Jack Abugov v. Minister of National Revenue, [1972] CTC 2598, 72 DTC 1493

A J Frost:—This income tax appeal is in respect of appellant’s 1962, 1963, 1964, 1965, 1966 and 1967 taxation years. Upon Notice of Objection duly signed and filed, the Minister of National Revenue reconsidered the assessments and confirmed them on May 14, 1970. The appeal was heard together with the almost identical appeal of Maurice Sunderland for the same taxation years on common evidence at Calgary, Alberta on October 1, 1971 before the Tax Appeal Board as it was then constituted.

The appellant and the said Maurice Sunderland were, at all times relevant to their appeals, partners in the architectural firm of Abugov and Sunderland (hereinafter referred to as the “partnership”) which, since its inception, had accounted for its income on a cash basis. Each partner had a 50% interest in this partnership.

In assessing the appellant for each of the aforesaid taxation years, the respondent added to his declared income the following amounts which had been claimed as deductions from the said income but which, according to the respondent, had not been “laid out to earn income”. In addition, in each year, the Minister imposed a penalty of 25% of the amount by which the tax that would have been payable on account of the reported income was less than the tax payable by the appellant for the year. The amounts added back to his income for the respective years were as follows:

(a) Architectural and engineering costs not laid out to earn income in 1962

Britannia “800” /2 of 5,285.97	$ 2,642.99
(b) Architectural and engineering costs not laid out to earn
income in 1963
Britannia “800” /2 of 1,545.28	772.64
(c) Architectural and engineering costs not laid out to earn
income in 1964
Personal residence J Abugov— /2 of 1,134.02	567.01
12th Ave. Building /2 of 14,000	7,000
(d) Architectural and engineering costs not laid out to earn
income in 1965
Personal residence J Abugov— of 834.64	417.32
(e) Architectural and engineering costs not laid out to earn
income in 1966
Personal residence M Sunderland- -1/2 of 703.48	351.74
(f) Architectural and engineering costs not laid out to earn
income in 1967
Personal residence M Sunderland- -1/2 of 351.74	175.87

The assessments also included the following amounts imposed as penalties and also amounts charged as interest:

The amounts of income thus added could be classified in three groups:

1. Amounts expended by the partnership in preparing plans and performing services in connection with the construction of the “Britannia 800 Building”. The cost of these services was agreed by the parties to be $6,831.25 and their fair market value $8,000.

The Britannia 800 Building was developed and owned by Century Leaseholds Ltd (hereinafter referred to as “Century”) which, at all relevant times, was owned by the following shareholders:

Branlyn Management Ltd was owned entirely by the appellant and his wife, and Jomas Management Ltd was owned entirely by Maurice Sunderland and his wife.

No invoices were rendered to Century and no accounts receivable were set up in the books of account of the partnership for the said services until April 26, 1968, ie after the appellant and his partner had been notified by the assessor of the Department of National Revenue of the omission. The cost of those services had been deducted from the income of the partnership in its 1962 and 1963 taxation years.

2. In its 1964 taxation year, the partnership charged an amount of $14,000 to its gross revenue as costs for personal services in connection with the construction of the “12th Avenue Building” owned by 12th Avenue Building Limited. The shares of this corporation at that time were distributed as follows:

The same accounting procedures were followed with regard to work done on the Britannia 800 Building project as had been adopted for the 12th Avenue Building, ie costs were charged to the partnership’s gross revenue, while the revenue generated by those costs was not recorded.

In 1966 the shares of 12th Avenue Building Limited were sold to an outside party and a profit was made by the shareholders on that transaction, but the revenue which should have been attributed to the partnership by providing the above-mentioned services was not recorded. On the contrary, the said profit realized from the sale of the shares was claimed to be a capital gain on the disposal of a capital asset (the shares).

3. The last group of adjustments to the appellant’s income concerned the building of his private residence in 1964 and 1965, followed by the construction of a similar dwelling for his partner, Maurice Sunderland, in 1966 and 1967. The cost of professional services rendered by the partnership in this respect was absorbed as a business expense and, in reassessing the appellant’s net income, the Minister disallowed this expense claimed as deductible from the partnership’s business income.

