Hammill v. The Queen

Hammill v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-09-13 Neutral citation 2004 TCC 595 File numbers 2001-2051(IT)G Judges and Taxing Officers Theodore E. Margeson Subjects Income Tax Act Decision Content Docket: 2001-2051(IT)G BETWEEN: WILLIAM HAMMILL, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on February 10 and 11, 2004 at Kitchener, Ontario Before: The Honourable Justice Theodore E. Margeson Appearances: Counsel for the Appellant: George G. Voisin Counsels for the Respondent: Roger Leclaire Michael Ezri ____________________________________________________________________ JUDGMENT The appeals from the assessments made under the Income Tax Act for the 1994, 1995 and 1996 taxation years are dismissed. The Respondent shall have its costs of this action to be taxed. Signed at New Glasgow, Nova Scotia, this 13th day of September 2004. "T. E. Margeson" Margeson J. Citation:2004TCC595 Date: 20040913 Docket: 2001-2051(IT)G BETWEEN: WILLIAM HAMMILL, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Margeson, J. [1] In reassessing the Appellant for the taxation years 1994, 1995 and 1996, the Minister made adjustments to the Appellant's income and disallowed the amounts as follows: 1994 deemed interest expense $4,210 1995 deemed interest expense $27,978 1996 expenses $1,716,222 1996 interest expense fee $139,578 The total amounts disallowed in 1994 were $4,210; in 1995, $27,978 and in 1996, $1,855,800. [2] The Minister took the position that the amounts of $4,210 and $27,978 claimed as deemed interest expenses in the 1994 and 1995 taxation years, respectively, were properly disallowed as they were not made or incurred for the purpose of gaining or producing income from business or property; the amount of $1,855,800 claimed as business losses in the 1996 taxation year were properly disallowed as not having been made or incurred for the purpose of gaining or producing income from business or property; and the amounts $4,210, $27,978 and $1,855,800 claimed in 1994, 1995 and 1996 taxation years, respectively, were not reasonable in the circumstances. The Minister relied principally upon the provisions of paragraph 18(1)(a) and section 67 of the Income Tax Act ("Act"). Evidence [3] At the commencement of the trial Exhibits A-1 and R-1 were admitted by consent, without restriction, except to the fact that the report of George Arnold was not used. The parties further agreed to allow into evidence the report of Gary F. Parker with respect to Generally Accepted Accounting Principles ("GAAP") and the report of Constable Tim Laurence. The parties submitted an Admissions and Agreed Statement of Facts as follows: 1) The Appellant is a retired lieutenant colonel from the Canadian Armed Forces Reserve. He was a regimental commander from 1977 through 1980 and 1983 through 1986. 2) The Appellant is the co-owner of a successful clothing manufacturing company in Guelph Ontario which employs 200 people and has annual sales in excess of $12 million. He supervises 26 salespersons over 15 sales offices and sells product himself, with about 4,500 customers. 3) In 1987 the Appellant commenced buying precious gems for the purpose of resale, from York Union, a Toronto area company. Initial contact was by telephone solicitation. Before undertaking the gem purchases, the Appellant visited York Union and over the course of his business with York Union, attended its offices many times. York Union closed operations in 1990. The Appellant's contact at York Union, Bill Hawkins moved to H & H Rarities, another Toronto area company. The Appellant continued to purchase gems from H & H Rarities through July 1992 with a view to resale at a profit. By 1992 he had acquired stones costing $272,789. By 1994, the inventory had increased to $529,926. 4) In 1993 when the Appellant decided it was time to sell his gem inventory, he sought the advice of Bill Hawkins at H & H Rarities, a company with which he had satisfactory dealings with for several years. An individual, Peter Manning from Premier Group Investments ["Premier"] telephoned the Appellant advising the Appellant that he had been referred to the Appellant by H & H Rarities. Premier offered its services in assisting the Appellant. The Appellant contacted Harold Schnap president of Premier, and over the next few years had regular contact, by telephone and face to face with representatives of Premier, including Harold Schnap, Andrew Martin and Peter Manning. The Appellant verified statements made to him with others at Premier, with another gem company, International Gem Consultants, and with other gem investors. 5) Andrew Martin was the principle contact from Premier. Andrew Martin presented the Appellant with an offer from an offshore purchaser. The terms of the offer would generate a very significant profit to the Appellant. In order to complete the purchase, the Appellant was told that he had to pay to Premier or as directed by Premier large up front fees. These fees were variously described as performance bonds, insurance, shipping, sales commissions and administration charges. 6) The sale was not completed. Andrew Martin had an explanation and a new offer. The presentation of an offer, requirement for up front fees and failure to close was repeated 4 more times. On one occasion, third parties claimed to have liens on the Appellant's gem inventory. The Appellant paid to have the liens removed. 7) Each of the five offers had the following in common: a) Very large profit to the Appellant; b) Up front fees; c) Were fraudulently created by Andrew Martin and his accomplices; d) Did not close. 8) Between 1993 and 1996, the Appellant made approximatively 40 payments with respect to five separate offers. The Appellant paid to Premier or as directed by Premier, $1,651,766. 9) The Appellant believed that the payments to or as directed by Premier were for the purpose of facilitating the sale of the Appellant's gems at a profit. 10) The following summarizes the economic results if the agreements had not been fraudulent and any of the deals had closed: No. Selling Price [Converted into CDN] Inventory Cost Payments Made by Appellant to Premier, lien Claimants or as Directed by Premier [Cdn] Gross Profit, Net of Payments to Premier, Lien Claimants or as Directed by Premier 1 $2,218,800 $292,788 $360,540 $1,565,472 2 1,190,414 292,788 139,410 758,216 3 3,401,560 529,926 457,914 2,413,720 4 7,879,032 529,926 479,438 6,872,668 5 6,412,900 529,926 214,464 5,668,510 Total $1,651,766 11) In 1996, the Appellant realized that Premier Investments had perpetrated a series of frauds upon him and consulted the RCMP. The Appellant assisted the police. The police raided the offices of Premier and arrested the representative known to the Appellant as Andrew Martin. Andrew Martin was identified as Michael Davis-Bingham, also known as Barry Davis, charged with theft over $5,000 and released on bail. The defendant fled and there is a bench warrant for his arrest. Premier's business disappeared, as have the other representatives. 12) Andrew Martin had possession of the Appellant's gem portfolio in 1996. When he was arrested and subsequently fled, the gems of the Appellant also vanished. The Respondent has allowed a business loss with respect to the theft of the Appellant's gem inventory. 13) The Respondent has denied any prepaid expense deduction with respect to the payments made to or as directed by Premier. 14) As a consequence of the denial of the deductions by the Respondent, the Respondent also denied interest expense with respect to the 1994, 1995 and 1996 taxation years. 15) In the event that this Court allows any of the payments paid to or as directed by Premier, such deductions will be applied to the 1996 taxation year. 16) The Appellant was engaged in business by virtue of being engaged in an adventure in the nature of trade. 17) The amounts paid to or as directed by Premier were paid by a combination of bank draft, wire transfer and cash. All amounts paid were verified by the RCMP. 18) Generally Premier did not provide receipts, invoices or other commercial documents to evidence payments made by the Appellant. 19) The following represent exceptions to the lack of supporting documentation. References are to the Appellants Document Book: Tab Document Description 6 Purchase/Sale Agreement The purported purchase price was US$1,720,000 and "There will be a 10% performance bond required to serve as indemnity against the delivery of the assets." 14 Titus Private Holdings Inc. "1. The balance of the funds totaling [sic] $17,000.00 US have to be paid in full before the completion date which ahs [sic] been set at September 3, 1994. 2. All fees including bank set up charges and holding fees and also disbursement fees to be split evenly, setting Mr. Hammill's charges proportionately at $6,700 and yours at 3,000.00 (all funds expressed in Canadian currency)." 17 Signed Receipt From Andrew Martin for $25,000 Canadian cash "rec'd 27 Apr. 94 from WHH for certification + frt + insur. + Admin fees." [signed] Andrew Martin 22 Titus Private Holdings "We have been informed by our associated at D & S enterprises Incorporated to maintain a holding pattern until this matter is dealt with. The problem stems from reports obtained from the P.G.L.I. and the G.L.S. that assets numbering 1 to 5 have liens registered against them for the total sum of $45,000.00, the liens are registered by more than one parties..." 23 Omega Speciality Investment Banking "There are no more liens apart from the ones you were notified of, these liens along with the SO3 that was registered in New York, together totaled [sic] 248,000 in Canadian currency." 36 G'Ral Management Limited "The other charges that will be needed is as discussed to be the amount equaling [sic] to 0.25% of the total to be transferred. I must clarify that this is YOUR RESPONSIBILITY and only yours and does not extend to anybody else." 43 Escrow Agreement "The fee payable to the Agent or Agencies, as the case may be, shall be Five Hundred and Sixty-Nine Thousand United States Dollars ($569,000 USD) which shall be deposited with the Escrow Agent for dispersal..." 51 p.2 Escrow Agreement "Seller will pay to the Agents or Agencies a fee for facilitating the transaction contemplated in the Agreement of Purchase and Sale between the Seller and the Buyer. The fee payable to the Agents or Agencies as the case may be, shall be Six Hundred and Ninety-Five Thousand United States Dollars ($695,000.00 USD) which shall be deposited with the Escrow Agent for dispersal to the Agents or Agencies on written instructions by the Seller on completion of the transaction contemplated in the Agreement of Purchase and Sale." 58 Signed Receipt from Andrew Martin for U.S. $6,205 "Andrew Martin received in cash $6,205 U.S dollar from William Hammill" [signed] Andrew Martin"" [4] In Court, William Homer Hammill testified that he was a manufacturer. He served in the Reserve of the Canadian Armed Forces and had obtained the rank of lieutenant colonel when he retired in 1986. He worked at J.P. Hammill and Sons Ltd. who manufacture garments and uniforms. He was a senior partner. The business employs 200 people. The sales amount to some $12 or $13 million per year. They have about 4,000 customers, 26 sales people and 15 different offices including offices in Dartmouth, Nova Scotia, Nanaimo, British Columbia and Houston, Texas. The business also receives telephone orders. [5] In the year 1987 he became interested in the purchase of gems as a result of a telephone call from a salesman in Toronto. It seemed like a good business so he visited the York Union office in Toronto and spoke with a person by the name of Peter Walker and later on, Bill Hawkins. He purchased gems from both of these individuals. [6] His intention was to build an inventory of gems and to sell them. The gems were packaged in small amounts with a certificate of authenticity. He stored them at his office and in his home. They were not capable of being worn as jewellery. [7] Peter Walker left the firm and Bill Hawkins took over. York Union closed and Bill Hawkins went on to work with H & H Rarities. The Appellant visited his offices on several occasions and bought from him several times. He did not insure his gems as this is very expensive and he believed that his gems were secure. He financed the