's
estranged
wife.]
The
police
had
developed
a
theory
as
to
the
disappearance
of
the
money
which
was
described
by
Staff
Sergeant
Saunders
on
page
419
of
the
Transcript,
in
the
following
exchange:
Q.
What
was
the
theory
you
suggested
to
Mr.
Marton?
A.
I
suggested
to
him
that
he
was
going
to
keep
the
$500,000,
and
the
fact
that
the
loan
had
been
obtained
by
using
the
company
itself
as
collateral,
and
the
actual
theft
of
the
money
would
cause
a
liability,
the
end
result
the
company
would
not
survive,
and
any
attempt
by
his
wife
to
obtain
further
monies
would
not
meet
with
a
great
deal
of
success.
Q.
What
did
he
indicate
about
that
possibility?
A.
Mr.
Marton
became
very
agitated
at
that
point.
He
became
profane,
began
to
shout
and
was
restrained
by
his
lawyer.
Q.
Did
he
indicate
anything
regarding
the
allegation
about
his
wife
and
his
money?
A.
Yes.
Mr.
Marton
replied
to
me,
"Well
if
that
is
what
you
think,
okay.”
Q.
Did
he
deny
the
money
had
been
taken
by
him?
A.
No,
that
was
his
reply.
Similarly,
Detective
Jessop
testified
that
he
had
deliberately
attempted
to
make
Mr.
Marton
angry
and,
on
his
accusation
that
Mr.
Marton
had
taken
the
money,
succeeded
in
doing
so.
He
testified
that
Mr.
Marton
became
extremely
irate
at
the
accusation,
was
shouting
at
Detective
Jessop,
which
shouts
were
returned
and
that
the
discussion
that
ensued
was
heated.
Prior
to
the
instigation
of
this
confrontation,
Detective
Jessop
had
interviewed
Mrs.
Holsey
at
the
Toronto-Dominion
Bank
as
well
as
the
estranged
and
embittered
Mrs.
Marton.
The
impressions
gained
by
the
police
officers
as
to
the
facts
were
actually
erroneous
in
that
the
borrower
was
Dualflex
and
not
Marton,
and
the
securities
to
be
pledged
as
collateral
were
not
that
of
Dualflex
but
rather
were
the
personal
properties
of
Marton.
A
review
of
the
banking
documents
in
respondent's
Document
6A
negates
the
police
theory
that
the
actual
theft
of
the
money
would
cause
a
liability,
the
end
result
being
that
the
company
would
not
survive,
because
it
ignores
the
fact
that
the
loan
had
been
fully
secured
by
Marton's
personal
assets.
Respondent's
counsel
has
urged
the
Court
to
take
note
of
the
many
factual
inconsistencies
as
testified
to
by
Marton
on
the
one
hand
and
the
police
officers
on
the
other.
I
accept
and
adopt
appellants’
counsel's
position
in
this
respect,
which
was
that:
There
is
no
question
that
Mr.
Marton
was
anxious
to
complete
the
deal
because
of
his
concern
about
his
marital
situation.
That
this
concern
led
him
to
steal
the
$500,000
is
a
completely
unsubstantiated
and
untenable
position.
The
assets
he
had
remaining
in
Canada,
and
indeed
the
continued
cooperative
attitude
of
the
bank
after
the
loss
of
the
money,
indicate
that
the
loss,
although
a
blow,
was
not
likely
to,
and
did
not,
affect
his
settlement
with
his
wife.
There
clearly
are
discrepancies
in
the
testimony
of
Mr.
Marton
and
that
of
the
police,
as
to
the
time
the
burglary
was
reported,
and
as
to
the
content
of
conversations
held
with
the
police.
It
is
submitted
that
these
discrepancies
were
not
unnatural
in
view
of
Mr.
Marton’s
distress
at
the
loss
and
his
confused
and
upset
state.
Further,
these
discrepancies,
while
disturbing,
do
not
contradict
the
basic
facts
put
forward
by
Mr.
Marton.
Respondent's
counsel
urges
that
there
were
material
discrepancies
to
be
considered
surrounding
the
infusion
of
$400,000
borrowed
from
Spea
Trading
in
November
of
1982.
The
Bank
had
requested
a
reduction
in
Dualflex’s
operating
loans
and
within
a
short
time
Marton
produced
two
payments
of
$200,000
in
cash.
Mrs.
Holsey
attended
upon
the
first
deposit
which
went
into
Marton's
personal
account
at
the
Bank
on
November
16,
1982.
Another
Bank
employee
attended
upon
the
second
one
two
days
later.
The
banking
records
show
that
the
money
went
immediately
thereafter
into
Dualflex’s
account.
Rolain
Levy
on
behalf
of
Spea
Trading
had
sent
one
telex
confirming
that
the
loan
was
to
Marton
personally,
and
then
he
sent
another
one
saying
it
was
to
Dualflex
and
setting
out
its
terms.
I
agree
with
the
appellants’
counsel
that
in
the
end
it
has
minimal
impact
on
the
real
issues
in
this
case.
Respondent's
counsel
concluded
that:
If
there
had
been
a
genuine
loan
between
the
parties,
there
would
not
have
been
the
inexplicable
discrepancy
in
the
evidence
as
to
whose
money
it
was
and
who
lent
the
money.
The
liabilities
would
have
been
fixed
and
not
revised
at
the
convenience
of
one
party.
Miksa
Marton
has
sought
to
provide
a
rationale
for
these
various
cash
transactions
and
why
he
had
to
carry
cash
through
town
in
garbage
bags
and
valises
or
why
others
carried
cash
across
international
borders
in
briefcases.
His
explanations,
lacking
evidentiary
foundation
should
not
obscure
two
facts.
Firstly,
it
is
not
usual
business
procedure
to
carry
hundreds
of
thousands
of
dollars
in
cash
as
Max
Weidtman
and
Gordon
Fowler
both
testified.
One
can
achieve
the
benefits
of
a
cash
transaction
with
a
bank
draft.
Secondly,
there
is
a
basic
feature
to
cash
—
it
is
not
traceable.
The
evidence
before
this
Court
is
of
money
disappearing
from
behind
folding
chairs
and
reappearing
from
Swiss
Bank
accounts
for
which
no
coherent
explanation
has
been
provided
by
Miksa
Marton.
It
is
respectfully
submitted
that
the
evidence
of
Miksa
Marton
regarding
the
borrowing
of
the
funds,
the
withdrawal
of
the
money
and
its
subsequent
loss
should
be
rejected
and
that
the
loss
be
denied
as
a
deduction
to
the
company
and
the
shareholder
appropriation
assessed
to
Miksa
Marton
should
be
upheld
for
the
following
reasons
which
were
disclosed
by
the
evidence:
(1)
money
borrowed
by
Dualflex
was
intended
for
Miksa
Marton's
personal
purchase
of
the
Dualflex
shares;
(2)
there
was
no
business
reason
for
withdrawing
the
money
borrowed
by
Dualflex
from
the
Bank;
(3)
the
money
borrowed
and
withdrawn
for
personal
purposes
went
missing
while
in
Miksa
Marton's
possession.
Analysis
In
respect
of
subsection
15(1)
of
the
Act,
the
question
rests
materially
on
the
underlying
facts.
Undoubtedly
one
wonders,
at
first
blush,
why
anyone
would
carry
around
and
store
such
a
large
quantity
of
cash
for
any
reason.
However
it
is
not
that
unusual
an
occurrence
such
as
to
invite
total
disbelief
and
thereby
compel
complete
disregard
of
the
actual
reasons
advanced.
