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Contentions For the appellant: — The Minister has unrealistically applied the 30-40% profit margin which is found in the scrap metal industry to Moshe Schwarz, and disallowed portions of his claim for expenses. — The expenses claimed by Moshe Schwarz are legitimate. — A careful analysis of Moshe Schwarz’s business operation would show a profit margin in the 10% range. For the respondent: — None of the cash purchases alleged by the appellant were supported by vouchers. — The appellant failed to keep proper books, records and accounts. — 25% of the amounts claimed as cash purchase expenses by the appellant were not outlays or expenses made or incurred by him for the purpose of gaining or producing income from a business. — 25% of the alleged cash purchase expenses claimed were disallowed as being unreasonable. ... In an attempt at cross-examination of the appellant, counsel for the Minister supplied the Board with a summary sheet which portrayed the basis of the reassessments in dispute: MOSHE SCHWARZ COMPARATIVE SCHEDULES OF SALES, PURCHASES, etc. 1973 1974 1975 Sales $ 97,779 $157,207 $108,182 Purchases (declared) 85,295 $139,924 $ 96,255 Gross Profit $ 12,484 $ 17,283 $ 11,927 Percentage 13 % 11% 11% Cash Purchases $ 82,200 $137,100 $ 92,300 Percentage of Total 96.37% 97.98% 95% 25% of Cash Purchases Disallowed $ 20,550 $ 34,275 $ 23,075 Total Revised Purchases $ 64.745 $105,649 $ 73,180 Revised Gross Profit $ 33,034 $ 51,558 $ 35,002 Percentage 34% 32% 32% Argument Counsel for the appellant restricted his comments to the point that relevance should be given to the business circumstances under which the appellant operated, and to the testimony given under oath by the appellant regarding the gross profit margin as being important. ...

The appellant had operated a farm for several years raising oats, hay and grain and in addition swine and cattle with the following result: Type of income Year Hay/Straw Oats Grain Other Swine Cattle Total 1965 $ 27 $ $ $ 22 $ 577 $ 2,407 $ 3,033 1966 660 6,457 7,110 1967 251 199 25 2,715 3,190 1968 580 1,215 1,795 After some 15 years’ farm experience, the appellant in 1967 decided to switch to horse-raising and breeding. ...

Evidence The Board was provided with financial statements of the corporation and during testimony for the appellant by the Company president Mr G Kirkland and by Mr Thomas P Conway, a chartered accountant, several additional documents were filed by the appellant, of which the following are significant and reproduced: COMBINED APPRAISERS AND CONSULTANTS COMPANY LTD INCOME STATEMENT FOR THE YEAR ENDED JUNE 16, 1975 Construction Rentals Appraisals Total Total & others Revenues (net) $96,121 $ 12,198 $112,023 $220,342 Cost of Goods Sold 45,368 — — 45,368 Gross Margin $50,753 $ 12,198 $112,023 $174,974 Operating Expenses Salaries & wages $ 700 $ $31,686 $32,386 Director’s wages 23,994 7,500 19,006 50,500 Supplementary wage costs 205 — 1,026 1,231 Advertising — 294 178 472 Interest & bank charges (147) 5,879 (167) 5,565 Account & audit 1,550 190 1,760 3,500 Membership fees 100 — 352 452 Stationery & postage — — 3,885 3,885 Rent 198 — 1,782 1,980 Telephone, heat & light 139 641 1,252 2,032 Travel entertainment — 7,324 7,324 Travel & entertainment — Repairs & maintenance 68 — 615 683 Municipal taxes 9 1,436 82 1,527 Depreciation 1,501 11,458 1,601 14,560 Vehicle operating 338 — 3,045 3,383 Miscellaneous 141 108 1,272 1,521 Bad debts — — 225 225 Donations 15 — 135 150 Equipment rental 43 — 385 428 28,854 27,506 75,444 131,804 Contribution to Net Income $21,899 $(15,308) $36,579 $ 43,170 COMBINED APPRAISERS AND CONSULTANTS COMPANY LTD Notes re Distribution of 1975 Income Statement 1. ... Accounting & audit fee distributed on the basis of gross revenues. 7. ... Travel & entertainment. All charged to appraisals, none specific to others. 12. ...