purchase of these gems through cash flow. During the summer of 1993 he decided to get serious about selling these gems. He talked to Bill Hawkins. He then received a telephone call from Peter Manning who said that he would work with him. Manning knew that the Appellant had a good inventory. He became aware of one Harold Schnap as the president of Premier Group Investments. [8] The Appellant completed five transactions with Andrew Martin. [9] He referred to a Purchase/Sale Agreement[1] and he said that he had signed it. The name on the top of the document was Martin & Douglas Holdings and Fiduciary Service signed on its behalf by Harold P. Schnap who was indicated as being the president, International Department. The Appellant signed also. The agreement was for 54 gems which was all of the inventory of the Appellant. The purchase price was to be US$1,720,000 and the Appellant expected to receive a profit from the sale. He had to provide a performance bond as well. He was told by Andrew Martin that this was a guarantee to the buyer that the seller would provide inventory certificates and would do all that he could to complete the sale. [10] He received a letter[2] that purportedly was issued on the letterhead of Rupertson, Fitzgerald, Barrister and Solicitors although it contained no return address. This letter was directed to Martin & Douglas Inc. in Toronto and to Mr. Schnap with a copy to the Appellant. The Appellant accepted this letter as confirmation that the funds were held in trust pending the sale. He did not think that it was significant that there was no return address on the purported letterhead of a firm of Barristers and Solicitors. He said that this was common in his business. The letter referred to a performance bond being enforced by their client by the name of Yin Xin Holdings. The language in this regard was quite confusing and it is impossible to determine what it meant. [11] Andrew Martin told the Appellant that there would be other fees as well. [12] There was a payment schedule for the year 1993[3]. In essence, this schedule showed the US dollar amount of funds remitted by the Appellant on September 17, 1993 to November 15, 1993 in the total amount of $323,407.40 with the names of the different identities to whom the funds were sent. These included Martin & Douglas, the Premier Group Financial, Chris Wells and Andrew Martin. A similar payment schedule was shown for 1994 when the Appellant remitted a total of US$501,128.27 to various entities including Pat Cox and John Skinner; Roche and Company; Premier Group Financial; Andrew Martin; Innity Music Promotions and Regal International Holdings. [13] Similarly in 1995, the Appellant remitted a total of $478,542.95 to various identities including Regal International Holdings; Andrew Martin; Coventry Resource Management; Ontario Company #1140191. [14] In 1996 the payment schedule showed that the Appellant remitted a total of $157,311.68 to Solomon Investment Group. The total remittances between 1993 and 1996 were US$1,460,390.20. The Appellant had no receipts for these payments but he said that he asked Andrew Martin about the receipts and he was told to go to his office. He did not go. All of these payments were made to assist in the sale of his inventory but the sale did not take place. Andrew Martin said that the principals could not put it together but he would try to sell the gems down the road. [15] The Appellant complained to Mr. Schnap about this failure and he was referred to a person by the name of Robert Salaam with Royce Management in New York. He talked to him about 12 times. Mr. Hammill then inquired about Royce Management with Harold Schnap, Andrew Martin and Patrick Cox who worked for International Gems. International Gems was independent of Premier, Martin and Schnap. Patrick Cox told him that he had been down to the offices of Royce Management. The Appellant did not go to their offices. [16] As a result of talks with Martin and the other persons, he sent US$175,280.93[4] to Roche and Company on February 16, 1994. The purpose of this advance was to purchase three more emeralds to "make the portfolio more saleable". He received the three emeralds and this gave him confidence that things were heading towards the completion of the sale. [17] Andrew Martin put forward a new offer[5]. This was from a different company, Tokumara Securities & Assets Ltd. whose letterhead was notable by having no return address. Some parts of the letter were blank and in general the language contained in the letter was confusing and unintelligible. The Appellant discussed this offer with Andrew Martin. The reported sale included some of the stones that he had purchased recently. He made a payment of US$78,000 in this regard to Premier Group Financial on March 25, 1994 and he said that these charges were with respect to a performance bond and service charges for this sale. He had no further explanation for this expenditure. [18] The US$10,500 payable to Premier Group Financial on April 12, 1994 and the US$18,200 sent to Premier Group Financial on April 15, 1994 were for advance fees for the group called Tokumara relative to that sale. He had no documents with respect to these expenditures. [19] On April 27, 1994, he forwarded the sum of US$18,050.54 to Andrew Martin, in cash. He gave it to him to certify some gems. He did produce a receipt[6] purportedly signed by Andrew Martin for C$25,000 which was the equivalent of US$18,050. The Appellant appears to have written in the document that it was for certification, freight, insurance and administration fees. When asked why he obtained a receipt for this, he said that they met in Toronto in a car; he gave the money to Martin and asked him to sign the receipt. Normally he sent bank drafts. Later he concluded that this sale was dead and he "came down on Andrew Martin" because this deal had not been concluded. [20] He then referred to a document[7] which contained the heading, Titus Private Holdings Inc. Again there was no return address on this letterhead. The document was directed to Mr. Andrew Martin with respect to William Hammill. Mr. Hammill regarded this as an offer of purchase from Titus Private Holdings Inc. Payment was demanded in the amount of US$22,337.55 or the equivalent of C$30,937.50. This payment was a condition that had to be met to complete the sale, so he paid it. [21] The wording in the document is quite unintelligible but the Appellant paid the money in any event. These funds were directed to Innity Music Promotions. The explanation for this was that Innity Music Promotions could facilitate the picking-up of the gems much more quickly. The Appellant said that his goal at this time was to sell his gem collection. [22] Then a real problem developed with the Titus deal. He received a letter from some identity referred to as Omega Speciality Investment Banking[8]. Again there was no return address on the letterhead. This letter informed the Appellant that were liens placed against his gem collection and in order to proceed with this deal he would have to pay the sum of $66,074.07 to satisfy the liens. The letter was "from the desk of Sharon Thurgood-Whyte". The Appellant said that he confirmed the letter with this person. The letter also referred to the firm Royce Management in New York and Mr. Robert Salaam. The letter contained a number of other names and titles, including one identical surname. The Appellant knew nothing about these people or even if they were real. However, he concluded that they had something to do with the lien. [23] The letter itself is incapable of being understood in light of the fact that the gems were free of any liens when they were delivered to Andrew Martin and there was no explanation given as to how such liens could now exist. [24] The Appellant discussed this letter with Patrick Cox and John Skinner at International Gems. He had used Patrick Cox as an advisor before. He was told what some of the abbreviations referred to in the above noted letter meant. These were apparently the Agencies or Boards which would hear the dispute with respect to the liens on the gems. There was nothing in this letter to suggest what those terms meant or what authority they possessed. The Appellant referred to this letter as a progress report. It was his understanding that because the earlier sale had not concluded that some entity was entitled to a lien on the gems. The lien holders were claiming that they had suffered damages and so they placed a lien upon the Appellant's property. As a result of this information, the Appellant paid the $66,074.07 without any further explanation. [25] The Appellant was referred to a series of payments made to Regal International Holdings[9] and he said that he made them. These payments were discussed with Andrew Martin and he was told that these were advance payments to complete a sale. No further explanation was given. [26] Eventually the Appellant concluded that the Titus sale was dead. He was very disappointed and discussed this with Andrew Martin and the fact that they had gone through a purported sale twice and they had both failed. Andrew Martin produced five offers from the summer of 1993 to August 1, 1996. The Appellant made 40 payments to him or Premier as a result of these offers. In order to obtain the funds, he sold his cottage, rental properties, mortgaged his house and cashed his RRSPs. The purpose was to enable him to sell his gem collection. [27] He met with Andrew Martin 30 times and telephoned him hundreds of times. When asked how he could be convinced that these offers were real, the Appellant said that Mr. Martin was being very personable. He only talked to the last purchaser, Patrick Lee Chin. He confirmed some contact in 1987 with York Union, Peter Walker and Bill Hawkins; in 1990 with H & H Rarities (Bill Hawkins and Jim Spurling); in the summer of 1993, with Premier - Peter Manning, Harold Schnap, Andrew Martin and Christopher Wells; International Gems (John Skinner and Patrick Cox); Royce Management of New York (Robert Salaam); Omega - Sharon Thurgood-Whyte, David McKnight and Patrick Lee Chin. [28] He finally realized that Mr. Martin was a "con-artist" and he went to the Royal Canadian Mounted Police ("RCMP") who assisted in the apprehension of Mr. Martin. He referred to the letter from Titus Private Holdings Inc.[10] directed to him and Andrew Martin on October 4, 1994, which indicated that assets numbering 1 to 5 had liens registered against them to the extent of $45,000. Yet, the document from Omega[11] allegedly showed liens totalling C$248,000 against the gems. Again the language in this letter amounts to nothing more than gibberish. There was no return address on the letterhead. [29] The Appellant said that the payment on December 6, 1994 to Regal International Holdings in the amount of $109,008.71 was part of the lien payment. He then referred to a purported purchase and sale agreement[12] with "g'ral Management Limited" from New York. This was supposed to be with respect to a Sales Agreement for 4.2 million dollars with Transpacific Enterprises Incorporated. When asked what the role of "g'ral" was, he said that they were supposed to be Escrow Agents as shown in the "Escrow Agreement"[13] (In this document the name was G'RALD MANAGEMENT). This document was between William Hammill and Transpacific Enterprises Incorporated, which indicated that it was a Korean Corporation. [30] The Appellant said that he made further payments as a result of this Agreement. He made payments to Regal in the amount of US$70,077.04 as part of this transaction. [31] He was referred to the Escrow Agreement[14] between him and Transpacific Enterprises Incorporated and Smith and Goldblume as the "Escrow Agent". This Escrow Agreement was with respect to a Purchase and Sale for US$4,695,000 and this agreement required an agent's fee payable in the amount of US$695,000. This had to be deposited with the Escrow Agent. On October 12, 1995 he forwarded the sum of US$11,830.12 to Andrew Martin by way of cash. On November 10, 1995, he forwarded the sum of US$30,000 to Coventry Resource Management by way of cheque as part of the $695,000 requirement and on November 15, 1995, he forwarded $37,045.12 to Ontario Company #1140191 for the same purpose. Again he confirmed that he had made 40 transactions over a period of