Drozdzik v. The Queen, docket 98-1605(IT)G

Date: 20021220

Docket: 98-1605-IT-G

BETWEEN:

SLAVOMIR DROZDZIK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Margeson, J.T.C.C.

[1]            This is an appeal from the assessments of the Minister of National Revenue ("Minister") for the taxation years 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995. By notices of reassessment for those years the Minister disallowed expenses in the amount of $36,343 in 1988; $127,883 in 1989; $134,444 in 1990; $82,698 in 1991; $58,318 in 1992; $103,277 in 1993; $43,843 in 1994 and $208,289 in 1995; as particularized in Schedules 'A' and 'B' to the Reply.

[2]            Further, in 1995 the Minister added $50,730 as undeclared income. The Minister also imposed penalties pursuant to subsection 163(2) of the Income Tax Act ("Act").

Argument on behalf of the Appellant

[3]            Counsel for the Appellant admitted that the onus is on the Appellant (hereinafter referred to as "Appellant" or "Drozdzik") in this case. However, he took some consolation from the recent decision of the Supreme Court of Canada in the case of Stewart v. Canada, [2002] S.C.J. No. 46, (Q.L.) 2002 SCC 46 File No. 27860 dated May 23, 2002. This case has changed matters substantially. The question of reasonable expectation of profit should not be accepted as a test in this case. Credibility is an issue in this case but no real issue can be made of the fact that the Appellant introduced as part of his evidence a bank statement and not the cheques. No unfavourable inference should be drawn against him in this regard. On the basis of Stewart, supra, he said that there are two issues:

(1)        is there a personal element involved?

(2)        if there is a personal element involved then you go to the second stage to determine whether or not the Appellant was involved in a commercial venture. All of the activities that the Appellant was involved in may not have been wise but they were profit-motivated. There was no personal element involved in any of these enterprises. He was expecting a profit in each case. Every aspect of each case was driven by a search for profit.

[4]            The burden of proof is on the Appellant to establish on a balance of probabilities that the expenses were incurred. There was incontravertable evidence that the Appellant fished during the years in question. The unavoidable inference is that he had a crew, that he paid them and that he paid the other expenses. He testified to that effect.

[5]            The Appellant was not a sophisticated person. He had little comprehension of the English language and he could not write it. It would be less significant in his case for him not to keep an accurate record as others might. It is thus significant that these types of records would not appear as important to him as they would to people who are sophisticated in business and accounting matters. The Court should accept what he had to say and his evidence should have been sufficient. There is no need of corroboration if his evidence is accepted.

[6]            He opined that even though there may not be any original records, no adverse inference should be drawn against the Appellant's position because of the very complicated situations the Appellant found himself in during the years in question. These complex issues involved the personal problems that he faced during the years in issue, the legal action involving the Drozdzik's, Western B.C. Seafood Inc. ("Western") and Exotic Alaskan Seafoods Inc. ("Exotic"). These were some of the enterprises with which he was dealing during the years in question. The actions that the Appellant took during all of this period of time were not unreasonable. Further, there were personal problems during the years in question of significance to the Appellant including the domestic dispute between the Appellant's brother and his wife which were also involved.

[7]            The Appellant did everything that he could to gather up documents to support his position. However, the Appellant himself said that he felt that he lost so much money that he would not have owed the government any money and therefore he did not file returns when they were due. This was an unwise action on behalf of the Appellant but he has given an adequate explanation.

[8]            The letters in Exhibit A-1 at Tabs 23 and 24 go to some extent to explain the reason for the loss of the records. This has also been testified to in evidence given in Court. The documents contained in Exhibit A-1 between Tabs 26 and 35 speak incontestably to the legal expenditures which are being claimed. There is also evidence in these documents of the maintenance of business. There is evidence of hard activity in these businesses. Food expense claims are reasonable. The Appellant testified as to the expenses that he incurred and such type of expenses would be necessary to carry on this type of activity. All of the expenses that were claimed were legitimately claimed. The appeals should be allowed with costs.

Argument on behalf ot the Respondent

[9]            Counsel for the Respondent took the position that this case was not complex in terms of law although the facts and issues are very convoluted. The basic test is whether or not the Appellant has met the onus on the balance of probabilities of establishing that the Minister's assessment was incorrect. Put another way, has the Appellant rebutted the presumptions contained in the Reply to the Notice of Appeal ("Reply") in accordance with the decision in Johnson v. M.N.R., 3 DTC 1182, (1948) C.T.C. 195.

[10]          The taxpayer should be able to show the income that he earned in the years in question and should be able to establish the deductions to which he is entitled. The issues in the case at bar are with respect to deductions and the Appellant must bring himself within the appropriate deduction sections of the Act.

[11]          What is notable in the present case is the large number of documents that are missing, not produced or those which were not created. The argument was that the Receiver of Western disposed of all of these documents except some of the documents produced by the Appellant which are very fortuitous for his case. The documents that were produced were those of the Appellant and his accountant.

[12]          The issues are those contained in the Notice of Appeal and the Reply. Counsel for the Appellant has referred to the recent case of Stewart, supra, but the position of the Respondent is that apart from the Herbalife of Canada Ltd. ("Herbalife") business and the jeans business that case has little application to the case at bar. The issues are whether or not the expenses were incurred and if they were incurred, whether or not they were incurred for the purposes of producing a profit from a property or business in accordance with paragraph 18(1)(a) of the Act. Further, were the expenses reasonable under the circumstances in accordance with section 67 of the Act.

[13]          The case of Stewart, supra, relaxes the rules with respect to reasonable expectation of profit but one still must look for the personal element in the enterprises. In this case there were personal elements involved such as the Appellant being involved in the business (just for fun), many of the expenses should be considered to be non-business items.

[14]          With respect to the Herbalife and the jeans enterprises the Appellant was only involved in a preliminary way. He had not come to the point where he had created a business. There was no business in effect. Consequently, these expenses should not be deducted.

[15]          Two different treatments were afforded to the claimed expenses as set out in the Reply in Schedule 'A'. During the period 1988 and 1989 the Appellant was involved in fishing. He had expenses for repairs, for crews, etc. The problem is what expenses did he have? Without the proper records, books and receipts it is impossible to say.

[16]          In the year 1988 the Minister disallowed expenses for vessel repairs in the amount of $11,776 as set out in Schedule 'A'. There were no documents to support this item. It would seem probable that he did have some expenses in those years but the question arises as to whether or not the expenses were reasonable. The documents are missing and the Minister has to ask, what were the expenses? What were they for and to whom were they paid?

[17]          In the later years, 1990-1995, the Appellant was not active in the fishing business, his income was from leasing licenses. Yet in the year 1989 the Appellant claimed vessel repairs and the Minister disallowed same in the amount of $100,065. This amount of expenditure was unreasonable in light of his limited activities in that year.

[18]          In the year 1990 the Appellant claimed expenses for fishing and vessel repairs in the amount of $117,857.32. In the year 1991 he claimed vessel repairs in the amount of $76,342.59 without sufficient documentation to support these claims.

[19]          In respect to the disallowed claims in Schedule 'B' of the Reply for the years 1990 to 1995 counsel was prepared to admit that oral testimony might be sufficient to establish that the expenses were incurred but where the amounts are so great there should have been more evidence other than the oral evidence of the Appellant.

[20]          Some of these items are capital in nature and may not be deducted in the manner that the Appellant sought to deduct them. These expenses were not reasonable in relation to the value of the boats.

[21]          A further question is whether or not these expenses were made by Drozdzik or by anyone. Most of these expenditures were alleged to be in relation to the vessels 'Sandra L' and the 'Bertha G'. There was no income from those boats during those years. Therefore, these expenses cannot be deducted. Most importantly, there are no bank drafts or cheques to support the claims.

[22]          The best evidence presented was in relation to the claims for legal and accounting expenses. Evidence was given in this regard by the former lawyer for the Appellant. Therefore, he has met the first test. It was a business but was it deductible? Was it a business against which he could deduct the expenses if there was a business? Were the expenses that might be deducted capital in nature?

[23]          With respect to the travel expenses, were they related to the business claim? With respect to the salary claimed in the amount of $14,000 for which the cheque was given to Mr. Edmund Skrodzki, the question must be asked, was it reasonable to use a cheque as a receipt for such an amount? Is it more probable that the expense claim is not a valid expense? With respect to the convention expenses, such as the seminar in Florida, there was no nexus between the expense claimed for the seminar and the fishing business to which it was allegedly related.

[24]          With respect to the bad debt expense claimed, these expenses were in relation to the law suit conducted by the Appellant on behalf of his business. It was not a bad debt and it could not be deducted as such. It might be on account of capital but there is no claimable head for this deduction during the years in question.

[25]          There were legal fees that were not claimable. The expenditure was not in relation to the business operation. The expense would have to be claimed against the income in the year in which it was expended. There were no corresponding amounts against which to claim expenses in the year in question.

[26]          With respect to the claim for allowable business investment loss ("ABIL") in the amount of three quarters of $14,000, there was no evidence that the Appellant was a shareholder. There were several pieces of evidence which indicated that he was a non-shareholder. The only evidence in support of his claim was a journal entry and a general ledger entry. He was not listed as a shareholder on the list of creditors. Further, this was a non-arm's length transaction since he was dealing with his brother and under the provisions of paragraph 40(2)(g) of the Act, the loss was deemed to be nil.

[27]          With respect to Schedule 'C' and the claim of the Minister that the Appellant failed to include the amount of $50,000 in his income, which was actually paid to Sunrise Fisheries Ltd., counsel argued that the evidence was inconsistent. First of all he said that Sunrise Fisheries Ltd. did not receive the money and now he says it did receive it but it went into his account only for the purposes of passing it through to his brother for personal reasons. The Court should not be satisfied that that is what happened to the money that went to his brother. The Appellant is attempting to recall what happened but he had no documents to establish this.

[28]          With respect to credibility counsel argued that the Appellant tried to show that the boat was transferred to Western when it was not. All of the evidence before the Court shows that he participated in a scheme to hide money that might have belonged to his brother's wife. He participated in the scheme to try to prevent her from attaching this money. Therefore, the Court must ask, was this credible? Further, the Appellant was sophisticated as far as business was concerned even though he might have been unsophisticated with respect to the use of the English language and with respect to accounting legal matters. He had considerable business acumen.

[29]          She referred to the provisions of section 230 of the Act and indicated that it is the Appellant's duty to keep accurate records of his income and expenses. When the time comes to prove them he must be able to do that satisfactorily.

[30]          With respect to penalties as set out in Schedule 'D', counsel took the position that the evidence in respect to some of the items was stronger than the evidence in relation to other items. For example, where the legal fees were disallowed, that expenditure might have been related to business as the Appellant claimed. Other expenses claimed were clearly personal and penalties should attach, particularly with respect to such items as the convention expenses.

[31]          In summary counsel said that there were a number of different items in dispute over a number of different years but the main issue was with respect to the disallowed expenses. The question arises as to whether or not they were deductible. Were they related to the earning of income? Were they reasonable under all those circumstances? Were they expended? If they were expended, were they deductible? The appeals should be dismissed with costs.

Reply

[32]          Counsel for the Appellant said that all expenses claimed were deductible. The testimony of the Appellant and the other witnesses was sufficient to establish this deductibility. There was no amount that was not established by oral testimony, by documentation or just by common sense. He took issue with the inference by counsel for the Respondent that the Appellant produced selected pieces of evidence and not others. The documents that were not produced were not necessary and there was no reason for the Appellant to believe that he should have produced them. One should ask the question, how much evidence do you need? The Appellant called the person who said that he received the $50,000 in issue and there has been no rebuttal of that testimony.

[33]          With respect to the expenditures for the so-called jeans business, this was a business and the monies claimed as expended were expended. The jeans were ordered. Counsel asked the question, how far do you have to go to be able to claim it?

[34]          During the years when the Respondent said that the Appellant was not fishing, he took issue with this position. Even though he was leasing his license he was still involved in fishing during those years because he still obtained fish, he was still selling fish, he was still looking for markets and he was trying to obtain the best price for the fish, which would enable him to make more money. He continued to repair boats and protect his fishing assets so that he could continue fishing in the future. This certainly amounted to fishing and he was not just in the business of leasing his license. Activities were ongoing.

[35]          Regarding the matter of the receipts, what is the difference between using a cheque as a receipt? No evidence has been adduced that the whole matter was fraudulent. It was indicated by the Appellant that this method of obtaining receipts was common in the business.

[36]          Concerning the trip to Florida for the seminar, the Appellant indicated that he was seeking to improve his skills at negotiating. It was very important to his business as he felt that if he could learn to communicate better, he would be able to make more money in the fishing business.

[37]          With respect to the amount paid for the legal settlement, this should be deductible because if the Appellant did not spend this money he would have lost his capacity for earning income in the future or his ability to earn income would have been severely reduced without his licenses which he sought to protect. He wanted to protect his future income as well as his present income.

[38]          There was no need to show that the Appellant had share certificates because the evidence clearly indicates that he was a shareholder. Evidence of shareholdings can be given not only by the use of share certificates but by other evidence as well. There were sufficient evidence here for the Court to conclude that he was a shareholder.

[39]          In the case of the $50,000 amount that the Minister alleged was paid to the Appellant in the year in question, he has established that it was not. This should not be added to his income.

Evidence

[40]          Andrew George Sandilands testified that he was a lawyer having been called to the bar in 1968. He practiced primarily in the field of Civil Litigation. He met the Appellant in the years 1989/1990 in connection with his dealings with a Category 'G' license issued by the Department of Fisheries and Oceans ("D.F.O.").

[41]          He pointed out that this license must be assigned to a vessel and Drozdzik assigned it to Mr. Stan Popielasz's boat. A trust agreement was completed by him showing that Mr. Popielasz held the license in trust for Drozdzik. This witness then started acting for Mr. Drozdzik in an action in the Supreme Court with respect to the ownership of the license.

