Brad and Luisa Stevenson v. Her Majesty the Queen, [1997] 1 CTC 2236 (Informal Procedure)

Margeson J.T.C.C.: — It was agreed at the commencement of the trial that the evidence given in one would be considered in the other, where applicable. These appeals were heard on common evidence.

Facts:

The Appellants, during the 1991, 1992 and 1993 taxation years, claimed to be 50% owners of racehorses. In their calculation of income for those years they sought to deduct restricted farm losses of $5,230.67; $7,307.77 and $7,631.59 respectively.

The Minister reassessed the Appellants, notice of such reassessments having been dated May 18, 1995, in which the Minister disallowed the deductions as restricted farm losses and imposed penalties pursuant to subsection 163(2) of the Income Tax Act, (the Act).

From these reassessments the Appellants filed Notices of Appeal.

Counsel for the Respondent agreed that the reassessment for the year 1991 would be statute barred unless it is saved by the provisions of subsection 152(4) of the Act.

Evidence

Brad Stevenson testified that one Marcel Bouvier was their trainer and that the Appellant’s sister, Erin Stevenson, took a special interest in the horses which belonged to the Appellants. The final decisions with respect to where the horses raced were made by the Appellant, Brad Stevenson.

In the years under appeal all business matters were conducted through Ferme Heritage Inc. and/or Marcel Bouvier and Erin Stevenson. Mr. Bouvier sold horses to the Appellants, trained them, boarded them, cared for them and sometimes disposed of them.

When the taxation problem surfaced in 1994, Brad Stevenson tried to contact Marcel Bouvier and was unable to do so until later on when he returned to Canada. In 1995, relationships improved, Mr. Brad Stevenson said that he was able to obtain records relating to his horse business and Mr. Bouvier contacted Revenue Canada by telephone and wrote to them.

It was Mr. Brad Stevenson’s position that the attitude of Revenue Canada changed after the objection was filed to the reassessments and only then did the officers indicate that it was the Appellants’ duty to provide the proof of the expenses. He said that himself and the other Appellant, Luisa Stevenson did everything in their power to provide the necessary information to Revenue Canada and that they did not do anything wrong.

He admitted that there was no “paper trail” supporting the claim for the expenses. The Appellants were not concerned because they were dealing with “family”. Mr. Bouvier and Erin Stevenson were involved in racing horses in various jurisdictions and did not keep records according to this witness.

He said that it was not uncommon for the horses to be raced under names other than those of the real owners. Often times they are raced under the name of the trainer. He said that in some cases his horses raced under the Appellants’ names and sometimes under the name of their trainer. The general explanation was that in many jurisdictions there was a residency requirement and if the horse was not raced under the name of a resident, their horses would be shut out from some valuable “purses”.

He said that the purses were taken in the names of Ferme Heritage Inc. or the trainer and the proceeds were deposited to their account and used to pay expenses of the Appellants’ horses. He said that the Appellants suffered financial difficulties with the business in 1991, 1992 and 1993 and the “purses” were necessary to pay the expenses.

He testified that he did not show any income from the horses in 1991 and 1992 because he believed that unless the “purse” money actually came into his own hands, he need not account for it. He also said that the expenses claimed were really “approximations” compiled by Marcel Bouvier and Erin Stevenson.

He admitted that one of their horses, Alaskan Peter, was sold by Mr. Bouvier without their permission for $500. He said that he paid $6,000 for this horse.

This witness introduced a series of exhibits, by consent, to show the existence of Ferme Heritage Inc. and the existence of the Appellants’ horses, which he believed was questioned by the officers from Revenue Canada. He also consented to the introduction of Exhibit R-2 for the same purpose.

In cross-examination he admitted that he did not own a farm property. He identified the income tax returns for the years in question. He said that the business operated on a “cash basis”. He became aware of the term “restricted farm losses” in 1987.

He said that he completed the income tax return for 1990. He bought “Strike the Bell” in 1990 but the horse did not race that year. There were no purse earnings in 1990. Some of the expenses claimed in 1990 may have been paid subsequently.

He could not say exactly where the money came from to buy the horse in 1990 but he believed it may have been borrowed from the Royal Bank. He did not know that he might claim interest on borrowed money as a business expense.

He obtained no receipts from Marcel Bouvier and Erin Stevenson for the expenditures and he had no cancelled cheques to support such payments.