three years for the purpose of completing the sale of his gems. [32] In cross-examination, he said that he never paid out the full amount of US$695,000 as requested. He made up his mind to get out of the gem business. [33] He was referred to the payment to Andrew Martin in the amount $11,832.12 on October 12, 1995 and he was asked what it was for. He said that it was to help complete the expected sale for US$4,695,000 with Transpacific Enterprises Incorporated. Likewise the payments of $30,000 on November 10, 1995 and the $37,045.12 on November 15, 1995 were to try to complete the sale. Smith and Goldblume were the Escrow Agents. They were to receive the funds. [34] Counsel referred him to the payment of October 12, 1995 in the amount of $11,832.12[15] to Andrew Martin and he was asked how that amount would find its way to the Escrow Agent and be of any benefit to him. He said that he was told that it would go to the Escrow Agent through Martin. He was then asked how the US$30,000 paid on November 10, 1995 to Coventry Resource Management would go to Smith and Goldblume to complete the transaction. He said that Martin told him that the money would go to complete the Agreement. [35] He confirmed a payment of $37,045.12 to Ontario Company #1140191. He was asked, "Do you not think it strange that in this very short period of time a large amount of money went to different companies?" He did not think this strange. [36] He said that he spoke to Transpacific four to six times, to Patrick Lee Chin and he also worked with Andrew Martin. He referred to the payment of $6,205 on December 21, 1995 made to Andrew Martin and he was asked what that was for. He said that they were to complete the deal by the end of the year and Andrew Martin said that he would arrange to complete the sale by that time if the Appellant could come up with $6,205. He also discussed it with Patrick Lee Chin. He also had one discussion with Smith and Goldblume. They were a minor actor in the process. He did not know where this discussion took place. He then said that he was talking to Andrew Martin. He was asked what assurances he had that the Escrow Agent was in agreement with this money going to Andrew Martin and he said that he trusted him. It was on his advice alone. [37] He was asked why he went into the gem business. He said that he had no intention of doing so before he received a telephone call from York Union. He could not say that he was surrounded by "a den of thieves then" but he could say that now. He would say that International Gems were not good friends of Premier. There was no connection. All other entities were connected. Patrick Cox at International was separate from Premier. Skinner was also independent. He was asked why he trusted Skinner and Cox. He said that he had a good rapport with them, the same as he had with his own salesmen. [38] He admitted that he had not initiated the original call. He decided to look into it. In Toronto he visited the York Union office and purchased a gem on his first visit. He had received a lot of information at York Union about the gem business when he was there. He kept accurate notes as he went along before he went to the RCMP. He wrote down the dates that he purchased the gems. He paid the money. He received the pouch of gems together with the certificate of authenticity. These certificates described the weight, the size, the clarity, the number of carats and the colour. The value of the gems was not indicated on the certificates. There was an invoice for some of the gems but not for all. [39] He hoped to obtain a profit of 15 to 24 percent from the sale of his inventory or more over a period of years dependent on the market. When asked why someone would buy his inventory he said that the purpose would be to add to their inventory so that they could sell it. This would be the main reason. Some people told him that purchasers might "come out of the cold and purchase the gems". The main intention was to go to Transpacific or someone like that to complete the sale of his gems. [40] He started purchasing in 1987 and did the same thing in 1988 and 1989. Between 1987 and 1990 he had not sold any. He never bought anything through Premier or Andrew Martin and he only used them for the purposes of sale. He mostly bought through Bill Hawkins. Between 1987 and 1993 he was purchasing gems for his inventory. [41] He was referred to his income tax returns for 1994, 1995 and 1996. He identified them. In the 1996 return he reported for the first time to Revenue Canada that he was involved in the gem business as WHH Gem Ventures. When asked why he did not deduct all of the expenses earlier he said that he was trying to complete his inventory, sell them and then he would claim all of the expenses at once. He was terribly busy. In the year 1996 he claimed, as the amount received from sales, the sum of $157,900. He would not accept the suggestion that he did not want to report the profit at all. [42] He made inquiries about Rupertson, Fitzgerald, Andrew Martin and Harold Schnap. He was not concerned about the lack of a return address on the letterhead[16]. This did not mean anything to him. The first dealing that he had with Premier Group Investments was August 28, 1993[17]. He did not know what the terms "ICC" meant in the document although he said that Andrew Martin explained it to him. As indicated, this document was convoluted and unintelligible. [43] He was not able to say whether that the signatures of Peter Manning on two different documents were dissimilar[18]. They might be. The sale price referred to in the Purchase/Sale Agreement with Martin & Douglas[19] was changed because they felt that the higher price was in order. The performance bond money was to come back if the sale went through. He did not get any of the performance bond money back because there were other deals in the works and he left it there. [44] The gems were in his possession on January 17, 1994. In reference to the deal was with Tokumara Securities & Assets Ltd.[20], it was noted that the name Global Titles appeared at the top which had not been referred to before. He did not think it strange. "It did not set off any bells." There was no address or telephone number for Tokumara Securities & Assets Ltd. He had no concern about this. He could call Andrew Martin. He did not think it strange that Andrew Martin had signed the document as a witness and also as a party and even though Mr. Hammill's name did not appear on it, he agreed to it verbally. [45] He agreed that he paid out US$78,000 to Premier Group Investments[21]. He was asked why this was necessary when he had already invested $360,000 of his money as result of the failed transaction. He said that they were trying to complete the sale. It was a big price, $852,000. His cost was about $292,000. He also paid out the amounts of US$13,026.05[22] and US$10,500 to Premier Group Investments. He was prepared to accept $852,000 as the sale price which would bring him a reasonable profit. Again he was asked why he would have to put up any more money when he already had $360,000 invested in the sale and he said that he would have sold at cost at that point in time. [46] He did not think that it was strange that the Titus Private Holdings Inc. document[23] contained no address on the letterhead. He would have responded to Andrew Martin. It did not bother him. He received offers like that every day. [47] He admitted that he paid $30,937.50 to Innity Productions[24]. When asked why Andrew Martin had to have more money from him he said that they had an offer from Titus for $2,456,000. Titus would be the purchaser. [48] He was referred to the document from Titus Private Holdings Inc. to him and Andrew Martin[25] and more particularly to that part of the document which referred to "the party holding the $50,000 position". He was asked who this was and there was no answer to that question. He was asked to whom he had paid the $30,937.50[26] and he said that since it was an offer of purchase he paid that amount and accepted the agreement verbally with Andrew Martin even though Andrew Martin was one of the parties referred to in the document. He paid the money to Innity Music Promotions. He was asked how this would advance his interest and he said that Andrew Martin told him that he was to be in Toronto and this would make it easier for him to pick up the money. He was asked where the money was to end up and he said that Andrew Martin was to look after his interest. It went to Innity Music Promotions. This was discussed on the telephone and there was nothing on a piece of paper about it. [49] The C$25,000 or US$18,050.54[27] was paid by him for certification of his inventory. Between three and six gems did not have certificates. Andrew Martin said that he would go and have them certified. It sounded reasonable to him. These were gems that Bill Hawkins was to have given to him and he did not. He never saw the three new certificates. He never asked Andrew Martin if he ever got them. He presumed that he did. [50] He did not know why the liens were registered against his gems for $45,000.[28] He was reminded that these liens were not his. He said that he asked Andrew Martin who the lien claimants were. Andrew Martin said that he suspected that it was Royce Management and he would find out. [51] He was referred to the document[29] from Omega Speciality Investment Banking to him and he was asked what role Omega was playing in the transactions. He said that they contacted him about the lien for a fee. Andrew Martin was protecting his interest at the hearing. It was taking place in New York as far as he knew. There was no address for Omega and no telephone number. This did not appear striking to him. He did not notice that there were two persons by the name of Whyte and there was also a Bianca Thurgood in addition to the name Thurgood-Whyte. This did not appear to have startled him in any way. [52] He sent in $66,074.07 to discharge the liens. It was suggested to him that he had been contacted by different persons, that the letters were very strange and that he should have been really concerned about these persons being involved in the gem business. Further, it was suggested to him that there was a lack of documents to verify the payments, such as invoices. He did not seem concerned by this. [53] He had never been in Andrew Martin's office. He received a letter on October 14, 1994 from Omega[30]. He purported to understand this document and was not distressed by its contents. He maintained that it was the same type of business deal that he encounters in his business. He was asked where the gems were and he said that they were with Andrew Martin. When asked why he did not ask for them, he said that he did, but Andrew Martin told him that a deal was pending and that there might be a duty problem. [54] The US$34,860 sent on January 24, 1995 and the $40,000 sent on January 30, 1995 were directed to Regal International Holdings[31]. These were administrative fees. Regal was an associate of Titus. There was nothing in the other documents to suggest that Regal International was his agent or was his intermediary but he said that this would be discussed on the telephone. He thought that Regal and Omega were sister companies. [55] He was referred to other documents[32] evidencing payments to Regal. When asked why he would pay these amounts he said that he was determined to complete a sale of his gems. It seemed very reasonable to him at the time. Titus was to be the purchaser even though the payments were to be made to Regal. He did not accept the suggestion that he should have known, based on the amount of money that he paid out, that something was wrong. He was satisfied about the deal. [56] In respect of the Agreement of Purchase and Sale with Transpacific Enterprises Incorporated[33] he said that he got the information from Andrew Martin. The information at the bottom of the document was in his handwriting. He admitted that he paid US$66,074.07 to Regal in regard to the liens[34]. After this he knew that the Titus deal was going nowhere. [57] He was referred to the payments that were made as a result of a letter from Titus Private Holdings Inc. to him[35] for C$30,937.50 or US$22,337.55. He asked for return of the monies. He did this all the time. He did not receive it. He had no