[42]          Drozdzik was involved in a company with his brother Casey that was incorporated in the mid-1980s. In the middle of the year 1987, Drozdzik had transferred to the company the three vessels that he owned and the license that he held. This was done in order to expedite the marketing of the company. All of these processes were completed without the assistance of lawyers. They transferred the vessels by filing bills of sale and then the company executed bills of sale back to Drozdzik.

[43]          They did not register the transfer back but there was a witness in the registry of ships' office with respect to the transfer back who would be able to establish the date. Litigation arose in 1990 when Casey Drozdzik and his wife separated. She sought a declaration that the shares of the company were family assets. The bank account was seized and the company had no cash with which to operate. Drozdzik transferred the ships back to himself and the bills of sale were registered. Casey's wife then commenced an action against Drozdzik and the company that the transfers were fraudulent conveyances and then the company was petitioned into bankruptcy by another company. The lenders, Federal Business Development Bank ("F.B.D.B.") executed their security, seized and sold the vessels but the licenses were not seized. Then a major creditor, under section 38 of the Bankruptcy Act, sued Drozdzik to obtain the license back.

[44]          In that legal action the issue was whether or not the beneficial ownership of the license had always remained with Drozdzik. A company by the name of Exotic was one party and Drozdzik and Casey's wife were the other parties. The license was valued recently at over $1 million. This witness represented the interest of Drozdzik to defend his ownership of the license (not that of Exotic).

[45]          The trial was scheduled for 1993. Drozdzik lost his nerve and made a settlement. He paid US$50,000 and another CDN$20,000 in order to settle the matter. He admitted that Exotic had the right to take action on behalf of the Company and since it had settled on behalf of the creditors Drozdzik had no claim. This conclusion was upheld. Drozdzik had to seek leave to appeal and it was dismissed. He had to pay the costs. This action included a number of Court appearances.

[46]          Exhibit A-1, Tab 2, was introduced with respect to the vessel 'Sandra L'. This was the document signed on the day that the company became the owner of the vessel and signed it back to Drozdzik. It was the register. This document was not admitted without restriction. The Declaration of Trust, at Tab 3, was admitted, subject to the restriction that the contents of the document were not admitted. These were subject to proof subsequently.

[47]          The documents at Tabs 26 to 36 were copies of statements of accounts rendered to Drozdzik by this witness. He confirmed that Drozdzik had paid these accounts. They were accepted into evidence as such.

[48]          Tab 42 was a copy of the Transfer of Registration in the Registry of Shipping. It showed the history of the ownership of the 'Sandra L'. It was admitted for the purposes of showing that it was consistent with this witness's knowledge of the history of the transactions with respect to this vessel.

[49]          The document at Tab 43 was admitted for the limited purpose of showing that it was consistent with this witness's knowledge of the other documents. The document at Tab 44, at page 3, was admitted without restriction. The documents at pages 1 and 2 were admitted for the purposes of showing that the witness acted on the basis of these documents being accurate and consistent with the regulations. The document at Tab 53 was admitted for the purpose of showing the work that was involved by the firm in obtaining the 'C' license. The document at Tab 54 was admitted without restriction. The document at Tab 55 was admitted for the purposes of showing the history of the ownership of the boat. Likewise, the document at Tab 56 was so admitted. The documents between Tabs 64 and 67 related to the purchase of the 'Sandra L'. These documents were admitted for the limited purpose of showing the history of the transactions. They went hand in hand with the documents at Tab 66. The documents at Tab 85 were accounts paid by Drozdzik with respect to the matter of the bankruptcy. The trustee in bankruptcy was Andrew Sandilands.

[50]          Exhibit A-2 was the record of the transfer of the vessel 'Coast Harvester'. The 'C' license was on this boat originally. This boat sunk on September 1, 1987.

[51]          It was pointed out that there was no dispute as to the ownership of the 'Coast Harvester' by Western. There was no conveyance back to Drozdzik. The insurance money was paid to Drozdzik as beneficial owner thereof. Exhibit A-3 was the original Bill of Sale. Exhibit A-4 was the original Bill of Sale of the 'Coast Harvester' when sold to Drozdzik. It was not registered because the boat sank. The documents in Exhibit A-1 at Tabs 7 and 9 were admitted into evidence. It was the position of this witness that Drozdzik had to take the action that he did in order to defend his license. Otherwise, he would have lost his license.

[52]          In cross-examination Exhibit A-5 was identified as the Consent Judgment. The witness said that Drozdzik held 25 per cent of the shares of Western at all times. All funds were paid to Exotic, being US$50,000 and CDN$20,000. These funds went to Exotic because their claim was greater than the amount paid and no other creditors participated in the claim. The vessels 'Sandra L' and the 'Bertha G' were taken by F.B.D.B. under their securities.

[53]          He explained that the document at Exhibit A-2, the note underlined in red, meant that the Registry was closed. Therefore, there was no more record with respect to this boat. The Certificate of Registry was not delivered probably because it was lost when the ship sank.

[54]          The license was probably worth $500,000 per year net, in income. He was asked how his firm generated bills and he said that it was from a printout received from his accounting system. They would have been drafted from information inputted by him from the printout. He was asked how they received payment and he said that it varied. Sometimes they received it from the trust account and sometimes it was received by cheque or occasionally by cash. Between the years 1990 and 1995 he did not recall how the accounts were paid but he believed they were paid by cheque. He only dealt with Drozdzik with respect to these accounts and he thought that it would be strange if someone else paid the accounts. He did not know where Drozdzik obtained the money to pay the bills but he was responsible to him to see that they were paid. His legal fees were in dispute in this case but he did not know what the total of his bills amounted to. Even if the Appellant was awarded costs, he did not remember that he received any.

[55]          Mr. Leo van Tongeren testified that he had been a Chartered Accountant since 1974, except for two years when he was in industry. Drozdzik asked him in the spring of 2000 to help him organize his records and make them understandable. It took several months to do so. He received all of the information he could from other accountants and from lawyers and other persons. He assisted Drozdzik in preparing a chronology. He also assisted him in a disclosure proceeding. He delivered documents 1 to 91 to the Ministry in relation to the Reply to Notice of Appeal ("Reply"). He looked up the major items referred to in the Reply and prepared his papers in accordance therewith. He prepared a summary of items and a submission binder in order to show how the documents related to the Reply. He also referred to some of the issues that were not in the Reply. He used additional new information.

[56]          He was allowed to refer to Exhibit A-1, at Tab 6, in order to show what actions he took. At this point, these documents had not been proven. The pages in the document referred to issues that he identified from the Reply.

[57]          Issue number 1 referred to paragraph 2 of the Reply; issue 2 related to the question of expenses and paragraph 5 of the Reply; issue 3 was with reference to eligible capital expenditures and related to paragraph 5 of the Reply; issue 4 related to capital cost allowance and related to paragraph 5(j) of the Reply; issue 5 related to the question of office expenses of Sunrise Fisheries Ltd. and referred to paragraph 5(f) of the Reply; issue 6 referred to all documents relating to convention and motor vehicle expenses and related to paragraphs 5(o) and 5(e) of the Reply; issue 7 related to expenses as referred to in paragraph 5(i) of the Reply; issue 8 related to the marriage exemption which was not contained in the Reply; issue 9 referred to the ABIL in paragraph 7 of the Reply; issues 10, 11, 12 and 13 were new matters; issue 14 referred to subsection 163(2) of the Act in the matter of penalties and was referable to paragraph 8 of the Reply.

[58]          With respect to vessel repairs, some of the issues raised were with respect to expenses claimed by Drozdzik on the basis of his beneficial interest in the vessel although he was not the owner of it.

[59]          He referred to Tab 50 of Exhibit A-1, in relation to the vessel 'Bertha G' and indicated that Drozdzik fished it in the year 1989. This witness delivered the document to Mr. Maugh of Canada Customs and Revenue Agency ("CCRA") in January 2001. It came from the information that Drozdzik brought into his office. Tab 50 was marked for identification purposes only, subject to proof.

[60]          The document at Tab 44 was given to him by the lawyer for Drozdzik. If a license was not attached to a boat it would be lost. Drozdzik tendered the bills for repairs to the 'Sandra L' at Tabs 16, 17, 19 and 20. This vessel was owned by Drozdzik beneficially and was not fit for fishing. The 'Bertha G' was owned by Western and was fished by Drozdzik who was paying for the repairs.

[61]          Tab 69 was identified as the F.B.D.B. loan document with respect to the 'Sandra L'. Tab 70 related to the seizure and sale of the 'Sandra L'. Tabs 12 and 13 related to the leasing of the 'Bertha G'. Tab 16 related to the leasing of the 'Sandra L' to Drozdzik for five years. Tab 11 related to the repairs to two ships and the settlement by the transfer of 75 per cent of the shares of Western. All of these documents were given to the witness by Mr. Drozdzik. The pictures at Tab 51 show that the vessel needed repairs in order for it to be used efficiently. The 'Bertha G' had most of the problems. This witness did not take the pictures referred to above.

[62]          Tab 25 was an internal document which showed the amounts owing to Drozdzik for repairs to the vessels. These were not repaid by Western. As a result of the bankruptcy the landlord destroyed the records.

[63]          In 1989 Drozdzik was fishing for Western, which was in financial difficulty, and Drozdzik was owed money. Tab 79 was a final report of the trustee showing amounts of money owed to Drozdzik that were lost. Tab 49 showed the fishing income during the year 1989. Tab 40 showed the catch reports and confirmed that Drozdzik was fishing the 'Bertha G' during this period of time. These documents relate to paragraph 2(a) of the Reply and show that Drozdzik was operating a commercial fishing business in 1989. Tabs 47 and 90 show that Drozdzik was attempting to fish in 1991. The information relating to issue 2(b) was used to show that Drozdzik intended to fish in the year 1991.

[64]          Tab 44 was an opinion that the Appellant owned the license. The documents at Tab 68 show that Western was supposed to pay for repairs to the 'Sandra L'. There is no indication that it did. Tab 50 shows that fishing was going on on October 2, 1989 to be reported in the 1990 income tax return. Drozdzik was shown as crew of the 'Bertha G'.

[65]          Tab 39 shows that Drozdzik could sign for the boats and the licensing in the years 1987 and 1989 in spite of the fact that the ownership may have been registered in someone else's name. Tab 10 shows that there was a fishing interest in 1991.

[66]          With respect to issue 2, the costs incurred to retain the fishing rights, the witness said that he gathered up all of the documents on that issue as referred to in paragraph 5(g) of the Reply. He received legal documents from the lawyer and information as to how a license works with respect to D.F.O. He also referred to documents that indicate at Tab 6 that Drozdzik was interested in protecting his interest in the fishing license. Legal fees were disallowed in Drozdzik's return. The claim for legal fees was $23,194.20 penalties were added. The total payments to Exotic for the settlement was $63,010 and $20,000 for a total of $83,010. Tab 3 shows that Drozdzik was to keep his right to the license.

[67]          The document at Tab 1 showed that he was supposed to fish from February of 1989 and to pay all expenses plus 5 per cent of the catch for the motor vessel 'Bertha G'. Tab 2 shows that the 'Sandra L' was transferred to Western in 1992.

[68]          Joseph William Hussey testified that he was the owner of the four-acre site located at 750 Terminal Avenue. This was an old Canada Packer's slaughterhouse and was used for food processing and also contained offices. Western was a tenant there. F.B.D.B. foreclosed on the property and distained for rent. Casey Drozdzik and his brother were already departed from the premises and the landlord disposed of all of their belongings. Their office was intact but the landlord could not contact anyone. Casey was supposed to have been their contact person. This witness was aware of Drozdzik's matrimonial problems. Ole Christiansen was the manager of the building and his brother helped with the physical end of it. Ole Christiansen died this year but his brother is here.

[69]          In cross-examination he said that he did not know the date that the company left. Ole Christiansen was involved in trying to find Casey. They were familiar with the Receivers. They worked with Ole Christiansen. They wanted to get the premises rented. Casey had a breakdown and was not functioning. His wife was around. It was between Ole, Casey and his wife.

[70]          Per Christiansen was the brother of Ole Christiansen. He worked with Ole for one an one half to two years in this building between 1989 and 1991. He remembered Western closing the doors on them. He cleaned it up, removed garbage, junk, boxes and papers and dumped them into the garbage bin. Ole and Joe tried to reach Casey. This witness had no direct contact with him. They tried to contact him. There were about two to three dolly loads of garbage and boxes which were removed from the building or approximately 8 to 10 to 12 boxes.

[71]          In cross-examination he said that they did not try to contact Casey. His brother was the manager of the premises. The Receiver would not take the documents.

[72]          Mr. Leo van Tongeren resumed his testimony and referred to the third issue, being the fishing licenses acquisition. He said that the boat Fleetway II needed a 'G' class and a 'C' class license for geoduck fishing. The 'C' license required a larger vessel. They had one 'G' license and two 'C' licenses. The 'Coast Harvester' and the 'Sandra L' were the larger vessels and the 'Bertha G' was the smaller vessel.

[73]          In the years 1994 to 1995 the license expenses were claimed. This witness examined the documents to see if there were any additional costs of the taxpayer that were not claimed. He determined that there were expenses that were not claimed. The costs of the 'C' license referred to at Tab 52 in the amount of $11,500 on June 27, 1995 were not claimed. At Tab 53, legal fees of $1,003.59 set out in a statement dated December 22, 1995 were not claimed. He admitted that some expenses were claimed for licenses but not these expenses.

[74]          On February 19, 1982, Drozdzik bought a 'C' class license from J. Bliss Fawcett. This was referred to at Tab 54. This was connected to the 'Coast Harvester'. Legal fees were referred to at Tab 55 in the amount of $650.00. The 'G' license was purchased for $7,000 on January 27, 1983 and he referred to it at Tab 56. The legal fees claimed were in response to paragraph 5(d) of the Reply. There were numerous documents that referred to licenses and expenditures. In respect to paragraph 5(g) of the Reply, he said that Drozdzik was the beneficial owner of the 'Sandra L' and the 'Partner' during the period in issue and referred to paragraphs 5(b) and 2(b) of the Reply. In response to paragraphs 5(g) and 5(p) of the Reply he said the cost of obtaining the 'G' license was close to the settlement costs, $50,000 plus US$10,000.