In 1991 he claimed no interest expense. He had no receipts to support the expenses claimed for that year. He said that the horse “Strike the Bell” could have made $5,000 in 1991 but there was no income reported and the return indicated that this horse was not of racing age. He admitted that this statement was not correct and he had no explanation why he claimed all the expenses but might not have claimed the income.

In 1992, the Appellants owned “Break Every Rule”. It apparently earned income between $5,000 to $8,000 but this was not declared. It was also referred to as a “yearling” but this was also a mistake. There were no receipts for the expenses but 100% of the expenses were claimed.

Mr. Brad Stevenson admitted that the horse could have been sold in September, October or November but yet he claimed board and training for 12 months. This was a mistake according to Mr. Stevenson.

In 1993, income was claimed of $720 from “race purses”. He admitted that Alaskan Peter was bought before Labour Day in 1993 but the statement of income and expenses showed a claim for board and training for 12 months. He had no receipts to verify the expenditures. He had no documents to show that he had received $720 in income but he said that he received it and that is why he showed it as income in that year. He said that he never saw the horses in person.

His position was that he believed that he had shown proof of purchase of the horses. He did not prepare a financial analysis for the years in issue. He did not want to own more than one horse at a time. He did not question the expenses because his sister was involved.

He admitted that he did not spend much of his time with these horses. He trusted his sister and Marcel Bouvier with respect to whether or not he would purchase a horse, the training of the horse, where it raced, although he had input into the decision as to where the horse would race.

He accepted the calculations as shown in the Reply to Notice of Appeal and shown in Exhibit R-l at Tab 1. He admitted that there were never any specific expenses listed but Mr. Bouvier and his sister provided estimates based upon what other trainers were charging.

All of the expenses shown at Tab 26 of Exhibit R-l and any documents relevant thereto were made up - “after the fact” and, “back dated”. Further, specific indications in the invoices and letters referrable to these invoices, that payment had been received “by cheque” or “bank draft” or that payment was received “promptly” were non factual.

This witness said that Ferme Heritage Inc. closed down in 1993 and the documents that were produced to show a “history of the horses” were not created until 1994 and more specifically between April 26, 1994 and June 13, 1994.

He said that when he gave the information to Mr. Redden of Revenue Canada, that he had received from Erin Stevenson, his intention was not to mislead him. He did not tell him that the receipts were legitimate. He gave blank cheques to his sister for the purpose of meeting the expenses for his horses but these cheques were never used.

Stewart Boschman had trained horses for the Appellants and knew them for several years. He always found the Appellant Brad Stevenson to be honest in his dealings with him. He also kept records of his business dealings with him.

In cross-examination he said that he had no dealings with the Appellants until 1994.

Gaston Tremblay met the Appellants in 1987 in Washington, United States of America at Remick Farms. At that time, the Appellants’ owned “It’s a Boy” and they raced him in Montreal, New York, California, Calgary and in British Columbia in 1987. This witness was working for Marcel Bouvier at the time. Later they moved the operation to Ferme Heritage Inc. in Quebec.

He said that the Appellants owned race horses with Marcel Bouvier. There were about 400 horses at Remick Farms and almost 250 in Quebec. Most of them raced in Marcel or Erin’s name because they raced in so many different places. He said that it was common for the purse to come to Marcel and for him to take out the expenses.

Maureen Stevenson had owned a horse with Brad Stevenson. She said that the general reputation of Brad Stevenson in the community was good and that he was experienced in the horse racing business and promoted it to the public.

Marcel Bouvier started dealing with the Appellant Brad Stevenson in Washington in the late 19803. He was the common-law spouse of Brad Stevenson’s sister Erin. He confirmed that the Appellants purchased “It’s a Boy” from him in 1987 for $5,000 to $7,000. Their basic agreement was that Mr. Bouvier would train the horses, collect the purses, and if there was a shortfall he would ask for payment. The horses were raced under his name. This was very common. In Quebec some races can only be entered if the owner is a resident.

He recommended that the Appellants buy “Strike the Bell” in 1990. She was raced in 1991 by him on behalf of the Appellants. He did not earn his full training bill. He was claimed by Mr. Bouvier in view of payment.