documents to support this position. Everything was verbal. None of the money came back in any event. [58] His position at the time was, "what do I have to do to sell my gems?" It was suggested to him that he had already put more money in than the gems were worth. He said that he would probably do the same thing now and do it no differently than he had done before and he acts no differently in his own business. [59] He was referred to the amount of US$40,046.58 sent to Regal[36]. He said that the money was sent to Regal in spite of the fact that he was trying to complete a deal with Titus. These were administration charges. He did not know what they were for. He suggested that they might have been intermediary charges in order to complete the sale. Again, the US$34,900 sent to Regal International Holdings on January 24, 1995 was for administration fees. The sum of $20,625.99 sent to Regal on February 9, 1995 was on the advice of Andrew Martin. He felt confident about it. The US$22,060.74 forwarded to Regal International Holdings on February 9, 1995 was for the same purposes as were the funds sent on April 5, 1995 in the amount of US$83,646.28[37]. [60] The letter from "g'ral" Management Limited" dated April 17, 1995[38] was the first communication with this entity. It was with respect to the US$4,200,000 Sales Agreement with Transpacific. "g'ral" said that 0.25% of the total amount of the purchase price was the Appellant's responsibility. He ignored it. It referred to "the taxation situation". He did not know what it meant. The $3,000 and $4,000 amounts[39] were sent to "g'ral" together with a further amount of US$4,714.93. The US$20,026.06 sent to Regal International[40], was to complete the sale to Transpacific. The same thing applied to the US$38,046.16 sent to Regal International[41] [61] He was referred to some deposit slips[42] and he said that these were deposits from the sale of some of his gems. These showed a 25 percent gross profit over cost. [62] He was asked to explain the nature of the Escrow Agreement showing G'RALD MANAGEMENT as the Escrow Agent[43]. He said this was an offer to purchase from Transpacific Enterprises Incorporated. The purchase price was to be $5,695,000. It was noted that the amount did not refer to it being in Canadian or American dollars, but the commission figure of $569,000 was referred to as US funds. He said that this was an advance payment and he considered it to be a reasonable request. [63] The Asset Purchase Agreement between Transpacific Enterprises Incorporated and William Hammill dated September 14, 1995[44] was the document that was being talked about in the Escrow Agreement[45]. Paragraph 3 of the Escrow document refers to Sections 6 or 14 of the Agreement of Purchase and Sale as being the applicable items for termination of the transaction but section 14 deals with representations and warranties and not termination of the transaction. When asked if there was something missing he said that he deals with this type of agreement all of the time. He probably did not read it in depth. When asked why paragraph 4 of the Agreement used the Turks and Caicos Islands Bank and did not use the US or Canada, he answered that it would be possible to get more money because of the interest factor. [64] It was noted that in the Asset Purchase Agreement[46] the name was changed to Transpacific Enterprises Incorporated and something was scratched out. He said that Andrew Martin sent this on September 14, 1995 and that is all that he knew about it. It was pointed out to him that the purchase price was changed from $5,695,000 in the Escrow Agreement to $4,695,000 in the Agreement of Purchase and Sale. He said that this was an error and the Purchase and Sale document was changed to correct the amount. It was pointed out to him that paragraph 3 was missing. He had no comment in that regard. [65] Paragraph 11(k) of the Asset Purchase Agreement[47] referred to the International Chamber of Commerce as being the appropriate body to deal with any disputes under the agreement but he did not know what the letters meant. He said that the arbitration clause did not occur to him then even though it was suggested to him that it conflicted with paragraph 11. He said that this would not be of interest to him and that he did not consult a lawyer. He did not know what the letters N.A.H.A.B.; P.G.L.I. and G.L.S. meant in paragraph 12(c) of the Agreement. [66] He was asked why they would use the law of Texas and what did it have to do with these transactions and the Agreements and again he said that it was of no concern to him. The fees paid[48] were advance fees for administrative charges paid to Regal. When asked why the contract references[49] referred to Smith and Goldblume of New York City instead of G'RALD and as to what they had to do with the business, he said that it was not strange to have more than one agent. They were working together to complete the sale as far as he was concerned. Nothing else about the agreement seemed to be out of order to him. It did not matter to him. They were getting a new Escrow Agent. [67] It did not seem of particular interest to him that the purchase price had been reduced by a $1,000,000 because he would do anything to sell the gems at that point in time. It was pointed out to him that there was a new bank in the Turks and Caicos Islands mentioned in the Agreement. It was not the same bank mentioned in the Escrow Agreement. First he said that it was whatever bank would pay the most interest but then he said that he had some concern about this and he did question it. [68] With respect to paragraph 14 of the Escrow Agreement[50] and the law of the State of Texas as being the law which governed the Agreement, he said that this did not matter to him. It did not matter to him that the Agreement was not signed by either party. It was to come in to effect on September 29, 1995. The purchase price was changed by $1,000,000 after they had time to talk about it. [69] It was pointed out that the Asset Purchase Agreement[51] for US$4,695,000 was in fact signed and witnessed and he was asked why he would not rely upon that one rather than the unsigned Asset Purchase Agreement[52]. He said that there was a verbal agreement to cancel the former document. He agreed to a new price and he wanted a sale. [70] The Appellant was referred to a request from Jerald Bettman of the Sutton Mercantile Group[53], for a further amount of US$12,000 and he admitted that he did not know who this group was and that he ignored it. Then he gave C$16,210[54] to Andrew Martin to complete the Transpacific sale. This was cash. When asked why he did this, he said that he agreed with it at the time. [71] He was referred to the letter from Pegasus Private Portfolio Management[55] which appeared to indicate that Andrew Martin was only going to act as a consultant/liaison between Pegasus and the sellers, would only act upon their instructions and that he was not authorized to act upon any other aspects of the transaction. He appeared to be unmoved by this and said that he thought that they were just trying to save fees. He did not have any concern about Pegasus. The letter had no effect upon him or his talks with Andrew Martin. [72] He sent US$30,000 to Coventry Resources and Management on November 10, 1995 in accordance with the letter's demand. The US$37,045.12 sent by him to the Ontario numbered company was sent on Andrew Martin's instructions. It was sent to "1140191 Ontario Limited". He considered it to be an advance on fees to complete the deal with Transpacific. [73] When referred to Tab 58 in the forwarding of US$6,200 to Andrew Martin on December 21, 1995, he said that he was trying to complete the sale by the year-end. Andrew Martin said that they had charges of this amount and it had to be paid. He did not know why it was needed. [74] On March 18, 1996 he sent US$22,000 to Solomon Investments Group[56] as administrative fees to progress the sale with Transpacific. The reason for this was because he was still trying to complete the Transpacific sale. He believed that is what they needed the money for. He did not ask for any money back from Regal. He did not expect to get any of the advances back although they were telling him something else. He did not believe it. He asked them about getting his advances back and Andrew Martin told him the funds would be held for possible future sales. He had evaluations of his gems from John Skinner, Bill Hawkins and independent companies. Bill Hawkins sold him most of his gems. [75] On April 12, 1996, he sent $15,000 to Solomon Investment Group because he considered the deal with Transpacific was still alive. The amount of US$8,124.94 equivalent was sent to Solomon Investment Group on April 12, 1996. This was an effort to secure the deal. For the same purposes, he sent US$26,130 to Solomon on June 11, 1996; C$3,000 on June 11, 1996; US$4,868 on June 17, 1996 and US$32,000 on July 2, 1996. All of these drafts were to the attention of Andrew Martin. [76] He sent the money to Andrew Martin because "he was getting pretty desperate". This was just before he went to the RCMP. He told Andrew Martin that he wanted his gems back. Andrew Martin told him that he would get David McKnight from Omega to work on it. They wanted $32,000. There was no other explanation for forwarding this amount. [77] The US$12,680 sent on July 8, 1996 was for the same purpose, to get the gems back. The US$42,450 was the last payment sent to Solomon to get the gems back. This was on August 1, 1996. [78] There are no values on the certificates of appraisal that were prepared by Jewels of Canada. He had other appraisals as well which gave him an idea of what his gems were worth. In May of 1992 he would have paid 10 percent commission for H & H Rarities to sell his gems in the next five years for US$350,000. He did not leave his gems with them. They charged him nothing for this service. [79] He agreed that between offers 2 and 3, the difference in sale price was far greater than the increase in the cost of that inventory, but this did not surprise him. It was suggested to him that the increased offers were unrealistic. He said that he could see this happening. It was suggested to him that he was being "conned" but he would not agree with that. The last offer was an increase of 100 percent but he had to add costs to that so that his profit would be about 300 percent. When asked when he thought it would be considered reasonable for him to have stopped being involved in this attempted sale, he said when he decided to go no further. Evidence of Tim Laurence [80] Tim Laurence was qualified as an expert. He is a constable in the RCMP, Commercial Crime Division. He described the typical gem scam as a situation where the victim, like the Appellant here, has purchased an amount of gems and hopes to sell them at a profit. He is convinced by the creator of the scam that there are a number of conditions which must be met before the gems can be sold. These invariably require the victim to pay sums of money to the perpetrator in order to perfect the sale. Typically the perpetrators prepare fictitious documents. There are often a number of different names referred to in the documentations but often times these are the same people. [81] In early 1997 he took over the Hammill file. His office told the Appellant that it was a fraud and if the principal perpetrator (Martin) "contacted him, he should call them immediately". In 1998, the Appellant did receive a telephone call and he contacted the RCMP who asked Mr. Hammill to "get a line on him". In mid-January he came back to the Toronto area. They received an address at O'Connor Drive and they were able to catch Andrew Martin at that address. [82] He was arrested and charged with fraud over $5,000 and released on bail. He reported for three months and then he did not report for two weeks and a bench warrant was obtained for his arrest. He disappeared in August. He described Exhibit A-4 as a report and Exhibit A-5 as a call sheet. These were both admitted into evidence by consent. [83] The officer said that the office where the scam was being perpetrated in Toronto was listed in the name of Summit International. It had several telephone numbers. Exhibit A-6, admitted by consent, was a so-called "cheat sheet". The officer said that