Hawrish v. R., [1999] 2 CTC 2886, 99 DTC 664

Garon T.C.J.:

These are appeals from income tax reassessments for the 1988, 1989 and 1990 taxation years. By these reassessments, the Minister of National Reve- nue disallowed various types of expenses which had been grouped under two heads for each of the taxation years in issue as shown below:

Expenses claimed on rental property:

Expenses claimed against professional income:

I shall first deal with the interest expense relating to the Appellant’s rental property, the deduction of which is claimed by the Appellant.

First, the parties have agreed that the amounts in dispute regarding this subject matter differ from those mentioned by the Appellant in his Amended Notice of Appeal. The Appellant has restricted his claim to the following amounts in respect of the taxation years mentioned below:

$22,562.48 for 1988

$17,118.16 for 1989

$5,500.00 for 1990

In the course of argument, Counsel for the Respondent indicated that she will not make any submission respecting the matter of the deduction of the interest expense in the computation of the Appellant’s income from the above-mentioned rental property for the three years in question. I then indicated in open Court that I will allow the appeals, to that extent, from the reassessments of income tax for the taxation years 1988, 1989, and 1990. I now confirm that the appeals from the reassessments of income tax for the three years in issue are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing his income the Appellant is entitled to deduct the following amounts opposite the years shown below:

$22,562.48 for 1988

$17,118.16 for 1989

$5,500.00 for 1990

The parties were also in agreement that the expense in respect of the year 1990 claimed under the heading “accommodations” shall be disallowed only to the extent of the amount of $4,949. The penalty in respect of this item is to be vacated relative to the latter amount. The new reassessment to be issued by the Minister of National Revenue for the 1990 taxation year should give effect to this agreement of the parties in relation to this particular expense.

At this point, I should also add that the Appellant submitted, in his Amended Notice of Appeal, that the Minister of National Revenue was precluded from reassessing with respect to the 1988 and 1989 taxation years because these reassessments were issued outside the normal reassessment period.

I must therefore determine whether the reassessments for the 1988 and 1989 are statute barred.

First, it is common ground here that the reassessments made by the Minister of National Revenue for the 1988 and 1989 taxation years were issued after the normal reassessment period.

In the case at bar, the Minister has alleged that the Appellant made a misrepresentation within the meaning of subparagraph 152(4)(a)(i) of the Income Tax Act (Act). The Appellant has denied that any misrepresentation was made by him.

The nature of the misrepresentation on the part of the taxpayer that is required in order to allow the Minister to reassess after the normal reassessment period is described in subparagraph 152(4)(rz)(i), which reads as follows:

has made any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in filing the return or in supplying any information under this Act.

The comments made by Justice Strayer of the Federal Court of Canada, Trial Division, as he then was, in the case of Venne v. R. [1] are of particular interest regarding the matter of misrepresentation:

1 am satisfied that it is sufficient for the Minister, in order to invoke the power under sub-paragraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. This is surely what the word “misrepresentation that is attributable to neglect” must mean, particularly when combined with other grounds such as “carelessness” or “wilful default” which refer to a higher degree of negligence or to intentional misconduct. Unless these words are superfluous in the section, which I am not able to assume, the term “neglect” involves a lesser standard of deficiency akin to that used in other fields of law such as the law of tort. [...]

The observations of Judge Bowman of this Court in the case of Sarraf v. Minister of National Revenue,? [2] are useful as well on this subject matter:

[...] A brief review of the rules relating to the making of reassessments after the normal reassessment period may be worthwhile:

(a) where a taxpayer wishes to attack an assessment as having been made beyond the normal reassessment period (defined in subsection 152(3.1) — generally, in the case of an individual, three years (or four years with respect to taxation years prior to 1983) from the date of mailing the original assessment for the year or of the notification that no tax is payable) the basis of challenge should be pleaded and it is for the taxpayer to establish a prima facie case that the reassessment has indeed been made beyond that period, unless the date of the original assessment is obvious from the material before the court;

(b) if a taxpayer has, in a return of income, made a misrepresentation that is attributable to neglect, carelessness, or wilful default or has committed a fraud in filing the return the Minister is entitled under subsection 152(4) of the Income Tax Act to assess beyond the normal reassessment period. The Minister’s entitlement to reassess beyond the normal reassessment period must be established by proving the existence of any of the elements set out in subparagraph 152(4)(«)(i). It is up to the Minister to do so;

(c) if those elements are established the onus shifts back to the taxpayer under paragraph 152(5)(b) to establish that the failure to include in the return an amount included in a reassessment beyond the normal reassessment period did not result from any misrepresentation that is attributable to negligence, carelessness or wilful default.