This document reads as follows: MR JOSEPH B GRENIER Sales reconciliation at 31/12/72 Proceeds of cash operations, receipts and expenditures $345,454.82 Adj 3— Unrecorded invoiced $ 16,956.35 Adj 5— Granby Corp proceeds deposited in B of M (deposit cert) $ 25,960.26 Adj 6— Corp cheque not deposited and used to pay Lambert and Grenier Inc re charges for the company $ 3,643.03 Adj 7— Corp cheque not recorded, $1,055.09 of which was deposited in Bank of Com merce $ 1,755.09 — 8— Sales entered in register (2-e) for which there are no invoices $ 673.76 — 9— Payment received from Binette & Frères re Parc des Voltigeurs and deposited in part in B of M $ 8,295.35 — 10— Cash payment received from “Roi du Steak”—old account. $ 8,000.00 — 11— Payment received from “Roi du Steak” not deposited—this cheque subsequently went to Lambert & Grenier Inc $ 5,000.00 — 13— Addition to accounts receivable $ 34,690.43 Adj 41—Cheque received from Les Placements Mondrum—which was given to Lambert & Grenier Inc $ 1,000.00 Adj 43— Cheque by Lambert & Grenier Inc deposited in Prov Bank on 5/1/73 $ 74.25 $109,048.52 $106,048.52 $451,503.34 Less 24—Cheque in trust re SOQUAP delivered and deposited $ 2,000.00 $449,503.34 3.17 The appellant’s accountant questioned the item included in 1-15 and described as “Addition to accounts receivable, $34,690.43”. ... (h) December, miscellaneous sales $1,635.12(3) 544.04 x 3= $ 1,635.12 $22,704.90 The various invoices were also proved. 3.28 The sum of $22,704.90 is thus broken down according to the exhibit by the respondent, and filed at p 27 of Exhibit 1-1: DISTRIBUTION BETWEEN SHAREHOLDERS Denis Lambert Roger Lambert J B Grenier Total Michaud & Simard $ 221.00 $ 221.00 $ 221.00 $ 663.00 Parc $ 284.48 $ 284.48 $ 284.48 $ 853.44 Quebec Project $2,275.48 $2,275.48 $2,275.48 $ 6,826.44 Miscellaneous receipts $ 269.29 $ 269.29 $ 269.29 $ 807.87 Tingwick—l’accueil $2,305.80 $2,305.80 $ 4,611.60 Quebec & Lachute $3,653.72 $3,653.71 $ 7,307.43 Miscellaneous sales $ 545.04 $ 545.04 $ 545.04 1,635.12 L $9,554.81 $3,595.29 $9,554.80 $22,704.90 3.29 As in Lambert & Grenier Inc, heard jointly with the cases at bar, Mr J B Grenier did not testify. ... (D) Penalties 3.30 In its various notice of re-assessment, the Department of National Revenue imposed the following penalties: Mr J B Grenier 1970: $ 1,160.09 1971: $ 1,008.97 1972: $11,113.09 Mr Denis Lambert 1973: $ 611.26 Mr Roger Lambert 1973: $ 204.72 4. ...

After recovering a number of supporting documents, the appellant in fact claimed other expenses as shown below: 1973 1974 Net profit—Price company $9,530.72 $11,133.13 Expenses: General insurance $ 342.00 $ 342.00 Permit and licence $ 91.00 $ 91.00 Travel and telephone expenses $ 148.00 $ 148.00 Taxes $ 175.00 $ 175.00 Wages — $ 200.00 Equipment expenses $2,522.86 $3,660.76 Depreciation $1,152.00 $ 806.40 —equipment $4,430.86 $ 5,423.16 Net profit $5,099.86 $ 5,709.97 One-third of net profit allocated to the appellant $1,699.95 $ 1,903.33 3./ The following amounts were added to the partnership’s and the appellant’s income by a notice of assessment from the Department dated August 28, 1976: 1973 1974 1974 Net income $ 9,530.72 $11,133.13 Plus Capital payment on skidder $ 1,425.00_$ 1,575.00 $10,955.72 $12,708.33 Less Expenses $ 2,436.52 $ 2,713.16 Adjusted net income $ 8,519.20 $ 9,995.94 Appellant’s share: /3 of the total added to his personal income $ 2,839.73 $ 3,331.98 3.8 Following a notice of objection from. the appellant, the respondent by a notice of reassessment dated February 24, 1977 allowed interest expenses of $625 for 1973 and $775 for 1974. The appellant’s additional income was reduced as follows: 1973 1974 Additional income $2,839.73 $3,331.98 Less 1973: $625 —:— 3 $ 208.33 Less 1974: $775-4- 3 = $ 258.33 Corrected income $2,631.40 $2,973.65 3.9 The expenses disallowed by the respondent are $1,994.34 for 1973 and $2,710 for 1974. ... 1973 Respondent’s total Board's total Allowed $ 528.52 $1,086.17 Disallowed $1,994.34 $1,437.19 Total $2,522.86 $2,523.36 1974 Allowed $ 950.00 $1,249.71 Disallowed $2,710.00 $2,261.11 Total $3,660.00 $3,510.88 According to the respondent’s witness, he came to the conclusion that the documents were fabricated after the event, or falsified, because the numbering of the documents was continuous from one invoice to the other. ...