they found files on the Appellant and 55 to 60 other files in the office. They interviewed two other victims as well. [84] Exhibit A-7 was a chart outlining the operation of the "scam". Andrew Martin was the centre of it. They could never identify anyone else. Exhibit A-8 was a so-called "script" or "rebuttal sheet". This was admitted by consent. The perpetrators used the name of more than one company so that they could insulate themselves. The Appellant was not unique in this process. A large number of these operations were in effect and they could not all be brought to Court. [85] In cross-examination he said that there is no other "raison d'être" for the gem market except to create a scam on innocent victims. There is no real secondary gem market. Peter Manning was also one of the perpetrators. [86] This witness was referred to the term SO-3 used in the correspondence to the Appellant with respect to the alleged liens on the gems and he said that this was probably a rating on a gem. Often times the liens that are alleged to be in existence are greater than the purchase price of the gems. They always use inflated prices. [87] It is not uncommon to have many operations of this type around the world in this day and age to the knowledge of businessmen. There are some agencies that could be called by an innocent party to find out whether or not these operations are real or are "scams". The return offered is normally a very large one. [88] In answer to a question posed to him by the Court the witness said that the only real person involved as far as he was concerned for sure was Andrew Martin. There may also have been another person by the name of Mr. Hawkins and one Harold Schnap. [89] Gary Frederic Parker was a chartered accountant. He testified that he had given evidence in court previously for the prosecution in forensic matters and values of companies. He was qualified as an expert and entitled to give opinion evidence with respect to GAAP and other matters of accounting. [90] He said that GAAP are those principles that accountants use in the preparation of financial statements such as matching, proper presentation of expenses, liabilities, quantification and valuing assets. In the case at bar he formed an opinion with respect to GAAP in relation to the expenses claimed by the Appellant. It was his position that the Appellant bought the gems in question as an adventure in the nature trade. Mr. Hammill had to maintain the inventory until it was sold or as in the case here, stolen. This includes claiming the expenses and the costs of the inventory. He was not entitled to claim the loss until such time as the inventory was disposed of. The quantum of payment was not in issue and the RCMP confirmed that. Mr. Hammill gave evidence that he was trying to sell the inventory. GAAP would require that the expenses be recorded for audit purposes. [91] In cross-examination he said that in the formulation of his opinions he relied upon the facts provided by the Appellant's solicitor. The opinion was not the result of an independent audit. There are differences between GAAP and the requirements of the Act. Where these are in conflict, the Act prevails. However, the Act closely parallels GAAP. When asked if there was a "reasonableness" section in the GAAP handbook, he thought that there was and attempted to find it. However, in the end, he said that the word "reasonableness" does not appear in the appropriate section in the GAAP handbook. [92] The Respondent called one David Anthony Graffi. He has been employed with CCRA for 15 years and has been an appeals officer for 10 months. Before that he was an auditor. He has a Bachelor of Arts (B.A.) and a Certified Management Accounting (CMA) designation. He had been in private practice for a period of time. He had also taken in-house courses with CCRA. He became aware of the present factual situation because of an audit of J.P. Hammill and Sons Limited. The Appellant's T1 "was screened up" on the basis of a 1996 loss claim. This was a secondary review. He allowed the inventory write-off on the gems for income tax purposes. He agreed that it was an adventure in the nature of trade and that any inventory loss was deductible. [93] With respect to the expenses, they were disallowed. The Appellant did not take reasonable care with respect to this alleged business and therefore the expenses were not reasonable under all of the circumstances under the provisions of section 67 of the Act. There was a lack of due diligence. The Appellant did not take out any insurance on the articles. He appeared to be dealing with a reputable dealer when buying the gems and could not understand why he had not insured the gems. If they had been insured there would have been an appraisal and he would have had reasonable valuations as to their worth. He admitted that the cost was not a relevant factor in this case, except to the extent that if a valid appraisal had been in place the Appellant would have been able to determine that the offers made to purchase the gems were not reasonable. A prudent businessperson would have had the appraisals done. [94] Further, the Appellant made no reasonable inquiries about the people with whom he was dealing. There were no return addresses. The contracts, which he purportedly entered, were concocted and ambiguous. No accountant or lawyer was involved. The Appellant paid "up-front" fees of hundreds of thousands of dollars. Payments were made continually. He did not reasonably inquire what these were for. They were referred to as administrative fees but there was no indication as to what that meant. It was not reasonable for him to pay the amounts of money that he did because he paid more than he was asked to. The payments that he was requested to make and that he did make, did not match up with to any reasonable, valid claim. The Appellant was not interested in what these funds were for. He lost all business sense. [95] On cross-examination he was referred to Exhibit A-10, entered by consent, which were his notes. He was given the file to review the losses and determine if they were tax deductible. There were no documents to support the pre-payments. Further, it is not just supporting documents that are in issue but there is the question of the reasonableness of the payments. [96] Exhibit A-11 was admitted by consent. These were his notes. He was trying to get as much information as he could to make a reasonable decision in this case. It was his position that so long as a taxpayer could verify the payments and so long as the taxpayer thought that they were with respect to a business, he should be entitled to the loss of the inventory under the provisions of paragraph 18(1)(a). He reviewed Income Tax Bulletin 459 and he was aware of the fraud in this case. He also reviewed Income Tax Bulletin 185R and allowed the inventory loss based on the inventory provided. He did not refer any of the companies named in this case to the North York RCMP office. [97] He identified Exhibit A-12, his notes, dated April 9, 1998. He was referred to the Agreed Statement of Facts, paragraph 10 and he said that he would have questioned the payment of $360,540 made by the Appellant to Premier with respect to alleged liens under paragraph 18(1)(a) and section 67 of the Act. There was no indication as to what the payment was for. He would have questioned this and determined whether he could tie this into income before they could be deductible. Argument on behalf of the Appellant [98] In oral argument counsel for the Appellant said that it would not make any difference that there was no secondary market for this sale. If there is a theft, section 67 has no applicability. It was his position that the expenses were deductible no matter what they were paid for and no matter that the Appellant did not know what they were for except in a general way or that they were administration fees. The Appellant also submitted written argument as follows: 1) The facts not in dispute were identified in the Admissions and Agreed Statement of Facts submitted at the outset of trial. 2) Mr. Hammill is a retired, twice decorated Lieutenant Colonel of the Canadian Armed Forces. 3) He is a successful entrepreneur, co-partner with his brother in a manufacturing business with 200 employees and 15 sales offices across Canada with annual sales of $12,000,000.00 to $13,000,000.00. 4) Starting in 1987 Mr. Hammill began acquiring precious gems for the purpose of resale. 5) The Respondent admits that Mr. Hammill's activities amounted to a business for the purpose of the Income Tax Act. This is in paragraph 16 of the Admissions and Agreed Statement of Facts. 6) There was no personal element to these gems. Mr. Hammill testified that the gems were packaged and stored in a secure spot. His wife did not know of the gems and they were not capable of being worn. 7) Mr. Hammill had many dealings with one Peter Walker, an individual at York Union where he purchased many gems. When Peter Walker left York Union, Mr. Hammill dealt with Bill Hawkins. 8) When Bill Hawkins left York Union and relocated to H & H Rarities, Mr. Hammill followed him and bought gems from him at H & H Rarities. 9) In 1993, Mr. Hammill determined that his inventory was substantial enough that he would try to sell it. He sought the advise of Bill Hawkins. 10) Mr. Hammill was contacted by a person identifying himself as Peter Manning from Premier Investment Group ("Premier"). Peter Manning said that he had been referred to Mr. Hammill by Bill Hawkins. 11) The services of Premier were offered to Mr. Hammill for the purpose of selling Mr. Hammill's gem inventory. Others from Premier were subsequently introduced, including one Harold Schnapp and Andrew Martin. 12) RCMP Officer Laurence provided some insight. He suggested that Mr. Hammill's name had been sold to Premier. The initial phone call in this type of scam is done by a person called a "Qualifier". If there is interest, the Qualifier turns the victim over to another. 13) We now know that Premier and the people associated with them were sophisticated fraud artists. 14) From the time Mr. Hammill met the people from Premier until the time he called the RCMP, Mr. Hammill paid Premier or as directed by Premier $1,651,766. This was admitted by the Respondent. 15) Principally, Mr. Hammill dealt with Andrew Martin. As needed, Andrew Martin brought in other players: Peter Manning or Harold Schnap from Premier, Robert Salaam from Royce Management, a woman identified as Sharon Thurgood Whyte from Omega Speciality Banking, Patrick Lee Chen from Transpacific and others. 16) These were not simply names on a fax. Mr. Hammill spoke to these people as well as others. 17) RCMP Officer Laurence testified that when he raided the office, there were four additional people beside Andrew Martin. All were arrested but charges were only laid against the person known as Andrew Martin. Exactly how large the office was we'll never know. 18) Mr. Hammill personally met with Andrew Martin 31 times and had hundreds of telephone discussions with him. He trusted him. 19) This trust was sorely misplaced. 20) Andrew Martin presented offers to purchase Mr. Hammill's gem inventory. The offers were for substantial amounts. Always, there were associated costs which had to be paid up-front. On one occasion, Mr. Hammill paid to have liens against his gems removed. We now know the liens were fictitious and were part of Andrew Martin's scam. 21) Some of the documents were confusing. For example, the Yin Xin transaction required Mr. Hammill to put up a 10% performance bond, US$172,000. What did Mr. Hammill do? He made 5 payments totaling [sic] US$323,407. Three of the payments were paid to Premier Group, one to Andrew Martin, one to Martin & Douglas and one to someone called Chris Wells. Why did he pay the extra amount? Because Andrew Martin told him the extra fees were required to cover prepaid commissions and administration fees. Why did he pay the various parties? Andrew Martin directed him to. 22) The Titus Private Holdings document is another example. The document was on Titus Letterhead, referred to parties identified as Pietro Romanoff, D & S Enterprises Inc. and Andrew Martin. Two payments were required to be paid under the document by Mr. Hammill, totaling [sic] $30,937. There is a reference to an unspecified third party holding a $50,000 position continuing to hold it and "is accepted into the payout of this transaction". This is confusing and Mr. Hammill was unable to explain it. Mr. Hammill paid the amount, but to add another name to it, Andrew Martin told him to wire the money to the account of Innity Music Promotions. Why Innity? Because Andrew Martin would be near Innity Music Promotions and it would be easier for him to pick up the money. 