Anthony Clifford Griffiths, Asher Berlin, Bridgeveyor Overhead Systems Limited v. Minister of National Revenue, [1986] 1 CTC 2177, 86 DTC 1140

Brulé, T.C.J.:—

Issue

The appeals herein were heard on common evidence and involved the disallowance of certain claimed expenses and deductions in the 1977 and 1978 taxation years.

Facts

Bridgeveyor Overhead Systems Limited (“Bridgeveyor”) is a company originally incorporated under the name of Economy Plastics Limited (“Economy”) pursuant to the laws of the Province of Ontario. By Articles of Amendment effective March 3, 1972, Economy changed its name to Bridgeveyor.

I quote the following paragraphs from the replies to the notices of appeal:

At all material times Asher Berlin (“Berlin”) and Anthony Clifford Griffiths (“Griffiths”) were the only two shareholders of Bridgeveyor, formerly known as Economy, each owning 50% of the issued shares.

By Agreement dated December 31, 1970, (“the Agreement”), Bridgeveyor, then known as Economy, agreed to purchase from Berlin and Griffiths all the assets and liabilities of the partnership business carried on by Berlin and Griffiths known as Bridge Bearings (Canada) Sales (the “Partnership”). The sale of the Partnership business was deemed to have taken effect on and from the 31st day of December, 1970, pursuant to Clause 8 of the Agreement.

In the relevant years under appeal, Revenue Canada objected to the treatment of certain of the company's transactions as follows:

A. $45,350.00 Plans and Drawings Expense

In its Income Tax Return for its 1977 taxation year, Bridgeveyor deducted from its income as part of its “Selling and Administrative Expenses” $45,350.00 relating to alleged “Plans and Drawings”.

Pursuant to the Agreement, Bridgeveyor then known as Economy, purchased from the Partnership an item listed as an asset on the Partnership Balance Sheet of December 31, 1970, at $45,350.00 and identified as Engineering Plans and Drawings. Subsequent to the sale of the partnership to Bridgeveyor, the said asset was carried on the financial records of Bridgeveyor until its 1977 fiscal year end when Bridgeveyor wrote off the entire amount of $45,350.00 against its 1977 fiscal year income.

B. $3,000.00 Plans and Drawings Expense

In its Income Tax Return for its 1977 taxation year, Bridgeveyor deducted from its income as part of its “Selling and Administrative Expenses” $3,000.00 relating to alleged “Plans and Drawings”.

Prior to its Income Tax Return for its 1977 taxation year being filed, a year-end adjusting entry was made in the financial records of Bridgeveyor on April 30, 1977, accruing an account payable for “Plans and Drawings” expenses in the amount of $3,000.00.

On April 28, 1978, cheque number 3236 in the amount of $3,000.00 was issued by Bridgeveyor payable to Griffiths who subsequently negotiated the said cheque. The claim by Bridgeveyor referred (to) herein arises from the issuance of cheque 3236 to Griffiths.

C. $7,500.00 Capital Cost Allowance for Machinery

In each of its 1977 and 1978 Income Tax Returns, Bridgeveyor claimed a capital cost allowance of $3,750.00 with respect to a Milling Machine (the “Machine”) allegedly purchased for the sum of $7,500.00 during its 1977 taxation year.

An adjusting entry was made in the financial records of Bridgeveyor on April 30, 1977, to represent the alleged acquisition of a Machine purchased for cash by Berlin and Griffiths in the amount of $7,500.00. Berlin and Griffiths were each given credit for one-half of the cost of the Machine by reducing their respective liability to the Corporation in their shareholder's loan accounts. The Machine was entered as a Class 29 asset and depreciated at 50% in each of 1977 and 1978.

An examination of the alleged Vendor’s records did not disclose the sale of a Machine to Griffiths and Berlin for $7,500.00. The Vendor’s records did disclose, however, the sale of a different Milling Machine for $3,500.00 to Bridgeveyor during its 1977 taxation year.