The
third
branch
of
the
stated
assessing
assumptions,
that
is
that
the
money
went
missing
while
in
Marton's
possession,
was
undoubtedly
true.
And
while
the
circumstances
surrounding
these
events
tend
to
arouse
one's
curiosity
and
to
test
one's
credulity,
it
must
be
remembered
that
they
are
founded
on
nothing
more
than
a
combination
of
suspicion,
police
theory
and
circumstantial
evidence.
Mr.
Marton,
in
my
opinion,
has
withstood
a
long,
gruelling
and
very
competently
devised
cross-examination
on
this
issue.
In
the
end
a
lot
of
his
recollections
were
certainly
not
in
accord
with
the
reams
of
documents
and
extensive
police
testimony
provided
by
the
respondent.
But
on
the
other
hand,
much
of
the
testimony
garnered
from
his
banker,
his
accountants,
his
lawyer,
his
office
manager
and
Mr.
Weidt-
man
were
generally
corroborative
of
Marton's
testimony.
And
it
would
be
patently
unfair
to
these
appellants
to
disregard
the
latter
in
favour
of
the
former
and
thereby
permit
a
combination
of
suspicions,
police
theory
and
uncustomary
financial
transactions
to
be
determinative
of
the
circumstances.
As
noted
by
appellants’
counsel,
many
of
Marton's
errors
of
recall
concerning
these
issues
were
neutral
in
consequence
in
any
event.
And
Mr.
Marton's
illiteracy
presented
considerable
difficulties
in
all
aspects
of
the
case.
As
to
the
first
branch,
which
is
the
identity
of
the
purchaser
of
Weidtman's
shares,
the
appellants
have
garnered
sufficient
corroborative
evidence
to
rebut
the
respondent's
assumption
in
this
respect.
The
key
corroborative
testimony
here
was
that
of
the
appellants'
accountant,
Mr.
Goddard,
and
their
lawyer,
Mr.
Grant.
There
simply
was
no
earthly
reason
as
to
why
Mr.
Marton
would
have
disregarded
their
advice
and
recommendations.
Mr.
Weidtman
and
his
lawyer,
Mr.
Bernhardt
were
at
the
very
least
neutral
in
this
respect
and
remained
so
until
July
3,
1981.
The
proposition
that
they
could
have
sought
to
alter
this
position
in
subsequent
meetings
involves
mere
conjecture.
Finally,
with
respect
to
the
second
branch,
the
reasons
advanced
for
the
cash
withdrawal
of
the
funds
has
already
been
commented
upon.
They
are
not
lacking
an
acceptable
foundation,
and
the
business
purpose
was
that
of
Dualflex's
acquisition
of
Weidtman's
shares.
Accordingly,
Marton's
appeal
on
the
appropriation
matter
succeeds.
As
to
the
appeal
of
Dualflex,
the
respondent
has
argued
in
the
alternative
that
if
a
loss
was
realized
by
it
in
its
1982
taxation
year,
the
amount
of
such
loss
is
deemed
to
be
nil
as
a
consequence
of
paragraph
40(2)(e)
of
the
Act
as
a
loss
from
a
disposition
of
property
by
it
to
the
controlling
shareholder.
The
answer
to
this
is
found
in
counsel's
submission
that
Dualflex
did
suffer
the
capital
loss
claimed
and
that
paragraph
40(2)(e)
has
no
application
to
the
facts
since
there
was
no
disposition
of
property
by
it
to
its
controlling
shareholder,
Mr.
Marton.
Therefore
the
appeal
of
Dualflex
on
this
matter
succeeds.
Dualflex
—
The
Alleged
Bonus
$400,000
-
1981
or
1982
Dualflex
claims
it
is
entitled
to
a
deduction
in
respect
of
an
amount
paid
to
Mr.
Weidtman
which
they
allege
was
a
bonus
for
his
services
rendered,
if
not
for
its
1981
taxation
year
then
for
its
1982
year.
The
notice
of
appeal
reads
thusly:
(5)
The
following
are
the
facts
relevant
to
the
amounts
listed
covered
by
this
appeal:
(b)
This
amount
represented
a
bonus
to
Mr.
Weidtman,
the
company's
representative
in
Europe.
Among
other
duties,
Mr.
Weidtman,
who
is
also
a
30%
shareholder
in
and
director
of
the
company,
was
in
charge
of
developing
the
European
market
and
servicing
the
European
customers.
In
addition,
he
is
involved
in
overall
management
decisions.
In
considering
the
operations
of
the
company
for
the
year
ended
May
31,
1981,
it
was
decided
that
bonuses
of
$400,000
would
be
paid
to
the
employees,
and
accordingly,
a
liability
for
that
amount
was
reflected
on
the
May
31,
1981
financial
statements
of
the
company.
At
a
meeting
of
the
Board
of
Directors
on
February
28,
1982
in
London,
England,
the
payment
of
this
bonus
to
Mr.
Weidtman
stipulated
that
the
amount
of
the
bonue
less
any
withholding
tax
be
loaned
back
to
the
company.
Prior
to
May
31,
1982,
a
cheque
payable
to
Mr.
Weidtman
was
prepared
and
signed
and
left
with
the
bookkeeper
to
hand
to
Mr.
Weidtman
on
his
arrival
in
Canada,
which
was
expected
to
be
before
May
31,
1982.
His
arrival
was
delayed
until
early
June,
the
cheque
was
delivered
to
him
and
it
was
realized
that
it
had
been
made
out
in
the
wrong
amount.
It
was
replaced
immediately
with
a
cheque
for
the
proper
amount.
Revenue
Canada
disallowed
the
deduction
of
the
bonus,
for
the
following
stated
reasons:
(1)
the
payment
cannot
be
regarded
as
a
reasonable
expenditure
on
account
of
a
bonus;
(2)
the
payment
by
its
nature
might
more
accurately
be
described
as
a
settlement
on
account
of
damages
suffered
by
Mr.
Weidtman
and,
as
such,
does
not
meet
the
qualifications
for
deductibility
as
outlined
in
IT
Bulletin
467;
and
(3)
even
if
the
payment
could
be
regarded
as
a
bonus,
it
was
not
paid
within
the
time
period
specified
by
Subsection
78(3)
of
the
Income
Tax
Act.
(6)
The
following
are
the
reasons
on
which
the
taxpayer
relies:
(b)
The
bonus
to
Mr.
Weidtman
was
to
compensate
him
for
his
services
to
the
company.
It
was
reasonable
in
amount
when
compared
to
the
profits
earned
by
the
company
from
sales
for
which
he
was
responsible.
The
bonus
was
not
compensation
for
any
damages
that
may
have
been
suffered
by
Mr.
Weidtman.
If
the
bonus
was
a
liability
at
May
31,
1981,
it
was
paid
by
the
delivery
of
the
cheque
to
the
bookkeeper
of
the
company
as
agent
for
Mr.
Weidtman.
This
delivery
took
place
prior
to
May
31,
1982.
In
any
event,
if
payment
did
not
take
place
by
May
31,
1982,
subsection
78(3)
does
not
authorize
the
inclusion
of
the
amount
in
income
for
the
year
ended
May
31,
1982.
If
the
bonus
was
not
a
liability
at
May
31,
1981
and
therefore
is
not
deductible
in
1981,
it
became
a
liability
in
February
1982
and
should
be
deductible
for
the
year
ended
May
31,
1982.
The
pertinent
portions
of
the
respondent's
reply
to
notice
of
appeal
is
as
follows:
6.