In 1992, “Break Every Rule” did not live up to his expectations and he was taken to offset the account owing for his training and board. It was between $5,000 to $7,000. He sold the Appellants horse “Alaskan Peter” in 1993. He raced twice and then became sick and was sold. He used the purse cheques to offset expenses.

In cross-examination he admitted that when he wrote a letter on August 20, 1995 on the letterhead of Ferme Heritage Inc. that it no longer existed. He used the letterhead merely to show that the horses in question had been purchased there.

In 1990 there were about 150 to 175 horses at Ferme Heritage Inc. and ten employees. During 1990, 1991 and 1992 he was in a common-law relationship with Brad Stevenson’s sister.

The Appellants paid by cashier’s cheques or money orders but he had no receipts to substantiate those facts. He did not know where the records were at the time of the trial but he said they existed. “Strike the Bell” was claimed by him and was sold for $2,500 to $3,000 in 1991 or 1992.

He said that “Break Every Rule” was purchased in 1992 for $5,000 to $7,000. He may have received payment by money order or cheque. He sold “Alaskan Peter” for $500 without even seeking permission of Mr. Stevenson.

He admitted that no invoices or bills were sent out for the expenses as they occurred. He had no receipts for any of the expenses. He was a shareholder in Ferme Heritage Incorporated.

In response to the Court’s questions, he said that he did not know what amounts were expended on specific items, what specifically was owing at any time nor the state of the account. He did not provide the Appellants with a dollars and cents statement of account.

David Stevenson was the father of the Appellant Brad Stevenson. He was aware of the fact that his son had an interest during the relevant years in “It’s a Boy”, “Break Every Rule” and “Alaskan Peter”. He also shared ownership of a horse with the Appellant in 1994 and 1995 by the name of “Shy Dixie”. He took some pictures of the horses and identified pictures of “Alaskan Peter” and “Break Every Rule”.

Erin Stevenson was the sister of Brad Stevenson and had been the common-law wife of Marcel Bouvier. She confirmed the purchase of “It’s a Boy” by Brad Stevenson in 1987 for $5,000 to $6,000. She said that Marcel Bouvier trained this horse as well as the other horses which are the subject matter of the expenses in issue here.

She confirmed the practice of registering a horse in the name of the trainer, described related problems with “It’s a Boy”, its transfer back to Marcel Bouvier, the move to Quebec to Ferme Heritage Inc. and said that Brad Stevenson had input into the management of the horses.

She said that they received a bank draft for the purchase of “Strike the Bell”. The horse raced in 1991 but not in 1990. She referred to health problems of the horse. She said that the purse cheques went to Marcel Bouvier who applied them against the expenses. He took ownership of “Strike the Bell” for expenses.

It was through her that the Appellants were encouraged to purchase “Alaskan Peter”. They discussed the type of races that he might enter and the possibilities of winning. Brad Stevenson gave her a draft for $5,000 to $6,000 for the purchase price and 12 blank cheques to be used to meet the expenses. The draft was payable to her. She cashed it and the proceeds were used to pay bills for Ferme Heritage Inc. She said that she took an “extra interest” in the horses owned by the Appellants.

In cross-examination she admitted that she was not the bookkeeper for Ferme Heritage Inc. and did not work there. She admitted that various invoices and letters included in Exhibit R-l were written, signed and prepared by her. The dates contained therein were not the dates on which they were written or prepared. The amounts referenced there were estimates based upon her memory, knowledge and the histories of the horses. The expenses were not necessarily factual but were based upon similar expenses made for other horses. She said: “I felt they (the expenses) were made and that is what they cost”. The information contained therein was not factual.

She said, “I thought that I was showing a history of the horses”. She admitted that for the years 1991, 1992 and 1993 she had no actual receipts for these expenses and did not know what the Appellants actually owed. The amounts referred to in the documents she produced for the Appellants were not taken from actual invoices.

She said that she received $4,560 in cash from Maureen Stevenson, that went to pay bills. This was the same amount referred to in Exhibit A-15. She gave no receipt for it but she said that perhaps Marcel Bouvier did.

She said that the Canada Trust requisition for $6,000, Exhibit A-13 was for the purchase of “Alaskan Peter”, made payable to her. This amount went to pay bills.

The Appellant Luisa Stevenson said that she was a 50% partner in the business in question and that she and Brad Stevenson owed the horses. She took no active part in the business.