[75]          He referred to the Bill of Sale for the purchase of the fishing vessel 'Partner' at Tab 57 for $23,500. He also referred to Tab 58 as being evidence of the payment for this vessel. This document is dated July 5, 1994. Legal fees were referred to at Tab 59 for $414.95 and these related to the transfer. Tab 60 was referable to the sale by Drozdzik of the fishing vessel 'Partner' to Mitchell Jacek Witt. The loss of about $22,000 was not accepted.

[76]          Tab 63 addresses the issue as set out in paragraph 2(b) of the Reply. This shows Drozdzik's efforts in that respect. Tab 63 was referable to the payments of $700.00 and $684.24 to D.F.O. in 1994 and 1995. This tab also referred to receipts from D.F.O. showing that Drozdzik had a license on the vessel 'Partner', for 1994. The document at Tab 64 shows the payment of $18,000 to James Nelson for the purchase of the 'Sandra L'. Tab 65 showed the down payment. Tab 66 showed the balance of the purchase price for the 'Sandra L' of $18,216. Tab 67 showed the source of financing for the $20,000. Drozdzik sold another vessel, the 'Coast Harvester'. Tab 68 showed that Drozdzik was the beneficial owner of the 'Sandra L' that was being transferred to Western. Tab 69 showed that the 'Sandra L' was being foreclosed upon by F.B.D.B. Tab 70 confirmed the loss of the 'Sandra L' due to the foreclosure on April 1, 1991.

[77]          These documents show that Drozdzik had accumulated capital losses with respect to the vessels and that there were efforts made by him to have another vessel operating and to resume fishing operations. His other vessel was caught up in the bankruptcy. The documents at Tab 57 show that Drozdzik bought the 'Partner'. He did not believe that Sunrise Fisheries was ever incorporated. There were no other documents with respect to the beneficial ownership by Drozdzik of the vessels 'Partner' and 'Sandra L'.

[78]          The witness addressed issue 5 with respect to the matter of office expenses referred to in paragraphs 5(f), 5(d) and 2(b) of the Reply. He said that Drozdzik was carrying on the business of trying to market his product and therefore he was entitled to the expenses claimed. He referred to Tab 72 and said that Drozdzik was attempting to locate the highest buyers and looking for the best markets between 1991 and 1995. In referring to Tab 45 he said that Drozdzik was forced to lease his license during that period of time and tried to obtain another boat. The boat 'Partner' was to be updated to enable it to fish for geoducks during the year 1994. Drozdzik had a license for this in the year 1994. This shows the intentions of Drozdzik to fish with this vessel in 1994.

[79]          During the year 1996 he did commercial fishing with the 'Arctic Queen'. This showed his intention to continue fishing. With respect to paragraph 5(p) of the Reply he said that Drozdzik used the name of Sunrise Fisheries Ltd. in claiming his expenses but they were really the expenses of Drozdzik himself. The fact that Drozdzik expended the monies on repairs to the vessels also showed an intention and continuing effort to fish in the future.

[80]          He referred to paragraph 5(o) of the Reply and said that Drozdzik expended $20,804 on convention expenses. Tabs 88 to 94 also referred to these expenses. Tab 72 showed expenses for repairs, licenses and the work done by Drozdzik during the year 1991 to obtain the partner. He had two other businesses as well being the export business and the Herbalife business.

[81]          With respect to the clothing business he referred to Tab 87 in support of this endeavor. This material was in the possession of Drozdzik. It shows that something substantial was going on in the clothing business and that of exporting.

[82]          Tab 89 was referable to the Herbalife business. These documents show Drozdzik's attempt to get this business going. Tab 88 items were not claimed. This was introduced to show that Drozdzik did not claim some allowable items for the purpose of countering the imposition of penalties. He said that Drozdzik did not understand the process of claiming expenses.

[83]          He referred to Tab 89 of the exhibit in reference to paragraphs 2(b); 5(b); 5(f) and 5(i) of the Reply. These documents show that Drozdzik did not just sit back and wait for lease payments on his licenses. Tab 11 was referable to the expenditure in the amount of $21,100 claimed as an ABIL. He claimed 75 per cent of this or $15,825. This was in reference to paragraph 7 of the Reply. Tab 11 shows again the business purpose of Drozdzik during the years in issue.

[84]          Again the document at Tab 69 showed the transfer of the 'Sandra L' to Western and was supportive of business going on between them at the time. Tab 49 shows the relationship between the company and Drozdzik. Tab 75 is a company ledger which shows the balance owing to Drozdzik. Tab 76 shows the loans made to the company by Drozdzik in the amount of $21,100. Tab 77 was the Western deposit book showing the loans. Tab 78 shows the business purpose of the loan. Loans were made to the company for the purpose of protecting his interest in Western. Tab 79 shows the final page of the Receiver's papers showing $21,000 owing to the company. Tab 70 showed the sale of the vessel made under the mortgage by F.B.D.B. after the foreclosure. This addresses paragraph 7 of the Reply.

[85]          Drozdzik loaned money to Western and $10,000 was paid to the trustee for legal fees as indicated at Tabs 83 and 84. These expenditures were made to try and restore the company to operation.

[86]          Tab 84 shows the disbursements to F.B.D.B. and the legal fees of $3,783.36. These payments were made to recover Western and should be deductible in 1995.

[87]          Tab 81 shows the offer by Drozdzik to the Receiver to pay $2,000 to obtain two sublicenses. Tab 82 shows that the company was restored and Drozdzik paid for it. Tabs 82, 83, 84 and 85 show further payments made by Drozdzik. On June 17, 1994 the name of Western was restored.

[88]          The expenditures made with respect to Kingdom Enterprises for travel show the business activity in existence. They were disallowed as shown at Tab 87. The business was buying second hand clothing at flea markets and shipping it to the Orient. Tab 87 supports this position as well.

[89]          Tab 88 was a reference to $2,040 paid for tuition and $616.69 for donations. These expenses were not claimed and show Drozdzik's lack of knowledge of tax matters.

[90]          From viewing Tab 89 one would surmise that some travel expenses would have been made, that business activity was going on at that time. This is all that supports that claim.

[91]          With respect to penalties and paragraph 8 of the Reply in reference to subsection 163(2) of the Act, this witness said that he worked at this issue for some months and finally was able to obtain a picture after receiving documents from the lawyer that Drozdzik used in the Court action. After that he was able to piece together the picture more easily.

[92]          A number of expenses were not claimed by Drozdzik. There was no claim for license amortization. Expenses for tuition were not claimed. This shows that he was disorganized and that the receipts were not available to prepare the returns. The books were not done progressively. No care was taken by those persons who prepared the books. Tab 7 showed the payments of US$50,358.09 and CDN$20,152.08.

[93]          Tabs 13, 14 and 16 to 21 showed more detailed invoices of work done by Drozdzik that he was not paid for. He worked on these vessels so that he could fish with them. The company could not pay for them. They are legitimate expenses.

[94]          Tab 38 was a letter showing that the 'G' license was transferred and noted on the register but it was not registered.

[95]          In cross-examination he agreed with counsel's submission that the Act requires taxpayers to maintain a certain standard of record keeping as required by section 230 of the Act. There were numerous boxes of records in different places including two other accountants' offices and that of his lawyer. Some were lost according to what he was told. He was not the accountant during the years under appeal. He was asked to go through all of the material to see what was relevant. He considered what Drozdzik told him. He was not the author of the documents except to prepare the index. There were bank records included but not all were there. All of them were not included in the binder. He decided which ones were relative to the issues under appeal.

[96]          At Tab 44 he said that he asked for every record that he could get his hands on. He decided whether it would be included in the binder or not. There are other documents that go to this issue. He relied on the contents of the documents including those at Tab 45. Then he reiterated that the invoices shown at Tabs 13, 14 and 16 to 21 showed the expenses paid by Drozdzik for which he was not reimbursed. He never saw the original receipts. He never saw the original receipts referred to at Tab 13, neither did he see the original receipts referred to at Tab 14. With respect to the invoice at Tab 16, he saw no breakdown of these invoices nor did he see any original receipts. He never saw any further breakdown of the invoices shown at Tab 17 or any corresponding receipts.

[97]          He agreed that the documents shown at Tab 18 had no particularization of items or receipts. He did not know whose handwriting they were in. The records did not indicate whether Drozdzik had been reimbursed or not. No records indicated repayment. There were other settlements that indicated that payment was not received. However, there were no documents that he saw which showed payment by Drozdzik before he invoiced Western. The same can be said of the documents at Tabs 19 and 20. With respect to Tab 21 there is no breakdown of the receipts. There was no breakdown and no receipts that correspond to the invoices.

[98]          He had no personal information regarding the vessels involved. He had no documents to confirm the dates on the invoices. With respect to the documents at Tab 11, he never saw anything to confirm this transfer. He had no knowledge of the photos at Tabs 50 and 51.

[99]          Tab 25 merely indicated that there were expenses that were not reimbursed to Drozdzik. He saw no receipts to support them. The amounts did not show up in the books of Western. He did not know who prepared the statements. He received some documents from Western but none corroborated these expenses. He assumed that the bookkeeping was bad and dealings were non-arm's length with his brother's company. He did not see the complete document as set out in Tab 79. It was the only paper found in another legal file. He referred to the catch reports at Tab 40 and said that these were all for the year 1989 or from May to November. These were presented to show that Drozdzik was fishing in 1989. It had to be reported in the year 1990. Therefore, he fished in 1989/90 taxation years. He saw no catch reports for later years.

[100]        He was referred to documents at Tab 47 and asked whether or not he saw anything to confirm that Drozdzik was granted a sea urchin license for the year 1991. He thought there were such documents but there were none in the exhibit and he never saw any.

[101]        Tab 39 just showed Drozdzik's activity in Western and the control of the licencing. One was written two years later and he did not know why.

[102]        He did not know why US$50,000 and CDN$20,000 was paid as per Tab 9. Documents at Tab 4 related to the same matter. He was asked whether he saw anything with reference to Tab 52 that would indicate that the transfer took place. He referred to Tab 53, which was a legal bill for the purchase of a license (but this did not show that the transfer took place). He then said that there were no documents to confirm the transfer. Tab 57 was a purported Bill of Sale for the vessel 'Partner'. Tab 58 was one half portion of a bank draft document. It did not include the cheque portion. Tabs 59 and 60 showed a transfer of the 'Partner'. He referred to Tab 61 and said that it was sold because the other person did not keep his part of the bargain. This document was undated and the witness had no knowledge of it. The documents relating to it were included to show an attempt by Drozdzik to re-establish his fishing including his application for a license. Mr. Drozdzik did not sign the document at Tab 72. There was also a lease agreement in 1990, one with two other persons in 1991 and then in 1994 they transferred to Stan Enterprises.

[103]        Exhibit R-1 was introduced to this witness for identification purposes. It purported to be the 1990 Lease Agreement. Exhibit R-2 was a Lease Agreement which was presented for identification purposes only. He had not seen it. He did not know why this was different from the document at Tab 72. His knowledge of when Drozdzik started fishing again in 1996 came from the documents that he saw.

[104]        The figure of $21,100 on which the ABIL was calculated was shown in the ledger of Western at Tab 75. He saw nothing with respect to interest. This document did not indicate repayment and this witness did not know whether Mr. Drozdizk was listed as a creditor of Western or not when it went bankrupt. The documents at Tabs 76 and 77 were Western documents but he saw nothing on Mr. Drozdizk's side to show that he made a contribution of $21,000.

[105]        He had no personal knowledge of the document at Tab 81, he did not prepare it. He understood that the license with respect to fishing sea urchins was not granted. Tab 91 was filled out by the son and indicated the transfer of the credit to Drozdzik. He referred to the receipt at Tab 88.

[106]        The documents at Tab 87 were mostly letters of inquiry by Kingdom Enterprises about buying blue jeans. They referred to price, quantity and location. He was asked what other documents indicated business activity and he said that there were notes about flight tickets, maps of San Francisco, a list of stores to visit, letters regarding prospective travels and yellow page advertisements, which to him suggested some investigation and a possible commitment with respect to a business. He had no information regarding the actual purchase and sale of any product. He reviewed the income tax returns of the Appellant and he did not claim any income from Kingdom Enterprises.

[107]        He looked at Tab 89 with respect to Herbalife for the 1994 and 1995 years and he said there was no agreement there with respect to this business. Tab 89 showed an active business because it showed US$329.98, listed as foreign income at page 2. It also showed an invoice for the purchase of product. Page 4 showed that inquiries were being made with respect to certain drugs of a pharmaceutical nature. Drozdzik received minimal income of US$329.98 in 1994 and income of $108.48; $85.22 and $59.48 in 1995. This income was not declared but he claimed expenses. The activities for which expenses were disallowed in paragraph 5(h) of the Reply did not match up with the expenses claimed. He could not match them up. He could not allocate the various expenses claimed to the various enterprises.

[108]        An accountant prepared the statements in 1995. The amount that he failed to claim for the tuition was small but the married exemption, legal fees, and other expenses that he failed to claim were large. This indicated that he had bad bookkeeping skills but he was not grossly negligent.

[109]        With respect to paragraph 6(d) of the Reply, the $50,000 should have been included in income. Only the penalties are disputed in this regard.

[110]        Drozdzik testified that he was 54 years of age. He was born in Poland and came to Canada in 1971. He started fishing in 1982. He described a geoduck as a large clam. It is found in tidal waters about 90 feet deep. Diving is used to retrieve the geoduck. It is valuable in the Asian market, particularly in Japan, China, Hong Kong and Thailand.