With
respect
to
subparagraph
5(b)
of
the
Appellant's
Notice
of
Appeal,
the
Respondent
admits
that
Mr.
Weidtman
was
a
30%
shareholder
of
the
Appellant
and
that
the
expense
claimed
was
disallowed
for
the
reasons
stated
but
otherwise
denies
the
said
subparagraph.
13.
In
assessing
the
Appellant
for
its
1980,
1981,
1982
taxation
years,
the
Respondent
relied,
inter
alia,
upon
the
following
findings
or
assumptions
of
fact:
(t)
in
its
1981
taxation
year,
the
Appellant
accrued
a
bonus
of
$600,000;
(u)
as
at
May
31,
1981,
when
the
bonus
was
accrued,
the
Appellant
had
not
determined
who
was
to
receive
the
bonus
or
what
amount
would
be
received
by
any
particular
employee;
(v)
as
at
May
31,
1981,
the
Appellant
had
no
liability
to
pay
any
amount
to
any
person
in
respect
to
a
bonus;
(w)
if
a
bonus
was
to
be
paid,
it
was
Miksa
Marton's
intention
that
he
was
to
receive
it
and
use
it
for
his
own
use
or
benefit;
(x)
$400,000
was
paid
to
Max
Weidtman
in
June,
1982
on
the
condition
that
the
amount
less
any
withholding
tax
be
lent
back
to
the
Appellant;
(y)
the
amount
of
$400,000
paid
to
Max
Weidtman
did
not
constitute
a
bonus
for
services
rendered
to
the
company
in
its
1981
and
preceding
years
as
no
services
were
rendered
by
Mr.
Weidtman
and
in
any
event
the
said
amount
was
not
a
reasonable
amount
paid
in
respect
of
a
bonus;
(z)
the
Appellant
is
not
entitled
to
deduct
$400,000
in
respect
of
a
bonus
in
its
1981
taxation
year
as
the
amount
does
not
represent
an
expense
made
or
incurred
by
the
Appellant
for
the
purpose
of
gaining
or
producing
income
from
its
business;
17.
The
Respondent
respectfully
submits
that
the
Appellant
is
not
entitled
to
a
deduction
for
$400,000.00
claimed
in
respect
of
a
bonus
in
that
the
Appellant
had
no
obligation
to
pay
any
amount
to
any
particular
person
in
respect
of
a
bonus
in
its
1981
taxation
year,
and
accordingly
the
amount
claimed
represented
a
contingent
reserve,
the
amount
of
which
was
properly
disallowed
pursuant
to
paragraph
18(1)(e)
of
the
Act.
18.
The
Respondent
respectfully
submits
that
the
Appellant's
claim
for
a
deduction
of
$400,000.00
in
respect
of
a
bonus
in
its
1981
taxation
year
or
at
any
time
thereafter
was
properly
disallowed
on
the
basis
that
the
amount
of
$400,000.00
paid
to
Max
Weidtman
did
not
constitute
an
expense
incurred
for
the
purpose
of
gaining
or
producing
income
within
the
meaning
of
paragraph
18(1)(a)
of
the
Act
in
that
it
was
not
a
bonus
for
services
rendered
to
the
Appellant
by
Max
Weidtman
in
its
1981
and
preceding
taxation
years,
[the
underlined
was
added
by
amendment
at
the
hearing]
19.
The
Respondent
respectfully
submits
that
the
deduction
of
$400,000.00
claimed
by
the
Appellant
in
respect
of
its
1981
taxation
year
was
properly
disallowed
as
the
said
sum
was
not
a
reasonable
amount
paid
in
respect
of
a
bonus
within
the
meaning
of
section
67
of
the
Act.
20.
The
Respondent
further
submits
that
the
deduction
of
$400,000.00
claimed
by
the
Appellant
in
its
1981
taxation
year
was
properly
disallowed
on
the
basis
that
if
allowed,
the
deduction
would
unduly
or
artificially
reduce
income
within
the
meaning
of
subsection
245(1).
With
respect
to
the
above-noted
amendment,
both
counsel
at
trial
understood
that
paragraphs
19
and
20
of
the
reply
were
thereafter
intended
to
be
read
on
the
assumption
that
the
words
of
the
amendment
to
paragraph
18
were
to
apply
to
them
as
well.
As
with
the
other
issues
that
have
now
been
determined,
all
of
the
facts
(both
subjective
and
objective)
are
crucial.
And
there
is
dispute
as
to
what
inferences
and
conclusions
should
be
drawn
therefrom.
In
my
view
respondent's
counsel
has
succinctly
and
accurately
chronicled
the
evidence
in
her
written
submissions.
The
following
portions
are
adopted
as
accurate,
with
my
own
interjections
being
indicated
in
square
parenthesis.
In
a
letter
of
Revenue
Canada,
Taxation,
Linda
Poupard
stated
on
behalf
of
the
company:
At
our
year
end,
last
year,
which
was
May
31,
1981,
a
bonus
was
set
up,
as
it
is
every
year.
Within
a
couple
of
months
after
that,
our
auditor
asked
us
who
would
be
receiving
this
bonus.
Mr.
Marton
did
not
know
at
that
time,
but
they
kept
pushing
him
for
an
answer,
so
we
sent
them
a
letter
stating
that
some
of
the
bonus
would
go
to
certain
employees
here
in
the
company
and
the
balance
would
probably
be
taken
by
him.
Max
Weidtman
knew
nothing
of
a
payment
of
a
bonus
to
him.
In
fact,
he
did
not
know
until
1982
that
such
a
large
bonus
had
been
declared
and
that
Miksa
Marton
had,
by
1982,
earmarked
it
for
himself.
In
the
spring
of
1981,
Miksa
Marton
was
embroiled
in
a
bitter
separation
with
his
wife.
Determined
not
to
let
her
share
in
Dualflex’s
prosperity,
he
sought
to
reduce
the
net
worth
of
Dualflex
and
hence
his
personal
worth.
To
that
end,
and
to
reduce
income
tax,
he
had
Dualflex
declare
an
unprecented
$600,000
bonus
in
respect
of
Dualflex's
1981
taxation
year
sometime
in
July,
1982.
[Marton
said
that
the
amount
accrued
for
bonuses,
in
total,
was
determined
by
the
auditors.]
As
Marton
and
Linda
Poupard
testified
and
as
the
company
letter
to
Revenue
Canada,
Taxation,
stated,
at
the
time
the
bonus
was
declared,
there
was
no
fixed
intention
to
pay
a
particular
bonus
to
any
particular
person.
[The
auditor
said
that
all
but
$39,500
was
to
go
to
Marton.]
Potential
scenarios
were
under
consideration
but
not
decided
upon.
Who
the
bonus
was
paid
to
depended
upon
the
status
of
the
negotiations
with
Marton's
wife.
If
the
negotiations
were
not
going
well,
it
was
Marton's
intention
to
pay
the
bonus
to
his
brother,
George,
so
as
to
reduce
Dualflex’s
net
worth
and
the
value
of
Marton's
assets
available
to
his
wife.
George
Marton
had
never
received
a
bonus
of
this
size
before.
Further,
it
was
never
really
intended
that
George
Marton
would
actually
receive
and
enjoy
it
as
a
bonus.
It
was
to
be
declared,
tax
paid
and
the
balance
returned
to
the
company.
Miksa
Marton
had
disclosed
these
plans
to
his
bank
manager,
Bernice
Holsey,
who
noted
it
in
her
reports
to
Head
Office.