In each case the shifting onus is a civil one and may be satisfied by making out a prima facie case which, if unrefuted by the opposing party, stands.

lam now required to apply these principles to the facts at bar.

Regarding his returns of income for the 1988 and 1989 taxation years, the Appellant has claimed the deduction of various air travel expenses in connection with trips between Saskatoon and Vancouver. On cross-examination, the Appellant admitted that a portion of the expenses on these trips was devoted to personal matters. Nevertheless, he claimed the entire amount of the expenses of every trip as a business expense. His records were in such a state of disarray that it was impossible for anyone to determine which portion of these expenses is of a personal nature and which is not. Nor was it possible to determine if the dominant purpose of a particular trip or of a number of trips over a given period related to the Appellant’s business activities or to some other pursuit.

In his return of income for the 1988 taxation year, the Appellant claimed as a bad debt a total amount of $73,409.00. Of that amount, $42,500.00 was made available by the Toronto Dominion Bank at the request of and for the account of the Appellant, as evidenced by a letter dated June 30, 1987. The paucity of the evidence regarding the deduction of such a large sum suggests that the Appellant is involved in a misrepresentation in not supporting his claim with a reasonable amount of information. As part of the amount of $73,409.00, is included a sum of $5,000.00 which, on the evidence, represented payment for the acquisition of shares. The amount paid for acquiring these shares cannot realistically be considered by a reasonably well-informed person to be a deductible expense.

With regard to the return of income for the 1989 taxation year, in addition to the air travel expenses mentioned earlier, I will simply refer to the deduction of the amount of $60,000.00 claimed by the Appellant as an expense. The latter amount is the amount of a cheque made by the Appellant to the order of his father. The cheque was never cashed or negotiated by the Appellant’s father. To deduct this amount as an expense for the 1989 taxation year under the circumstances shows a clear disposition to deceive the tax authorities.

I therefore find that a portion of the expenses in respect of air travel, which portion cannot on the evidence be determined, as well as the amount of $60,000.00 in respect of the uncashed cheque to which I have just made reference, represent amounts claimed by the Appellant as deductions that were obviously not deductible. The deductions claimed by the Appellant in respect of these two items amount to a misrepresentation that is attributable to carelessness or to a clearly reprehensible conduct, on the Appellant’s part.

On this branch of the case, I therefore conclude that it was open to the Minister of National Revenue to reassess the Appellant for the 1988 and 1989 taxation years.

I shall now consider the evidence relating to the deduction of seven items of expenditures claimed against the Appellant’s professional income.

The first item under review has to do with the amount of $3,258.00 deducted as interest expense for the 1988 taxation year. In his direct evidence, the Appellant stated that the amount of $3,258.00 represented interest expense paid on a loan from the Toronto Dominion Bank, which account was used in connection with the operation of his legal practise. He tendered a bank statement and a cheque to demonstrate how he had arrived at an amount of $3,258.00. This statement showed that the Appellant had incurred an overdraft of $3,258.00 on this account. The cheque demonstrated that he had paid the same amount to the account at the Toronto Dominion Bank from an account with the Royal Bank of Canada. In cross-examination the Appellant was asked to provide some details as to the nature of the loan on which he had paid $3,258.00 as interest. The Appellant admitted that he could not “pinpoint” the nature of the loan.

The Appellant’s evidence regarding his payment of $3,258.00 in 1988 in connection with an alleged loan from the Toronto Dominion Bank is extremely vague. He could not adduce evidence concerning the purpose of the loan, as I have just mentioned. The link between this loan and his legal practice could not be established. Therefore, the deduction of the amount of $3,258.00 cannot be allowed in the computation of the Appellant’s income for the 1988 taxation year.

