O’neil Enterprises Limited, T J O’neil, Md v. Minister of National Revenue, [1982] CTC 2709, 82 DTC 1732

M J Bonner (orally):—I will give my reasons now in the O’Neil and the O’Neil Enterprises appeals. It may be in order at the outset to make one or two preliminary observations about the function of this Board. The function of this Board is not to perform any sort of auditing procedure or any sort of investigative procedure. This Board cannot act as counsel for either party. It is incumbent on an appellant who brings an appeal to this Board to adduce evidence and argument in a cogent way in an effort to demonstrate that the assessments appealed against are wrong. In a general way I say that in this case, in large part, I am not necessarily satisfied that the assessments are right. On the other hand, except in a few instances which I will get to shortly, I am not satisfied that they are wrong, and unless the appellant does satisfy the Board that assessments are wrong and, as I say, he may do so by producing evidence and by producing argument and by organizing his case in some sort of a comprehensible fashion, this Board cannot interfere with them.

The individual appellant appeals from assessments of income tax for the 1973 to 1977 taxation years. The corporate appellant appeals from assessments for the 1974 and 1975 taxation years. The appeals were heard together on common evidence.

The individual appellant is a medical doctor practising his profession in Kelowna, British Columbia. He owns properties from which he derives rental income. He owns a farm. He has entered into certain land development transactions. He appears to be astute in matters of business and investment, however, he appears to have been remarkably poor in keeping financial records, a fact which accounts for the multitude of adjustments to declared income made by the assessments under appeal. Another generalization which should, perhaps, be made is that, in the course of the hearing, the appellant demonstrated an amazing inability to come to grips in any cogent way with many facets of the assessments which he asserted were wrong.

I will deal first with the appeals of the individual appellant, Doctor O’Neil, and at the outset with the disallowed farm losses. The appellant lived on and worked a small farm. Initially, at least, the main crop appears to have been hay. Subsequently, the appellant bought a horse of fine pedigree, although it would not appear that at the time of purchase the appellant knew exactly how good the pedigree was. There is a total absence of evidence as to what the appellant’s revenue and expense expectations were. The available evidence does not show any clear and consistent plan for the operation of the farm as a profit-making enterprise. The appellant also objected, as a separate item, to the disallowance of municipal taxes on the farm as a deduction. He was quite unable, apparently, to appreciate that even if the farm was operated as a business, this cost must be allocated between that portion applicable to the residence in which he and his family lived and to the balance of the farm. In any event, the presence of a reasonable expectation of profit was not shown and this branch of the appeals must fail.

I will turn next to the $716 item with respect to B & T Development income in 1973. The appellant denied receiving the money represented by this addition to declared income. B & T was a partnership of which the appellant was a member, and I will get back to other aspects of B & T later. The fact that the appellant did not receive this $716 did not mean that it was not his share of the partnership profits for the relevant period. The appeal fails in this respect.

I turn next to professional income. The appellant failed to keep any adequate record of the expenses of his professional practice, despite a written undertaking given to the respondent to do so given prior to the years in question in these appeals. This is clear from the evidence of the assessor, Rogers. The bald assertion by the appellant that the figures reported in his returns were correct is insufficient to discharge the onus. There was no other evidence which could conceivably form the basis for the granting of relief. The appeals fail in this regard.

Automobile expenses were dealt with as a separate item. The appellant said that he and members of his immediate family had up to five cars, one of which was reserved for his use, and that it was used exclusively for his practice. He did, however, concede that it was used in driving from home to office, a distance of three or four miles. He contended that the 25% deduction from total automobile expenses for personal use was too great. There was no evidence adduced of any record of mileage driven, and I cannot give the vague generalizations of the appellant any weight. The appeals fail in this regard.

I turn next to rental income. The appellant owned the Breton Court Apartments and an office building. He said that the utilities expense as allowed by the respondent was insufficient. His evidence was that the utilities expense was around $5,000 a year and not the $2,000 allowed by the respondent. This evidence I can only characterize as vague, and I note that it was unsup ported by any record or voucher. I therefore find it totally unconvincing. The appellant did, however, produce a receipt for 1976 taxes on the office building in the amount of $6,605.28, which taxes were paid in 1978. It would appear that the appellant claimed and was allowed only $3,300 for taxes on this building for that year. The 1976 assessment should therefore be varied to allow an additional deduction in the amount of $3,305.28.