Disclosure
to
her
was
essential
as
large
bonuses
were
of
concern
to
the
Bank
who
sought
to
protect
their
security.
In
her
October
6,
1981
report,
Bernice
Holsey
noted:
As
outlined
in
Manager's
analysis,
a
large
bonus
of
$600,000
was
expensed
and
is
held
as
a
current
liability
on
the
company's
balance
sheet.
It
is
Marton's
intention
to
advance
these
funds
to
his
brother,
George,
as
outlined
in
projected
cash-flow
statement.
In
turn,
the
after
tax
balance
of
approximately
$260,000
will
be
deposited
with
us
and
hypothecated
in
support
of
a
guarantee
to
the
company
signed
by
George
Marton.
This
measure
results
in
a
reduction
in
both
corporate
and
personal
net
worth
which
is
vitally
important
as
Marton
is
experiencing
some
difficulty
with
his
estranged
wife.
A
fuller
explanation
was
provided
in
the
Manager's
analysis:
As
previously
advised,
Marton
and
his
wife
have
legally
separated.
At
the
time
of
separation,
it
was
decided
that
Marton
would
provide
his
wife
with
a
house,
car,
lump
sum
payment
of
$5,000
and
an
annual
income
of
$18,000.
The
agreement
which
was
drawn
up
by
Marton's
lawyer
was
referred
to
Mrs.
Marton's
solicitor
who
not
only
did
not
recommend
her
acceptance
but
would
not
witness
her
signature.
She
was
however
satisfied
with
the
arrangement
and
signed
the
document
in
the
presence
of
Marton's
secretary.
He
complied
with
the
terms
of
the
agreement,
but,
now
after
seven
months,
Mrs.
Marton
has
decided
she
was
pressured
into
signing
and
court
proceedings
have
commenced
to
determine
the
validity
of
the
executed
separation
agreement.
With
this
in
mind,
the
company
has
expensed
a
bonus
of
$600,000
which
is
presently
held
as
a
current
liability.
If
Marton's
current
domestic
affairs
are
not
settled
by
Feb.
1982
when
the
first
installment
will
be
paid,
the
bonus
will
be
given
to
Marton's
brother,
George.
The
after
tax
balance
will
be
deposited
with
us
and
hypothecated
in
support
of
a
personal
guarantee
to
Dualflex
Co.
Ltd.
signed
by
George
Marton.
Any
additional
funds
advanced
to
George
will
be
available
to
us.
In
response
to
Bernice
Holsey's
Application
for
Credit
dated
October
6,
1981,
the
Toronto-Dominion
Bank
Head
Office
management
responded
as
follows:
3.
We
understand
the
$600,000
bonus
payable
to
Mr.
Marton's
brother
is
to
lower
Mr.
Marton's
personal
worth.
As
this
represented
earnings
by
the
company
last
year,
a
substantial
portion
of
it
would
have
been
taxed
away
in
any
event
so
that
the
action
is
not
as
extreme
as
it
first
appears.
The
after
tax
portion
said
to
be
approximately
$260,000
will
be
pledged
as
security
for
term
loans
in
support
of
a
guarantee
to
be
given
by
Mr.
Marton's
brother.
The
settlement
between
Miksa
Marton
and
his
wife
at
the
close
of
1981,
which
settlement
was
formally
signed
in
January,
1982
obviated
the
necessity
for
giving
the
bonus
to
George.
As
Bernice
Holsey
reported
at
December
16,
1981:
As
outlined
in
our
Application
for
Credit
of
October
6th,
1981,
the
company
allocated
a
bonus
of
$600,000
which
initially
was
to
be
paid
to
Marton's
brother
in
early
1982.
However,
just
this
past
week,
Mr.
Marton
and
his
estranged
wife,
through
their
solicitors
have
agreed
upon
a
separation
settlement
as
follows:
(1)
Mrs.
Marton
will
receive
$20,000
per
year
(2)
a
cash
settlement
of
$10,000
after
tax
will
be
provided
this
year
(3)
a
cash
settlement
of
$15,000
after
tax
will
be
provided
next
year
(4)
Marton
will
sign
off
on
the
Woodland
house
(5)
Mrs.
Marton
will
sign
off
on
the
Santo
Drive
house
The
separation
agreement
is
in
process
and
is
expected
to
be
signed
by
December
21,
1981.
Once
this
is
completed,
Marton
will
be
in
a
position
to
receive
the
bonus
himself,
which
he
would
like
to
do
on
January
4th,
1982.
We
have
been
asked
to
provide
a
loan
in
the
amount
of
$600,000
to
accommodate
this
payment.
At
the
time
of
the
advance
$300,000
will
be
paid
to
Revenue
Canada
for
income
tax,
$250,000
will
be
placed
in
a
term
deposit
and
assigned
to
us,
and
$50,000
will
be
utilized
by
Marton
to
pay
his
estranged
wife
the
cash
settlement
as
previously
mentioned
and
pay
legal
fees.
We
propose
the
loan
be
advanced
and
secured
as
follows:
(1)
the
sum
of
$300,000
to
be
advanced
from
the
cash
collateral
account
already
established
which
will
continue
to
be
secured
by
collateral
mortgages,
excluding
the
Woodland
property
(2)
the
sum
of
$250,000
to
be
advanced
by
way
of
Demand
Note
will
be
secured
by
an
Assignment
of
a
TD
Term
Deposit
registered
in
the
name
of
Miksa
Marton
(3)
the
sum
of
$50,000
to
be
advanced
under
existing
operating
credit.
The
threat
posed
by
his
ex-wife
lifted,
thus
permitted
Marton
to
apply
to
the
Bank
for
a
loan
to
pay
himself
the
bonus
in
December
1981.
In
January
1982,
he
took
a
bonus
of
$80,000
which
was
actually
paid
and
deposited
to
his
bank
account.
He
intended
to
defer
any
further
payment
of
the
bonus
until
May
31,
1982,
as
Bernice
Holsey's
report
to
Head
Office
on
January
19,1982
revealed:
On
January
5th,
1982
Dualflex
Company
Limited
paid
a
bonus
to
Miksa
Marton
of
$80,000.00.
Miksa
Marton
received
the
sum
of
$39,731.80
with
the
balance
to
be
paid
to
the
Receiver
General.
These
funds
were
utilized
to
pay
his
estranged
wife
the
sum
of
$17,000
as
outlined
in
the
separation
agreement
and
to
cover
legal
fees
incurred
by
both
parties.
It
is
now
Marton's
intention
to
defer
any
further
payment
of
bonus
until
May
31,
1982
which
is
the
last
possible
date
that
funds
can
be
withdrawn
from
the
company.
It
is
his
intention
to
return
funds
net
of
taxes
back
to
the
company
as
shareholder's
loans,
rather
than
borrow
the
gross
amount
and
assign
a
certificate
to
us,
as
originally
outlined.
If,
when
the
tax
portion
is
paid
it
will
be
necessary
to
draw
on
term
credit
approved,
it
is
our
intention
to
obtain
a
registered
postponement
of
shareholder's
loans
executed
by
Mr.
Marton.
In
any
event,
Marton's
final
decision,
which
will
be
made
closer
to
May
31,
1982
will
be
relayed
to
your
office.
The
decision
to
probably
pay
the
bonus
to
Miksa
Matton
but
to
postpone
it
until
the
last
possible
date
was
conveyed
by
Bernice
Holsey
to
another
of
Dualflex's
creditors,
the
Ontario
Development
Corporation
on
February
2,
1982:
We
have
delayed
in
responding
to
your
letter
of
December
16,
1981
as
plans
regarding
the
outstanding
bonus
to
Mr.