The second item of deduction relates to air travel expenses. The Minister of National Revenue, as appears from paragraph 7 of the Amended Reply to the Notice of Appeal, disallowed air travel expenses in the amount of $4,661.00, $8,301.00 and $11,368.00 for the 1988, 1989 and 1990 taxation years respectively.

At the commencement of the hearing, Counsel for the Respondent was prepared to agree to the deduction of $1,309.00, $2,557.00 and $2,113.00 for the 1988, 1989 and 1990 taxation years respectively. Later in the course of the trial, Counsel for the Respondent was prepared to allow a further amount of $1,933.00 in respect of the 1990 taxation year. Therefore, the amounts in issue are $3,352.00, $5,744.00 and $7,322.00 for the 1988, 1989 and 1990 taxation years respectively.

The Appellant asserted that these amounts represented one trip from Vancouver to Toronto, one trip from Vancouver to Montréal, several trips between Vancouver and Saskatoon. With respect to the Vancouver to Toronto trip, the Appellant tendered a receipt of an airline ticket which had been issued to him. The purpose of the trip to Toronto in 1989, was for a Mr. Lamb, representing a certain company, to view a housing development named “Anaheim Developments”.

With respect to the trip to Montréal, the Appellant claimed the deduction of a number of expenses amounting to $679.68 for his 1990 taxation year. The Appellant explained that he travelled to Montréal to attend a seminar presented by the Immigration Section of the Canadian Bar Association. The Appellant stated that he practised in the field of immigration law from 1988 to 1991.

The remainder of the air travel expenses relates to trips between Vancouver and Saskatoon. It will be recalled that the Appellant moved with his family to British Columbia in 1987, but maintained, nonetheless, his practice in Saskatoon. The Appellant stated that his reason for travelling to Saskatoon was to maintain his law practice. He admitted, while in Saskatoon in 1989 and 1990, he attended to a number of personal matters, as mentioned earlier.

It was also disclosed that the Appellant was involved, from 1990 onwards, in a number of court proceedings, namely, criminal charges for fraud and theft, an action taken by the Canadian Imperial Bank of Commerce to enforce the personal guarantee of the $40,000.00 loan to Ambrosia Food Company Ltd., foreclosure litigation commenced by the Saskatchewan Trust Company, disciplinary proceedings initiated by the Law Society of Saskatchewan and a civil action instituted by some investors in Ambrosia Food Company Ltd.

The Appellant recognized that none of these trips between Vancouver and Saskatoon were exclusively of a business nature. The Appellant was unable to locate his diary which would list some of the clients he may have seen in Saskatoon in the course of those trips.

With respect to the travelling expenses, I would allow the deduction of expenses incurred by the Appellant concerning his trip to Toronto in 1989 in the amount of $1,120.00 and the expenses, as well, made in 1990 relative to his trip to Montréal in the amount of $679.68. I would maintain the disallowance by the Minister of National Revenue of the expenses relating to the trips between Vancouver and Saskatoon in view of the paucity of the evi- dence and my finding that it is likely that the dominant purpose of some of those trips was of a personal nature.

The third item has to do with the deduction of losses claimed in respect of investment made in a corporation engaged in two restaurant ventures. The Appellant claimed the deduction of bad debt expenses totalling $73,409.00 in 1988 in connection with these restaurant ventures. In 1989, the Appellant deducted losses amounting to $40,000.00 relating to a personal guarantee given by him to a bank in respect of a loan made to his associates in the restaurant ventures.

In 1983, the Appellant entered into the restaurant business with one Gerard Hogan, a friend. In early 1984, the Appellant and Mr. Hogan incorporated Ambrosia Food Company Ltd. (“Ambrosia”) which was to operate the restaurant business in question. The Appellant lent $25,909.00 to Ambrosia in exchange for interest-bearing promissory notes from the corporation. The restaurant business was a failure. The Appellant received neither interest on the loan nor the return of the principal he invested. In 1988, the Appellant believed that the sum of $25,909.00 would never be paid to him and he claimed this amount as a loss.

Ambrosia was involved in another restaurant venture referred to as The Food Factory. To raise capital for this new venture, the Appellant attempted to take advantage of what was then the new venture capital legislation. The Appellant also invested $5,000.00 in the corporation on the occasion of the initial offering of shares. In order to finance the venture, the Appellant arranged for a letter of credit to be issued by the Toronto Dominion Bank involving an amount of $42,500.00. The Food Factory was a flop and the Appellant lost a total amount of $47,500.00.