She identified her income tax returns for the years in question which were prepared by Brad Stevenson.

She said that she never saw the receipts for the expenses but believed they were paid out of the joint account of herself and her husband. She kept no records.

She said that she did not even look at the returns and had no idea of what expenses were claimed or how they were calculated. She had no receipts for the expenditures and could not recall paying any bill.

At no time did she inquire as to whether the business was losing money but she declared the losses and claimed the refunds. She said, “I did not turn my mind to the receipts sent in by my husband but Brad must have sent whatever they required”.

The Respondent called Thomas Redden who was a special investigator for Revenue Canada. He investigated this matter and completed the audit. He communicated with the Appellants, talked to the Appellant Brad Stevenson on the telephone and met with both Appellants at their home. He wrote a routine letter to the Appellants on April 21, 1994 and asked them to provide all books and records, including all expense vouchers, cancelled cheques and related invoices which would add up to the claimed expenses as per the profit and loss schedules provided in the Appellants’ income tax returns under review.

He said that Mr. Brad Stevenson telephoned him subsequently and told him that he did not have the documents that were requested. He did not keep records and only kept registers for a few months. He did not know where the figures came from.

He was told by Mr. Stevenson that he had not claimed some income. Mr. Stevenson was told that the profit and loss forms would be sent back and that he should only claim those amounts that could be supported by documentation and that he should claim the income.

Subsequently, Mr. Redden received the documents set out in Tabs 25, 26, 27 and 28 in Exhibit R-l which were referrable to the expenses claimed in 1991, 1992 and 1993. He became suspicious about the documents because the handwriting was similar and the numerical sequence was odd. He interviewed both Appellants at their home. The Appellant Brad Stevenson became quite angry at one time because he concluded that Mr. Redden did not believe him. Mr. Stevenson told him that he had been given everything that he had at that time and that was good enough.

Mr. Redden told the Appellant Brad Stevenson that he had to have proof to support the documentation sent to him on June 13, 1994. Mr. Stevenson said that he believed that the documents had been prepared by someone at Ferme Heritage Inc. Mr. Stevenson was given a charter warning but he said that he did not need a lawyer.

Information was provided about the Appellants’ Royal Bank account at Vernon, British Columbia, the Bank of Commerce account and The Power Line account. Mr. Stevenson said that his involvement with horses was a disaster and that he was trying to sell off his house to pay the debts.

In cross-examination he admitted that on August 17 during the interview he was made aware of the fact that the invoices were “made up”. At no time had he done or said anything that could conceivably lead the Appellants to believe that anything except actual documentation would suffice. He admitted that he spoke to the Appellants’ lawyer and Marcel Bouvier and he might have told the Appellants that he would try to find Mr. Bouvier.

In re-direct he said that he never saw any cheque registers, there was no Ferme Heritage Inc. at the address given in the invoices and that the purpose for the meeting with the Appellants was to discuss their returns for the 1991, 1992 and 1993 taxation years.

In response to a further question by the Appellants he said that he did not see proof of payment of the $6,000.

Argument of the Respondent

Counsel for the Respondent said that there was no proof of payment of the expenses. The whole business was conducted on a cash basis and not an accrual basis.

A four year history of the principal chequing account, Exhibit R-2 does not prove that any expenses were paid. The items on page 23-01 might have been referrable to the receipt and disbursement of funds regarding a mortgage.

There was no income included in the years 1991 and 1992 but there was in 1993 and 1989. The only explanation was that the Appellants had not received the income personally in 1991 and 1992 but yet they claimed all the expenses in those years.

If the Court should conclude that the expenditures were made, there was no evidence to show that the expenditures were made for the purpose of “gaining or producing income from a business”. These expenses were personal. The Appellants were merely “gambling with their money” and merely hoped that the operation might become successful. There was no reasonable expectation of profit.

The Appellants’ failure to report income amounted to gross negligence since they claimed all expenses. The Appellant Brad Stevenson was an educated person, a teacher, he had knowledge about “restricted farm losses” and calculated such losses, why not declare the income?

The Appellants claimed expenses for training some of the horses when they were not even owned by them at that time.

The filing of the so-called “supporting documents”, sent in by the Appellants with the letter of June 13, 1994, (Tab 26), which were knowingly back dated by someone who was not associated with Ferme Heritage Inc., amounted to gross negligence.