At the beginning of the hearing, the appellant asked for leave to amend his Notice of Appeal so as to add thereto his objection against the lasi-mentioned adjustment. However, in his Notice of Objection, the appellant had stated that he did not object to the disallowance of the amounts reassessed in connection with the cost of providing services for his personal home, nor did he retract this omission in his Notice of Appeal.

Counsel for the respondent therefore objected to this amendment to the appellant’s Notice of Appeal contending that subsection 58(1) of the Income Tax Act requires a taxpayer to set out, in his Notice of Ob- jection, the reasons for the objection and all relevant facts. He referred to the jurisprudence of the Board on this subject and asked the Board to reject the proposed request for amendment. In general, it is not very satisfactory to dispose of an issue on account of a procedural omission, especially if the other party cannot be considered to have been seriously harmed in his argument if the correction of such an omission were allowed.

However, in this case, the proposed amendment would introduce a new issue which had already been disposed of voluntarily by the appellant himself in two consecutive documents. I am of the opinion that under those conditions the appellant was estopped from amending his Notice of Appeal at this late stage. I also refer to the decisions of the Board in Lenglet v MNR, [1969] Tax ABC 129; 69 DTC 146, and Rosenberg v MNR, [1968] Tax ABC 1131; 68 DTC 830.

I may add though that, even if I had had to consider the appellant’s complaint on its merits, my finding would not have been in favour of the taxpayer. The appellant’s contention that the services provided in building his private home did not in fact cost the partnership anything because the work was done during slack periods and the partners had to keep their staff busy anyway, did not convince me that the cost of their employment and related expenditures incurred for private benefit of the appellant should be treated as deductible business expenses of the partnership. In principle it is incorrect to charge expenses to business operations without accounting for matching revenues or private benefits created.

This leaves the Board with the two other categories of disallowed expenditures. With regard to Britannia 800 Building, the appellant took the position that one could, almost arbitrarily, postpone the accounting for revenue which would normally result from expenditures in the year in which these expenditures were incurred or shortly thereafter. This is of course not so. It would be tantamount to creating a new kind of reserve which is not permitted under the Act. It appears to me that the Minister, under the circumstances described hereinbefore, treated the appellant fairly and reasonably by adding to his income an amount equal to the cost of the services in the taxation year during which they were rendered, ignoring even their fair market value, and I cannot either from a legal or an accounting point of view find any justification for the appellant’s argument that no revenue was earned because all interested parties (including the appellant) agreed that Century’s cash position did not permit the outlay at the time or in the succeeding years. The fact that he and his partner owned a substantial interest in Century, thereby benefiting from the expenditures, combined with the fact that there was apparently an understanding between Stewart, Green Properties Ltd not to bill Century for the costs of services rendered has strengthened my opinion that the assessment was fair and reasonable and in accordance with the Act and generally accepted accounting principles.

Lastly, the Board must deal with the adjustment made by the Minister concerning amounts expended by the partnership for the con- struction of 12th Avenue Building. If a taxpayer claims that a certain capital expenditure creates a capital asset in respect of an investment holding, he cannot at the same time claim it as a personal expense of his business. In this particular case, the appellant claimed a capital gain on the disposal of his 12th Avenue Building asset, which had in fact been enhanced in value by certain professional activities rendered by the partnership. In my opinion, the Minister again acted fairly and reasonably in disallowing the said expenditures.

Having dealt with the adjustments to which the appellant objected, I now come to the matter of the penalties. Counsel for the appellant, in his argument, contended that the onus should be on the Minister to prove his allegations of “gross negligence” on the part of the appellant, contending that if this were the case the Minister had failed to discharge that obligation.

I agree with the appellant that the onus of proof in the case of alleged gross negligence normally rests with the Minister. However, this does not mean that if gross negligence is obvious from the facts proven to the satisfaction of the Board, there would be any need for charging the Minister with additional, and therefore redundant, proof of what is already evident. In this case, it is quite clear from the facts, as related herein that the appellant Knowingly omitted the abovequoted items from his income tax return. He deliberately charged the contentious expenditures to the partnership’s gross income although ne should have understood that they could not under the circumstances be claimed. The appellant followed this erroneous practice consistently and the fact that some of these expenses were “chickenfeed”, as counsel for the appellant called them, did not improve the weight of appellant’s argument.

For the above reasons, I find that the appeal must be dismissed.

Appeal dismissed.