Further, it would appear that the respondent included in 1973 rental income the sum of $2,490, which amount had been deposited in an account normally used by the appellant for the deposit of rental receipts. The appellant’s evidence in this regard, which was not shaken on cross-examination or weakened by the other evidence, was that moneys totalling this amount were deposited by his mother who acted as his rent collector, and that he had supplied those moneys from his own assets. In short, they were not rent. The appeal for 1973 will therefore succeed in this regard and the assessment will be varied to delete the $2,490 from income.

The appellant asserted that adjustments for the understatement of rental income on the O’Neil building for 1973, 1974 and 1975 were incorrect because one tenant, Doctor Bergman, just did not pay his rent of $225 per month. The appellant stated that he and Doctor Bergman were partners in a land development venture which, as I understood it, was in some way connected with the non-payment of rent. He stated, and I quote, “The thing never did get straightened out”. The appellant did not explain the connection between the two matters, that is to say, how the rental deferral was connected with the partnership. No partnership financial records were produced. There is insufficient evidence here for any variation in the assessments in this regard.

The appellant’s attack on the computation of the taxable capital gain realized on the disposition, in 1974, of his interest in the Abbott Harvey properties was so unclear as to be incomprehensible. The nature of his relationship with the other doctors who were co-owners with him of the property was not explained. There was no evidence as to what V-Day value was, save for the bald allegation that it equalled or exceeded proceeds of disposition. This branch of the appeal therefore fails.

In 1977 the respondent included in the computation of income the sum of $169,573.15, being the appellant’s share of the profit on the sale of what were called the B & T lands. In 1964 the appellant was approached by two developers named Schellenberg to buy an eighty acre parcel of land adjoining a twenty acre parcel which the Schellenbergs already owned. It would appear that the appellant and an associate, Weston, did buy the eighty acres and that the arrangement made at the outset was that each would contribute his interest in the land to form a jointly owned one hundred acre pool in which each would have a 25% interest. There was, according to the appellant, some discussion at the outset of a proposal that the one hundred acres be developed with housing to be let to students at a school proposed to be built on adjacent land. The eighty acres, at least, was zoned agricultural at the time, and it required draining and filling before development could proceed. Title to the one hundred acres was never transferred to the four associates and thus, according to the appellant, the Schellenbergs were able to proceed without the appellant’s knowledge or concurrence with the subdivision of the twenty acres to which they held legal title. The Schellenbergs moved, in 1970, to dissolve the partnership after subdividing the twenty acres and, following litigation and the appointment of a receiver of the assets of the partnership, the appellant’s 25% interest was sold, giving rise to the profit in question. The appellant stated that he was reluctant to sell his interest in the land, and it appears that he is correct in so stating, at least to this extent, it is clear that the appellant was reluctant to see the sale proposed by the receiver proceed at the price then named.

On the evidence, I can find no dedication of the land to an investment purpose. The development of student housing may well have been discussed at the outset, but such use, once rezoning, financing and other prerequisites were satisfied, would clearly not have required one hundred acres of land. The entire student population planned for the projected school was only five hundred. There was no evidence that any other or additional use was either discussed or pursued.

The appellant was in a minority position in the group. The Schellenbergs, being developers, might well, from the very outset, have been expected to push for development and resale as they in fact did, at least with the 20 acres. In all the circumstances, I am not persuaded that the appellant’s intention at the outset was not to turn the land to account for profit in the most advantageous way possible. The appellant, though a doctor and not in ordinary occupation a developer, was not a stranger to the land development business by any means. The subject matter of this transaction was raw land. There is, in my view, no basis for a finding that the transaction was on capital account. The land, as I see it, was simply the inventory of the partnership formed with a view to dealing in land. What was sold was inventory, even though the sale of it by a receiver was undoubtedly not foreseen at the outset. That is the factor which, in my view, characterizes the gain on the sale as income. This branch of the appeal therefore fails.

The appellant made no attempt to show that the interest paid by him to M Greening for the purchase of some raw land escaped the prohibition of subsection 18(2) of the Income Tax Act. He suggested no basis for the deductibility by him of legal fees which he personally paid in respect of litigation, to which litigation he was not a party, but, rather, the party was a company in which he was interested. It was shown, as well, that the appellant was allowed the deduction of the RRSP premium payment which he made.

In 1976 the appellant, by reason of inadequate records, included $2,000 in the computation of his income from the medical practice. This amount was an estimate of earnings for a period when, according to the appellant, the earnings were, in fact, $2,484. That the earnings were, in fact, the latter figure appears to have been substantiated by statements from the government insurance plan. The respondent should therefore have added $484 to declared income, not $2,484, and the appeal will succeed in this respect. The appellant, however, was so demonstrably confused in accounting for the financial returns of his medical practice that I cannot accept his unsupported assertion that the addition of $7,448 in respect of accrued accounts receivable was made in respect of a period in the following fiscal year. This branch of the appeal fails.