The expenditures are not deductible on the basis of paragraphs 18(1)(a), 18( 1 )(h) and subsection 248(1) of the Act.

Subsection 230(1) requires every business to keep records. By admission no such records were kept here. The expenditures were not verified.

Counsel took the position that it was arguable that the Appellants were maintaining horses but they were not owners. They were not operating a business. Their activity was informal and was for the purpose of generating a windfall. No one would operate a business like that.

With respect to the penalties, counsel argued that they were properly levied. The provisions of subsection 152(4) of the Act apply because the Appellants made misrepresentations in the filing of their returns which were attributable to neglect, carelessness or wilful default.

Likewise, the assessment for the 1991 taxation year may be made although otherwise it was statute barred.

The Appellants are liable for the penalties at the rates assessed because they either knowingly or under circumstances which amounted to gross negligence, participated in, assented to or acquiesced in the making of a false statement or omission in their returns filed for the years in issue.

The Appellant Luisa Stevenson at least acquiesced in the making of the false statements or omissions in the returns filed by Brad Stevenson. She signed the returns and sent them in blindly. That certainly amounts to acquiescence.

The Respondent relied upon the case of Moldowan v. R., (sub nom. Moldowan v. The Queen) [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213 in arguing that there was no reasonable expectation of profit. Objectively one could argue that this was at best a hobby and that nothing can be deducted.

The losses from 1989 to 1995 were very substantial for each year. They ranged from $3,477.25 to $25,526.37. When they are added together they become massive.

There was no plan in force as to how the Appellants intended to make money. They had only intended to own one horse at a time and that would not be sufficient to make money because of the danger of being “wiped out” in the event of a calamity, which in fact happened here. The Appellants may have had some limited training but nothing more.

As in the case of Karpish v. Minister of National Revenue, [1986] 2 C.T.C. 2347, 86 D.T.C. 1782 (T.C.C.), the Appellants had no organized, comprehensive plan for making a profit in the future.

As in Halbegewachs v. R., (sub nom. Halbegewachs v. Canada) [1993] 1 C.T.C. 4, 93 D.T.C. 5037 (F.C.T.D.) and Bigelow v. R., (sub nom. Bigelow v. Canada) [1990] 1 C.T.C. 351, 90 D.T.C. 6262 (F.C.T.D.), the Appellants invested very little personal time or effort in the enterprise. There was nothing beyond “wishful thinking” to indicate that “a business” could ever become profitable.

Counsel argued that the recent case of Tonn v. R., [1996] 1 C.T.C. 205, 96 D.T.C. 6001 is applicable. In the case at bar the circumstances were suspicious because of the personal element involved. The sister of Brad Stevenson was involved, Brad Stevenson had a personal interest in the horses, the possibility of profit was very remote and by refusing to allow the expenses, the Court would not be merely substituting its judgment or the judgment of the department for that of the taxpayer who had just made an honest error in judgment and lost money instead of making it.

With respect to the penalty, counsel cited Paillé v. Minister of National Revenue, [1979] C.T.C. 2758, 79 D.T.C. 644 (T.R.B.) in support of his contention that even though the taxpayer indicated income in his 1993 taxation year and claimed that his failure to report the income earlier was an honest mistake, the evidence shows that the effort to supply a receipt did not come until after the investigation started. The failure to report the income could not be due to a simple oversight in light of the Appellants’ claiming of all the expenses.

A failure to keep records is not a defence to the levying of the penalties. The case of Stirton v. Minister of National Revenue, [1988] 1 C.T.C. 2298, 88 D.T.C. 1205 (T.C.C.) is on all fours with the case at bar.

The Appellants were guilty of wilful blindness and that is tantamount to gross negligence.

As late as April the 1st, 1996 in the Notice of Appeal the Appellants were suggesting that there was nothing wrong with the 1993 return and there was. In that letter they refer to a horse called “SuperSonic Jimmy” and no evidence was given at all about that horse during the trial.

“Alaskan Peter” was sold without the permission of the Appellants and that suggested a personal relationship between Marcel Bouvier and the Appellants and not a business one.

There was no hard evidence to confirm that the expenses were incurred. The source documents, so-called, were created. There was gross negligence.