23) On the Omega letters with respect to liens, the writer is apparently Sharon Thurgood Whyte. The letterhead refers to a Sharon Thompson Whyte and a Bianca Thurgood. Whoever drafted the letter mixed up the names. Mr. Hammill did not notice the error. 24) Documents were presented with no return address on or telephone. Mr. Hammill said that if he wanted to talk to someone, Andrew Martin set it up. Always through Andrew Martin. 25) The evidence of Mr. Hammill with respect to the lien claim was that liens were allegedly placed against his gems by Robert Salaam of Royce Management. He learned of the liens through a letter from a person identified as Sharon Thurgood Whyte. He spoke to her and Andrew Martin. He had no reason to know that Sharon Thurgood Whyte was part of the Premier swindle. He had previously spoken to Robert Salaam when he purchased emeralds through him and believed him to be a real person. 26) To verify the lien story, Mr. Hammill spoke to Patrick Cox at another gem company, International Gems. Not only did Patrick Cox confirm that the lien story was plausible, Patrick Cox said that he had been to the office of Royce Management in New York City and it was a "proper operating office". 27) In each case, Mr. Hammill was convinced of the legitimacy of the offers to purchase and paid the amounts Andrew Martin specified and as Andrew Martin directed. Mr. Hammill said that every payment was for the purpose of selling his gems at a profit. 28) Objectively, in hindsight, we know that no part of any money paid to or as directed by Andrew Martin in fact advanced Mr. Hammill's purpose of selling his inventory. 29) We know how convincing Andrew Martin was. Mr. Hammill was so certain of the imminence of the sales, that to fund the up-front fees, he sold his family cottage, his sailboat and investment properties. He mortgaged properties. He cashed in RRSP's. 30) At one point, Andrew Martin and his accomplices suggested to Mr. Hammill that he purchase additional gems to make a deal more saleable. Mr. Hammill paid US$175,000 and the additional gems arrived by Fed Ex. Andrew Martin's credibility was enhanced. If Andrew Martin was not legitimate, why would the gems have appeared? 31) When Mr. Hammill realized that he was a victim, he reported the scam to the RCMP. Officer Tim Laurence investigated and arrested Andrew Martin also known as Michael Davis-Bingham, Barry Davis and Allan Martin. 32) Officer Laurence gave his observations about the office. It was very professional. There were telephone lines in the office with Chicago and New York City area codes. If a victim were told to phone a number in New York City, area code 212, a phone in Premier's office would ring. 33) Officer Laurence interviewed two other victims of Andrew Martin. He indicated there were about 50 others identified in the files of Premier he did not interview. He told the Court in response from a question from the Bench, that the Crown discourages the RCMP from wasting resources interviewing extra victims when they have an adequate case with a few. 34) The losses of the other two victims he interviewed, a Dr. Richard Weinstein form New Mexico and a Mr. Dale Evoy from Terrace Bay, Ontario were US$500,000 and $800,000 respectively. Dr. Weinstein was a foot surgeon and Mr. Evoy was a cable TV developer. 35) Officer Laurence gave an overview of this type of scam: He brought to Court exhibits from the criminal case against Michael Davis Bingham, also known as Andrew Martin. One exhibit was a complex relationship chart, showing the inter-relationships of the various companies. It was clearly a sophisticated operation. 36) Officer Laurence provided "Call Sheets" found during the raid. He explained that these sheets are names and telephone numbers of potential victims purchased from others. 37) He similarly provided "Rebuttal Sheets". These are programmed and well thought out answers to those reluctant to respond to a telephone solicitation. 38) When questioned about fraudulent invoices and documents, Officer Laurence provided examples. For example, he recently worked on a case where fraud artists simulated Yellow Pages advertising invoices. The Yellow Page logo was reversed. The perpetrators send out these phony invoices to Yellow Page users. The invoices are routinely paid. 39) The particular sting against Mr. Hammill and others is what he called an advance fee scam. 40) A carrot is held out to the victim. All the victim has to do is pay an up front fee. Officer Laurence described the loan version of this. He said that a business that needs unconventional financing might be approached with an offer of financing. All the borrower has to do is pay a large up front fee. The fee is paid and there is no loan. 41) Officer Laurence has worked on a number of gem scams. He offered the opinion that there really is no secondary market for precious gems. Mr. Hammill's initial purchases from York Union may have been the early stages of a gem scam. In the gem scam the victim has no venue for selling his gems. He becomes dependent upon the fraud artist to sell the gems and at the same time the fraud artist is promising large profits for hanging in there. Purpose Test under Paragraph 18(1)(a) 42) For an expense to be deductible, paragraph 18(1)(a) restricts deductions as follows: "In computing the income of a taxpayer from a business or property, no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property". 43) If the test for deductibility was based upon an objective test, Mr. Hammill would have problems with some of his payments. We could look at some of the confusing documents. We could question the inconsistencies in payments. We could shake our head through parts of his testimony and wonder how a decorated Lieutenant Colonel and successful business man could fall victim to this sting. 44) However, no matter how bad one may think his decisions to pay part or all of the $1,651,766 as directed by Andrew Martin, our opinions are not relevant because under paragraph 18(1)(a) of the Income Tax Act, it is not an objective test. It is in fact a subjective test and we were not there to witness how convincing Andrew Martin was. 45) In Tonn v. R. found at Tab 8 of the Book of Authorities, Justice Linden in the Federal Court of Appeal ruled that the standard in paragraph 18(1)(a) is a subjective test, not an objective test. To be deductible according to paragraph 18(1)(a), an expense must have been incurred with the intention of producing profit. In other words, the expense must have been incurred within a business framework, bearing some relation to the income earning process. I might mention in this context that such intention, strictly speaking, is subjective; no requirement of objective reasonability is expressly imposed by the section. 46) This decision confirms that it is the subjective opinion of Mr. Hammill that matters. Not the opinion of Canada Customs and Revenue Agency. 47) Unless there is a legislative change, Tonn is authoritative on this point. 48) The starting point is to question Mr. Hammill's subjective purpose in making payments to or as directed by Andrew Martin. 49) Mr. Hammill's evidence, is not contradicted. He repeatedly testified that he believed Andrew Martin and that the payments he made would facilitate the sale of his gem inventory at a profit. 50) And what level of profit was expected by Mr. Hammill? The Appellant and the Respondent by their counsel executed an Agreed Statement of Facts. At paragraph 10, it was admitted that if the first agreement had been real, Mr. Hammill was spending $360,540 to earn a gross profit of $1,565,472. If the second agreement had been real, Mr. Hammill was spending an additional $139,410 to profit $758,216. The final agreement had Mr. Hammill spending an extra $214,464 to profit $5,668,510. 51) Knowing now that the agreements were fraudulently created does not put us into Mr. Hammill's subjective position. 52) Mr. Gary Parker, a forensic chartered accountant and partner with a national accounting firm gave evidence. He prepared a report as well. At page 2 of his report, he stated: "In my opinion the payments made in the course of business related to the prepayment of fees and commissions are deductible in the context of Generally Accepted Accounting Principles (GAAP)." According to the Institute of Chartered Accountants (CICA) Handbook "expenses that are linked to revenue generating activities in a cause and effect relationship are normally matched with the revenue in the accounting period in which the revenue is recognized". 53) Mr. Parker testified that from Generally Accepted Accounting Principles, the payments of Mr. Hammill were deductible expenses. 54) The threshold for the Minister to be able to challenge an expense under paragraph 18(1)(a) is difficult to meet. 55) Justice Linden, in Tonn, continued at paragraph 43, page 108: "But do the Act's purposes suggest that deductions of losses from bona fide businesses be disallowed solely because the taxpayer made a bad judgment call? I do not think so. The tax system has every interest in investigating the bona fides of a taxpayer's dealings in certain situations, but it should not discourage, or penalize, honest but erroneous business decisions. The tax system does not tax on the basis of a taxpayer's business acumen, with deductions extended to the wise and withheld from the foolish. Rather, the Act taxes on the basis of the economic situation of the taxpayer -- as it is in fact, and not as it should be, subject to what is said below." 56) I emphasized Justice Linden's comment with respect to the foolish. Even if this Court concludes that some of Mr. Hammill's decisions were foolish, Justice Linden's dicta is that it is irrelevant from the perspective of allowing deductions. 57) It is submitted that pursuant to the test laid out by Justice Linden in Tonn, the payments made by Mr. Hammill were deductible under paragraph 18(1)(a). Losses Based Upon Theft or Defalcation 58) An alternative and no less persuasive argument of the Appellant is based upon the theory that business losses based upon theft or defalcation are deductible. 59) Parkland Operations v. R., is a decision of Justice Jerome of the Federal Court. This case is found at Tab 1 of the Appellant's Book of Authorities. 60) In Parkland Operations, two officers of the taxpayer corporation misappropriated $563,396 of the taxpayer's funds. The officers of the corporation believed that two signatures were required on cheques, but in fact only one signature was sufficient. The theft was discovered and the RCMP called. There were insufficient charges to support convictions against the two officers for the full amount, but the officers were convicted of theft of approximately $200,000. 61) Counsel for the taxpayer in Parkland argued, at paragraph 16 on page 6 of the Book of Authorities: "In Parkland, it is noteworthy that the embezzled funds came out of the operation funds of the company by drawing down its operating line of credit which was secured by its trade receivables. This stamps the transaction as being an income account." 62) Justice Jerome, at paragraph 18 on page 6 of the Book of Authorities, had little difficulty in determining that the misappropriations were deductible pursuant to paragraph 18(1)(a): "I am satisfied that in the case before me the expense in question was incurred by the taxpayer for the purpose of gaining or producing income from a business; and further that this expense was incurred in accordance with the principles of accepted business practice. I find that the funds in question were wrongfully drawn from the company's operating line of credit which, as the plaintiff suggests, stamps the transaction as being on account of income. I cannot accept the defendant's submission that the money at the time of the theft was not part of the normal revenue receiving activities of the company. The funds in question came out of the company's operating funds, which indeed constitute a part of the company's normal revenue receiving activities." 