Barry Beech v. Minister of National Revenue, [1976] CTC 2175, 76 DTC 1134

Roland St-Onge:—The hearing of this appeal started at London, Ontario on June 18, 1975 and was continued on March 4, 1976 at Toronto, Ontario. The hearing was held in camera at the request of the appellant’s counsel.

This appeal was the result of a net worth assessment for the 1968, 1969 and 1970 taxation years. At the beginning of the second hearing, counsel agreed on certain amounts as follows:

Counsel for the respondent conceded that, with respect to the assessment for the 1969 taxation year, the amount of $517.14 included, in computing the appellant’s income, as “income from snowmobiles” should not have been so included; and, with respect to the 1970 taxation year, the respondent also conceded that the loss disallowed in the computation of the appellant’s income (loss from snowmobiles) in the amount of $1,103.66 should not have been so disallowed.

On behalf of his client, counsel for the appellant admitted, with respect to the 1968 reassessment, that $6,560.05 should have been added to taxable income and that, with respect to the 1969 taxation year, two other items, namely, $11,684.22 and $18,777.10, should have been included as income.

As to the 1970 taxation year, the appellant’s counsel also conceded that $6,000, which represents the value of the estimated material content for erecting a concrete block building, and $1,665.21, which represents unreported additional sales and revenue from the rental of a bulldozer and several trucks to Brandford Builders Supplies Limited, should also be included as income.

Agreement as to all these figures has been confirmed by individual letters written by the respective lawyers for the parties, and received by the Board on April 5, 1976.

At the second hearing, four issues were raised:

(1) whether a deduction of $92,000 in respect of bad debts could be allowed on the grounds that the appellant was in the money- lending business;

(2) whether the sale of certain equipment for $42,000 had realized a non-taxable capital gain of $11,000;

(3) whether a sum of $4,800 paid by a company to the appellant could be deducted by the latter as travel expenses;

(4) whether the appellant should be assessed any penalties.

The appellant, a carpenter, has a Grade XII education. He explained that, in 1968-69, he made a substantial gain on one transaction but was not as successful in other transactions in subsequent years. As to his unreported income, he admitted signing, without examining, the returns that his accountant had prepared.

On May 25, 1962 the appellant made a mortgage loan to Mr Harry Thomas Barnes of London, Ontario in the sum of $3,470 at a rate of 7% interest.

On July 7, 1970 he also loaned on mortgage to Mr James Wonnacott of London, Ontario a sum of $4,000 at an interest rate of 12% and another sum of $3,000 at 19%. Apparently he lent another sum of $17,000 at 12% interest to an unnamed person, which was repaid in 1971.

Three other loans were also made by Mr Beech: one at $3,000 to a Mr Cardinal on a chattel mortgage at 19%; another of $12,000 in 1969 to a Mr Vanboun, guaranteed by a second mortgage on a farm: and, finally, a loan of $20,000 on a promissory note to his father of which the latter allegedly received only $2,000.

A solicitor’s letter dated May 15, 1968 was filed to show that a Mr Hill owed the appellant some money but the latter could not remember the amount.

Then the appellant explained that, in 1968-69, he purchased shares in a company known as Brandford and, after a period of nine months of hard work, the company was able to sell its assets at a substantial profit of about $300,000. The appellant testified that for nine months he worked about 19 hours a day and made several plane trips, but there were no vouchers to substantiate these trips.

Encouraged by this success, the appellant entered into various other transactions. Around 1969 he purchased some equipment in the United States for the sum of $31,000 and entered into an agreement with a municipality to excavate and install cement pipes. He could not finish the contract and, consequently, was not completely paid. Because this kind of equipment was unique in the world, he sold it to a Mr Clarke for the sum of $42,000, realizing thereby a gain of $11,000.

The appellant also purchased some shares in a company, known as Turneff International Development Company, which was supposed to be in the land development business. In mid-1970 he went to Freeport to meet with Messrs John Lett, Raymond S Tower, Ernesto Kaiser and William C Rose, all shareholders of the above-mentioned company. During this meeting they told him that, if he loaned money for this project, he would be able to purchase shares in the said company, which was allegedly negotating with the Government of British Honduras for the acquisition of Turneff Island for some $1,100,000.

Following this meeting, the appellant decided to lend a sum of $90,000 to Mr Lett (Exhibit A-22). (In order to prove this loan, the appellant filed documents to the effect that this money was paid to the Bank of Montreal on October 8, 1970.) This project did not materialize and, in 1970, the appellant lost this $90,000 plus the interest he had to pay to the bank. He could not say why this loss of $92,000 was not mentioned in his 1970 return.