Marton
have
not
been
finalized.
We
understand
that
it
is
his
intention
not
to
bonus
these
funds
until
the
last
possible
date,
at
which
time
he
intends
to
return
these
funds
to
the
company
by
way
of
shareholder's
loans.
It
is
our
intention
as
at
this
date
to
obtain
a
Registered
Postponement
of
Shareholder's
Loans
executed
by
Mr.
Marton
when
this
bonus
is
advanced.
[Of
the
bonus
accruals,
$80,000
was
paid
to
Mr.
Marton,
$80,000
was
elected
to
have
been
treated
as
having
been
paid
to
him
under
section
78
of
the
Act,
approximately
$40,000
was
paid
to
other
employees,
leaving
the
balance
of
$400,000
to
be
dealt
with.]
Max
Weidtman
appeared
to
learn
of
Marton's
intentions
regarding
the
payment
of
the
bonus
and
the
treatment
of
the
$500,000
loss
concurrent
with
the
receipt
of
the
company's
cash
flow
statement
and
1981
financial
statements.
The
cash
flow
statements
showed
that
the
bonus
was
to
be
paid
to
Miksa
Marton.
The
1981
financial
statements
indicated
that
Dualflex
intended
to
treat
the
$500,000
loss
as
a
company
loss.
The
combined
effect
was
the
$500,000
loss,
which
Marton
guaranteed
would
not
debit
Weidtman's
account,
would
not
debit
Weidtman's
account,
would
be
shared
70-30
by
Marton
and
Weidtman,
and
Marton
would
receive
the
bulk
of
the
$600,000
bonus.
On
February
26,
1982,
Weidtman
wrote
to
Marton
to
“strongly
protest"
against
these
two
items:
(1)
Subsequent
items
(note
2).
I
cannot
agree
to
your
personal
loans
for
the
purchase
of
my
shares
indebting
the
company
and
consequently
indebting
my
part
pro
rata.
In
no
way
I
am
going
to
accept
the
statement
as
is.
(2)
The
payment
of
a
bonus
of
more
than
$400,000
dollars
to
you
alone
cannot
be
accepted.
If
this
is
necessary
to
rise
[sic]
the
funds
for
the
purchase
of
my
shares,
then
this
has
to
be
done
at
a
later
time,
but
not
as
long
as
I
am
a
shareholder
in
the
company.
As
it
stands
now
as
per
May
31,
1981
you
are
sharing
the
loss
with
me
on
a
70
to
30
ratio
and
keeping
the
profit
for
yourself.
You
will
agree
that
this
is
not
acceptable.
That
Dualflex
was
to
bear
the
loss
was
an
abrogation
of
Weidtman's
understanding
concerning
what
the
loan
was
and
how
it
would
be
treated.
He
had
accepted
the
loan
so
long
as
it
did
not
effect
his
“account”.
Marton
had
assured
him
that
it
would
not.
Now
it
would,
creating
a
new
source
of
friction
between
them.
[Mr.
Marton
acknowledged
that
Mr.
Weidtman
deserved
compensation
for
his
efforts
on
behalf
of
the
company
but
that
he
had
delayed
dealing
with
the
matter.
Mr.
Weidtman
had
also
indicated
that
he
felt
entitled
to
a
bonus,
and
the
failure
to
resolve
this
matter
had
had
some
influence
on
his
decision
to
sell
his
shares.]
The
dispute
about
lack
of
profit
sharing
was
not
new.
It
had
been
a
long
standing
source
of
friction
which
had
given
rise
to
Weidtman
“fading
away”
from
Dualflex
and
seeking
to
sell
out
to
Marton
in
1980.
Back
in
June,
1981,
Weidtman
had
recounted
to
Marton
some
of
the
broken
promises
and
he
evidenced
his
anger
and
frustration.
Marton's
response
to
this
complaint
had
been
twofold.
Dualflex
could
not
pay
Weidtman
a
bonus
because
the
company
lacked
the
money
and
because
Weidtman
was
not
working
in
the
company.
At
trial,
Marton
sought
to
explain
this
position
and
he
testified
that
the
company
could
not
afford
to
pay
Weidtman's
bonuses
and
that
he
was
not
sure
of
the
legality
of
paying
a
bonus
to
a
non-resident
who
was
not
a
salaried
employee.
[The
accuracy
of
both
of
the
above
has
been
shown
to
be
questionable
as
Dualflex
had
paid
a
bonus
to
Weidtman
of
$18,900
in
1979
and
had
accrued
but
not
paid
him
a
bonus
in
1980.
In
1980
it
paid
a
$136,850
bonus
to
Marton
and
$20,000
to
Ms.
Meloche.]
[Weidtman
gave
extensive
evidence
as
to
his
work
and
services
that
he
had
performed
since
joining
the
company
in
1976.
He
said
that
he
had
spent
50
per
cent
of
his
time
on
an
annual
basis
creating,
establishing
and
supervising
a
market
for
Dualflex’s
products
in
Europe.
Much
of
his
energies
were
devoted
to
gaining
outlets
through
the
assistance
of
national
organizations
and
health
agencies
and
to
this
end
he
had
frequently
attended
in
Scandinavia,
Switerland,
Germany
and
the
Netherlands.
The
Fien
Trading
Company
account
was
his
largest,
with
sales
volumes
from
this
source
alone
amounting
to
$4.5
to
$5
million
dollars
up
to
1982.
Testimony
was
advanced
that
the
gross
profit
of
Dualflex,
which
averaged
around
35
per
cent
on
all
sales,
on
the
sales
to
the
Fien
organization
would
have
amounted
to
something
like
$1.5
to
$1.75
million
dollars.
Just
using
minimum
quanties
alone,
the
estimated
figure
was
$700,000
U.S.
Mr.
Weidtman
testified
that
he
felt
it
was
not
unusual
for
salesmen
with
his
duties
and
accomplishments
to
earn,
on
a
conservative
basis,
up
to
$100,000
per
year.
There
is
no
evidence
whatsoever,
however,
that
the
$400,000
amount
paid
to
Mr.
Weidtman
had
been
somehow
mathematically
connected
to
or
integrated
with
any
of
the
above
information.]
[Marton
testified]
that
a
bonus
to
be
paid
to
Weidtman
was
agreed
to
at
a
director's
meeting
in
London
[on
February
28,
1982].
He
stated
that
the
actual
amount
of
the
bonus
to
be
paid
had
also
been
agreed
to
at
that
meeting.
This
was
not
Weidtman's
recollection
of
the
facts.
He
did
not
acknowledge
arrival
at
an
agreement
in
London
regarding
the
payment
of
a
bonus:
Q.
What
transpired
at
that
meeting?
A.
That
I
was
going
to
have
a
considerable
bonus,
we
didn't
have
enough
books
and
things
at
hand,
a
considerable
bonus
under
the
condition
that
I
loaned
it
back.
[He
later
said
that
$400,000
had
been
discussed
at
the
London
meeting
but
that
he
could
not
say
when
an
agreement
as
to
an
amount
had
been
arrived
at.
His
best
recollection
was
that
the
$400,000
was
arrived
at
in
May,
that
there
had
been
phone
calls
prior
to
his
coming
to
Windsor
and
that
it
must
have
been
before
his
arrival
but
that
he
had
no
firm
recollection
of
any
particular
time
in
May.
Further,
Weidtman
was
of
the
understanding
that
the
bonus
discussions
were
with
respect
to
the
1981
year-end.]
