Kenneth L Easton v. Minister of National Revenue, [1978] CTC 2416, [1978] DTC 1347

A W Prociuk (orally: November 14, 1977):—The appellant, Dr Kenneth L Easton, formerly of Mississauga, Ontario, appeals from the respondent’s reassessment for the taxation years 1971, 1972 and 1973, wherein the respondent made certain adjustments and additions to the appellant’s income, and disallowed certain deductions in respect of the taxation years 1971 and 1972. In respect of the taxation year 1973, because the appellant had not included in his return his professional income at the time, and the evidence does not satisfy me it was included at anytime, there was a penalty levied in respect of that year in the sum of $2,473.48 under the Income Tax Act, SC 1970-71-72, c 63, as amended, and $784.89 under the Province of Ontario Income Tax Act.

The history of this situation is certainly not a happy one and the appellant has suffered considerably during the material time. While one does, in listening to the evidence, sympathize with him, one is almost constrained to remark that the appellant was the author of his own misfortune.

The appellant is a graduate veterinarian and has practised his profession in Mississauga from 1959 to 1971, when he felt he needed a junior partner. At that time he entered into a partnership agreement commencing on May 1, 1971 with a Dr J R McCleary who had just graduated from the College of Veterinary Medicine. This is where the problem began. The partnership commenced on a 60:40 ratio and the appellant’s partner suggested certain changes in the operation of the clinic, to which the appellant agreed, but all this led to considerable difficulty at a later stage.

In 1971, when the appellant entered into the partnership agreement, he rented the building he owned, and in which the practice was carried on, to the partnership and deducted the expenses incurred and connected with the building against his income. One item was the sum of $1,108.73 which represents the amount of interest paid on the money borrowed to pay for the mortgage on the building. After the audit was completed by the auditors of the Department of National Revenue, the respondent allowed a deduction of only $752.27, as having been the amount that was proved to have been paid. The difference, being $356.46, did not appear to have been paid in 1971 notwithstanding the fact that the cheques appear to have been written in that year. The cheques were not negotiated until 1972. There is some evidence to indicate that this amount was allowed in 1972 as a deduction.

There was also an initial claim in respect of capital cost allowance in the sum of $933.33, which the appellant has withdrawn at this hearing. So, as far as the year 1971 is concerned, I hold that the appeal be dismissed.

In the taxation year 1972 there were further difficulties with the partnership. The partnership decided to do its own janitorial services to the building. Also, both partners were called, on occasion, to work after hours as the emergencies arose. In the first instance there was the sum of $420 paid to the partners for services to the building such as Cleaning, keeping books of account and so on, of which the appellant was allocated $252 by the auditors and that amount was added to his income. At the trial today, after listening to the evidence, counsel for the respondent agrees that this amount should be reduced by $52 as the appellant only received $200 of the $420, the remaining $220 having been paid to his partner, McCleary. Another sum totalling $854.42, being emergency fees collected by the partners requires adjustment. When the auditors went through this account they allocated 60% of this sum to the appellant, which totalled $512.65. The appellant stated he received no more than ten per cent of this amount as McCleary did most of the after-hours work and he got paid for it. Counsel for the respondent, agreeing to that position, it would appear that it is fair and proper the appellant be taxed on $85.50 only, and the remainder should be assessed to his former partner, McCleary. Accordingly, this item is reduced by $427.15.

The appellant, also claimed a deduction of $680 which was the amount of bank interest paid on a loan which he had negotiated for the purpose of purchasing a Chevrolet station wagon for business use. This amount was disallowed by the respondent. During the course of the hearing of this appeal it became apparent that this vehicle was, in fact, used by the appellant for business purposes, the appellant agreeing that at most 25% of the time that vehicle was for personal use. Accordingly, the sum of $510 is allowed as a further deduction for the taxation year 1972.

In other words, the total amount by which thé appellant’s income should be reduced for the taxation year 1972 is, if my arithmetic is correct, $989.15.