D. $1,859.62 Labour Cost Expense

In its Income Tax Return for its 1977 taxation year, Bridgveyor claimed as a deduction from income $1,859.62 allegedly arising from an expense which Bridgeveyor identified in its financial records as “Sublet Labour.”

A journal entry corresponding to the alleged expense in paragraph 16 herein was made in the financial records of Bridgeveyor at its year-end, April 30, 1977, to reduce the loan receivable account of Griffiths by $1,859.62.

E. $40,000.00 . . . Purchase Expense

In its Income Tax Return for its 1978 taxation year, Bridgeveyor deducted from its income accrued expenses which it estimated, at its 1978 fiscal year end, would be required to complete a contract it had entered into with Aidershot Industrial Installations Ltd. (the “Contract”). The Contract price excluding a 10% holdback, was included in Bridgeveyor’s income.

F. $8,400.00 . . . Purchase Expense

In its 1978 Income Tax Return, Bridgeveyor claimed as a deduction from income $8,400.00 . . . based on a cash purchase of parts at an exceedingly advantageous price by Berlin.

On June 7, 1978, (subsequent to its 1978 fiscal year end) Bridgeveyor issued a cheque in the amount of $8,400.00 payable to cash, which was eventually endorsed by Berlin.

G. $2,800.00 . . . Purchase Expense

In its 1978 Income Tax Return, Bridgeveyor deducted from its income, expenses of $2,800.00 incurred for the purchase of gears.

In a year-end adjusting entry on April 30, 1978, $2,800.00 of ‘‘cash gear” purchases were established in the books of Bridgeveyor. A corresponding credit was entered in the loan account of Griffiths’ mother.

H. $2,382.00 Bad Debt Reserve

In its Income Tax Return for its 1977 taxation year, Bridgeveyor wrote off $8,418.00 in bad debts against its income for that taxation year. Of the amounts written off, $2,382.00 were recovered by Bridgeveyor during its 1978 taxation year but said amounts were not included in income in its Income Tax Return for its 1978 taxation year.

By notices of reassessment dated November 27, 1980, the Minister reassess Bridgeveyor’s 1977 and 1978 taxation years as follows:

(a) 1977 Taxation Year

Adjustments to Active Business income:

Add:

Unvouchered Plans and Drawing Expenses	$48,350.00
Labour Cost Expense Disallowed	1,859.62
Capital Cost Allowance Class 29 Disallowed	3,750.00
TOTAL	$53,959.62
(b) 1978 Taxation Year
Adjustments to Active Business Income:
Add:
Unvouchered Purchase Expense Disallowed	$51,200.00
Genera! and Office Expense Disallowed	274.57
Unreported Income	2,382.00
Capital Cost Allowance Class 29 Disallowed	3,750.00
TOTAL	$57,606.57

By notices of reassessment dated October 6, 1980, the Minister reassessed Griffiths for his 1977 and 1978 taxation years as follows:

(a) 1977 Taxation Year

By adding:

Unreported Salaries	$ 5,600.00
Unreported Appropriations of Property	5,609.62
Unpaid Shareholder's Loan	2,211.06
TOTAL	$13,420.68
(b) 1978 Taxation Year
By Adding:
Unreported Salaries	$ 7,300.00
Unreported Appropriations of Property	3,000.00
TOTAL	$10,300.00

By notices of reassessment dated October 6, 1980, the Minister reassessed Berlin for his 1977 and 1978 taxation years as follows:

(a) 1977 Taxation Year

By Adding:

Unreported Salaries	$ 5,600.00
Unreported Appropriations of Property	3,750.00
Unpaid Shareholder's Loan	7,913.60
TOTAL	$17,263.60
(b) 1978 Taxation Year
By Adding:
Unreported Salaries	$ 7,300.00
Unreported Appropriations of Property	8,400.00
TOTAL	$15,700.00

Appellants’ Position

The appellants’ explanations for the above matters were as follows:

A. $45,350.00 Plans and Drawings Expense

The costs written off in 1977 represented the capital costs of a depreciable asset (model/prototype) contributed by Mr. C. Griffiths to the Corporation's predecessor partnership, “Bridge Bearings and Conveyors". Although incorrectly treated in the accounts as a period expense of 1977, the asset was a depreciable capital asset and was eligible for C.C.A. (Class 8). Revenue Canada Taxation disallowed the deduction of the $45,350.00 period expense for 1977 without allowing for the recognition of a depreciable capital property of the same amount.