[111]        He had received seven years of primary education and two years in high school. Then he worked in farming. He came to Canada with two brothers, Ted and Casey. In 1982 he bought his first boat, the Fleetway II. He bought a 'G' license separately. Bliss Fawcett was the seller of the license. He also bought a 'G' license from all Canada development. The 'C' license was a basic commercial license. The 'G' license allowed you to fish for geoducks. The Fleetway II blew up in 1984. He was injured and hospitalized for a week. He then bought the 'Coast Harvester' and transferred the 'G' license and the 'C' license to it. He fished these for two years for geoducks. Western was incorporated by Casey Drozdzik in 1985. The 'Coast Harvester' was lost at sea in the year 1987. The Appellant was not on board. He had an operator for it. Two people were on board and one died. He bought the motor vessel 'Sandra L' and paid $20,000 for it. He paid $2,000 down and borrowed $18,000. He mortgaged the 'Coast Harvester'. The 'Sandra L' was to be used basically to transport the product to Port Hardy or Prince Rupert (after that it would be trucked out).

[112]        Casey incorporated the company to impress the Japanese and therefore the 'Sandra L' took the license. He transferred the 'Sandra L' to the company. He put the 'G' license on the 'Bertha G' and tied up the 'Sandra L' to do work on it. The license was still owned by him but he fished on the boat owned by Western, the 'Bertha G'.

[113]        He borrowed money from The Toronto-Dominion Bank to buy the 'Sandra L'. He did not borrow from F.B.D.B. There was no personal mortgage. The 'Sandra L' was transferred to the company and his brother put a mortgage on it. In the years 1989 and 1990 he leased the 'Bertha G' from Western. He put a lot of money into it. It needed a lot of work for him to use it. He did not get paid for it even though Casey had promised to do so. His wife left him and that created trouble. Western was in serious trouble and needed protection. His brother gave him 75 per cent of the company. He fished the 'Bertha G' in 1989. He was working on the 'Sandra L' as well. They had a quota and when that was finished he worked on the boat.

[114]        He found out that Casey had put a mortgage on the 'Sandra L'. His sister was helping him financially and wanted security. They wanted to put the boat back into their names but the mortgage was too great and the bank sold it. He got the license back into his name. Things were not good. He could see all of his work amounting to nothing.

[115]        When the 'Coast Harvester' sank he had a limited period of time to get a boat to protect the license so he made a trust agreement with Stan Popielasz and this was prepared by Mr. Sandilands. It provided that the license would be held in trust. They had a written agreement and an oral one that a friend drew up. They agreed that whoever found the highest buyer would be the one to whom they would sell the product. Drozdzik would benefit because he received 50 per cent of the proceeds.

[116]        In 1990 and 1991 he followed the litigation as much as he could. He kept his records at Western's office. His brother told him that his wife had left him. When the Appellant got there his brother was gone and the Receiver was in the company's office and Casey was sleeping in his car. The bank took the boat. His records went into the garbage can. He was in shock. He understood the settlement that was made with Exotic. He bought the 'Partner' hoping to fix it up and put his license on it to enable him to go fishing. He purchased it with another person in order to fix it up. The other person did nothing. The Appellant paid him off and hired someone else to work on it. He found that the engines were no good. It was a waste of money. He paid off the other partner and sold the boat for $2,000 although he had $23,000 invested in it.

[117]        With respect to the vessel 'Partner' he had a 'C' license. He had to have this license in order to transfer his 'G' license back. He was trying several other businesses because the value of the license went up and down. He tried the Herbalife business selling natural herbal products between 1993 and 1995. During the same years he found out about antique clothing from Ai-Peng Koh who was a former girlfriend from Singapore. Old Levi's jeans were fashionable in Asia and Europe. After that, the market disappeared because Thailand came out with fake jeans. He did a lot of traveling to find out about it. Ai-Peng Koh knew a lot about it. She was the ideal person to do it. She had to go to San Francisco in order to obtain the jeans and then go to Europe and Asia to put them on the market.

[118]        It was his position that there were profits to be made but she had to go to second hand stores and buy them. When he started, the jeans were $6 to $7 a pair. Then more competition came in and the price went up. He found that he could still make money by selling the product wholesale. He would buy quantities from the rag company, pick out the good ones and sell the residue back to the rag company.

[119]        Ai-Peng Koh was to do the marketing. They met in 1988. Between 1992 and 1995 they discussed the business. They had a written agreement. Ai-Peng Koh was to buy the product, sell it and keep 30 per cent of the profit and he was to receive the balance.

[120]        He obtained the money from leasing his license to Stan. He also had an arrangement with Casey to sell the clams. He knew the buyers in Asia. They wanted to sell the product direct to Japan. In Canada, the fishermen were paid $5 to $10 per pound and they could be sold for $50 a pound in the restaurants in Asia. He expected to make a profit of about $7.50 per pound depending on the market. He was relying on his brother who knew the business. He agreed to pay his brother for marketing the product. He developed this knowledge over a period of five years. Casey Drozdzik would pay him one half of what he received from Stan's Enterprises Ltd. He ultimately intended to cut out the middleman.

[121]        He recognized Exhibit A-1, Tab 1 and it was accurate. Likewise, he identified the documents at Tabs 2, 3, 4, 5, 6, 7, 8, 9 and 10. With respect to Tab 10, he knew about it and he was seeking a sea urchin license. He applied for the license. It went with the boat when they took the 'Sandra L'. He also recognized the exhibits at Tab 11. He did the work and issued the bills for it. He was not paid. He received the shares but they were worthless. He was asked why he did the work and he said that he was trying to make the boats seaworthy.

[122]        The documents at Tab 12 were correct. He signed it and Casey signed it. Tab 13 was an invoice for $1,727.03 related to the 'Bertha G'. It was getting geared up for long line fishing. This expenditure was for an automatic fishbaiter and bait cutter. The expenditure of $1,207 was for lubrication and rollers. The sum of $520.03 was for payment to a person that he hired to paint the boats. The receipts went with the bill to the office. The trustee said he knew nothing about it. He made a photocopy of it. Tab 14 referred to repairs to the 'Bertha G'. He submitted the original receipts and they were in the office. He was using Polish sailors. They were out of work. He paid them cash. He never received any reimbursement except from the issue of the shares to him. The amount at Tab 13 for $1,727.03 was included in the figure of $117,857. He was claiming this amount. He was also referred to the figure of $108,412.12 at Tab 15 and he said that he was claiming that amount. The figure of $51,706 at Tab 16 was referable to payments to the sailors. It was paid in cash. He had no receipts from them as they went to Western. The work referred to in the document at Tab 17 in the amount of $56,706.12 was all done under his supervision.

[123]        With respect to Tab 18, he said that the sailors did all of that work, they did it and he supervised it. He identified the photos at Tab 51 and then said that they replaced the beams, the mast and he paid for it. This was required under the lease.

[124]        Tab 19 was with respect to the amount of $1,635.57 and he said that he paid it. Tab 20 was in relation to a payment of $43,587.20 and he said that he did this work and he paid the workers. He did the work even though the boat was leased to Western.

[125]        He referred to Tab 21 regarding an amount of $31,120 and he said that he paid it and he was not reimbursed for it. The 'Bertha G' records were lost. Ole Christiansen was dead. He referred to the fax dated June 18, 1990 at Tab 25 on Western letterhead and he said that these were general maintenance amounts and boat repair amounts paid by him in 1989. He was not reimbursed for these amounts totaling $50,988.73.

[126]        Likewise, he paid the amount referred to in Tab 26 of $1,197.88; the amount referred to at Tab 27 of $2,639.47 and the amounts referred to at Tab 28 for the license. He also paid the amounts in Tabs 29, 30, 31, 32, 33, 34 and 35 and that amount of $2,000 referred to in Tab 36. He was familiar with the information at Tab 37 and it was true. He was also familiar with the information at Tabs 38 and 39. The document at Tab 39 was executed because he was responsible for boats and licenses. He was familiar with the documents at Tabs 40 and 41 which were duplicates and with the document at Tab 42 with respect to the 'Sandra L'. He bought it and transferred it to the company in trust for himself. These documents are accurate.

[127]        Tab 43 was a declaration of trust with respect to the 'Sandra L' and it was correct. Tab 44 was correct and was received from Casey's wife's lawyer. The trust declaration for the license was with respect to Stan's Enterprises Ltd. in trust for himself. He was familiar with Tab 45, which was a notice to put the license with the boat; Tab 46 which was a trust declaration; Tab 47 with respect to the red sea urchin license and it belonged to the 'Bertha G' and was seized. He identified the documents at Tab 48 as an application for the sea cucumber license for the 'Bertha G'. They did not get the license. Tab 49 was related to the geoducks and was a trip validation log. This showed that he was fishing for geoducks in 1989.

[128]        He identified the documents at Tabs 50 and 51 and the Bill of Sale at Tab 52. The sum of $11,500 was paid cash for the 'C' license and he paid it. He needed it to replace the one that he lost. It went to the vessel 'Catherine'. He owned it. He received it in 1996. It was obtained in order for him to go fishing. He paid the amounts referred to in the documents at Tab 53. The documents at Tab 54 were relative to the period when he bought his Class 'C' license for the first boat that blew up.

[129]        The documents at Tab 55 represented the bill for the transfer of the 'Fleetway II' and of the 'C' license. He paid it. He identified the document at Tab 56 as a mortgage on the 'Fleetway II'. He bought the geoduck license for $7,000 and mortgaged the boat to the seller. Tab 57 was the bill of sale for the 'Partner'. The documents at Tab 58 were the cheque stubs. He paid them in the amounts of $10,000 plus $13,500 for the 'Partner'. He paid the amount set out in the document at Tab 59. This was a legal bill for work done for the 'Partner' to restore it so he could use it to fish geoducks. Tab 60 showed that he sold the fishing vessel 'Partner' for $2,000 but he kept the 'C' license.

[130]        Tab 61 showed that the goods and services tax ("GST") was paid and that Edmund Skrodzki had no interest therein. The document at Tab 62 represented moorage fees paid by him. The document at Tab 63 referred to fees for licenses for fishing with the 'Partner' because he was going to take it to sea. Tab 64 was for roughly $18,000 paid for the 'Sandra L'. Tab 65 is referable to the $2,000 paid by him for the 'Sandra L'. Tab 66 was the mortgage at The Toronto-Dominion Bank on the 'Sandra L' and Tab 67 was the mortgage on the 'Coast Harvester' for $20,000. Tab 68 was a declaration of trust that he signed and under which he was the beneficial owner. It was dated March 10, 1987. Tab 69 was a Transcript of Register for the 'Sandra L'. It was correct.

[131]        He was familiar with the document at Tab 70 and this document showed him that F.B.D.B. had a mortgage of $150,000 and $70,000 second interest against the 'Sandra L'. He knew that he had lost the boat.

[132]        At this point in time the Appellant retired from the stand and reserved the right to continue his evidence at a later date, after other witnesses had testified, for convenience purposes.

[133]        Casey Drozdzik was from Surrey, British Columbia and was self-employed. He was asked what arrangements, if any, were made for payment of monies with respect to the lease of the 'G' license to Stan's Enterprises Ltd. He said that two payments of $150,000 and $50,000 to Stan's Enterprises Ltd. were received. He told CCRA that he had received them. He was fishing geoducks and selling them to Japanese and Chinese markets. He was divorcing his wife and did not want to put the money into his account. He gave the cheque to the solicitor who cashed it and gave him the money. The Appellant did not get any of it.

[134]        In cross-examination he said that he was self-employed mainly in the construction of residential accommodation. The 'G' license was his brother's. He leased it to Stan's Enterprises. He did not continue after he received these two payments. He was going to do the marketing for the Appellant. They had no written agreement.

[135]        The $150,000 cheque was made out to him as well as the $50,000 one. Sylvester Drozdzik cashed the cheques and gave him the money. He did not report the $50,000 or the $150,000 because of the problems with his wife. His company was Western. It went bankrupt. Business was finalized in 1991. He was chased from the office, literally. It was locked on him. He was distraught. He was there a few times. It was petitioned into bankruptcy after 1991 or 1992.

[136]        At this point in time the Appellant was recalled to give further testimony. He identified the document at Tab 71 as a commercial fishing license for the 'Partner' for the year 1994. It was issued on October 12, 1994 and he paid three cheques of $50 and one of $10. The document at Tab 72 was a lease agreement dated August 5, 1993 with Stan's Enterprises. He felt that he could sign it at any time. Exhibit R-2 was a draft relative to Tab 72. Tab 72 was the correct one. He was asked what happened in 1998 to the income from this lease. He said that $200,000 went to Casey and $220,000 went to him.

[137]        He met Ai-Peng Koh in 1988 or 1989. They had a child. She recommended the jeans business that operated between 1993 to 1995. They made a written agreement. He was to finance it. He gave her $82,000. He paid the amounts represented by the receipts at Tab 73.

[138]        Tab 74 was a birth certificate for the child. The document at Tab 75 represented $21,100 that he loaned to Western to keep it alive. He made the payments referred to in the documents at Tab 76.

[139]        The documents at Tab 77 were deposit slips from the bank which he put in the exhibit. He signed the document at Tab 78 and made the loans of $21,100 referred to at Tab 79. These loans were made to Western. He leased the 'G' license to Western for the year 1988 which was referred to in Tab 80. He wrote the document at Tab 81 to find out if he could get landing rights for sea urchins. He was trying to keep the license alive in Western's name so that he could get them himself. He was familiar with the documents at Tab 82 and said that he restored the vessel to have access to the licenses.

[140]        With respect to the documents at Tab 83 he said that he was trying to pay off the creditors of Western, to restore it, to be able to get the licenses. These amounts were $10,000; $25,000 and $6,006.19.

[141]        He paid the bills referred to at Tab 85. With respect to the document at Tab 86 he said that he had to have the name approved again in order to have it restored. The documents at Tab 87 referred to Kingdom Enterprises. He traveled in order to try and get it started. He went to San Francisco, Thailand, Hong Kong, Tokyo and Los Angeles. He received the fax letter at Tab 87 dated February 18, 1992 as a result of the advertisement that he saw with respect to the used jeans. Ai-Peng Koh gave him the information. He sent the letters. He did not buy any "501 jeans". The maps that were in the exhibits were taken from telephone books. They showed the places where he could buy the jeans being the flea markets and other places. He gave them to Ai-Peng Koh.