The item for “labour, personal and capital” related in part, the appellant said, to work done to repair sewers at the Breton Court Apartments and in part to work done with a view to the erection of a clubhouse for a proposed golf course. What part was what, the appellant did not say. The erection of a building usually involves a capital outlay. The installation of sewers might also have been a capital outlay, it might also have been repairs to existing sewers involving a current outlay. It is not clear exactly what sewer work was done. I cannot therefore say, on the evidence, that the assessment was wrong in relation to the sewers, and it plainly was not wrong in relation to the clubhouse. I will therefore not interfere with this aspect of the assessment.

I do not accept the appellant’s bald and unsupported assertion that he, and not the partnership in which he was involved, paid the interest on the McFarlane purchase. The appellant made no attempt to produce cancelled cheques or records. I strongly doubt that the appellant had any consistent grasp of or recollection of such detail of his financial affairs. In contrast, however, I do accept the appellant’s unchallenged evidence that he did not receive interest from his former partners in the medical clinic. It was evidence that the appellant’s relationship with them was rather acrimonious and I believe that he is quite capable, because of that, of recollecting, without the aid of financial records, whether he ever received interest from them or not. The $1,007 addition to 1973 income will therefore have to be deleted.

The appellant testified that he increased his interest in the Breton Court rental apartments by purchasing, in 1974, the one-half interest formerly owned by Mr Weston. He stated that the respondent failed to allow capital cost allowance based on the resultant addition to the capital cost of depreciable property. The appellant produced a schedule of capital cost allowance which he said was prepared by one of the respondent’s assessors, which would seem to show that no 1974 addition to the property described in Class 3 and 8 was made. The schedule is undated. On cross-examination, counsel for the respondent elicited admissions that certain additional CCA had been allowed on assessment, but he did not, either in cross- examination or in examining the assessors whom he called as witnesses, attempt to establish a link between that additional CCA and the additions resulting from the purchase of the one-half interest in the apartments. I am far from satisfied that the assessments are right in this respect. I am equally far from satisfied that they are wrong. In the circumstances, I cannot disturb the assessments.

Finally, in 1974 the respondent included $5,000 in the computation of the appellant’s income in respect of a benefit which he found to have been conferred when the appellant’s company, a partner in a land development firm known as Raymer Bay Estates, transferred a lot belonging to the partnership to the appellant. Taxation here, according to the respondent’s counsel, was said to rest on section 15 of the Act. The respondent, however, neither pleaded nor did he attempt to show that he assumed that the transfer was made in the course of an operation for the conferral of a benefit on the appellant, qua shareholder of the corporation, and barring the assumption of such fact on assessment or the proof that such was the nature of the operation, the assessment cannot stand in this regard. I would refer, in this case, to the decision of the Exchequer Court in Pillsbury Holdings Ltd v MNR, [1964] CTC 294, 64 DTC 5184. The appeal will succeed in this respect and the assessment will have to be varied to exclude the $5,000.

I turn next to the appeals of the company. So far as I can discern in this morass of confusion, the respondent has included in the income of the partnership an amount equal to the fair market value of the two lots disposed of by the partnership to the principal shareholders of each corporate partner and he has assessed the corporate appellant on its share of the partnership income so calculated. His action in doing so appears to be warranted by paragraph 45(1 )(a) of the Income Tax Act. Doctor O‘Neil’s bald assertions that the respondent’s valuation of the two lots are too high are insufficient to discharge the onus on him which is to demonstrate that the respondent’s assumptions as to value are wrong.

The appellant sought a $10,000 deduction in respect of the write-off of a bad debt owed by a company called Thermo-ply Concrete Products. Here, the convoluted evidence given by Doctor O’Neil does not lead me to the conclusion that Thermo-ply was ever indebted to the corporate appellant to begin with.

Finally, a claim was asserted to a write-off of $5,000 in respect of the destruction and loss of a bulldozer. It was not shown that the machine was the property of the corporate appellant to begin with. If it had belonged to the company it would, I assume, have formed part of the depreciable property owned by the company. Neither proof of purchase nor even any schedule of depreciable property was ever produced by Doctor O’Neil. This branch of the appeal therefore fails.

The appeals of the individual appellant succeed only in respect of the matters previously mentioned. The appeals of the company fail in their entirety and will be dismissed.

Appeal of appellant allowed in part. Appeal of corporate appellant dismissed.