It may be useful to reproduce here Schedule A attached to the appellant’s notice of appeal and filed as page 14, Tab 4 of the respondent’s Exhibit R-1: SCHEDULE Est Est Est Est Est Est Est 1975 1976 1977 1978 1979 1980 1981 1982 1983 Gross income $12,301 $6,944 $3,496 $13,978 $20,346 $50,000 $55,000 $60,000 $65,000 Expenses (includ ing CCA 11,955 10,152 8,336 23,961 42,079 65,000 65,000 65,000 $65,000 Net income 346 (3,208) (4,840) (9,983) (21,733) (15,000) (10,000) (5,000) — Cattle 8 13 8 22 15 15 15 Pigs 20 20 20 20 112 300 400 Chickens 20 500 500 500 Capital Expenditure $15,600 $ 1,000 $ 1,000 $ 1,000 $49,000 — — — — It is interesting to compare Schedule A with the actual and the estimated deficit for the years 1979-82 produced by the appellant as Exhibit A-6: ACTUAL AND ESTIMATED EXCESS (DEFICIT) OF INCOME OVER EXPENSES FOR THE YEARS 1979-1982 (estimates projected in 1981) 1979 1980 1980 1981 1981 1982 1982 Actual Actual Actual Estimate Income Crops and Seed $ 3,668 $ 5,998 $ 320 $ 500 Livestock—cattle 14,832 10,542 2,890 21,000 —swine 17,608 3,252 12,000 —poultry 586 1,000 Eggs 1,355 8,512 8,747 16,000 Other 491 367 172 500 $20,346 $43,027 $15,967 $51,000 Expenses Livestock—cattle 10,346 13,300 1,924 3,000 —swine 2,235 8,664 3,531 3,500 — poultry 2,477 700 3,178 Interest—real estate 3,242 3,199 4,564 5,200 —operating 241 4,001 3,946 5,000 —barn 981 8,222 8,850 5,600 Feed & straw 3,727 9,668 11,110 12,000 Custom & contract work 3,892 5,161 4,697 4,000 Other 6,568 11,476 11,416 12,000 Capital cost allowance 8,370 7,816 8,589 8,000 42,079 72,207 61,805 58,300 Excess (deficit) of income over expenses ($21,733) ($29,180) ($45,838) ($7,300) Capital Investment Balance, beginning of year $14,835 $60,482 $56,014 $52,655 Additions Class 6—barn 49,054 437 8—fences, cages 4,963 2,911 325 10—truck, tractors 4,905 68,852 63,830 61,244 52,655 Capital cost allowance 8,370 7,816 8,589 8,000 Balance, end of year $60,482 $56,014 $52,655 $44,655 1982 Estimate based on the following assumptions: — continued high interest rates throughout period — interest on mortgage will be renewed annually at prevailing high rates — weak commodity prices for cattle and swine — increase in egg production — utilization of own produced feed and straw to feed herds In 1980 the farm income was less and the expenses greater than was anticipated but in 1981 the income was considerably less than had been estimated and the expenses were still high. ... The appellant’s statement of assets and liabilities for each of the calendar years ending in 1979, 1980 and 1981 is as follows: STATEMENT OF ASSETS, LIABILITIES AND FARM CAPITAL FOR THE CALENDAR YEARS ENDED 1979, 1980, 1981 1979 1980 1980 1981 1981 ASSETS Current Cash $ 1,000 §$ 577 Fixed Barn (depreciated value) $ 50,661 45,988 41,390 Equipment (depreciated value) 8,221 8,906 7,385 Truck & tractor (depreciated value) 1,600 1,120 3,880 60,482 56,014 52,655 Other House (approx market value) 50,000 50,000 50,000 Land (approx market value) 90,000 90,000 90,000 140,000 140,000 140,000 Total assets $200,482 $197,014 $193,232 LIABILITIES AND FARM CAPITAL Liabilities Bank loan—operating $ 20,000 $ 24,000 $ 28,000 —barn 45,000 49,000 31,000 Mortgage 29,272 28,874 28,646 Total liabilities 94,272 101,874 87,646 Farm capital Beginning of year 116,330 106,210 95,140 Additional capital 11,613 18,100 56,284 127,943 124,310 151,424 Excess (deficit) on revenue over expenses (21,733) (29,170) (45,838) End of year 106,210 95,140 105,586 Total liabilities & farm capital $200,482 $197,014 $193,232 On the basis of the evidence, it appears to me that the appellant invested in the farm property in order to provide for himself and his family a life-style of their choosing on a property which had belonged to the appellant’s father and on which the appellant had been raised. ...