[142]        He identified certain notes which he said were from a friend of his and these contained more information. The references are to airlines that could be used for shipping products. It was a friend of his in San Francisco who was doing this kind of thing. He was asked what these advertisements signified in respect to his activities and he said that they were taken from telephone books in different cities. He went to California many times and he cannot remember. It is the whole page of the book. He was trying to sell jeans in the Orient and bring back silk to sell in Canada.

[143]        With respect to selling Levi jeans, advertising helps identify the product. He told prospective customers what he was shipping and got their business cards and telephone numbers. He gave Ai-Peng Koh $82,000 to go and buy in bulk, sell them, keep 30 per cent and give him the rest.

[144]        At this point Drozdzik retired from the stand, with the intention of returning later on, in order to accommodate other witnesses.

[145]        Mariah Machniak was from Penticton, British Columbia. She described herself as a bookkeeper, tax preparer and travel agent. She was employed by Western between 1989 and 1990. Her duties included office manager, doing computer work, payroll, bank deposits, fishing business work and processing accounts with respect to catching and buying fish. The company caught fish, iced it, processed it at the plant, gutted, cleaned, layered and fast froze the product. They sold it locally and in other countries as well. The same thing applied for geoducks.

[146]        When Ms. Machniak met the Appellant she thought that he was a partner. He owned vessels and brought fish in to the business. His brother did the buying and selling. She saw invoices for boat repairs. She saw attachments as well. She thumbed through them and was told that they could not pay the invoices at that time. The Appellant's records were kept in a separate filing cabinet in the office. The office was located at 750 Terminal Avenue in the J.W. Hussey Building. She was there when it experienced financial difficulties. At first there was enough money to pay the bills. Then one day when she dialed in to the bank to find out a balance, because she had a cheque outstanding to disburse, she was told there was no money. She could not pay bills or wages.

[147]        She asked Casey about it and he did not believe it. The bank told him that his wife took the money out. Casey apologized to everyone and tried to make changes. He could not. The Receiver came in and she walked out. She did not loan any money to the company but she was owed $7,500 in wages. Sylvester was owed $21,500 in loans. He did not receive it. Casey's sister was owed as well. Casey felt that he would recover the money. She recognized the documents at Tabs 13 to 22. She saw some of the repairs in progress. The accounts were presented for payment. Casey looked at them and asked how much we had in the bank. We paid the suppliers first. Casey said that he would deal with anything over $1,000 after talking to Sylvester. They were put in a filing cabinet.

[148]        Around 1993, Drozdzik asked her to help him prepare his tax returns. He had not filed for many years. I told him to file from 1981 or 1982 and I obtained permission to talk to CCRA about his files. I encouraged him to file returns for 1981 to 1993. He is capable of handling his finances. I was only familiar with the facts in 1989 and 1990.

[149]        Ms. Machniak looked at the documents at Tab 18 with respect to an amount of $100,065.14. When she first saw them she was alarmed at the amount. She looked at the receipts and they were all for mechanical work. She met some of the Polish sailors who worked for Drozdzik. They wanted cash. Drozdzik received no payment while she was there. The 'Sandra L' was on the list of assets of Western but it was mortgaged. She was told that it was Sylvester's boat and that they were mortgaging it in order to continue in business. It was seized and sold to pay the bank. The Appellant received nothing for it while she was there.

[150]        She became aware of 'Fleetway II' as well. She was advised that it had exploded and sank in 1983. She was advised that the Appellant had bought the 'Sandra L' for $20,000. The invoices confirmed which boat it was.

[151]        With respect to the 'Coast Harvester', Ms. Machniak was aware that it was bought and that it later sank. She saw papers that the Appellant was only paid $60,000 for the insurance. She thought that the Appellant told her that it was worth $120,000. It was a capital loss. She thinks it was claimed in 1987.

[152]        It is very important to maintain vessels. There are constant repairs and breakdowns and sometimes the boats are gone for one to two weeks. Sometimes it is necessary to travel to obtain parts, to fly someone in to do the work on it or get the parts flown in. They were old vessels.

[153]        Ms. Machniak was familiar with the ABIL claim for $21,100. That was the amount of the Appellant's claim and hers was for $7,500. Drozdzik claimed 75 per cent of the $21,100 which should have been reported in 1991. The year-end was in May. November 30, 1990 was the date of the loss.

[154]        The Appellant could not fish because he had no boat. He had to have a boat to attach the license to. He obtained the boat from Stan's Enterprises Ltd. and put the license on it. Between 1991 and 1994 the Appellant was not actively engaged in fishing. He was seeking out a partner. At this point the witness was allowed to review her notes.

[155]        After reviewing her notes Ms. Machniak said that Stan's Enterprises Ltd. was leasing the 'G' license from the Appellant, probably in January 1991 for $80,000 for the entire year. She was aware of the tax returns under review in this case. Between 1991 and 1994 the Appellant was not fishing. He had leased out the license. He bought the 'Partner' in 1994 or 1995 and resumed his fishing. Then she said that he bought it in 1994 and started fishing in 1995. She obtained this information through Drozdzik and from documents that he showed her.

[156]        Between June 1, 1991 and May 31, 1992, the Appellant was leasing out the 'G' license. Ms. Machniak did not know to whom he leased it. He was also trading clothing. He reported income of $455. Sylvester told her that he had been fishing all his life, that he had been a captain in Poland. He used the same year-end for all businesses. Between June 1, 1992 and May 31, 1993, the Appellant declared income from the 'G' license and from trading in the amount of $550. He claimed expenses of $3,000. He told her that he had bought inventory of $83,000 and claimed the loss against the business.

[157]        When asked as to whether or not the Appellant ever had any inventory and as to whether she had seen any, she said that she had not. She saw no documents relating to inventory. She did not do the 1994 return. Then she said, 'I don't know, the last return was for 1993. The date on the bill was 1994.'

[158]        Ms. Machniak did the returns between the years 1988 and 1993. She had no notes for 1995. She did not do the Appellant's returns in 1995.

[159]        In cross-examination she said that she worked for Western under a contract. The contract was from month-to-month. There were other companies in the building as well. There was a furniture store there and two or three other businesses. There was a fish processing facility there. She saw invoices as part of her work.

[160]        With respect to Tab 13, the documents had receipts attached to them and were related to parts, labour and repairs. She did not recall specific receipts. She went through the invoices but did not compare them one for one nor did she check the totals. She added them up in her head. The Appellant had a small filing cabinet in the office at Western. There were occasions when there was a box there. She did not do filing for the Appellant but did it for Western. She could not recall the date when she found out that there was no money. She continued there for about a month and a half after that. Some suppliers were reluctant to sell products to Western. In 1990 she first became aware of the problems. She was there until the Receiver took over. She had nothing to do with the Receiver.

[161]        Tab 19 indicated her salary. She allowed the Appellant to keep the salary and she intended to get it back. She did not charge interest. She was doing work up until November of 1990. She had no guarantee in writing.

[162]        With respect to Tab 12, it related to the 'Bertha G'. Paragraph 3 covered repairs and maintenance only. She saw the documents at Tab 12 and she passed them on to the accountant. She did nothing with them. She did no tax returns for Western, she did not know what the agreement meant. She did not know whether it was in exchange for the amount outstanding or not.

[163]        The invoices at Tab 20 just went into a filing cabinet. She did not realize that the company was in trouble until there was no more money in the bank. She interpreted the term 'running' and 'maintenance costs' to be day-to-day costs.

[164]        She believed that the invoices were submitted to show what it cost to operate the boat. She thought Western would reimburse the Appellant for the invoices. She did not know what was next by that time. She did not consider that any of the invoices included items for running and maintaining the boats. She did not do any returns for the Appellant until after Western went bankrupt.

[165]        Ms. Machniak was referred to Tab 18 and the invoice for $100,065.14. She was not aware of any payroll that Drozdzik kept for the crew. Casey told her that the Polish sailors were paid by cash. Between 1991 and 1994 Drozdzik did not have a boat but was only leasing out his 'G' license. He eventually bought the boat 'Partner'. The 'G' license was leased for $80,000.

[166]        She found out that there was an audit. She thought that she had a telephone call from someone from CCRA looking for papers. She told this to the Appellant. She was asked about the $83,000 bad debt claim. There was a shipment of inventory lost and it was worth $83,000 according to her. She did not tell the auditors that this amount represented the unpaid balance on the 'G' license. She was not involved with the matters after the Appellant bought the boat and started fishing again in 1995.

[167]        She accepted the figures presented to her. She had no source papers and did no audit. Her last return for the Appellant was in 1993. They are still friends. She had no idea what the Appellant did by way of business activity in 1994 and 1995.

[168]        At this point in time the matter was adjourned sine die with the intention that two more days would be required at a later date to be continued in April 2002.

[169]        Drozdzik was recalled to the stand and indicated that the document at Tab 87 showed the $82,000 that he had given to Ai-Peng Koh. He was asked why he was involved in this business and he said that the fishing business was not reliable and that he needed an option. He admitted that he had no experience in the clothing business and was told by Ai-Peng Koh in 1992 that it was a good business. He did not claim these expenses according to him and it has nothing to do with this case. He presented this information merely to show the history of his business dealings. He needed a volume business for the clothing business to be of any value.

[170]        He reiterated that he paid the amount of $83,000 to Exotic to settle the claim. This was shown at Tab 6. The purpose of the payment was to protect his license. He needed Western as a viable company to protect his licenses. He had to pay off their creditors to get the licenses because if he did not, other creditors would be eligible for those licenses.

[171]        Western was eligible for those licenses and he was not because Western had landings from the previous three years and was eligible for those licenses. These licenses were for green sea urchins, red sea urchins and sea cucumbers. People would pay in the neighborhood of $300,000 for the green sea urchins' license, $300,000 for the red sea urchins' license and $120,000 for the sea cucumber license. He also believed that he could recover from Casey's family the money that they withdrew from the bank account. Therefore, he bought the Exotic claim and he could go after them for that amount, a fraudulent preference claim and by settling it he could get the geoduck license which was worth about $200,000. He summed up the potential benefits that he would obtain as a result of settling this claim which were: 1) the potential for acquiring new licenses; 2) the recovery of monies from the Casey family and, 3) to protect fishing licenses for the 'Sandra L'. His livelihood and the geoduck license depended upon it.

[172]        The reason he paid US$50,000 and CDN$20,000 was because that is what they demanded to settle the action. If he recovered more, including costs and interest, he had to pay the surplus to Exotic.

[173]        He was asked what gain was in it for him and he said that he could foresee gaining $500,000 from the settlement by gaining the Company and the potential licenses. The family had claimed the new licenses. It took nearly two years to finalize the deal. When he got the company it was too late to get the licenses. They had closed the file on it and consequently the results were not satisfactory.

[174]        He referred to the exhibit cheques at Tab 8 and said that he gave those two cheques to Mr. Sandilands. These were in the amounts of $20,152.08 and US$50,358.09 on October 4, 1993. These were the settlement funds.

[175]        Had he not settled the claim he could still have gone to court because he had the trust agreement. As a result of a court action he possibly could have obtained the rights to Western and would have been one step closer to his goals of protecting his own license. He thought that the settlement route was a good idea and would have earned him money. He believed that he still had to settle with the others in any event and this route was easier. He did not have a long relationship with Exotic. However, it was very important to him to pay off the creditors of Exotic who were in the industry so that he could maintain a position and his reputation in the industry.

[176]        He did not fish in 1991, 1992 and 1993. He was packing fish and trucking it from the Port to the buyers. Five people were on board when he fished. They were running night and day. He had two crews. When they went back to the fishing grounds there was always another load waiting for them. He paid them the minimum wage (whatever that was) and it cost him $75 a day for food. He went fishing in 1988, 1989 and 1990 and probably had four to five people engaged. In order to fish sea urchins under a permanent license he had to establish himself. He had to show that he had the ability to fish. He fished on the West Coast near the Queen Charlotte Islands and all the way up to Prince Rupert. A trip lasted 24 hours. He also spent some time repainting the boats.

[177]        He was referred to Tab 89, which was a receipt for tuition fees and he said that he paid it on account of his son. Tab 90 related to the Herbalife business. He would bring these goods in bulk and try to sell them to friends. These orders cost in the neighborhood of $4,000 to $5,000. He referred to certain documents that were written in Polish and said that these related to the kind of products he was trying to sell. He sent a letter to his brother in Poland who was trying to start a business with them. He also identified the letter from Ai-Peng Koh to the pharmaceutical department in Singapore and said that this was to see if the products could be sold legally in Singapore. This did not turn into a profitable business. Ai-Peng Koh ran away with his money and they broke up. She lost the money in gambling.

[178]        Ai-Peng Koh had a child who was handicapped. He spent money on medical treatment for the child. He was a Canadian citizen who lived with the mother in Singapore.

[179]        He referred to the Reply at paragraph 4(d) with respect to the years 1988 and 1989 and he said that these claims for expenses during those years were disallowed. He was packing and fishing in those years. He spent money on food, repairs, crew, equipment and safety equipment. He provided receipts for all of the items claimed. He gave them to his accountant and he allegedly gave them to CCRA. He alleged that they made copies of them and sent them back to the accountant but he says that he does not have them. He declared income in 1988 and 1989. To the best of his knowledge the amount of expenses claimed in those years are correct.

[180]        In reference to an answer that he had given earlier regarding the minimum salary for the crew and he said that he meant that it cost him a minimum of $1,000 per month for a trip which lasted a total of four months. Then he said he paid them the least he could. He basically paid $36,343 because that is what he claimed. In 1989 it cost more to operate the boat. He upgraded the boat at that time. He had receipts for these and sent them to Western and they did not reimburse him for these expenses. They were supposed to reimburse him.

[181]        In 1988 he had an office in his home. He had a camera which he used for diving under water. He had to make sure that the bottom was clean. The D.F.O. demanded that they keep not only the good fish but the bad fish even though they were not useable. He also bought a calculator which had a foreign currency capability on it. He did not know what the term "dubbing video tapes" meant as that term was used in the Reply.