The appellant brought forward another figure in the sum of $8,439.39, which he claims to have paid in the year 1972 as business debts incurred prior to the date of commencement of the partnership and paid in the taxation year 1972 because the other partner, Dr McCleary refused to have anything to do with the accounts that were incurred prior to the commencement of the partnership. According to the appellant he did pay the sum of $8,439.39 in the taxation year 1972, but when questioned by counsel for the respondent as to how this amount was made up, he was unable to produce any documentary evidence whatsoever to substantiate his claim. I say it is unfortunate for the appellant because the matter having been raised, it is incumbent on him to come forward with satisfactory proof that this, in fact, was a business account that was paid in that year. If so, it ought to have been allowed. There being no evidence on this point at all, the Board has no alternative but to disallow that portion of the claim.

Accordingly, for the taxation year 1972, the appeal is allowed in part and the matter referred back to the respondent on the basis that the appellant’s income be reduced by the sum of $989.15.

In so far as the taxation year 1973 is concerned the situation is even more complicated. By January of 1973 the appellant had realized that he could not possibly get along with his junior partner any longer. By this time his partner had, according to the evidence of the appellant, taken all accounts into his own hands and obtained the services of his own accountant and lawyer to a point where the appellant, being totally dismayed and frustrated, sought employment elsewhere at the end of January 1973. He left his veterinary practice in the hands of Dr McCleary. I presume there was some understanding that the accounts would be taken and settlement made in due course but no evidence was adduced in this direction.

The appellant states that he had considerable difficulty in obtaining settlement. In fact, he was afraid this might severely impair his health at that time. However, be that as it may, the fact does remain that there was at least $3,188.69 of cash receipts allocated to the appellant which he did not report in his 1973 return.

The 1973 return did not get filed until some time in April 1974. By this. time the appellant had been working for the Ontario Humane society on a salary basis, and in 1974 he accepted a position with the Health of Animals Division of the federal Department of Agriculture and is presently stationed in Ottawa as National Supervisor. Therefore I have to view this difficult portion of the appeal in the light of what transpired, not in 1973, but at the time the appellant filed his return in 1974.

He had a little over a year within which to bring his professional accounts into some form of order. It appears that the figure which I mentioned represents cash receipts obtained from another office, in another town where the partnership operated a clinic. It also includes the appellant’s share of accounts receivable from that office for the taxation year 1973. A further, even more serious item; is the sum of $25,757.10 which was the appellant’s share of the partnership income from the Mississauga office which the partnership financial statements disclosed on or about April 19, 1974, when Dr McCleary filed his return and included said financial statements. The appellant says he filed his 1973 return in the middle of April 1974, a few days before he obtained the financial statement in respect of the operation of the partnership business.

He states that he orally advised the auditors of the Department of National Revenue that his professional income be added to the 1973 return, but it appears, and I am going by the evidence II have heard, that he did nothing more or nothing further in that regard. He did not write to the Department. He did not file an amended or revised return after having received the financial statements. He had, at least, eleven clear days in which to do that. In fact, there is no evidence that this additional income was formally declared and filed by the appellant at any time.

His 1973 return only included the income from his employment as he was at that time employed by the Ontario Humane Society on a salary basis. There was no mention of his partnership income, which as I said before, totalled $29,000 more or less and which ought to have been reported. The obligation was on the appellant to do so.

While I entertain a certain amount of sympathy for the appellant because of the quandaries he found himself in, I don’t think that I would be justified, in the light of the evidence and particularly in the light of the fact that he had been away from the partnership for over a year and failed to do anything about reporting his professional income, in disturbing the assessment in respect of the penalties for the taxation year 1973. In conclusion, therefore, the appeal in respect of the taxation year 1973 is dismissed.

Taking the whole matter together the appellant has succeeded in part in respect of the 1972 taxation year wherein there will be judgment directing the respondent to reduce his income for that year in the amount that I indicated, $989.15; in all other respects the appeal is dismissed.

Appeal allowed in part.