On the matter of costs, counsel argued that if the appeal is allowed, there should be no costs because the matter was originally scheduled to be heard in the Okanagan and was referred to Vancouver to accommodate the Appellant and further expenses were incurred. Further, many of the witnesses called by the Appellants were of very little consequence to the case except to offer character evidence. Any costs incurred to bring them to the hearing should not be allowed.

The counsel argued that the appeals should be dismissed and the Minister’s reassessments confirmed.

Argument of the Appellants

The Appellant, Brad Stevenson on behalf of both Appellants, said that himself and Luisa Stevenson have been open, honest and forthright with the Court. If they were inconsistent in their testimony then their mistakes were honest ones and due to incorrect filing procedures.

He said that the Appellants have shown an involvement in the horse racing industry. They tried to show proper documentation. They had a complete record of all business dealings except those with Marcel Bouvier and Erin Stevenson.

They purchased the horses and although their procedures may seem inadequate (bad), they did not believe it to be odd. They followed the process set up by H&R Block for claiming restricted farm losses. The Appellants did not personally receive the purse monies which were not included in income for two of the years in question.

No one at Revenue Canada questioned their procedures for claiming restricted farm losses other than Mr. Redden and even he was made aware of the difficulties that the Appellants encountered in contacting Mr. Bouvier.

He could not understand why Mr. Redden did not conclude that the Appellants had no paper trail and that any records would have to be “made up” by Erin Stevenson. She tried to do the best that she could with what she had.

This Appellant said that he called the financial institutions about the cost of obtaining supporting documentation but this was shortly before trial. His position was that he gave Mr. Redden a paper showing the original payment for “Alaskan Peter’. They depended on Erin Stevenson because she was “family”.

He said that he did not claim the income from the horses in 1991 and 1992 but he did in 1993.

They did not consider their horse business to be a “hobby”. They believed that they had a very good trainer and through their contact with Erin Stevenson, they could make a large amount of money.

Just because they had only one horse at a time would not prevent them from being profitable. Marcel did not make all the decisions regarding the horses. Brad Stevenson had the final say.

He said that he did not claim a deduction for the interest expense and that should show that he did not know much about the tax laws.

The Appellants said that it was difficult for them to be advised that the expenses claimed were not deductible, that they owed money to Revenue Canada and that penalties were being assessed against them.

He did not know why he referred to the horse “SuperSonic Jimmy” in the Notice of Appeal because that was the name of his sister’s horse. “There was no malice”.

His position was that the Appellants were telling the truth. The horses existed. They were having financial difficulties as a result of this process and the horse business. He believed that the appeal should be allowed.

Rebuttal

In rebuttal counsel for the Respondent indicated that his argument with respect to the Appellants’ only having one horse at a time was made to show that there was no proper capitalization of assets and this had to be considered in whether or not there was a reasonable expectation of profit.

Analysis and Decision

The issues as the Court sees them are as follows:

1. Was the Minister entitled to reassess the Appellants for the years 1991, 1992 and 1993?

2. Were the expenses claimed actually incurred and paid during the years in question?

3. If the expenses were proven to have been incurred and paid in the years in question, were they deductible under the provisions of the Income Tax Act?

4. If the expenses were not deductible, or were not incurred and paid, was the Minister correct in assessing penalties as he did under subsection 163(2) of the Act?

5. If the appeal is allowed, are the Appellants entitled to costs?

Counsel for the Respondent raised the argument that there was a real issue as to whether or not the Appellants even owned the horses in question. However, after considering all of the evidence and drawing all reasonable inferences from that evidence, the Court is satisfied that the Appellants had a sufficient proprietary interest in all of the horses for which the expenditures were allegedly made except for “SuperSonic Jimmy”, which reference in the Notice of Appeal may indeed have been an honest error. It is true that the “process of ownership” and the “indicia of true ownership” was different, but the Court is satisfied that this process was not novel in the horse racing business for the reasons given by the witnesses called on behalf of the Appellants.

The Appellants took no issue with the presumptions of fact as set out in the Reply to Notice of Appeal with respect to the total income from 1989 to 1993, the amounts of expenses claimed in 1991, 1992 and 1993 nor with the calculations of farming losses as set out in Schedule “A” to the “Reply”. These presumptions of fact are therefore deemed to be correct.

