Donald M Ross v. Minister of National Revenue, [1984] CTC 2748

Goetz, TCJ [ORALLY]:—This is an appeal with respect to the appellant’s 1975 taxation year. It was pointed out by the appellant that the issues to be determined are the capital cost allowance claims with respect to two films, “Flight of the Swan’’ and “Entre La Mer et 1’Eau Douce”. The other issue was whether he had trading gains or losses and whether it was capital or whether it was income.

The appellant is an investment dealer or broker and, with respect to the film issue, he has agreed that the allegations in paragraph 4(b), (c), and (d) of the reply to notice of appeal are correct. For the record, I will read them:

4. . . .

(b) the Appellant, in 1969, purchased a 40% undivided interest in a motion picture film known as “Entre La Mer et 1’Eau Douce’’ for $84,000.00 with a downpayment of $14,000.00 and the balance payable from the proceeds from distribution;

(c) the Appellant claimed and was allowed capital cost allowance on the amount of $84,000.00 as follows: 1969, $50,400.00; 1970, $20,160.00.

(d) the Appellant was therefore allowed capital cost allowance in an amount greater than that to which he was entitled since his capital cost of his interest in the motion picture film was no greater than $14,000.00.

Dealing with the film “Entre la Mer et 1’Eau Douce”, the case of Lawrence H Mandel v The Queen, [1976] CTC 545; 76 DTC 6316, a decision of the Federal Court, Trial Division, on more or less similar facts as it relates to the “Entre La Mer” film where the appellant’s appeal was dismissed. Just from the headnote I quote:

Therefore, capital cost allowance for the 1971 taxation year was only calculable on the sum of $150,000, the amount actually paid in that year. The balance of $427,892 constituted a contingent liability and therefore, could not be included in the computation for the 1971 taxation year.

The appellant candidly admitted on advice that the Mandel case applied to paragraphs 4(b), (c) and (d) and, as a result of the Mandel case, he has agreed to those allegations.

Paragraphs 6 and 7 of the reply read:

6. The Respondent submits that he properly disallowed a deduction on account of capital cost allowance with respect to the motion picture film “Flight of the Swan’’ for the Appellant’s 1975 taxation year since the Appellant did not own the film and therefore did not have a capital cost with respect to that film.

7. The Respondent submits that he properly disallowed capital cost allowance with respect to the motion picture film “Entre La Mer Et L’Eau Douce’’ for the Appellant’s 1975 taxation year since the Appellant had been allowed capital cost allowance equal to his full capital cost in prior years.

That brings us to the “Flight of the Swan’’. The appellant was in the unfortunate position of having to prove certain facts relating to the situation that occurred several years ago. He filed a number of letters, documents, face value cheques paid to or on behalf of Banting, a friend of his, and there is no proof of negotiation of these cheques that was shown to me. There was a self-serving letter from Banting dated December 17, 1976 (after the event of the assessment), and Banting says that the appellant owns the film. I do not see any reason for that. There was an oral agreement apparently, according to the appellant, between himself and Banting, that he purchased the “Flight of the Swan” for $45,000 to be paid in instalments. He has indicated he made certain instalment payments, but we do not have proof as to the total amount paid. As I say, it is regrettable that this matter is so old.

As hard as the appellant tried, I feel that he fell short of the burden upon him to prove that he owned the film. There was no agreement in writing for the purchase thereof, that is the “Flight of the Swan”. The only record of any income from that film was a letter from the distributor whereby he received $2,450, I believe. Otherwise, there is no record. I find that the evidence falls short of proof of ownership. He did not own the film and the allegations of the Crown in the reply in paragraph 6 stand.

At the beginning of the hearing, Mr Malette asked and was granted an amendment to his reply. Paragraph 4(e) was added which reads:

That in so far as the profit derived from shares and other securities traded in the Appellant’s personal trading account, the profit or loss derived therefrom is income or loss from an adventure or concern in the nature of trade.

This amendment came about as a result of conversations flowing between the appellant and Mr Malette whereby his claim for capital loss from securities of $10,207.71 was disallowed, and as a capital loss it was changed to a trading loss or an income loss. The appellant says that the Department, up to 1974, treated his purchases and sales in his own name of securities as a capital gain or a capital loss. The appellant says, as substantiated by the tax form T7WC attached to his notice of appeal, that he reported it as a capital loss but it was changed to a business loss, thereby giving him a benefit in 1975. He described himself as a trader in securities, broker in securities. At the relevant time I think he was either a partner or employed by St Lawrence Securities. He says his purpose of purchasing securities in his own name as principal was in the hope of obtaining agency business. He said it was a small business that they ran and this was his method of getting business. He said purchasing securities as principal were listed in the firm’s trading account and the profits and losses “go with me”, [sic] Then he mentioned that there was a percentage that went to the firm and he could not remember the percentage. He said that the purchase in his own name as principal of securities was for his own use and that he bought the shares in his own name for gain or loss. As a sales agent, he merely got a commission. He could make more money dealing with the securities as a principal owner. He could gain more or he could lose more.

The dilemma facing me is that being a trader in securities, the great difficulty he had was, which he did not prove, separating securities purchased as principal for business purposes as opposed to purchase of securities for his own beneficial interest and no one else. It would be impossible for anyone looking at the securities to differentiate between business use and for his own personal beneficial use. There is no evidence to help me in that area.

As counsel for the Crown has ably pointed out, dealing with this security problem as it stands, the taxable income for the appellant for the 1975 taxation year was $2,769.52. If the appellant were to win this appeal it would increase to approximately $12,000 his revised taxable net income. It could have been used in subsequent years. Those years are now statute-barred.

The appellant was a trader in securities trading in shares, to use his own words, and he has been very forthright in the box. I do not say I disbelieve him in any sense of the word, but he needed more backup proof: one, of ownership of the “Flight of the Swan”; and two, his dealing in securities was most fuzzy.

Coming back to the increase in net income, I cite the case of The Queen v John Zands tra, [1974] CTC 503; 74 DTC 6416, I quote from the judgment of Mr Justice Heald when he was a member of the Federal Court, Trial Division, at 509 and 6420 respectively, whereby the appeal was dealing with gifts per year, to children attending school. The figure was somewhat over $200.

Justice Heald said:

The figure of $200.00 per child used by the Department was an arbitrary figure in the sense that it is lower than the actual cost per child established by the evidence.

Then he goes on to say:

Thus, the arbitrary figure of $200.00 selected by the Minister is on the low side. This is not the case however where the assessments should be referred back to the Minister since that course of action would result in an increase in the assessments. This would have the effect of allowing an appeal by the Minister from his own assessment. On a taxpayer’s appeal to the Court, the matter for determination is basically whether the assessment is too high.

Justice Heald refers to a number of cases in support of his position. For the foregoing reasons, I therefore dismiss the appeal.

Appeal dismissed.