B. $3,000.00 Plans and Drawings Expense

The taxpayer Corporation's president (and a shareholder) acquired, for cash, metal racks for storage of spare parts and materials. These racks are still in the possession of the taxpayer Corporation and this disbursement represented a bona fide business asset acquisition.

C. $7,500.00 Capital Cost — Allowance for Machinery

Revenue Canada Taxation disallowed an unvouchered cash expenditure which was made by the taxpayer Corporation's shareholders to purchase a milling machine at a price which was felt by the Corporation's officers to be exceedingly advantageous.

D. $1,859.62 Labor Cost Expense

This amount represented actual cash disbursement by an officer of the Corporation.

E. $40,000.00 Purchase Expense

The Company had accrued, at April 30, 1978, this amount to represent additional costs to complete a contract in progress at that date. The Company had incorrectly booked 100% of the revenue on the contract in question prior to commencing it, and, perhaps should more properly have cancelled the unshipped progress invoices for financial reporting purposes. Documentation of the actual completion date of the job in question was scarce; however, Revenue Canada Taxation representatives were shown both a scheduling report and delivery slips showing substantial contract deliveries subsequent to April 30, 1978. No credence was given to this evidence at all and the amount disallowed out of hand.

D. $8,400.00 Purchase Expense

Revenue Canada Taxation disallowed a disbursement made to an officer in the amount of $8,400.00 in order to acquire for cash and for what the taxpayer felt was an exceedingly advantageous price, parts which were needed to complete the contract mentioned in “E” above. This disbursement although unvouchered was a bona fide business expense incurred on behalf of the Corporation.

G. $2,800.00 Purchase Expense

Revenue Canada Taxation disallowed an expense of $2,800.00 representing cash purchases of parts acquired by an officer on behalf of the Company. The expenditure represents a bona fide business transaction entered into on behalf of the Company.

H. $2,382.00 Bad Debt Reserve

In 1977, the Company deducted a bad debt reserve of $8,418.00 which amount appeared in the company’s books April 30, 1977. In 1978, accounts totalling $2,382.00 were recovered and Revenue Canada Taxation re-assessed the $2,382.00 as a reserve not added back in 1978. However, since the reserve did not appear in the Company’s books at April 30, 1978 it is claimed that the Company did in fact take the unused reserve back into income by a current year (1978) adjustment to its reported sales.

Minister's Position

Briefly the Minister, with reference to each of the above, alleged as follows:

A — That the said Engineering Plans and Drawings on which the claimed deduction of $45,350.00 was based, was not an outlay or expense incurred by Bridge- veyor for the purpose of gaining or producing income from its business nor was it a depreciable asset.

B — That the said $3,000.00 was not an outlay or expense incurred by Bridge- veyor for the purpose of gaining or producing income from its business but rather was an appropriation of Bridgeveyor’s monies by Griffiths.

C — That Berlin and Griffiths did not purchase for Bridgeveyor during its 1977 taxation year a Machine for $7,500.00. Accordingly, Bridgeveyor is not entitled to a capital cost allowance for its 1977 and 1978 taxation years in regard to the Machine. The amounts credited to Berlin and Griffiths’ shareholder’s loan accounts do not arise from the sale of a Machine and accordingly, the amounts credited to the said shareholder’s loan accounts are appropriations of corporate assets.

D — That the alleged expense of $1,859.62 was not incurred by Bridgeveyor as an outlay or expense for the purpose of gaining or producing income from its business but rather was an appropriation by Griffiths of corporate assets.