The Appellants also agreed with the allegations of fact set out in paragraphs 5(b), (e), (f), (i), (1), (p) and denied the remainder of the allegations which go to the heart of the matters in issue.

The evidence of Stewart Boschman, Gaston Tremblay and Maureen Stevenson was chiefly directed to the good general reputation of the Appellants in the horse racing community. They also knew something of their involvement in the horse racing business but could not offer any reliable evidence regarding the matters in issue.

David Stevenson, the father of the Appellant Brad Stevenson had a limited knowledge of the business and likewise could offer no concrete evidence with respect to the expenses claimed.

The Appellant Luisa Stevenson readily admitted that she knew very little about the horse business in which she was 50% partner. She put little or no time or effort into the business. She signed her income tax returns based upon calculations made by her husband and relied upon those calculations.

Most significantly she saw no receipts to support the expenses claimed although they were supposedly paid out of their joint account. She kept no records. She had no receipts and could not even remember paying any of the expenses.

At no time did she inquire as to whether the process was profitable. She admitted to having claimed the losses and as a result of claiming those losses receiving refunds. She believed that there must have been receipts sent in to support the claims. She said, “Brad must have sent in whatever they (Revenue Canada) required.”

Only the evidence of Brad Stevenson, Marcel Bouvier and Erin Stevenson was directed, in any meaningful way, to the main issue of the payment of the expenses. However, in each case even their evidence was woefully inadequate.

Even though Marcel Bouvier was involved with the Appellants’ business almost from the beginning, was a shareholder and manager of Ferme Heritage Inc., he candidly admitted that no invoices were sent out as expenses were incurred and that he had no invoices to support the expenditures.

In response to a question asked by the Court he admitted that he could not say what specific amounts were expended on the horses, what amount, if any, was owing with respect to the horses and said, “the dollars and cents, he (Brad Stevenson) did not get the specifics from me.”

Erin Stevenson had no direct involvement with Ferme Heritage Inc. but it was she who prepared the documents that the Appellants presented in support of their claims for deductions. Her admission was that the invoices were not originals. They were made up from her memory, they were back dated and yet she took the position that the invoices were made up from her knowledge of the operation of Ferme Heritage Inc.

She said that the expenses were common to all horses and that she could remember the costs of the drugs and the amount expended otherwise on the Appellants’ horses because she took “special interest in her brother’s horses”. It is noteworthy that Ferme Heritage Inc. had as many as 150 to 175 horses there at times.

The witness said, “I made a list of expenses that I felt were incurred and what they cost. They were estimates from memory.”

Even though some of the documents bore the date 1991 they were actually composed in 1994. It is to be remembered that Ferme Heritage Inc. ceased operation in 1993. Even the purse cheques that were used to off-set expenses were not applied to any specific expenses although if believed, certain of the documents would lead to that conclusion.

Her statement that when she made up the invoices after the fact she believed that she was showing a history of the horses is rather incredible and one would have to wonder how such a history would support an allegation of a specific expense as was obviously required and asked for by the officers from Revenue Canada.

The evidence of this witness could not and did not support the payment of any specific expense claimed. The documents she prepared were at best created from her memory, her general knowledge of the horse racing business and from her special interest in her brother’s horses and fall far short of establishing on a balance of probabilities that the expenses were incurred and paid, as alleged.

The Appellant Brad Stevenson was equally uncompelling on the main issue as to whether or not the specific expenditures claimed were indeed made. He relied on his memory and that of his sister. He knew that the documentation provided was composed after the fact and must have known that Revenue Canada was seeking real documentation in support of the claimed expenses and that estimates based upon the memory of someone who is not even an employee of Ferme Heritage Inc. and had no official capacity with that business could not provide any reliable information which the Department could use to reconcile the figures set out in the profit and loss statements and submitted by the Appellants.

The Court accepts Thomas Redden’s evidence that he told Brad Stevenson that he was sending back the profit and loss statements to be redone and that the Appellants should “claim only the expenses that could be documented and that any income earned from the horses should be included.”

The Appellants knew what kind of documents were required, they knew that they had no such original documents or true copies thereof and they knew that what they submitted were other than such documents.

Any suggestions by the Appellants or any other witness that the documents that were provided would suffice, be acceptable, portray the true situation and that that was what they really believed is not credible.

The Court must answer question 2 in the negative.