[182]        With respect to paragraph 4(d) of the Reply, the claim for "crew share expenditures" for the years 1988 and 1989 and them being disallowed, he said that he paid all of these and was not reimbursed for them. He then said that he paid each member $1,000 a month for a total of $20,000 for a five man crew for four months. He declared the income earned.

[183]        With respect to paragraph 4(e) and the matter of repairs, he said that in 1989 he did something substantial. He repaired decks, planking and the engines and he paid the workers himself. The workers were sailors. He paid them in cash. These expenses were for the 'Bertha G' and the 'Sandra L'. He was not reimbursed for these.

[184]        With respect to paragraph 4(f), concerning food expenditures, he said that he bought the food in the stores and obtained receipts for it. He gave them to his accountant and presumed that he gave them to CCRA. He had to buy food that cost about $75.00 a day on the average. That is all that he was claiming.

[185]        With respect to subparagraph 5(b)(i) in the year 1990 he said that he repaired the 'Bertha G' and the 'Sandra L'. Stan's Enterprises Ltd. used its own vessel. He claimed expenses for them but he was unable to say which vessels he was working on. They were at the fourth street marina. He worked on them and paid others to work on them. He kept receipts. He gave them to Western and they did not reimburse him. The receipts were lost. He agreed with subparagraph 5(b)(ii) that he had leased his 'G' license with John Boulton and Paddy Wong in the year 1991 but he still had some expenses attributable to this year.

[186]        With respect to the allegation in subparagraph 5(b)(iii), that from 1992 to 1995, Stan's Enterprises Ltd. leased the license on the basis that it would pay the Appellant 50 per cent of the gross revenues, he agreed with this and said that he did not do any fishing. He reiterated that he was trying to get into the business and was trying to restore the 'Partner'. Someone put a penny in the hole and it ate out the aluminum bottom. They decided it was not worth putting more money into it. They got rid of it.

[187]        He referred to paragraph 5(c) of the Reply and said that the expenses he claimed were not those set out in the Reply. In 1992 he only claimed the expenses of $51,988.64 and not $58,318.00. He also claimed $7,452.22 expenses for legal and accounting.

[188]        In 1992 he was not working on any boats. He was trying to get into the jeans business and the Herbalife business. He claimed car expenses. He had to check out the catch to see what had been shipped. He claimed $20,803.72 in convention expenses and this was to enhance his negotiating skills. The place where he went was the only place he could receive the course. He had to sell the catch and he needed these negotiation skills. He claimed over $7,000 in travel expenses. He went to Hamburg to look for better markets so that he would be able to obtain a better price. The best price he was able to obtain was $6 a pound in Vancouver. However, he tried to go to Europe and develop a market since there were more Asians in Europe than had been formerly but he never sold any in 1992 in Europe. In 1993, he had his taxes prepared by Trim Tax but he did not claim the expenses of $103,077.00 in 1993 and $100,000.00 of that was paid to Exotic for the settlement and the rest were for legal fees for settling the case with Exotic.

[189]        With respect to the automobile he said that he used it in visiting Stan and checking markets. This was only a portion of the total expenses of the automobile but he only claimed $360.00.

[190]        In relation to the $360.00 claim for automobile expenses he gave the receipts to his accountant. He traveled to Port Hardy by plane to ensure the quality of the product. He suspected that the truckers were not delivering the product that they received. There were three grades, grade 1 was the best. They could make money by delivering grade 1 product, they could break even by delivering grade 2 product and if they delivered grade 3 product they would lose money. After his visits, the quality improved. His rationale was that he was receiving a percentage of the profits from Stan's Enterprises Ltd. and therefore if they got a lower price he suffered. If they got a higher price he would benefit. The amount of $83,000 was paid to Exotic that year. He was pretty sure that the claimed expenditures in 1994 were paid and they were recorded. He only claimed $190,249.20 in 1995 and not $208,189.00 as alleged in the Reply. The Minister was wrong. He was referred to line 207 in his income tax return, which referred to capital cost allowance and he said that he did not know what it was for.

[191]        In regard to paragraph 4(d) of the Reply, he had to renew his licenses every year. The sea license is a general license. He did not know what year they were talking about in making the disallowances that they did.

[192]        Paragraph 5(e) of the Reply referred to the motor vehicle expenses. He did not know what expenses the Minister was talking about for the car. He did not know what the $156.70 claim for Shiseido was for, which was disallowed. Further, he did not know what the Wealthmaster's disallowed membership fee was for but he did not think that they claimed it. He did not think that he claimed the car rental amount of $1,176.34.

[193]        In paragraph 5(f), the Minister disallowed office expenses in the amount of $5,000. That was for a computer that he had purchased through Sunrise Fisheries Ltd. He needed it. He thought it was in 1994. He was building a new boat and that was of assistance to him. Sunrise was building it for him. He was the sole proprietor. He took a private course in computers. The instructor came to his place. He needed it for e-mail and to program the expenses for building the boat. He needed office space as well. He also needed to use the telephone for business purposes.

[194]        The legal expenses claimed in paragraph 5(g) were necessary or he would not have been able to carry on with the geoduck license.

[195]        Some invoices were paid by David Perry. Sometimes this person bought parts for the 'Bertha G' when there was a breakdown. He was a crew member and the Appellant was reimbursed. There were only one or two items. He did not know anything more than that about the item. He did not know whether the invoices were photocopies or originals. In 1991 he leased his license to Stan's Enterprises Ltd. The expenses that he claimed were relative to the boat in 1991 but were actually made in 1990 when he had the boat. Otherwise those claims in 1990 were for the working year 1989. In December 1990, he lost the 'Sandra L'. In the earlier part of the year he had done considerable work to the 'Sandra L'.

[196]        The travel expenses in paragraph 5(d) for the San Francisco trip related to the purchase of jeans. He went there to buy jeans and to take them to Asia for sale. In 1992 he traveled to Poland and Bangkok. All of these trips were for business purposes. The trips to Costa Rica were also for business purposes and were with respect to Herbalife. He went to Germany and Amsterdam in relation to the sale of geoducks. There were many Asian people there. He was entitled to recover 50 per cent of the sales from Stan's Enterprises Ltd. and he would receive more money if the trips were successful.

[197]        In 1993 he took mostly short trips arising out of quality problems with the geoducks. The travel through the Queen Charlotte Islands, Port Hardy, Prince Rupert and other places were for the purposes of inspecting the landings. The Minister had refused to allow the claim of $12,365 for traveling in 1994. This was for the Herbalife business and for the purposes of quality control with respect to the geoducks. He was referring to a chronology made by Mariah Machniak. She went through the records and reconstructed this chronology. When he went to Germany, these trips were all business trips. They were not personal. Likewise, the expenditures of $13,819 in 1995 were all related to business. His brother was the main dealer in Poland but they made no profit. The product was stale-dated.

[198]        He did not know what the capital cost allowance claim was for in paragraph 5. He did not know what the items in 5(k) were for but he suspected they were for the crew. He did not know what paragraph 5(l) was referring to. The expenses in paragraph 5(m) were for paid moorage in 1988, 1989 and 1990 and storage expenses as well. Nets and gear were stored at the government dock at False Creek. He paid for the fishing boats. He had no private boat. He did not use a boat for recreational purposes. He did not know what the reference in paragraph 5(n) was about.

[199]        The convention expenses in 5(o), in the amount of $20,804, were for him attending the convention. It was US$15,000. His sister also attended but paid for herself. He admitted that it was a real estate convention but he attended because it also dealt with negotiation in general and he thought that he would benefit from it. There was no recreational purpose attached to this trip. It was in the fall. Then he said he was not sure.

[200]        He indicated that he had about 75 per cent interest in the shares of Western because his brother did not reimburse him for the cost of the boat repairs. The Company was in trouble. With respect to the bad debt claimed of $83,000 in 1993, this was with respect to the court settlement. It was not a bad debt.

[201]        Casey received the money mentioned in paragraph 6(d) and not him. He did not know what the ABIL claim of $15,825 was about but it was in relation to Western. He was a shareholder of the Company and paid $21,100 in by way of loans and never received the money back. These loans were referred to at Tabs 77 and 49.

[202]        He did not make any false statements that would attract penalties, he did not make any negligent statements nor did he act negligently. He relied on his accountant. He talked things over with him. He put the receipts into a shoebox and gave them to Mr. Katey. Then he obtained a new accountant and continued to use him.

[203]        In cross-examination he identified Exhibit R-3 which was his income tax return for the year 1988. It was prepared by Trim Tax and specifically by Maria Machniak who earlier testified. He showed a net loss of $1,290.07. The $60,000 figure was with respect to an insurance claim paid due to the loss of the 'Coast Harvester'. He knew nothing about the numbers in the return. He fished red sea urchins, crabs and geoducks that year. Fishing was 100 per cent of his income.

[204]        He identified Exhibit R-4 as his 1989 return. He signed it and it was prepared by the same person as the 1988 form. His fishing income was $57,065.83 gross and a net loss of $82,469.45.

[205]        The fishing income and expenses related to the 'Bertha G'. Fishing represented 100 per cent of his employment. Both the 1988 and 1989 returns were filed late on the 30th day of September 1994, even though they were both signed on July 7, 1989. This was due to the personal problems that he was having. It was a nightmare for him during that period of time. He was pretty sure that he would not owe anything to the government and that is why he did not worry about them being filed late. He then said that his year-end was May 31st and that the date that they were allegedly completed was incorrect.

[206]        He identified Exhibit R-5 as his 1990 income tax return. He signed it and Trim-Tax prepared it. His fishing income was $80,000 gross and the net loss was $38,619.21. No boat was referred to in this return and he said that the income of $80,000 was from Stan's Enterprises Ltd. It was pointed out to him that no fishing income was claimed in this return although he had said that he had income from fishing in that year. He had only claimed boat repairs. He then said that the income should have been included in his 1990 return but was not. Then he said that he could not say if he had not claimed expenses. However, he said that he fished and he produced fish slips.

[207]        He referred to the analysis at page 8 and the claim for $21,100. He did not see the rest of the document. This referred to loans that he made to the Company.

[208]        It was also pointed out to him that the date on this return was different from the others being dated April 25, 1994 and that it had been received by the Minister on July 26, 1994. He had no explanation as to why they were sent at a different time to the Minister.

[209]        Exhibit R-6 was admitted by consent. This was the Appellant's 1991 income tax return. He signed it and Trim-Tax prepared it. Maria Machniak did it and he was in touch with her. It showed a fishing income of $60,000 gross and a loss of $24,084.83. The statement of fishing income was for the period from June 1, 1990 to May 31, 1991. It claimed expenses for fishing with respect to legal and storage. This return was dated April 25, 1994 and filed on July 25, 1994.

[210]        Exhibit R-7 was the 1992 income tax return admitted by consent. He signed it and the Minister received it on June 10, 1994. It was dated April 25, 1994. He noted that there was no fishing income reported and the gross business income of $102,887 was reported. He was asked if he had another business and he said that that was from the leasing of the licenses. He was referred to page 5 of the return where he indicated that the self-employment income was from trading and leasing and this represented 100 per cent of his income. Yet his business was the trading of jeans, the Herbalife business and the leasing of licenses. He showed income of $455 from the sale of jeans and Herbalife products. This was not broken down. From the lease of his license he obtained income of $102,432 with a net of $41,655.80. This was filed on June 10, 1994 and signed April 25, 1994.

[211]        Exhibit R-8 was admitted by consent. It was his 1993 income tax return dated April 25, 1994 and filed June 10, 1994. It showed a gross income of $165,197 and a net income of $61,850.43. The statement of business income and expenses referred to the type of business as that of trading. Those were for the period from June 1, 1992 to May 31, 1993. It showed income of $550 from Herbalife and jeans. The lease income was $164,647. The $2,969.53 item represented the cost of purchasing the jeans. It was suggested to him that he had earlier said that he had not bought any jeans but he denied that he had said that. Later on he gave the money to his girlfriend to buy in bulk.

[212]        He switched to Chambers Phillips and Company to do his returns after the year 1993. He was referred to Exhibit R-9, which was admitted for identification purposes only. It was not signed or dated. It was filed on July 4, 1997. It showed fishing income of $125,248.68 but this amount was written on the document where the figure of $81,519.68 had been in item 143. This was not the one that he had filed on his behalf. He did not know whether he had obtained the amount of $125,819 from leasing his license that year and he did not know if these were the expenses that he had claimed. The end result was that he could not identify this income tax return.

[213]        Exhibit R-10 was admitted by consent. This was the Appellant's 1995 income tax return. It was dated June 14, 1996 and it was filed on September 17, 1996. It showed gross income of $239,000 and net income of $30,642.79. He was asked what the figure of $14,000 represented at line 8223 and he said that it was for the repairing of the 'Partner'. He paid all of his workers. He gave a list to CCRA. These people were Frank Zahara, Mike Baublevski, Edmond Skrodzki, Richard Flak and Zigmand Sroka. He was referred to the figure of $153,199 for capital cost allowance but he did not know what it was for. The total expenses were $184,471.20 for the period June 1, 1994 to May 31, 1995 according to the first statement of fishing activities.

[214]        However, there was a second statement of fishing activity which referred to the period from June 1, 1995 to December 31, 1995. He did not know why a second statement was filed in that year. This statement showed a net loss of $23,886. He did not know where this came from. There was no income reported in the second statement for that period. Chambers Phillips and Company completed this return on his behalf. He was asked if he received income from the lease of his license during this period and he said that he did but none was reported. He did not know when he received the income but the license was still leased to Stan's Enterprises Ltd. He did not go fishing after 1995 and did not know why his accountant filed a second statement.

[215]        He referred to Exhibit R-11, which was admitted by consent. This exhibit was a notice of reassessment. He received these assessments from which he is appealing. He was advised by his accountant to file some evidence to object to them. He identified his objections found in Exhibit R-12, filed on September 30, 1997. These are for the periods from 1988 to 1995.

[216]        His objections were completed by his accountant after he had discussed them with him. He was missing evidence and receipts and he had to try and find them. He did not know why the objections were not more specific.