E — That Bridgeveyor did not incur any expenses after its 1978 fiscal year with respect to the Contract nor was it reasonable to expect that Bridgeveyor would incur such expenses. In addition, Brideveyor was unable to identify specific costs that would be incurred after its year end and therefore does not qualify for any reserve.

F — That the $8,400.00 referred to in Statement of Facts (F) supra, was not an outlay or expense incurred by Bridgeveyor for the purpose of gaining or produc- ing income from its business and that the cheque referred to constituted an appropriation of Bridgeveyor’s funds by Berlin.

G — That the said $2,800.00 was not an outlay or expense incurred by Bridge- veyor for the purpose of gaining or producing income from its business.

H — That the sum of $2,382.00 recovered as a bad debt during the 1978 taxation year should be included in Bridgeveyor’s Income Tax Return for that year.

In summary, counsel for the Minister said that: “In regard to the various appropriations by Berlin and Griffiths, such amounts should properly be included in Berlin’s and Griffiths’ income and that in regard to the various alleged expenses of Bridgeveyor referred to that since they were not outlays or expenses incurred by Bridgeveyor for the purpose of gaining or producing income from its business, the various alleged expenses should be disallowed.

In regard to the claimed capital cost allowance in “C”, supra the Minister submits that Bridgeveyor is not entitled to any such allowance since it never purchased the machine referred to therein by the Appellant.

Analysis

This is a case of the evidence, given principally by Mr. Griffiths, not being supported by corporate or personal records. No company records were introduced in evidence. The claim is that the expenditures reassessed were made for business purposes, and, notwithstanding the absence of supporting documentation, were made pursuant to bona fide business transactions. The witness could not explain why there was a write-off in one year of the “Plans and Drawings” referred to in “A” above and why this designation was used. In cross-examination he allowed that some of the $45,350 may have been for time and travel. While there was the suggestion that many of the items claimed were paid for by the principal shareholders who were reimbursed when funds were available there was no supporting documentation.

If an appellant is to contest a tax assessment the onus is on him to prove his case and he must produce satisfactory evidence to the Court. In the case of Raymond Séguin v. M.N.R., [1979] C.T.C. 2181; 79 D.T.C. 46 the Court said at 2183 (D.T.C. 48) (reported in French and translated) as follows:

The appellant had the onus of proving not only that the account . . . was genuine and was paid but also that it was owed by him personally. This onus has not been discharged.

Here the appellant Bridgeveyor falls into this category.

In Walter L. Medica v. .M.N.R., [1969] Tax A.B.C. 479; 69 D.T.C. 360 R.S.W. Fordham, Q.C., then Assistant Chairman of the Tax Appeal Board said:

Mr. Medica freely admitted that all the amounts disallowed were those for which vouchers were missing, for one reason or another, and expressed himself as content to fall back on the discretion of the Board. The latter is allowed no leeway, of course, in dealing with what is, or is not, deductible and must follow the letter of the law. This is particularly the rule where, as here, an income tax matter is under review.

In the present case there were no company records produced and no vouchers.

The Tax Review Board reviewed a similar situation regarding business expenses in James B. Conja v. M.N.R., [1982] C.T.C. 2284; 82 D.T.C. 1252. At 2286-87 (D.T.C. 1254) it was stated:

. . . the task before him (the Appellant) was properly and completely spelled out in the Minister’s Reply to Notice of Appeal . . . it was to prove the business expenses he claimed. This he has not done, and he cannot succeed. The appellant should not labour under the impression that . .. expenditures are deductible solely on his own perception of their objective contribution to his business purpose — that remains a hurdle to be overcome for every businessman when challenged by the Minister to do so.

The arguments provided on behalf of the appellants have not been very convincing. Misdescription of items, lack of written substantiations, admissions of poor accounting methods, year-end adjustments to benefit the shareholders, and conflicting evidence with an independent vendor all lead the Court to the conclusion that the appeals have no substance in law even though some of the events as described by the appellant Griffiths may have taken place.

The conclusion therefore is that these appeals are dismissed.

Appeals dismissed.