The Appellant tendered in evidence the letter of credit in favour of the Hongkong Bank of Canada, a copy of a cheque in favour of that bank in the amount of $5,000.00, and a bank statement from the Toronto Dominion Bank debiting the Appellant’s account for the sum of $42,500.00. The Appellant also stated that because he has entered into the restaurant ventures with the intention of earning a profit, he was entitled to take as a deduction the $73,409.00 loss he sustained.

The Appellant also testified that the $40,000.00 loss, the deduction of which he claimed in his 1989 taxation year, related to a personal guarantee which he had given to Canadian Imperial Bank of Commerce (C/BC) for a loan extended to his associates in the restaurant ventures. In this connection, the Appellant stated that he paid CIBC by way of a bank draft that he gave to the bank’s lawyers. To establish this payment, he relied on the settlement agreement between the Appellant and the bank which acknowledged the payment by the Appellant to the bank of the amount in question.

The Appellant never made a formal demand on Ambrosia to pay the amounts which he had advanced to it. There is no evidence, as well, that the Appellant demanded the payment of $42,500.00 representing funds made available to Ambrosia by virtue of a letter of credit issued by the Toronto Dominion Bank. The evidence also discloses that Ambrosia did not go into bankruptcy. It simply ceased to operate.

In my view, the Appellant is not entitled to the deduction of a) the amount of $42,500.00 representing funds made available to Ambrosia pursuant to the letter of credit referred to earlier and b) the amount of $25,909.00 loaned by the Appellant to Ambrosia on the security of promissory notes.

I have not been persuaded that the payment by the Appellant of the amount of $42,500.00 relative to the letter of credit from the Toronto Dominion Bank is anything but a capital outlay, the deduction of which is prohibited by paragraph 18( !)(/?) of the Act.

With respect to the loan in the amount of $25,909.00 made by the Appellant to Ambrosia, it cannot be considered to have arisen in the course of trading transactions, as far as the Appellant himself is concerned, as contrasted with Ambrosia which was actually carrying on the restaurant business. This loan from the Appellant’s standpoint constituted capital advanced by the Appellant to Ambrosia. Accordingly, the loss sustained by the Appellant on account of the failure of Ambrosia to reimburse this loan is of a capital nature. Its deduction is prohibited by paragraph 18(1)(b) of the Act. Similarly, the deduction of the amount of $5,000.00, representing the payment of shares in Ambrosia, cannot be allowed on the ground that it represented a loss on account of capital, the deduction of which is prohibited by paragraph 18(1)(b) of the Act.

With respect to the loss sustained by the Appellant in respect of the guarantee given to the bank for a loan extended to his associates in the restaurant ventures, I am also of the view that the Appellant is not entitled to the deduction of this loss. It was not established that the guarantee was given for a fee. The guarantee was not arranged by the Appellant for the purpose of earning income. This loss was also on account of capital. Its deduction is prohibited, again, by paragraph 18( !)(/?) of the Act. In this con- nection, I find it useful to refer to the decision of the Supreme Court of Canada in the case Minister of National Revenue v. Steer} [3]

I shall now deal with the fourth item of deduction, which relates to interest payments made to Mr. Andrew Hawrish.

In 1981, the Appellant’s father, Mr. Andrew Hawrish, loaned money to the Appellant so that the latter could purchase an apartment building in Saskatoon. The original loan was in the amount of $117,000.00. Initially there was no written agreement that the Appellant would pay interest on the loan.

Later on, the arrangements between the Appellant and his father were formalized. In 1987, both the Appellant and his father decided that the latter should register an interest in the land. A copy of the mortgage dated July 27, 1987 was entered into evidence. Under the mortgage, Mr. Andrew Hawrish lent the Appellant the sum of $219,463.00, representing the original mortgage of $117,000.00 plus the unpaid interest on the original loan.

The Appellant’s financial situation had improved by 1989, and on December 27, 1989 the Appellant gave his father a cheque in the amount of $60,000.00 as a payment of interest on the mortgage. The Appellant also gave his father another cheque dated December 28, 1990 in the amount of $12,700.00, also on account of interest. Mr. Andrew Hawrish never cashed nor negotiated the two cheques in question.