[Weidtman
had
telexed
Marton
that
he
would
be
arriving
in
Windsor,
Ontario
during
the
evening
of
Thursday,
June
3,
1982.
He
said
he
had
difficulty
obtaining
flights
before
then.
In
anticipation
of
his
arrival,
enquiries
had
been
made
to
Revenue
Canada
as
to
the
amount
of
withholding
tax
with
respect
to
the
bonus
and
the
information
was
received
that
no
withholding
was
required.
A
cheque
for
$500,000
was
prepared
and
dated
May
31
for
the
full
amount
and
was
held
for
Weidtman's
arrival.
Weidtman
and
Marton
met
June
4,1982.]
Linda
Poupard
testifed
that
Marton
and
Weidtman
met
in
Marton's
office,
and
after
a
while,
Marton
came
out
and
asked
Linda
to
prepare
a
cheque
for
$400,000.00.
She
expressed
concern
that
Dualflex
had
insufficient
moneys
in
the
bank
to
cover
the
cheque,
but
Marton
assured
her
that
he
would
not
sign
the
cheque
until
Weidtman
endorsed
it
and
that
the
money
would
be
deposited
to
Dualflex's
account.
The
cheque
given
to
Weidtman
was
actually
prepared
June
4,
1982
and
was
backdated
to
May
31,
1982.
Marton
testified
in
chief
that
a
cheque
in
the
amount
of
$400,000.00
had
been
prepared
before
the
end
of
the
fiscal
year,
that
he
had
signed
it
and
locked
it
in
his
drawer.
He
then
stated
that
the
girls
had
made
an
error
in
the
amount
so
they
cancelled
it
and
made
out
another
in
the
exact
right
amount
which
Marton
signed
and
gave
to
Weidtman.
The
evidence
shows
that
Marton
did
not
sign
the
original
cheque
[which
was
actually
for
$500,000.]
and
his
statement
that
the
amount
reflected
a
clerical
error
was
rebutted
by
Linda
Poupard
who
testified
that
the
cheques
were
made
to
reflect
Marton's
instructions,
that
he
had
directed
the
payment
of
a
different
amount,
that
she
knew
the
payment
had
to
be
on
or
before
May
31,
1982
and
so
she
treated
the
cheque
as
a
replacement
cheque:
We
had
instructions
from
the
auditor
that
all
bonuses
had
to
be
paid
by
May
31st.
So
I
don't
know
the
exact
date
that
the
cheque
was
made,
but
it
had
to
be
by
May
31st
.
.
.
I
guess
they
had
decided
to
one
amount
and
then
changed
it
to
another
amount
so
the
cheque
had
to
be
changed
to
another
amount,
to
$400,000.00
and
I
forget
what
the
original
cheque
was
for.
Linda
Poupard
was
not
concerned
with
the
discrepancy
between
the
cheque
for
$500,000.00
on
May
31
and
the
$400,000.00
cheque:
A.
Mr.
Marton
can
do
whatever
he
wants
with
his
bonus.
I
have
no
control
over
that.
Q.
You
didn't
concern
yourself
with
the
facts?
A.
No.
Q
You
just
did
what
you
were
told?
A.
Yes.
[During
this
meeting
the
following
minutes
were
prepared
and
signed.]
SHAREHOLDERS
&
BOARD
OF
DIRECTORS
MEETING
HELD
IN
LONDON,
ENGLAND
ON
FEBRUARY
28,
1982
AT
11:00
A.M.
MINUTES
OF
MEETING
The
Board
of
Directors
decided
to
pay
Mr.
Max
Weidtman
a
bonus
for
the
fiscal
year
ended
May
31,
1981.
The
bonus
is
paid
with
regard
to
his
personal
efforts
to
make
European
operations
a
success
for
the
company.
The
Board
of
Directors
further
decided
and
Mr.
Weidtman
agreed
to
loan
back
the
bonus,
less
withholding
tax,
if
any,
to
the
company
as
a
debenture.
The
Board
of
Directors
will
have
to
decide
on
partial
or
total
repayment
of
the
debenture.
The
company
will
pay
interest
on
the
loan
not
higher
than
the
bank
rate.
If
the
company
cannot
afford
this
expenditure,
the
Board
of
Directors
can
decide
on
a
lower
rate
of
interest.
Further
discussions
were
made
regarding
the
$500,000.00
that
Mr.
Miksa
Marton
had
borrowed
from
the
bank
on
behalf
of
Dualflex
Co.
Ltd.
to
purchase
Mr.
Max
Weidtman's
30
shares
in
Dualflex.
At
this
meeting,
it
was
decided
that
this
same
money
that
was
afterwards
stolen
and
lost,
be
considered
case
closed
and
a
tragic
loss
for
the
company.
These
arrangements
were
made
by
mutual
agreement
of
all
shareholders
and
board
of
directors.
Concurrently
Marton
signed
an
acknowledgement
of
the
return
of
the
same
$400,000.00
paid
to
Weidtman
as
the
issue
of
a
debenture
to
him.
[Mr.
Weidtman
testified
that
he
had
been
paid
the
bonus,
that
he
had
included
the
amount
of
bonus
in
his
income
for
German
income
tax,
that
the
money
had
been
reinvested
in
the
company
by
way
of
debenture
which
had
not
yet
been
repaid.
He
acknowledged
that
there
was
no
direct
relationship
between
the
bonus
and
the
$500,000
loss
except
that
it
put
him
in
a
stronger
position
to
exert
pressure
on
Marton
to
settle
the
remuneration
question.]
Analysis
The
first
aspect
to
be
cleared
away
concerns
the
appellant's
point
that
of
the
$600,000
purported
bonus
accrued
as
at
the
1981
year-end,
the
respondent
had
really
challenged
only
$400,000
thereof
and
therefore
may
be
seen
as
having
blown
both
hot
and
cold
on
the
issue
of
whether
a
liability
had
indeed
been
created.
In
my
view
this
argument
is
specious.
Firstly,
no
evidence
had
been
presented
by
either
party
that
the
respondent
had
erred
in
allowing,
as
a
bona
fide
business
expense
pursuant
to
paragraph
18(1)(a)
of
the
Act,
the
accrual
and
subsequent
payment
of
those
amounts
totalling
$200,000
which
were
made
up
of
$80,000
to
Marton,
another
$80,000
to
him
under
a
section
78
election
and
$40,000
to
other
employees.
Secondly,
the
fact
that
Marton
and
Weidtman
intended
to
and
believed
that
they
were
dealing
with
a
balance
of
a
bonus
amounting
to
$400,000
accrued
at
May
31,
1981
does
not
necessarily
breathe
life
into
something
that
may
have
been
misdescribed
in
the
first
place.
The
matter
is
therefore
brought
back
precisely
to
the
initial
issue
which
is
whether
or
not
a
liability
for
a
bonus
of
$400,000
existed
at
May
31,
1981
so
as
to
entitle
Dualflex
to
its
deduction
for
that
year.
I
have
indicated
earlier
that
the
facts
are
crucial.
It
is
for
that
reason
that
they
have
been
set
out
in
considerable
detail.
At
this
juncture
it
is
apt
to
note,
and
adopt
as
being
applicable
to
this
case,
the
words
of
Cattanach,
J.
in
Don
Fell
Limited
et
al.
v.
The
Queen,
[1981]
C.T.C.
363
at
366;
81
D.T.C.