63) The next case I wish to draw to the attention of the Tax Court is Cassidy's Ltd. v. MNR found at Tab 2 of the Book of Authorities, a decision of Justice Rip of the Tax Court of Canada. 64) A vice-president of Cassidy's, one Mr. Rochefort, caused the corporation to pay personal bills. Over a four-year period, $454,264 was taken. 65) Justice Rip determined, at paragraph 28 on page 16 of the Book of Authorities that the amounts stolen would have been deductible under Generally Accepted Accounting Principles: "In my view the relevant amounts would have been deducted from revenues for the year to determine that year's profits in accordance with GAAP." 66) Justice Rip then cited a decision of President Thorson of the Exchequer Court of Canada in Royal Trust v. MNR, quoted with approval by Madame Justice Wilson in Mattabi Mines v. Ontario at paragraph 29, page 16: "The essential limitation in the exception expressed in Section 12(1)(a) is that the outlay or expense should have been made by the taxpayer "for the purpose" of gaining or producing income "from the business". It is the purpose of the outlay or expense that is emphasized but the purpose must be that of gaining or producing income "from the business" in which the taxpayer is engaged. If these conditions are met the fact that there may be no resulting income does not prevent the deductibility of the amount of the outlay or expense. Thus, in a case under the Income Tax Act if an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business its amount is deductible for income tax purposes." 67) Justice Rip allowed the appeal and held that the losses by embezzlement were deductible. 68) A more recent decision of this Court, one which Mr. Leclaire is familiar with as he was counsel, is Agnew v. R, found at Tab 3 of the Book of Authorities, a decision of Justice O'Connor decided October 15, 2002. 69) Agnew involved a limited partnership that was designed to provide tax benefits to investors while providing what the Court found essentially to be a sound business plan. 70) The business was run by a general partner who used approximately $1,000,000 of the partnership funds on personal expenses. Justice O'Connor found that the business failed because of the defalcation by the general partner. 71) The case was argued on the basis that the resulting losses were not deductible because the partners had no reasonable expectation of profit. 72) Mr. Leclaire made numerous submissions, starting at paragraph 69 on page 46 of the Book of Authorities and continuing through paragraph 122 on page 54. I could find no reference to an argument by Mr. Leclaire that a theft by defalcation was not deductible. I could find no reference to an argument by Mr. Leclaire that the losses should be denied because the $1,000,000 in personal expenditures was unreasonable under section 67. One wonders why that is the principle issue here but was not worthy of argument in Agnew. 73) Canada Customs and Revenue Agency's assessing policy is to permit the deductibility of losses from theft or defalcation: 74) Interpretation Bulletin IT-185R, reproduced at Tab 4, page 57 of the Book of Authorities provides as follows: "2. Losses through theft, robbery and shoplifting by strangers are an inherent risk for most businesses. Accordingly, losses of trading assets from these causes in circumstances where the loss is reasonably incidental to the income-earning activities of the business are normally deductible in computing income from a business." 75) My friend may try to draw a distinction between theft by embezzlement as in Parkland, Cassidy's and Agnew, versus theft by fraud as in the case at bar. However, whether it is theft by fraud or theft by embezzlement, it is submitted that it is still theft, and there is no reason why the innocent taxpayer Mr. Hammill, should be treated differently from the innocent taxpayers in Parkland, Cassidy's and Agnew. 76) For example, if I use Officer Laurence's example, if a business pays a fraudulent invoice for Yellow Pages advertising, should the deduction be denied because it is a theft by fraud and not a pure theft? 77) Let me repeat that postulation: There is no reason to believe that the Income Tax Act provides relief to business victims of theft but not to business victims of fraud. 78) If the Income Tax Act permits the deduction of theft losses, should the Court or Canada Customs and Revenue Agency conduct a Hammill type of inquiry to determine whether the theft was reasonable? In Parkland, was it reasonable to allow unlimited cheque writing with only one signature? In Cassidy's was it reasonable to have an embezzlement by a trusted officer continue for four years without being discovered? 79) Perhaps Canada Customs and Revenue Agency should disallow losses from shoplifting if in hindsight the storeowner took inadequate precautions to prevent theft. 80) Or perhaps Canada Customs and Revenue Agency should check whether a warehouse that has experienced a theft had adequate locks and security systems, and deny the loss if the auditor believes the precautions to be unreasonable. 81) In Agnew, apparently the embezzling partner did not even cover up the theft. Did Canada Customs Revenue Agency launch an investigation as to whether the partnership took reasonable precautions to prevent the misappropriation? 82) It is submitted that the Parkland, Cassidy's and Agnew cases on their own are sufficient to cause this Court to allow the appeal and remit the matter back to the Minister on the basis that the amounts paid by Mr. Hammill are deductible. Application of Section 67 83) Mr. Leclaire's argument will be that this case can be decided against the Appellant based upon section 67. 84) Mr. Graffi gave evidence that Mr. Hammill's business decisions were so bad as to be unreasonable. Mr. Hammill's own evidence made it clear that he made questionable business decisions. Mr. Hammill trusted a con man so much that he paid as directed by him $1,651,766. Andrew Martin absconded with the gems. 85) A difficulty in taking this approach is knowing where to draw the line. When Mr. Hammill made his first payment as directed by Andrew Martin, should he have known that Andrew Martin was a con man? What about the second payment? 86) When Mr. Hammill paid amounts to clear up the liens, he discussed the liens with Patrick Cox at another company. It seemed legitimate. Should the Court disallow those payments? 87) Section 67 of the Act restricts otherwise deductible expenses to those that are reasonable: "67. General limitation re expenses -- In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances." 88) In Cassidy's cited earlier, counsel for the Appellant taxpayer argued that section 67, the general limitation of unreasonable expenses did not apply: The Court agreed with that submission. At paragraph 33, page 18 of the Book of Authorities, Justice Rip wrote: "Counsel for the appellant did argue that the amounts deducted were reasonable in the circumstances and therefore not prohibited by section 67 of the Act. The respondent did not raise the issue that the expenses were not reasonable and accordingly that issue need not be addressed in these appeals. However, if amounts stolen are otherwise deductible in computing income, one would normally assume that the losses from the defalcation were reasonable deductions in the circumstances." 89) If Justice Rip is correct, Section 67 does not apply in theft cases. If Justice Rip is wrong, then how is section 67 to be applied? 90) In Mohammad v. Canada 97 D.T.C. 5503, [1997] 3 C.T.C. 321, a decision of the Federal Court of Appeal, Justice Robertson, writing for the Court stated that section 67 must be applied objectively in terms of magnitude: When evaluating the reasonableness of an expense, one is measuring its reasonableness in terms of its magnitude or quantum. Although such a determination may involve an element of subjective appreciation on the part of the trier of fact, there should always be a search for an objective component. When dealing with interest expenses, the task can be objectified readily. For example, it would have been open to the Minister to challenge the amount of interest being paid on the $25,000 loan had the taxpayer agreed to pay interest in excess of market rates. The reasonableness of an interest expense can thus be measured objectively, namely, by reference to market rates. Similarly, the Minister might want to confront a taxpayer who seeks to deduct 3/4 of the interest paid on a mortgage loan pertaining to a duplex in which the taxpayer is residing in one of the two identical units. Once again, the reasonableness of the interest expense being claimed can be measured objectively by reference to area (assuming, of course, that the rental value of a square meter in one part of the property is equal to that in another): 91) In the context of this case, to apply Mohammad, it is submitted that one would compare the magnitude of the expenses to the anticipated revenue. Recall that the payments made by Mr. Hammill were small in comparison to the promised profit and that they were paid over a three year period. 92) Justice Linden in Tonn referred to section 67 and provided an example of the application of that section, a case where it was successfully applied to limit very large expenditures as part of the taxpayer's "humour therapy business" where the taxpayer with $85 in annual revenue sought to deduct almost $7,000 in expenses. 93) Finally, Justice Linden cited with approval a decision of this Court at paragraph 62, page 113: "This criticism was echoed by Bowman J.T.C.C. in Bélec v. R., where he stated: It must be noted that these losses were incurred solely in a business context. There was no personal element, either in his purchase nor in his use of the building. The appellant is an experienced businessman. He took his decision in good faith on his best judgment and on the facts available to him at the time. It is not up to the Minister (or this Court) to substitute his business acumen for that of the taxpayer, with the benefit of hindsight. The question to be asked is not, "Knowing what I know now, would I have embarked upon this enterprise?" The answer is no doubt "No", because the question only comes up when there are losses. 94) In Gabco Ltd. v MNR, at Tab 7 of the Book of Authorities, a decision of Justice Cattanach of the Exchequer Court, the issue was the reasonableness of a fairly young and inexperienced employee who was a significant shareholder in the company. Evidence was adduced by the Appellant that the amounts were reasonable. The Income Tax Act at the time had in subsection 12(2) a provision similar to section 67. The Court found at paragraph 52, page 93 of the Book of Authorities: "It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only the business consideration of the appellant in mind." 95) RCMP Officer Tim Laurence provided evidence in this regard. He found in the files of Premier many other victims, including two he interviewed that paid amounts of US$500,000 and US$800,000. Once other businessmen have been found to have paid similar amounts, it is submitted that the Minister cannot demonstrate that "no reasonable business person would have paid the amounts". 96) Mr. Hammill made payments when he expected very large profits. It is submitted that one cannot conclude that paying an additional amount on the eve of a profitable conclusion of a sale is unreasonable. 97) In King v. R. found at Tab 10 of the Book of Authorities, this Court had to deal with substantial expenditures by the taxpayer in showing his horses. The taxpayer's argument was that showing horses enhanced his business. At paragraph 120, page 170 of the Book of Authorities, this Court wrote: The Court accepts the argument of counsel for the Appellants that it is up to the taxpayer, as a matter of business judgment, to determine what business expenses are reasonable, within certain restrictions as referred to in Tonn, supra, and others, in particular where the expenses were successful in generating business income as in the present case. There would appear to be nothing in the facts of this case that would lead this Court to conclude that the expenses incurred here were so egregious that the Court should second-guess the actions of the taxpayer. 