During the same period, the appellant made several attempts to engage in other kinds of businesses. First, he tried to purchase a company by the name of Triad Steel Mfg Corp Ltd, a company incorporated to manufacture lightweight concrete in London, Ontario. He also purchased six cranes for the construction of high buildings and, in 1971, he negotiated a postal service deal and was to deliver mail between Kitchener and Winnipeg. All these ventures failed.

Counsel for the appellant argued that the whole amount of $11,000 made on the sale of the US equipment was a capital gain because it is in evidence that the purchaser of the equipment, Mr Clarke, "would have had substantial liabilities exceeding the holdbacks in order to complete these contracts”. He also points out that the assessor did not even take the trouble to ask United Dominion Finance Corp Ltd about the value of the equipment sold by the appellant when the evidence shows that United Dominion lent $30,000 to Mr Clarke to purchase the said material. The logical assumption is that the finance company must have put a value of at least $20,000 on the said equipment.

As to the amount of $4,800 claimed as travelling expenses, he stated that Mr Beech had received that money as travelling expenses and it was registered as such in the books of Brandford Builders Supplies Limited.

Counsel for the appellant also argued thai the appellant was in the money-lending business, and he referred the Board to the decision of Justice Walsh in The Queen v Pollock Sokoloff Holdings Corp, [1974] CTC 391; 74 DTC 6321, where he decided that a taxpayer can be in the money-lending business even if this phase represents only 1% of his total business. Counsel alternatively argued that the appellant also became a trader in shares or assets, and that he should therefore be allowed to deduct the sum of $92,000 as a business loss.

As to the penalties, he said that none should be assessed, since the appellant never had any intention to deceive the Minister. He therefore referred the Board to subsection 56(2) and paragraph 139(1)(ba) of the Income Tax Act to support his contention that the assessment of penalties was premature according to the definition of “tax payable” which is the amount fixed by an assessment or a reassessment, subject to variation on objection or appeal.

Counsel for the respondent argued that the appellant should be assessed penalties because of the substantial amount of unreported income (some $30,000) over a period of three years; that the appellant was assessed under subsection 56(2) which deals only with gross negligence and, therefore, it is not necessary to prove intention to defraud; that the appellant admitted that his records were “sloppy” and later tried to shift the blame to his accountants. Finally, counsel for the respondent submitted that the omission of such large amounts of income constitutes gross negligence.

As to the question of the $11,000 gain, he argued that there was $6,000 worth of holdbacks due to Mr Beech, and that this amount could be regarded as part consideration for the disposition of the equipment in accordance with paragraph 20(6)(g) of the Income Tax Act. He stated that the onus of investigating the value of the equipment rested with the appellant.

With regard to the travelling expenses, he submitted that they were paid in equal amounts of $575 and deducted in the books of the appellant’s company. In such a case, these allowances would normally be included in the appellant’s income, but there is no evidence to this effect and, furthermore, no vouchers to prove these travelling expenses. As to the verbal evidence adduced that this was to cover the cost of travelling from the appellant’s home to his place of business, none of the travelling expenses are deductible.

Concerning the loss of $92,000, counsel for the respondent contended that it was incurred not in 1970 but some time later because, according to Exhibit A-22, the appellant obtained the money from the bank three months before the end of 1970 and lent it to Mr Lett on the same day at 12%, repayable on October 1, 1971. Consequently, if there was any loss, it could not have been incurred in 1970. He further stated that, in his opinion, the appellant was not in the money-lending business.

As previously mentioned, the Board has four issues to decide. As to the $92,000, there is sufficient evidence to prove that, if there was any business loss, it could not, by the terms of the documents filed, have been incurred in 1970 and, therefore, this loss is not allowed.

As to the $4,800 travelling expenses, there are no vouchers to prove their nature, and the evidence adduced shows that they were paid and deducted by the appellant’s company, and could even have been incurred for travelling between the appellant’s residence and office, in which case they were non-deductible personal travelling expenses.

As to the penalties, the moment a taxpayer files a return, he has in fact assessed himself, and the Minister can assess penalties If the appellant has shown gross negligence in failing to submit to his accountant all the information necessary to complete an accurate return. In the present appeal, the appellant has admitted that his records were actually “sloppy”. In addition to this admission, the evidence shows that the amounts omitted were numerous and substantial when compared to the income actually declared.

Concerning the $11,000 gain, it is very likely that the value of the equipment sold was at least $30,000, representing the amount of money that was loaned by the finance company to allow Mr Clarke to ourchase the equipment. The allegation by the Minister to the effect that the sale price of $42,000 could have included the sale of the holdbacks is, in the Board’s view, highly speculative. It follows that the full amount of $11,000 is considered a non-taxable capital gain.

For the above reasons, the appeal is allowed in part and the matter referred back to the Minister for reconsideration and reassessment, in accordance with the admissions made by counsel for the parties at the second hearing and also according to the Board’s decisions regarding the contested issues.

Appeal allowed in part.