5282
at
5285:
Counsel
for
the
defendant
in
support
of
his
contention
that
the
partnership
never
intended
in
fact
to
pay
the
bonuses
looked
to
the
conduct
of
the
appellants
as
objective
indicia
of
the
intention.
Intention
is
rarely
the
subject
of
direct
evidence
apart
from
the
plaintiff's
statements
at
trial
as
to
what
their
intention
was.
These
statements
are
only
part
of
the
evidence.
Such
evidence
may
be
given
in
all
sincerity
and
still
may
not
reflect
the
true
management
bonuses.
The
question
of
fact
as
to
what
the
partnership
intention
was
on
declaring
the
bonuses
is
one
that
must
be
decided
upon
a
consideration
of
all
of
the
evidence.
The
subjective
statements
of
intention
by
the
plaintiffs
must
be
considered
along
with
objective
facts.
In
a
similar
vein
see
also
Cedar
Ridge
Construction
Ltd
v.
M.N.R.,
[1983]
C.T.C.
2616;
83
D.T.C.
551
(T.R.B.)
where
it
was
noted
by
Member
M.J.
Bonner
(as
he
then
was)
at
page
2618
(D.T.C.
552):
Mr.
Dyck’s
evidence
as
to
what
ultimately
happened
demonstrates
the
futility
of
relying
on
the
fleeting
thoughts
of
a
person
who
is
a
corporate
officer
as
proof
of
an
act
of
that
corporation.
I
do
not
intend
to
review
the
objective
evidence
as
it
has
already
been
extensively
set
out.
The
answer
as
to
whether
$400,000
of
the
amount
accrued
as
a
bonus
as
at
May
31,
1981
was
a
corporate
liability
for
a
bonus
is
found
in
the
objective
facts
themselves.
These
facts
demonstrate
that
this
amount
had
not
been
based
upon
effort,
contribution
or
service
to
Dualflex
of
any
particular
individual.
Further,
the
evidence
points
away
from
there
being
any
corporate
intent
that
it
was
to
have
been
accrued
as
a
form
of
compensation
at
all.
The
objective
facts
show
it
had
been
accrued,
not
for
the
purpose
of
having
gratuitously
compensated
Weidtman
(or
George
Marton
for
that
matter)
for
his
past,
present
and
future
contributions
to
the
company
[see
Crosbie
Estate
v.
M.N.R.,
[1966]
C.T.C.
648
at
657;
66
D.T.C.
5424
at
5429]
as
at
that
time,
but
to
reduce
the
company's
net
worth,
and
hence
Marton's
net
worth
for
reasons
unrelated
to
the
business
of
Dualflex.
These
objectives
and
purposes
do
not
satisfy
the
requirements
of
18(1)(a)
of
the
Act
and
the
accrued
amount
in
issue
is
not
capable
of
being
characterized
as
an
expense
incurred
for
the
purposes
of
gaining
or
producing
income
from
a
business
as
that
provision
requires.
It
is
also
my
view
that
Dualflex
has
failed
to
establish
that
that
amount
would
have
been
reasonable,
in
any
event,
as
required
by
section
67
of
the
Act.
It
has
also
failed
to
rebut
the
respondent's
further
submission
that
the
$400,000
bonus
sought
to
be
deducted
would,
in
any
event,
be
prohibited
by
subsection
245(1)
of
the
Act
for
the
reason
that
it
would
have
artificially
and
unduly
reduced
income.
In
this
case
the
purported
$400,000
bonus
sought
to
be
created
was
indeed
artificial.
In
Shulman
v.
M.N.R.,
[1961]
C.T.C.
385;
61
D.T.C.
1213
artificiality
was
found
to
mean
"unnatural"
or
"not
in
accordance
with
normality"
and
the
word
"unduly"
as
relating
to
quantum
and
meaning
“excessively”
or
"unreasonably".
The
Exchequer
Court
added
at
page
400
(D.T.C.
1221)
that:
Regard
must
be
had
to
the
nature
of
the
transaction
in
respect
of
which
the
deduction
has
been
made.
Any
artificiality
arising
in
the
course
of
a
transaction
may
taint
an
expenditure
relating
to
it
and
preclude
the
expenditure
from
being
deductible
in
computing
taxable
income.
That
being
the
true
situation
here,
the
respondent's
disallowance
of
a
deduction
of
$400,000
for
the
appellant’s
1981
year
is
to
be
sustained.
The
appellant
has
argued
that
if
the
bonus
amount
was
not
deductible
in
1981,
it
was
deductible
for
its
1981
year
ending
May
31,
1982
on
the
basis
either
that
it
was
a
continuous
liability
from
the
1981
taxation
year
(in
which
case
the
matter
of
its
payment
prior
to
May
31,
1982
is
crucial
to
preserving
deductibility
in
1981,
otherwise
by
virtue
of
subsection
78(3)
of
the
Act
it
would
have
to
be
added
back
to
Dualflex’s
income,
not
for
1981
but
for
1983)
or
that
a
liability
had
been
created
in
the
1982
taxation
year
(in
which
case
the
appellant
would
not
be
offside
even
if
the
payment
was
seen
to
have
been
made
just
after
the
1982
year-end).
The
first
part
of
the
submission
fails
because
it
has
already
been
determined
that
there
was
no
1981
liability
to
continue,
even
though
Marton
and
Weidtman
thought
to
the
contrary.
That
Weidtman's
bargaining
in
1982
for
fair
compensation
for
his
own
past
and
present
services
was
real
and
intensive
is
beyond
doubt.
Mr.
Weidtman
was
a
forthright
and
credible
witness.
The
corporate
treatment
of
the
$500,000
cash
loss
as
impinging
on
his
equity
was
obviously
used
by
him
as
a
powerful
bargaining
tool
against
Marton
who
could
no
longer
prevaricate
on
the
matter.
I
accept
Weidtman's
testimony
that
a
substantial
bonus
in
his
favour
had
been
discussed
at
the
February
1982
meeting
in
London
and
that
it
had
been
predicated
on
his
acknowledged
and
very
significant
contribution
(past
and
present)
to
the
success
of
the
company
up
to
that
time.
And
whatever
large
amount
it
was
to
have
been,
he
was
then
and
subsequently,
prepared
to
immediately
loan
it
back
to
Dualflex
under
debenture
security
because
it
made
business
sense
to
preserve
the
company's
liquidity.
I
also
accept
Weidtman's
evidence
that
the
$400,000
amount
had
been
determined
sometime
in
May
through
telephone
conferences
with
Marton
before
his
arrival
on
June
3.
Accordingly
the
facts
support
a
finding
that
a
corporate
liability
had
indeed
arisen
before
May
31,
1982
and
that
the
June
41982
payment
had
been
made
to
satisify
that
liability.
In
a
substantive
sense,
this
liability
did
not
arise
by
way
of
an
extension
of
any
pre-existing
liability
because
there
had
been
none.
Substance
rather
than
form
is
to
be
applied
in
respect
of
the
true
state
of
affairs
for
both
1981
and
1982,
and
the
resolution
of
the
issues
in
this
matter
turns
on
that
principle
which
gives
the
correct
answer.
The
factual
situation
underlying
deductibility
of
the
bonus
for
the
1982
year
falls
squarely
within
the
parameters
of
the
following
comments
of
Kerr,
J.
in
The
Queen
v.
Ken
&
Ray's
Collins
Bay
Supermarket
Ltd,
[1975]
C.T.C.
504
at
509;
75
D.T.C.
5346
at
5350:
The
payment
of
bonuses
to
officers
of
companies
for
the
benefit
of
the
officers
and
the
company
is
not
uncommon
and
is
in
accordance
with
well
accepted
principles
of
business
practice.