Mr. Andrew Hawrish passed away in January 1992. By the terms of Mr. Andrew Hawrish’s Will, the Appellant was left a share of the residue of the estate. The statement of assets of the estate listed the amount of $146,763.00 as an amount owing from the Appellant to the estate. His bequest was accordingly reduced.

It is obvious that the Appellant is not entitled to the deduction of the amounts of $60,000.00 and $12,700.00 in computing his income for the 1989 and 1990 taxation years since the cheques in question were never cashed or negotiated by Mr. Andrew Hawrish. The Appellant, in reality, never made the payments in question in the taxation years 1989 and 1990. The matter of the deduction of these amounts does not arise because no outlays were made by the Appellant.

I shall now consider the fifth item relating to the deduction concerning the Appellant’s disbursement in favour of Mr. Robert Wenman.

The Appellant deducted a bad debt expense in the amount of $12,364.97 from his income in the 1989 taxation year. In his practice as a member of the B.C. Bar the Appellant acted for an individual named Robert Wenman who was a member of Parliament. In 1985, Mr. Wenman was sued by American Express Company for a debt he owed to that corporation. Around the same time, Mr. Wenman was running for the leadership of the Social Credit Party in British Columbia. In order to spare his client and friend any negative publicity, the Appellant guaranteed a loan from the Toronto Dominion Bank to Mr. Wenman in the amount of $12,364.97, the proceeds of which were used to settle the American Express Company’s claim.

When Mr. Wenman failed to pay the bank the necessary funds, the bank debited the Appellant’s account. Ultimately, the Appellant testified that he was required to pay the entire amount of $12,364.97, but no documentation was put in evidence that he disbursed the amount in question.

The Appellant did not charge Mr. Wenman any fee or interest for guaranteeing the loan. The Appellant testified that he assisted Mr. Wenman in settling his debt with American Express Company partly because Mr. Wenman was a friend and partly because the Appellant wanted to ensure that Mr. Wenman’s leadership campaign not be derailed.

On the assumption that the payment of $12,364.97 was made by the Appellant, this disbursement in connection with the guarantee given by the Appellant for a loan made to Mr. Wenman is obviously an expense of a personal nature. The giving of the guarantee was not made for the purpose of earning income. The Appellant is therefore not entitled to the deduction of the loss in the amount of $12,364.97.

I shall now deal with the deduction claimed by the Appellant on account of payments that he allegedly made to Mr. Paul Jaffe for services that the latter had provided to one of the Appellant’s clients. This is the sixth item of deduction.

The facts relating to this matter may be easily summarized. From 1988 to 1990, the Appellant acted on the Goldwood file for which he billed a total amount of $163,679.00 to the clients involved. The Appellant was assisted on the file by Mr. Paul Jaffe, a lawyer who at that time shared office space with the Appellant. The Appellant had known Mr. Jaffe since 1983.

The Appellant testified that Mr. Jaffe received one-third of the fees paid to him by his clients. The Appellant entered into evidence a statement of account from Mr. Jaffe dated July 5, 1988 regarding the Goldwood file, as well as a series of the Appellant’s cheques made out to and cashed by Mr. Jaffe in 1989 totalling $35,200.00.

The Appellant also explained that he was paid a fixed amount by his clients and that the amount in question was paid in periodic instalments. As he received the payments he would pay Mr. Jaffe his one-third share. Counsel for the Respondent pointed out that only three of the cheques to Mr. Jaffe had the notation “Goldwood” on them.

The Appellant stated that he was absolutely sure that each of the cheques paid to Mr. Jaffe was for work on the Goldwood file. The Appellant submitted cheques made to Mr. Jaffe in 1990 evidencing payments of a sum of $2,700.00.

I have concluded that the amounts paid to Mr. Jaffe in 1989 and 1990 should be allowed as deduction. Although the evidence is lacking in some areas, there are elements in it that have persuaded me that it is more likely than not that the payments had been made to Mr. Jaffe by the Appellant in 1989 and 1990 in the amounts mentioned and for the purpose indicated.