There was no impediment to the Minister assessing the Appellants in 1992 and 1993 but to do so in 1991, the Court must be satisfied that there was some “misrepresentation that was attributable to neglect, carelessness or wilful default or (that the Appellants) have committed any fraud in filing the returns or in supplying any information under the Act.”

There can be no doubt that at the very least the Appellants have violated this provision of the Act. The returns of both Appellants contained information which was obviously misleading. Expenses were claimed for some of the horses for parts of the year when they were not owned by the Appellants. The documents submitted in support of the expenses were based only on estimates prepared from the memory of the person creating them, they purported to be in support of specific expenses but were obviously at best based upon what the creator believed to be the normal expenses for race horses. The vouchers and invoices were prepared by someone unassociated with the company in any form and capacity. The expenses were allegedly paid to someone unassociated with the company, the returns did not include some income which was earned by the horses in the years in question. Anyone of these factors is sufficient to support a finding that subsection 152(4) of the Act has been violated.

The Appellant Luisa Stevenson acquiesced in the filing of the returns in question which contained the impugned information. She signed the returns as being correct. Her actions amount to wilful blindness at best and the actions of the Appellant Bruce Stevenson bind her has well. She cannot escape the effects of such actions by saying that she trusted him and that he must have sent in all documents that were required.

She claimed the losses that resulted from the claiming of the expenses and profited therefrom by obtaining a refund of tax paid.

The Minister was entitled to assess both Appellants for all of the years in question. The answer to question 1 is in the affirmative.

In light of the foregoing findings, it is not necessary to consider the second part of question 3 but the Court will do so.

The Court is satisfied that the Appellants spent little time and effort in the horse racing business. They delegated the major portion of the work to Marcel Bouvier and to a lesser extent to Erin Stevenson and Stewart Boschman.

It is true that Brad Stevenson had some input into which horses they would purchase and where they would race but even there the Appellants relied intrinsically upon the advice of Erin Stevenson and Marcel Bouvier. Brad Stevenson may even have had the final say in where the horses were to race but that is not the most important aspect of the business. He did not have the final say in whether the horses would be disposed of and in at least one case a horse was disposed of without him knowing about it.

There was no business plan in existence at any time, any expectation of profit was more fanciful than real and based upon chance rather than good planning.

There were no proper records or accounts kept. It would be impossible to calculate any projected profit.

Under Moldowan, supra, the Appellants were at best involved in a hobby and they would be characterized as class 3 farmers at best.

Even the most liberal interpretation of Tonn et al., supra, does not aide the Appellants’ position. The facts of the case at bar do admit of suspicious circumstances and a non-business motive. This is not a case where to disallow the expenses claimed (if they were indeed proved) would be tantamount to placing the department (or this Court) into the shoes of the taxpayer who had made an honest error in business judgment and therefore even if the expenditures had been proved, they would not be deductible.

The answer to question 3 is in the negative.

Under subsection 163(2) of the Act, the Minister may levy penalties if any person, “knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under the Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”)”.

The taxpayers were required to keep records of their expenses. They did not do so, they knew that they did not do so. When they were contacted by the agents from Revenue Canada the Appellant Brad Stevenson undertook to provide the proper documentation in support of all expenses claimed, which he knew he did not have. When the so-called supporting vouchers and receipts were forwarded he knew that they had been made up, back dated and were obviously not what they purported to be. By no stretch of the imagination could they have supported the deductions claimed.

The initial returns filed did not claim any income when there was income and when the total expenses had been claimed. The position of Brad Stevenson that he did not believe that he had to claim the income unless it actually came into his hands is quite tenuous at best in light of his knowledge of restricted farm losses and their calculations, in light of his training and profession and in light of his position that he had kept receipts in other years.

These actions at the very least amounted to gross negligence on behalf of Brad Stevenson. Luisa Stevenson signed and filed her returns containing the same information and at the very least assented to or acquiesced in the actions of Brad Stevenson and so she has violated section 163(2) of the Act as well.

The Minister has properly levied the penalties under section 163(2) of the Act and the answer to question 4 is in the affirmative.

The appeals are dismissed and the Minister’s reassessments are confirmed as are the penalties.

In light of this decision the answer to question 5 is unnecessary.

There will be no order as to costs.

Appeal dismissed.