In
Crosbie
Estate
v.
M.N.R.,
66
D.T.C.
5424,
Jackett
P.,
as
he
then
was,
said
at
page
5429:
It
is
beyond
controversy
that
gratuitous
payments
to
employees
having
regard
to
their
services,
past
and
future,
are
nevertheless,
for
business
and
income
tax
purposes,
payments
as
remuneration
for
services;
and
are
taxable
in
the
hands
of
the
employee
and
are
deductible
in
computing
the
employer's
profit
from
his
business.
In
the
present
case,
if
the
bonuses
had
been
paid
in
the
company's
fiscal
year
ending
February
28,
1969,
the
amount
paid
would
have
been
an
“outlay”
made,
within
the
meaning
of
the
exception
expressed
in
sec.
12(1)(a)
of
the
Income
Tax
Act
[now
18(1)(a)],
even
if
the
payments
were
gratuitous.
But
I
think
that,
to
have
the
benefit
of
the
exception
where
in
fact
there
was
not
such
an
outlay,
there
would
at
least
have
to
be
an
"expense
incurred"
by
the
company
in
that
fiscal
year,
which
leads
to
the
question
whether
the
company
did
incur
such
an
expense
in
that
year
for
payment
of
bonuses.
As
to
an
additional
point
raised
by
respondent's
counsel,
it
is
my
view
that
the
evidence
would
not
support
a
finding
that
the
$400,000
bonus
to
Weidt-
man
was
in
fact
unpaid
because
he
was
somehow
without
its
control
and
that
he
had
somehow
not
enjoyed
its
actual
receipt.
Further,
there
is
considerable
support
in
the
evidence
to
find
that
its
deductibility
for
Dualflex’s
1982
taxation
year
is
not
to
be
precluded
because
of
section
67
of
the
Act
or
of
subsection
245(1)
thereof,
both
of
which
have
been
discussed
in
the
context
of
the
1981
year
bonus
disallowance.
In
conclusion
then
the
result
is
that
the
amount
of
$400,000
had
been
properly
disallowed
by
the
respondent
as
a
deduction
from
Dualflex’s
income
for
its
1981
taxation
year.
However,
it
is
to
be
allowed
as
a
deduction
with
respect
to
its
1982
taxation
year.
Miscellaneous
Matters
The
first
paragraph
of
these
reasons
refers
to
a
settlement
that
had
been
arrived
at
between
the
parties
with
respect
to
the
remaining
issues.
The
following
is
extracted
from
respondent's
counsel's
written
submissions.
Its
particulars
appear
to
accord
with
those
set
out
in
the
appellants’
counsel's
written
argument.
Dualflex
has
conceded
that
the
amount
of
$53,062.00
claimed
as
an
expense
in
its
1982
taxation
year
in
respect
of
shipments
to
its
U.S.
affiliate
was
properly
disallowed
on
reassessment.
The
parties
have
agreed
that
of
the
amount
of
$29,140.00
originally
disallowed
to
Dualflex
as
overhead
in
respect
of
administrative
expenses
for
its
U.S.
affiliate,
that
the
amount
of
$19,200.00
was
properly
disallowed
in
respect
of
the
1982
taxation
year.
The
parties
have
also
agreed
that
of
the
amount
of
$7,778.00
claimed
by
Dualflex
as
legal
fees,
the
amount
of
$6,626.20
was
properly
disallowed
as
a
business
expense
of
Dualflex
and
treated
as
a
shareholder
benefit
to
Miksa
Marton,
as
it
represented
personal
or
living
expenses
of
Miksa
Marton,
Dualflex's
principal
shareholder
and
that
penalties
were
rightly
reassessed
in
respect
of
that
amount
on
both
taxpayers
pursuant
to
subsection
163(2)
of
the
Income
Tax
Act.
The
parties
have
further
agreed
that
in
respect
of
these
issues,
there
should
be
no
costs
awarded.
The
appeal
filed
by
Dualflex
as
Court
File
#85-787(IT)
contained
a
request
for
relief
concerning
an
investment
tax
credit
amounting
to
$22,237
earned
by
the
appellant
in
the
1984
year
to
be
applied
to
reduce
its
1982
tax
liability.
By
letter
dated
July
28,
1987
received
from
counsel
for
Dualflex,
the
Court
has
been
advised
that
for
the
reasons
therein
outlined,
this
is
being
dealt
with
and
litigated
separately
in
connection
with
the
1984
taxation
year.
For
these
reasons
counsel
advises
that
he
has
been
instructed
to
withdraw
that
portion
of
this
appeal
as
it
relates
to
the
investment
tax
credit.
Disposition
of
Appeals
For
the
reasons
aforesaid
the
appeal
of
Miksa
Marton:
(a)
for
his
1980
taxation
year
is
to
be
dismissed;
(b)
for
his
1981
taxation
year
is
to
be
allowed,
with
costs,
and
the
matter
referred
back
for
reassessment
on
the
basis
that
the
amount
of
$500,000
be
deleted
from
his
income
for
that
year;
and
(c)
for
his
1982
taxation
year
is
to
be
allowed
in
part,
without
costs,
and
the
matter
referred
back
for
reassessment
on
the
basis
that
in
calculating
his
income
for
that
year
the
amount
of
$6,626.20
be
added
thereto
pursuant
to
subsection
15(1)
of
the
Income
Tax
Act
(the
'Act")
and
that
penalties
are
to
be
reassessed
in
respect
of
that
amount
pursuant
to
subsection
163(2)
of
the
Act.
For
the
reasons
aforesaid
the
appeal
of
Dualflex
Company
Limited
A.
as
to
Court
File
#85-787(IT):
(1)
for
its
1980
taxation
year
is
to
be
dismissed;
(2)
for
its
1981
taxation
year
is
to
be
dismissed;
(3)
(a)for
its
1982
taxation
year
is
to
be
allowed,
in
part,
and
the
matter
referred
back
for
reassessment
on
the
basis
that
in
calculating
its
income
for
that
year
the
following
amounts
are
allowable
as
deductions:
(i)
$5,000
in
respect
of
overstatement
of
general
expense,
(ii)
$9,940
in
respect
of
administrative
expenses
for
its
U.S.
affiliate,
(iii)
$1,151.80
in
respect
of
professional
legal
fees,
(iii)
$1,151.80
in
respect
of
professional
legal
fees,
(iv)
$400,000
in
respect
of
bonus
remuneration;
(a)
and
that,
subject
to
Appeal
#86-2128(IT),
the
appellant
is
entitled
to
no
further
relief
in
respect
of
the
other
matters
raised
in
this
appeal,
(c)
and
that
with
respect
to
an
amount
of
$6,626.20
overstated
as
professional
legal
fees,
penalties
are
to
be
reassessed
in
respect,
of
that
amount
pursuant
to
subsection
163(2)
of
the
Act;
and
B.
as
to
Court
File
#86-2128(IT):
(a)
for
its
1982
taxation
year
the
appeal
is
to
be
allowed,
the
respondent's
notice
of
determination
of
loss
dated
June
6,
1986
is
to
be
vacated
and
the
appellant
is
to
be
allowed
a
deduction
in
respect
of
a
capital
loss
of
$500,000
for
that
year.
C.
Excepting
for
the
items
3(a)(ii)
and
3(a)(iii)
aforesaid,
the
appellant
is
entitled
to
its
costs
on
a
party-and-party
basis.
Appeals
allowed
in
part.
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