[217]        Exhibit R-13 was an objection completed on his behalf. It was submitted by consent. He signed it and it was stamped November 17, 1997. He did not know why a second set of objections was filed. Mr. Katey signed them on his behalf. He did not know why these objections were not more specific.

[218]        Mr. Katey lost his papers, which were the originals. Mr. Katey said that he gave the originals back to him. However, he did not get them. CCRA made copies of some of them. Mr. Katey had told him that he had presented them to CCRA. However, Mr. Drozdzik was not there at that time.

[219]        He went to the CCRA office with his accountant and saw some photocopies of documents that they had. There were documents for car expenses, invoices for vessel repairs and some general receipts. Some documents were lost at the Western offices. These were the earlier documents. The later documents went to Mr. Katey and they were also lost at different times. He knew that he was missing documents. Mr. Sandiland's office did not have any documents.

[220]        Exhibit R-14 was a Notification of Confirmation by the Minister which was admitted by consent. At this point in time Exhibit R-1 was admitted by consent. It was dated June 29, 1990 and was the Lease Agreement between Sylvester Drozdzik and Stan's Enterprises Ltd. It contained the Appellant's signature as well as Stan's signature.

[221]        Likewise, Exhibit R-2 was admitted by consent. This was a Lease Agreement dated August 5, 1993 with the same signatures. He was shown the document in Exhibit A-1, at Tab 12, which referred to the $9,445.21 which Western owed to Drozdzik. He recognized it. He referred to Exhibit A-1, at Tab 15, with reference to a claim of $108,412.12 and he said he did not recognize his signature on the document. He was referred to the invoice at Tab 15, which was purportedly signed by himself as an authorized agent of Western. He did not recognize the signatures on the document but he did not know why anyone else would use such a document.

[222]        In December of 1990 Western went bankrupt. He was trying to keep it from going bankrupt. He paid rent, some suppliers and the telephone. After the bankruptcy he paid the judgments to the creditors i.e. Exotic for $83,000 and legal expenses for Western as well as some suppliers to the extent of over $10,000. He also paid B.C. Tel. The trustee was Campbell Saunders and his lawyer met with them. Mr. Sandilands and he had received documents from the Receiver. He made the payments to the creditors except for F.B.D.B.. He believed that they accepted his offer. His lawyer paid them on his behalf.

[223]        He did not know what was paid to the preferred creditors.

[224]        With respect to unsecured creditors he paid $10,000 to the Receiver and asked him to settle the accounts and he said that he had settled with all of the creditors except F.B.D.B. (not including Exotic). His name was not included in the list of creditors because his lawyer told him that he was an owner.

[225]        He was referred to Tab 79 of Exhibit A-1, the Receiver's report that referred to him as a non-shareholder. He was asked why that was and he said he did not know why.

[226]        He did not know whether he had received a transfer of the shares but Mr. Katey had agreed to it. His indicia of titles were at Tab 11 dated June 20, 1990.

[227]        He was asked why he would pay this amount of money if the shares were worth very little or nothing. The agreement called for him to release his claim of $217,922.47 in return for 75 per cent of the company. The Company had nothing else and he knew by June 20, 1990 that the Company was in bad shape but that was the best deal that he could make. Mr. Katey owned 75 per cent of the shares that he was to receive. In his own mind, based upon Tab 11, he owned 75 per cent of the shares in the company.

[228]        Exhibit R-16 was admitted for the sole purpose of showing that the Appellant was not considered to be a creditor for three quarters of the amount of the bankruptcy that was included in his claim.

[229]        He was referred to Schedule 'C' of the Reply and he said that the cheque number 0497 for $122,040.25 was made out to him. This was for the balance of the 1994 'G' license lease. This was deposited at the Bank of Nova Scotia. The cheque for $150,000 was from Stan's Enterprises Ltd. to Casey.

[230]        He gave his brother cash for the $50,000 cheque numbered 0497. He cashed it himself and gave Casey back the cash. There were no records. Tabs 17 and 18 were admitted by consent.

[231]        The witness was referred back to Exhibit R-10 and the first statement of fishing activities which showed an expense of $14,000 for salaries wages and benefits. This was paid to crew members for work on the boats. Edmond Skrodzki was the skipper of the 'Bertha G'. The amount of $14,000 was paid to him for brokerage and management fees for managing the work on the 'Partner'. It was not paid to the persons listed but to pay this invoice. He was asked whether or not he had any records to show that they were cashed and he said he gave him the cash and he put it on the back of the cheque as a receipt. He had no other record showing that they received the cash. He was asked if he remembered the crew members' names for the year 1989 and he was referred to Exhibit A-1 at Tab 50. The crew members had temporary visas and he never issued T-4 slips to them. He did not know whether they reported this income or not.

[232]        He was referred to the claim of $20,000 for a course in Florida and was asked how he found out about it. He said that it was advertised on television. He claimed that there were no courses in B.C. in negotiations. He went entirely by the ad. He never investigated to see if B.C. had any such courses such as the B.C. Justice Institute.

[233]        The expenses for travel claimed in paragraph 5(i) of the Reply were spent in San Francisco and Los Angeles in buying jeans, in Bangkok and in Thailand for selling jeans and for delivery of them. Costa Rica and Poland were for the Herbalife business. All of these trips were international because you have to open up to new markets. He did not remember the dates of the trips or the specific amounts spent. He did not name any contact people in San Francisco. After his product was stolen in San Francisco, he gave up. He gave all of the tickets to his accountant Mr. Katey. He had no documents to match up the travel for the Herbalife business or the jeans business. The travel to Germany was for the geoduck business. Other travels were for the jeans and the Herbalife business.

[234]        He was asked what he did when he went to these places and he said that he visited places and houses and tried to get markets. He gave all of the receipts for the convention and travel to Mr. Katey. When asked whether or not it would have been easier to work from home rather than travel all these distances personally he said that you have to meet the people at shows and display the product. He was asked about the contact persons and he said that they were his brother and sister in Poland and a lawyer in Costa Rica.

[235]        At this point in time the trial was adjourned and the Appellant's counsel was to complete re-direct at that time followed by oral argument.

[236]        The Appellant returned to the stand for re-examination by his counsel on June 3, 2002 at Vancouver, British Columbia. He was asked why it was necessary for him to travel to San Francisco and Los Angeles with respect to the jeans business and why he did not use the telephone instead. He replied that it is necessary to check out the product personally and that it was easier to talk to persons involved in person than on the telephone. He referred to the document at Tab 87, which was a letter from JMS/Strutters Ltd. and he said that he obtained these advertisements from newspapers. He contacted Mr. Joel M. Shaw in New York City inquiring as to the availability of 501 type jeans. This was a good brand name and the jeans are almost antiques now. They have the same pattern that is in use today. It is impossible to find these jeans in stores. You must look for them in flea markets and old shops. This was a business of his and not a hobby. He did not get involved in it for fun.

[237]        With respect to the Herbalife initiative, the only objective was to be involved in the business. He was reminded that he was a fisherman and really had no knowledge of this business. He admitted that he could not write English and only had grade 9 education in Poland. Yet, he was satisfied he could make money in this business by buying the product at wholesale and selling it retail. Again, this was not a hobby for him. From his observations and from the knowledge that he had obtained this was a good money-making business from which he could make a profit of 100 per cent. However, he found out that there were too many retailers in the business and therefore he decided that it would be a good idea to travel to other places outside of North America to find markets.

[238]        He gave the airline ticket receipts to his accountant and he never saw them again except when they visited the CCRA. At that time Mr. Mah was there and an older lady from CCRA as well as Leo Bantara and his lawyer Mr. Christie. They discussed his travel expenses and his contract with his ex-girlfriend. He had a file containing many receipts which belonged to him. He recognized photocopies of the airline tickets, his visa statements, bank statements and invoices from the boat repairs. He gave up on them and he did not want to waste time on them now.

[239]        He introduced a bank statement from the Toronto-Dominion Bank for the period of February 28 to March 31, 1995. This statement showed a deposit of $50,000 on March 10 by means of a cheque from Stan's Enterprises Ltd. and the cheque for number 97. The statement also showed other withdrawals of $10,000. This was $50,000 which was paid to Casey Drozdzik. The bank statement was on the account of Sunrise Fisheries Ltd. and disclosed that the $50,000 that the Minister assigned to him was actually belonging to Casey Drozdzik and was paid out to him. He said, "Casey received it. He asked me to pay it out to my account."

[240]        Counsel for the Appellant objected to the admissibility of this document on the basis that it was not disclosed earlier, was not contained in the list of documents and that she had not had an opportunity to examine it. After argument by both counsel the Court admitted the document as Exhibit A-6 and then allowed counsel for the Respondent to cross-examine the witness on the document.

[241]        At this point in time there was a break in the evidence to allow for the examination of Mr. Ash Katey, who was a resident of Vancouver and who had been a chartered accountant since 1977. He practiced with Chambers and Philips and Company and in 1998 he went out on his own.

[242]        Mr. Katey acted for the Appellant as a chartered accountant in April of 1996. The Appellant had been referred to him by another accountant and he met with him on a number of occasions (on a personal basis as it was easier to understand him) rather than talking to him on the telephone.

[243]        He said that the Appellant had limited ability in financial and taxation matters and he had difficulty with accounting matters but was well versed in business. The Appellant brought a letter to him from a tax auditor with reference to the years 1989 to 1993. He asked for all documents, receipts and other material available in relation to the issues raised in the auditor's letter. The Appellant brought them to him in a box or a bundle. He went through them himself. He had little knowledge as to what was in them. However, there were many bills and receipts in the bundle.

[244]        Before he had an opportunity to go through them he was contacted by the tax auditor. He asked permission to come and view the documents. He told them to come and see them. The auditor took what was available for those years. The witness did not remember whether the auditor signed a receipt for them or not. He took at least two boxes of documents. He was 99 per cent sure that the documents came back from the auditor.

[245]        The auditor sent back a proposal disallowing many of the expenses and the reasons therefore. This witness asked the Appellant for more documentation and told him that he did not have enough documents to change the tax auditor's mind with respect to some of the disallowed items. The witness said that these expenses were made for the purposes of business.

[246]        They examined the documents and put forward a proposal. He could not remember what it was and did not know whether the proposal represented that set forth by the Minister in the Reply. In September and October of 1999 he turned all those documents over to Drozdzik. He told him that he would be better off if he kept them and Mr. Drozdzik wanted them back.

[247]        In cross-examination he said that Drozdzik was referred to him by Sharlene. She was a business woman. She had also done the tax work for the Appellant between the years 1989 and 1993. She did work for the Appellant for the years 1996, 1997 and 1998. He gave him back everything that he had received from him and that included what he had given to CCRA.

[248]        He referred to Exhibit R-12, which was a Notice of Objection for the years 1988 to 1995 and he said that he had filed this objection for each year. This was with the Appeals Division. These documents did not contain more material in support of the claim because he intended to provide the information when a meeting could be arranged. He could not remember whether or not he received a further request for more information. However, he did file further notices in November for each year. These were shown in Exhibit R-13. These objections contained little or no information. This was because there were numerous documents and there were gaps that had to be explained. He believed that it would be less expensive to do it this way rather than to sit down and meet with the auditor. He indicated to the Appellant that some of these expenses would not be allowed. He needed more information. For example, he needed the invoices and receipts to match up with the visa statement which was produced. He spoke to an accountant later on but did not know who he was.

[249]        In re-direct he said that it was possible that when he returned the documents to Slavomir Drozdzik, all of the receipts were not there. However, when questioned by the Court he was satisfied that all of the documents had been returned to the Appellant. Very few documents were sent by Mr. Sandilands' office.

[250]        The Appellant was recalled to the stand for the purpose of continuing the re-direct examination.

[251]        He was referred to the $14,000 expenditure for wages, which was referred to in Exhibit R-10, the income tax return for the 1995 taxation year. This was paid for wages of crew members to work on the boat. The amount of $14,000 was paid to Edmund Skrodzki. He gave him cash and used the back of the cheque as a receipt. He had no other record showing that Mr. Skrodzki had received the cash. He gave Mr. Skrodzki the $14,000 because he paid the others to do the work. As far as he was concerned this was an acceptable way in the industry for obtaining a receipt.

[252]        He was asked when he became a shareholder in his brother's company and he said that it was in 1990. He knew the Company was not in good shape and if he was going to put money into it he had to have control. He knew that if he restored the Company to health he would be a 75 per cent owner of it and there would be more profit for him.

[253]        He was asked what assets the Company had and he said that he knew that it had quotas and that it might be able to obtain the licenses but unfortunately at the end of the day it did not. The Company could only apply for licenses up to a period of two years and it was out of time because he was too involved in litigation in Court. By the time he realized it, time had run out. He also had to deal with the Receiver on a number of other difficult personal matters during this period of time.

[254]        He did not know why the dates on the returns were as noted. He was up to his neck in Court actions and he did not know why they were dated the way they were. He was asked why he expended monies on repairs for the 'Bertha G' and 'Sandra L' when his license had been leased to Stan's Enterprises Ltd. during that period of time. He said that he had to keep up the boats in order to keep them safe and to be able to use them at a later date. This was for business purposes. He was entitled to receive 50 per cent of the catch with Stan's Enterprises Ltd. and he continued to sell the fish himself.

[255]        He was asked why he started the Herbalife business at that time and he said that fishing was not stable enough and he knew that the licenses could be cancelled and transferred to others on short notice and he wanted to have a contingency plan in place. He could not explain why all of the documents were not available but he saw some of them at CCRA. Also, Mr. Kateygave some of the files back to him as well as the files of others.

[256]        With respect to the payment to crew members he said that they received 50 per cent of the catch or a minimum of $1,000 guarantee. It was necessary to expend at least $75 a day to feed the crew because they eat a lot. There were five people on board and this amounts to only $15 a day per crew member.