Firstly, the Appellant produced the statement of account for 1988 which established that Mr. Jaffe was co-counsel on the Goldwood file. Secondly, at least some of the cheques had the notation “Goldwood” on them. Thirdly, the unannotated cheques were of similar amounts to the annotated ones and were so consistently. Moreover, the Appellant’s contention that he included the amounts paid to him from his clients and then deducted the amounts paid to Mr. Jaffe seems plausible under the circumstances. In this connection, it must not be overlooked that the Appellant declared professional income of $313,985.00 and $146,799.69 for his 1989 and 1990 taxation years respectively. It is not unreasonable to conclude that the amounts of $35,200.00 and $2,700.00 were included in the Appellant’s gross revenue.

In coming to the conclusion that the Appellant is entitled to the deductions of the amounts of $35,200.00 and $2,700.00 in computing his income for the years 1989 and 1990, I have considered the matter of the negative inference that may be drawn from the Appellant’s decision not to have called Mr. Jaffe as a witness. In my view, the overall evidence, however, supports the conclusion arrived at respecting the matter of these payments to Mr. Jaffe.

The Appellant also claimed that he paid an amount of $55.38 to the law firm of Barrigar Oyen for legal advice regarding a patent. Counsel for the Respondent made no submission respecting the matter of the deduction of the payment of $55.38 made to the latter firm of Barrigar Oyen. On the evidence, I allow the deduction of the payment of the amount of $55.38.

Finally, I shall advert to the deductions claimed by the Appellant in relation to the payments in the amounts of $30,000.00 and $11,244.00 to the law firm of Halyk Dovell in the 1989 and 1990 taxation years respectively.

As a result of the failed restaurant ventures, a number of investors sued the Appellant for fraud. Also, the Appellant faced disciplinary action, that is, the suspension of his licence from the Law Society of Saskatchewan as a result of his conduct. Mr. Halyk of the firm of Halyk Dovell represented the Appellant in connection with both matters. The Appellant produced cheques made out to the firm of Halyk Dovell in 1989 totalling $30,000.00. The Appellant deducted the amounts paid to Mr. Halyk because, in his view, the money was spent to prevent the Appellant from losing his licence to practice law and therefore his ability to earn income. Also, it should be borne in mind that the civil action arising from The Food Factory fiasco was directed not only against the Appellant himself but also against his law firm. Thus, the Appellant felt justified in deducting the fees paid by him relating to the civil action. Incidentally, the Appellant ceased to practice law after he was convicted of a criminal offence in 1991.

With regard to the deduction of amounts paid to Mr. Halyk, who represented the Appellant before the Law Society of Saskatchewan, it is clear that these amounts represent a loss on account of capital. It was for the purpose of preserving a capital asset, that asset being the Appellant’s right to practice law in the years to come. The prohibition of such a loss is spelled out in paragraph 18(1)(b) of the Act.

With respect to the amount paid for Mr. Halyk’s services of the above- named firm for representing the Appellant in the civil action instituted against him and his firm, there is no evidence allowing me to apportion the total amount of fees paid by the Appellant for Mr. Halyk’s services in 1989 and 1990 between the two classes of matters, that is, the proceedings involving the Law Society of Saskatchewan, on the one hand, and the civil action instituted against the Appellant and his firm by some of the persons involved in the restaurant ventures, on the other hand.

Since I have concluded that the legal expenses made by the Appellant to preserve his status as a lawyer are not deductible, it is not possible for me to allow the deduction in respect of the civil suit, of any specific portion of the total amount paid for Mr. Halyk’s services even if I were of the opinion that the Appellant was entitled to the deduction of the expenses that relate to the last mentioned matter.

In addition, it has not been established that the legal expenses incurred by the Appellant in connection with the civil action were expenses incurred for the purpose of earning of income from the practice of law or from some other business carried on by the Appellant.

I would therefore maintain the disallowance by the Minister of National Revenue of the expenses relating to the civil action instituted against the Appellant and his law firm by some of the investors involved in the restaurant ventures.

It remains for me to consider the assessments of penalties levied by the Minister of National Revenue pursuant to subsection 163(2) of the Act. The question is: Did the Appellant knowingly, or in circumstances amounting to gross negligence in filing his tax returns for the 1988, 1989 and 1990 taxation years, make those claims of deduction against his professional income?