These notices of assessment imposed on the appellant the following penalties and additional taxes: Additional Taxes Penalties 1968 $1,432.80 $358.20 1969 $1,351.12 $337.78 1970 $ 648.84 $162.61 The burden of proof with respect to the additional taxes falls on the appellant in accordance with, among other things, the decision handed down by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182. ... The dates on which the returns were filed and the various notices of assessment were issued are as follows: 1968 1969 1969 1970 1970 Return filed 21/04/69 14/04/70 13/04/71 1st notice of assessment 16/06/69 03/06/70 28/06/71 1st notice of reassessment 04/10/76 04/10/76 04/10/76 2nd notice of reassessment 22/06/78 22/06/78 22/06/78 2.03 The gross income (GI) and taxable income (Tl) concerned in the first notices of assessment (FNA), the first notices of reassessment (FNR) and the second notices of reassessment (SNR) are as follows: 1968 1969 1969 1970 1970 (a) FNA GI $ 4,854.98 $ 3,054.36 $ 5,281.19 Tl $ 1,607.92 $ 14.66 $ 2,155.75 (b) FNR GI $31,437.92 $17,941.52 $17,862.82 Tl $28,185.10 $14,775.92 $14,693.62 (c) SNR GI $14,542.93 $12,401.82 $ 9,237.38 Tl $11,290.11 $ 9,236.22 $ 6,068.18 2.04 Mr André Houle, a witness for the respondent, testified that he had carried out the investigation and had issued the first notices of reassessment on October 4, 1976. ... All of these statements were in general supported by documentation. 2.08 The statement of assets and liabilities shows that between December 31, 1967 and December 31, 1970 the following increase took place: Assets 1967 1967 1970 1970 Difference Current $13,035.05 $ 1,945.70 Investments $56,950.00 $ 72,950.00 Fixed assets $ 1,616.33 $ 32,718.83 $71,601.38 $107,614.53 $36,013.15 Liabilities Loan $ 4,000.00 Mortgage $ 21,149.00 Capital $71,601.38 $ 82,465.53 $71,601.38 $107,614.53 $36,013.15 2.09 The following is a summary of the figures shown in the capital reconciliation (exhibit I-4): 1968 1969 1969 1970 1970 Increase in capital $ 2,476.24 $ 1,753.54 $ 6,634.37 Plus Cost of living and other expenses $12,122.69 $10,954.28 $11,352.91 $14,598.93 $12,707.82 $17,987.28 Minus Family allowance and surrender of insurance policy $ 306.00 $ 306.00 $ 8,749.90 Revised total income $14,292.93 $12,401.82 $ 9,237.38 Deduct Total reported income $ 4,854.98 $ 3,054.36 $ 5,281.19 Increase in total income $ 9,437.95 $ 9,347.46 $ 3,956.19 2.10 According to exhibit I-4, the cost of living was established as $5,500 in 1968, $6,000 in 1969 and $6,000 in 1970. ...

The financial statement filed with the appellant’s tax return showed: JAMES CONJA — DESIGNER STATEMENT OF INCOME FOR THE YEAR ENDED FEBRUARY 28, 1977 FEES $14,935 EXPENSES Advertising and promotion 1,909 Business use of residence 950 Office supplies 667 Travel 615 Bookkeeping 513 Capital cost allowance 368 Trade publications and fees 623 Equipment rental 166 Insurance 154 Interest and bank charges 258 Maintenance 69 6,292 NET INCOME $ 8,643 CAPITAL COST Undepreci Undepreci- Undepreci ated Capital Adjusted ated Capital Cost Undepreci- Capital Cost Cost February ated Capital Cost February 28/76 Additions Cost Cost Allowance 28/77 Office equipment $ 528 $ — $ 528 $106 $ 422 Technical library 1,230 80 1,310 262 1,048 $368 Prepared without audit for income tax purposes. ... The business expenses which the Minister had allowed were “bookkeeping — $513” and $445.34 of the “trade publications and fees”. ... In view of the fact that his income all came from one source — Modern — which, in turn, was paid by some form of contract from the Ministry, it is difficult indeed to follow the appellant’s reasoning that some of the expenses were necessary. ...