[257]        As indicated earlier the Court allowed the admission of Exhibit A-6. The Toronto-Dominion Bank statement under the provisions of Rule 89. Counsel for the Respondent asked the witness if he had the bank statements for any other period other than that shown in Exhibit A-6 and he said that he did not because he did not think this was an issue. The money that was put into his account, was paid out to Casey as he was having trouble with his wife and he asked him to do it that way. He did not know why he drew it out in five different draws. He did not know how this would help him out but he asked him to do it and he complied. He did not have the cheques.

Analysis and Decision

[258]        This case was heard on three different occasions, over a considerable period of time. The evidence of a number of witnesses was interrupted by evidence of subsequent witnesses in order to accommodate the interests of the parties. The evidence was substantial in terms of the oral testimony itself and the number of documents introduced into evidence. The evidence of the Appellant himself was at times difficult to understand, due to the difficulties that he had with the English language and in spite of his best efforts to present his evidence in as illuminating a manner as he could. Neither counsel wished to present detailed argument nor to make detailed references to the evidence nor to the case law but were content to give a general summary of their positions.

[259]        The number of issues to be decided must be dealt with on the basis of the facts presented and the Court's view of those facts. There was no great issue of law identified or argued once one passes beyond the effects of the decision of the Supreme Court of Canada in Stewart, supra.

[260]        Counsel for the Appellant concluded that the results in Stewart, supra, should affect the decision that the Court makes in the case at bar in light of its rejection of the reasonable expectation of profit test. The Court takes the Respondent's position to be, that with respect to the so-called "fishing business", it was not arguing that there was no business but was taking the position that the expenses claimed were not proven to have been made for the purpose of gaining or producing income from that business. The expenses were not proven to have been made because there was insufficient documentation or other evidence before the Court to conclude what the expenses were for, why the expenses were made or that they related to the business of "fishing", in the years for which those expenses were claimed or that they were not reasonable. The Court takes that to have been the thrust of the Respondent's argument and a review of the Reply would not indicate otherwise.

[261]        Counsel for the Appellant argued that there was no personal element involved in any of the enterprises in which the Appellant partook during the years in issue. Further, the enterprises were clearly commercial and no further inquiry is necessary.

[262]        As far as the Court is concerned this would appear to be the essence of the decision in Stewart, supra. Here the Court is satisfied that with respect to the fishing enterprise during the years in question the Appellant was involved in a business and he would be entitled to deduct the expenses claimed provided they meet the other requirements earlier referred to by counsel for the Respondent. To be deductible, these expenses must not only be related to a business operated for the purposes of (income), but the Appellant must prove that they were made for that purpose, that they were reasonable under all of the circumstances and that the quantity of expenses claimed has been established on a balance of probabilities.

[263]        Having decided that the Appellant, during the years in issue, was involved in a business and that he is entitled to deduct the expenses that he claimed providing he has established on the balance of probabilities the elements referred to above, the decision must rest upon the evidence given and any reasonable inferences that the Court is entitled to make from the evidence. Of paramount importance here is the question of credibility of the witnesses. At the end of the day, the Court will have to be satisfied that the Appellant has destroyed a sufficient number of the presumptions of the Minister so that the Court is satisfied that the Appellant has met the burden of proof on a balance of probabilities and that the expenses are deductible.

[264]        With respect to the question of credibility the Court concludes that the Appellant was a very credible witness. Likewise, the other witnesses who testified were credible witnesses and gave their testimony in a straightforward manner. The Court draws no unfavourable inference against the Appellant's position based upon the credibility of his testimony or that of any other witness.

[265]        However, the question of the sufficiency of the evidence to meet the burden upon the Appellant is another thing. That will have to be decided on the basis of a close scrutiny of the evidence given.

[266]        Regarding the matter of the Herbalife and the jeans activities, the Court has very little difficulty in deciding that there was no business in place during the years in question. In neither case did the Appellant advance beyond the stage where he was merely making preparations to go into business. He earned little or no income during the years in question from these enterprises. He did not have in place any means of earning income in those years. The Court is unable to conclude that with respect to those two activities he was running a business during the years in issue. The expenses were not reasonable and must be considered to have been personal in nature.

[267]        As referred to in Stewart, supra at paragraph 63, this Court concludes that even though the Appellant had an abiding intention of making a profit from the activities, the Court is satisfied that "the activity was not carried out in accordance with objective standards of businesslike behavior". According to the evidence, no actions of the Appellant during the years in question with respect to these two activities lead the Court to conclude that a business existed at all, without further substantial actions having been taken by the Appellant to put in to place some kind of activity which would at least have enabled the Court to conclude that some income might have been obtained therefrom.

[268]        That leaves for consideration by the Court the more difficult and substantial issue with respect to the expenses claimed in relation to the fishing activity, which undoubtedly was a business during the years in question.

[269]        The point raised by counsel for the Respondent that it is the Appellant's duty to keep accurate records of his income and expenses under the provisions of section 230 of the Act is well taken. As indicated, when the time comes to claim the expenses, the Appellant must be prepared to prove satisfactorily that the expenditures were made and what they were made for. In a perfect world the Appellant would be able to do so without any problem by maintaining proper records of account, keeping not only invoices of the alleged expenditures but also satisfactory proof that the expenditures so claimed were actually paid.

[270]        In the case at bar the Appellant's evidence falls far short of that perfect proof because in many cases he did not have the requisite receipts and invoices which showed specifically what the expenditures related to and he relied in many instances on invoices instead of receipts. He claimed deductions for alleged expenditures, which at first blush may have indicated that the responsibility for paying such expenses were not his. Because of the shortcomings of the Appellant's documentary evidence, it was necessary for him to rely upon his own viva voce evidence, viva voce evidence of other witnesses and less substantial documentation to establish his case.

[271]        However, the point made by counsel for the Appellant is also well taken where he argued that it may be sufficient to establish deductibility if the testimony given in support thereof by the Appellant and the other witnesses is believed. It was his position that there were no amounts that were not established as having been expended and the expenditures were sufficiently categorized to be deductible as claimed by the Appellant. This, he said, was supported by the oral evidence of the witnesses and by the documentation which was presented.

[272]        The Court is satisfied that where documents were not produced the Appellant has given sufficient reason for their absence. In some cases the Appellant decided that they were not necessary and in other cases they were completely beyond his availability.

[273]        In some cases the evidence given was far from the best evidence but it was the best evidence available and he has given an adequate explanation for the missing documents. The extraordinary problems faced by the Appellant prevented him from producing certain documents which would normally be expected to be available. Further, the Appellant was not a sophisticated person insofar as keeping records were concerned although he certainly was very knowledgeable in business. He did have a problem comprehending the English language and was unable to write it.

[274]        The Court is satisfied that he did not completely appreciate the necessity of keeping more accurate and complete records. The argument made that this was less significant to him than it would be to more sophisticated business persons who had a better knowledge for accounting matters, was not completely unworthy of acceptance.

[275]        Counsel for the Appellant took the position that if the evidence of the Appellant was accepted then there is no need for corroboration of that evidence. If this were a case where the Court believed that the Appellant was deliberately refusing to make records available because they might reflect unsatisfactorily on his claim, the Appellant would be in a difficult position indeed and the Court might have been required to make an adverse inference against him and to his credibility. The Court does not make such an inference here.

[276]        The Court finds considerable corroboration of the evidence of the Appellant in the evidence of the other witnesses including Leo van Tongeren. He referred to documents in support of his testimony that the Appellant incurred legal fees to protect his interest in the fishing license. He was familiar with the nature of the settlement made to Exotic to the extent of $83,010. In general his testimony supported that of the Appellant and was certainly corroborative of it.

[277]        The evidence of Joseph William Hussey, also corroborated to some extent the evidence of the Appellant. He was able to corroborate Mr. Drozdzik's testimony that he and his brother had already parted from the premises and that the landlord disposed of all of their belongings. Their office was intact but the landlord could not contact anybody. He was further aware of Drozdzik's matrimonial problems.

[278]        Ole Christiansen also worked in the building for one and a half to two years between 1989 and 1991. He remembered Western closing their doors on the Company. He cleaned it up, removed garbage, junk, boxes and papers and dumped them into the garbage bin.

[279]        The evidence of Casey Drozdzik was that the payments of $150,000 were made to Stan's Enterprises Ltd. with respect to the lease of the single 'G' license to Stan's Enterprises Ltd. He was divorcing his wife and did not want to put the money into his account. He gave the cheque to the solicitor who cashed it and gave him the money. The Appellant did not receive any of this money.

[280]        The $150,000 cheque was made out to him as well as the $50,000 one. Drozdzik cashed the cheques and gave him the money. He did not report the $50,000 or the $150,000 because of the problems with his wife.

[281]        Mariah Machniak's evidence also corroborated in some material aspects, the evidence of the Appellant as did the evidence of Casey Drozdzik, Leo van Tongeren and to a lesser extent, the evidence of Ash Katey and Ole Christiansen.

[282]        Andrew George Sandilands testified that the Appellant owned 25 per cent of the shares of Western. His position was that the license was probably worth about $500,000 per year in net income. He described how his firm generated bills which was from a printout received from his accounting system. It would have been drafted from information inputted by him from the printout. Sometimes his firm received payment from the trust account and sometimes it was received by cheque or occasionally by cash.

[283]        Between the years 1990 and 1995 he did not recall that all of the accounts were paid but he believed that they were paid by cheque. He dealt only with the Appellant with respect to these accounts and he thought that it would be strange if someone else paid the accounts. He did not know where the Appellant obtained the money to pay the bills but he was responsible to him to see that they were paid. His legal fees were in dispute in this case but he did not know what the total of those bills amounted to.

[284]        On the basis of the evidence provided by the witnesses and the Appellant, the Court is satisfied that an adjustment must be made to the years in question. It would be extremely unjust, as far as this Court is concerned, for the Minister to assign to the Appellant all of the income that he did and not give further consideration to the deductibility of many of these expenses, which were obviously expended for the purpose of gaining or producing income from a business.

[285]        The appeals are allowed and the matters are referred back to the Minister for reassessment and reconsideration based upon the Court's finding, that on the balance of probabilities, the Appellant is entitled to claim the following further deductions during the years in question.

[286]        For the taxation year 1988, vessel repairs, $11,776 crew share $21,063; for the taxation 1989, vessel repairs $100,065, crew share $22,826, food $3,637. In 1990 legal expenses $762; vessel repairs $117,857, ABIL $15,825. For the taxation year 1991 legal/accounting $2,662; vessel repairs $76,343, storage/ moorage $2,260. For the taxation year 1992, legal/accounting $4,608; taxation year 1993, legal/accounting $12,165; legal action settlement cost $83,000. Taxation year 1994 license, $4,960; legal/accounting $7,279; legal accounting $262, vessel repairs $235. For the taxation year 1995, license expenses ($5,434 minus $156.70) $5,277.30. Legal/accounting $2,840 and salary $14,000.

[287]        The Court is satisfied that the Appellant has established on a balance of probabilities, that these expenses were deductible in the years in question.

[288]        The Court is further satisfied on the evidence that the Minister improperly included the amount of $50,730 in the 1995 taxation year as income from the business of the Appellant. This money was not received by the Appellant on his own behalf. He served only as a conduit for his brother. He had no interest in those funds. It is not this Court's job to pass judgment upon the actions of the Appellant's brother in handling the funds the way he did. However, there is no doubt that the funds were not those of the Appellant and they should not be added to his income. The appeal is allowed in that regard.

[289]        In regard to the matter of penalties the Court is satisfied that there were many times that the Appellant might have been less than meticulous with respect to his record keeping. Because of his carelessness in this regard he has become involved in this long, difficult and expensive process before this Court. However, it is not every time that a taxpayer keeps bad records, fails to keep sufficient records and keeps records in a careless and prudent manner that penalties are called for under the provisions of subsection 163(2) of the Act.

[290]        This is a penal section. It has extreme consequences for the taxpayer and should only be resorted to on evidence which makes it clear that the taxpayer has knowingly, or under circumstances amounting to gross negligence, made an omission or false statement in his returns of income which resulted in him reporting less tax than he would otherwise have had to pay. The actions of the Appellant in this case do amount to carelessness, lack of proper knowledge with respect to record keeping matters and to some extent, his own mistaken belief that he would not have owed any income tax in some of the years in question.

[291]        However, these factors do not amount to gross negligence as alleged by the Minister. The burden in that respect is on the Minister and the Court is satisfied this burden has not been met. All penalties with respect to the years in question are deleted.

[292]        The Appellant shall have his costs of these appeals to be taxed.

Signed at Ottawa, Canada, this 20th day of December 2002.

"T.E. Margeson"

J.T.C.C.

COURT FILE NO.:                                                 98-1605(IT)G

STYLE OF CAUSE:                                               Slavomir Drozdzik and

Her Majesty The Queen

PLACE OF HEARING:                                         Vancouver, B.C.

DATE OF HEARING:                                           October 1 to 4, 2001,

April 4, 2002 and

                                                                                                June 3, 2002

REASONS FOR JUDGMENT BY:      The Honourable T.E. Margeson

DATE OF JUDGMENT:                                       December 20, 2002

APPEARANCES:

Counsel for the Appellant: Douglas H. Christie

Counsel for the Respondent:              Karen Truscott

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Douglas H. Christie

        Firm:                                Barrister, Solicitor, Notary Public

                                                                                810 Courtney Street

Victoria, B.C. V8W 1C4

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

98-1605(IT)G

BETWEEN:

SLAVOMIR DROZDZIK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on October 1, 2, 3 and 4, 2001, April 4, 2002

and June 3, 2002 at Vancouver, British Columbia, by

the Honourable Judge T.E. Margeson

Appearances

Counsel for the Appellant:                                  Douglas H. Christie

Counsel for the Respondent:                                              Karen A. Truscott

JUDGMENT

                The appeals from the assessments made under the Income Tax Act for the 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995 taxation years are allowed, with costs, and the matters are referred back to the Minister of National Revenue for reassessment and reconsideration in accordance with the attached Reasons for Judgment.

                The Appellant shall have his costs of this appeal, to be taxed.

Signed at Ottawa, Canada, this 20th day of December 2002.

"T.E. Margeson"

J.T.C.C.