As set out in subsection 163(3) of the Act, the burden of proof is on the Minister of National Revenue. It has been determined by the case law that the type of conduct that is contemplated by subsection 163(2) of the Act is one characterized by a high degree of negligence that borders on recklessness.

It is true that the Appellant experienced a very difficult period, particularly in the year 1992. In effect, he was the accused in criminal litigation, his father passed away in January 1992 and in October 1992, his wife was diagnosed with multiple sclerosis. Having regard to all circumstances, I have concluded that the evidence established that the Appellant was at least in respect of the three matters mentioned in the immediately following paragraph grossly negligent in claiming the deductions in his returns of income for the years in question. Among other things, the paucity and disarray of his financial records were obvious. Also, the Appellant did not show the sense of a responsibility that would normally be expected of a responsible citizen. He showed an obvious lack of cooperation, even in the course of the pre-hearing proceedings involved in the present litigation. For example, he had to be served with a demand for particulars. Generally speaking, the Appellant demonstrated at the relevant times a consistent disregard for the attributes of our self-assessing system. I agree with Counsel for the Respondent that the Appellant exhibited a consistent disinclination to provide details about the expenses, the deduction of which he claimed during the three years in issue.

On the evidence, I am satisfied that the onus imposed on the Minister of National Revenue in connection with the assessments of penalties has been discharged in relation to the following matters:

(a) the deductions of the travelling expenses where I have maintained the disallowance of such expenses;

(b) the deduction in respect of the bad debt in the amount of $12,364.97 pertaining to the guarantee provided to a bank for the benefit of Mr. Robert Wenman;

(c) the deduction of the amounts of $60,000.00 and $12,700.00 from his income for the 1989 and 1990 taxation years respectively in respect of the cheques made out by the Appellant to his father.

With respect to these three subject matters, I am satisfied that the Appellant was guilty of gross negligence in claiming these deductions. I find that the Appellant was fully aware that he was not entitled to these deductions.

With respect to the other items of deductions, which are not allowed in these Reasons, I have come to the conclusion that a reasonably well-informed person but who is not specialized in income tax law, as is the case of the Appellant, might have honestly believed that he might have been entitled to those deductions. I therefore vacate the assessments of penalties in relation to all matters, except in the three areas I have already mentioned.

To sum up, the appeals from income tax assessments are allowed as hereinafter indicated:

(1) The Appellant is entitled to the deduction of the interest expense in relation to the rental property in the amounts of $22,562.48, $17,118.16 and $5,500.00 for the years 1988, 1989 and 1990 respectively;

(2) The Appellant is entitled to the deduction of the expense relating to the subject matter described as “accommodations” to the extent that this expense exceeds $4,949.00. The disallowance of the latter amount is maintained. The penalty in relation to this item “accommodations” is vacated in its entirety. The matters mentioned in the present paragraph were the subject matter of an agreement between the parties, as I have mentioned earlier;

(3) The Appellant is entitled to the deduction of travelling expenses in the amount of $1,120.00 for the 1989 taxation year and in the amount of $679.68 for the 1990 taxation year. These latter amounts must be deducted in the years indicated from the amounts in issue in

connection with the subject matter which were: $3,352.00 for 1988; $5,744.00 for 1989 and $7,322.00 for 1990;

(4) The Appellant is entitled to the deduction of the fees paid to Mr. Jaffe in the amount of $35,200.00 for 1989, and $2,700.00 for 1990:

(5) The Appellant is entitled to the deduction of the amount of $55.38 for 1989 paid to the law firm Barrigar Oyen;

(6) The assessments of penalties are vacated in relation to all items of deductions except the following three:

(a) the travelling expenses where I have maintained the disallowance;

(b) the amount of $12,500.00 paid in 1989 for the benefit of Mr. Robert Wenman; and

(c) the amounts of $60,000.00 and $12,700.00 that the Appellant has deducted in 1989 and 1990 as alleged payments to his father.

In all other respects, the assessments are confirmed.

Since the Respondent was successful to a greater extent than the Appellant, and having regard to all circumstances of the case, including the delay occasioned by the Appellant’s request to amend his Notice of Appeal, costs are awarded to the Respondent.

Appeal allowed in part.