They now claim an additional deduction of $6,215 as follows: Additional expenses Year Expenses deducted claimed 1961 $ 1,214.58 $ 470 1962 1,263.76 $ 470 1963 1,639.72 $ 470 1964 1,296.04 $ 470 1965 1,701.40 $ 470 1966 2,004.19 $ 470 1967 2,204.61 $ 470 1968 2,623.26 $ 595 1969 2,945.26 $ 572 1970 3,151.04 $ 726 1971 4,001.75 $1,032 TOTAL: $24,045.61 $6,215 3.12 The additional insurance premiums claimed are those paid by the appellants on their personal automobiles. ... Travel and representation expenses: $29,214 3.15 When they filed the financial statements attached to their income tax returns the appellants, in computing the partnership income, had already deducted the following amounts in respect of travel, transportation and advertising: Year Travel Travel Transportation Advertising 1961 $ 286.40 $186.50 $350.97 1962 $ 313.37 $203.14 $197.01 1963 $ 314.42 $221.59 $376.71 1964 $ 456.43 $274.87 $388.91 1965 $ 820.49 $255.50 $542.18 1966 $ 829.59 $160.60 $448.61 1967 $ 950.00 $ 54.55 $315.44 1968 $ 744.60 $ 65.05 $525.40 1969 $ 614.11 $ 82.45 $362.53 1970 $ 705.54 $ 91.60 $375.73 1971 $1,652.15 $ 51.40 $436.27 3.16 In their notices of appeal, the appellants claimed an amount of $29,214 in respect of additional costs of travel, representation and other charges (gasoline made available by the partnership to employees as compensation for the use of their personal vehicles for partnership purposes). ... In this statement, these items appear as follows in 1961 (the other years are similar): “Appendix C” PAPILLON & FRERE ENR CAPITAL ACCOUNT STATEMENT As at December 31, 1961 Paul Guy Guy Papillon Papillon TOTAL Balance at December 31, 1960 $12,014.94 $11,390.32 $23,405.26 Add Net profit 4,039.55 4,039.56 8,079.11 $16,054.49 $15,429.88 $31,484.37 Deduct Auto expenses—personal use $ 106.24 $ 106.24 $ 212.48 Auto depreciation—personal use 12.54 12.54 25.08 Drawings $ 3,389.67 $ 2,807.32 $ 6,196.99 $ 3,508.45 $ 2,926.10 $ 6,434,55 Balance at December 31, 1961 $12,546.04 $12,503.78 $25,049.82 The first significant point to note is that the two items in question are deducted from the balance of the partners’ capital account in the same way as personal drawings. ...

In cross- examination, the respondent established the following: EQUIPMENT AND SALES CHART 1975 1976 1977 EQUIPMENT $ 35,639 $ 45,459 $ 50,698 SALES $1,217,651 $2,129,655 $2,927,689 BREAKDOWN OF SALARIES (1977) A total of $812,455.00 is distributed as follows: GRAPHICS $349,134 (for 20 employees) OUTSIDE LABOUR $ 31,616 (work performed by artists, layout artists and for extra work) PHOTOGRAPHY SECTION $ 17,364 (for 1 photographer) CAMERAS $ 24,971 (for 1 senior, 1 junior, in photo-engraving) SUPERVISORY DEPARTMENT $ 85,096 (for 5 employees whose role (purchasing and services and responsibility consist in internal and external co ordination, supervising the making of layouts) OTHER SALARIES $304,274 (administration, support, sales and for 6 secretaries) Mr Séguin then explained that the information-gathering process consisted in obtaining as much information as possible, enabling the client to reach a wider public in order to sell his product. ... Mr Albert L’Ecuyer, who has been the appellant company’s chartered accountant since 1963, filed a statement of sales as Exhibit A-14: CABANA, SEGUIN INC Statement of Sales 1974 to 1977 1974 1975 1976 1977 Sales Graphics $775,065 $1,217,650 $1,746,425 $2,195,781 (100%) (100%) (82%) (75%) Media —. — $ 383,229 $ 559,345 (18%) (19.1%) Fees — — — $ 172,561 (5.9%) Sales $775,065 $1,217,650 $2,129,654 $2,927,687 (100%) (100%) (100%) (100%) He explained that the appellant first of all paid the excise tax on the invoice sent to it by the printer. ... “Nemo dat quod non habet” — one cannot give what one does not have. The appellant did not have raw materials to be processed and therefore could not produce a manufactured product. ...