98) The unfairness of allowing the Minister to have sweeping powers to second-guess honest taxpayers was described recently by Justices Iacobucci and Bastarache in the Supreme Court of Canada in Stewart v. R., at Tab 9. Although this is a Reasonable Expectation of Profit Test, the analysis is apropos to the application of reasonableness. 99) At paragraph 44, page 141, the Court wrote: "Even if the basis for calculating profit was clear, it is still uncertain how much expected profit would be required, in what time frame, and whether the amount of expected profit should vary with the risk of the venture: .... For example, a high-risk venture may incur substantial losses, which may be disallowed by virtue of a reasonable expectation of profit analysis; however, it is highly unlikely that, where such a venture does pay off, the Minister would abstain from an assessment on the ground that there was no reasonable expectation of profit and therefore no business." 100) The Court then cited Justice Bowman, in Nichol, at paragraph 45, page 142: "The vagueness of the REOP test encourages a retrospective application which, as pointed out by Bowman J.T.C.C. in Nichol, supra, at p. 1219, causes uncertainty and unfairness: [The taxpayer] made what might, in retrospect, be seen as an error in judgment but it was a matter of business judgment and it was not one so patently unreasonable as to entitle this Court or the Minister of National Revenue to substitute its or his judgment for it, or penalize him for having made a judgment call that, with the benefit of 20-20 hindsight, that Monday morning quarterbacks always have, I or the Minister of National Revenue might not make today. ..." Insufficient Documentation 101) The final argument of the Respondent appears to be that there is insufficient documentation with respect to the payments made by Mr. Hammill. 102) The Minister admitted the payment amounts and that they were paid by Mr. Hammill to the selling agent or as directed by the selling agent, and such payments were verified by the RCMP. 103) Mr. Graffi made inquiries during the course of his audit. He asked Rulings in Ottawa whether receipts were required. Mr. Graffi was told that proof of payment was sufficient. From Mr. Graffi's notes of that discussion: "He [George Techana from "Rulings"] said so long as the T/P can show that he laid out the funds and that he thought they were reasonable, then there was no need for physical verification via expense vouchers" 104) We concur with the advice Mr. Graffi received from Rulings in Ottawa. 105) Mr. Hammill testified that he kept accurate records of his purchases and payments. He said that he was told he could pick up receipts at the office of Premier in Toronto. Considering that any receipts or corroborating documents from Andrew Martin would have been part of Andrew Martin's fraud, it is submitted that the presence or absence of such receipts would be irrelevant. In this day and age of home computers and scanners, a phoney receipt is easy to manufacture. 106) This Court has accepted less than perfect documentation. 107) In Allen v. R. found at Tab 11, this Court wrote at paragraph 130, page 194: The Court accepts the fact that there were some difficulties with tracing every specific dollar through the accounts of the Appellants into and out of the accounts of the Company, but at the end of the day, the Court is satisfied on a balance of probabilities that the amounts in issue did flow from the private resources of the Appellants by the various means referred to in the evidence into the accounts of the Limited Company, were expended for the purposes of the Company and that the amounts of $306,094.00 remained outstanding when the Company went out of business. 108) And in Drozdzik v. R., at Tab 12 of the Book of Authorities, another decision of this Court, counsel for the Minister took almost the identical position as in the present case. This Court summarized that position at paragraph 260, page 240 as follows: [The Respondent] was taking the position that the expenses claimed were not proven to have been made for the purpose of gaining or producing income from that business. The expenses were not proven to have been made because there was insufficient documentation or other evidence before the Court to conclude what the expenses were for, why the expenses were made or that they related to the business of "fishing", in the years for which those expenses were claimed or that they were not reasonable. 109) This Court then set the criteria for deciding Drozdzik at paragraph 263, page 241: Of paramount importance here is the question of credibility of the witnesses. At the end of the day, the Court will have to be satisfied that the Appellant has destroyed a sufficient number of the presumptions of the Minister so that the Court is satisfied that the Appellant has met the burden of proof on a balance of probabilities and that the expenses are deductible. 110) This Court then described the shortcomings of the documentary evidence, which shortfall parallels the instant case: Commencing at paragraph 269, page 242, this Court wrote: In a perfect world the Appellant would be able to do so without any problem by maintaining proper records of account, keeping not only invoices of the alleged expenditures but also satisfactory proof that the expenditures so claimed were actually paid. In the case at bar the Appellant's evidence falls far short of that perfect proof because in many cases he did not have the requisite receipts and invoices which showed specifically what the expenditures related to and he relied in many instances on invoices instead of receipts. He claimed deductions for alleged expenditures, which at first blush may have indicated that the responsibility for paying such expenses were not his. Because of the shortcomings of the Appellant's documentary evidence, it was necessary for him to rely upon his own viva voce evidence, viva voce evidence of other witnesses and less substantial documentation to establish his case. 111) This Court gave the benefit of any doubt to the Taxpayer at paragraph 272, page 242: The Court is satisfied that where documents were not produced the Appellant has given sufficient reason for their absence. In some cases the Appellant decided that they were not necessary and in other cases they were completely beyond his availability. 112) The Appellant asks that the appeal be allowed with costs, and that the matter be referred back to the Minister for reconsideration and reassessment based upon the Court's finding that the Appellant was entitled to the business loss claimed, and that adjustments be made with respect to the interest expense claimed. Argument on Behalf of the Respondent [99] Counsel for the Respondent referred to paragraph 15 of the Appellant's argument and recited the different people and corporations with whom the Appellant was allegedly dealing. These were various and sundry. It was Andrew Martin who brought in other players: Peter Manning or Harold Schnap from Premier; Robert Salaam from Royce Management; a woman identified as Sharon Thurgood-Whyte from Omega Specialty Banking; Patrick Lee Chin from Transpacific and others. At the back of all of these, there was a substantial air of unreality about this whole matter and it was a scam. [100] He referred to paragraph 68 of the Appellant's written argument in relation to Agnew v. R., 2002 DTC 2155 and said that was entirely a case decided under subsection 18(1) and it was not a question of reasonableness. He referred to Khaira v. Canada, [2004] T.C.J. No. 63. In that particular case Justice Mogan referred to the Appellant as having "bought the Brooklyn Bridge" and found that the limited partnership was a scam. [101] In response to counsel for the Appellant's references in paragraphs 78 and 79 of his written argument, counsel for the Respondent said that section 67 is the government's way of saying it is not going to be an insurer. At some point in time objective reality has to replace subjective intention. Section 67 does this. Under section 67 the question of reasonableness is brought into the picture. [102] He also referred to paragraph 91 of the Appellant's written argument where it was argued that in the context of this case one should compare the magnitude of the expenses to the anticipated revenue and that the payments made by Mr. Hammill were small in comparison to the promised profits and they were paid over a three-year period. But counsel for the Respondent said that the cost of the inventory must be borne in mind in relation to the stated profit and that profit expected must be reasonable. [103] He rebutted paragraph 103 of the Appellant's written argument referencing the conversation that Mr. Graffi had with Rulings in Ottawa (where he was told that proof of the expenditure was not necessary so long as the taxpayer can show that he laid out the funds and that he thought that they were reasonable. There was no need for physical verification by way of expense vouchers) and said that this was with reference to a case dealing with a tax credit and unlike the one at bar. [104] The fact that there was no secondary market is a significant factor. That was the evidence in this case. The information was available in 1987. It is indicative of the lack of due diligence on behalf of the Appellant and it goes to everything that follows thereafter (including the cost of purchases and the expenses). [105] The question of reasonableness is a question of fact. The question that has to be asked is, "what would a reasonable businessman do here?" He referred to Gabco Ltd. v. M.N.R., 68 DTC 5210 and Tonn v. R., 96 DTC 6001 and said that reasonable expectation of profit and reasonableness are two different things. The Minister need only refer to section 67. He referred to Stewart v. R., 2002 S.C.C. 46 and said that in the case at bar there is no question about a source of income. We are merely talking about the question of "reasonableness". [106] He referred to King v. R., 2000 DTC 2341 at page 570 where the Court found that the expenses, which were claimed, were "not so egregious as to be disallowed". In the present case they were so egregious that they ought not be allowed. He used this case in support of his argument that the issues of reasonableness and the source of profit or whether or not there is a business are separate issues. [107] The matter of reasonableness is not solely the magnitude of the profit. There is more than one factor. Section 67 must be applied as objectively as possible. The Court should consider the fact that the investment that was made was small in relation to the unreasonable, anticipated profit. [108] In the case at bar there was no advice to the Appellant upon which he could rely to take the actions that he did. There is no evidence as to what the expenses were made for so that the Appellant could have determined whether they were indeed reasonable under the circumstances. When the Appellant continued to make payments on the fourth transaction he completely disregarded all of the previous transactions. [109] Counsel for the Respondent was prepared to concede that there might have been some basis for the first payments up to the amount of $360,540 but not thereafter. At that point there were more flags for him and he should have paid attention to them. Mr. Hammill completely ignored the inherent contradictions in the alleged contracts. It was impossible for him to know what was going on. [110] In Exhibit A-1 at Tab 4 the contents of this agreement were "gobbledegook" and needed explanation. Paragraph 3 of the document at Tab 14 was a red flag. The Appellant should have asked what it meant. A further red flag should have been found at Exhibit A-1 at Tab 23. There was a complete lack of consultation throughout. [111] The document at Tab 36 makes no sense whatsoever and the document at Tab 55 is inconsistent and untrue. The Appellant had received no results at all up to that point in time. Mr. Hammill did nothing about it. There was a complete lack of due diligence. The Appellant had recorded no results but at the end of the day he was asked for a further US$30,000. [112] There was no return address, telephone number or fax number on the document. These are all red flags. There was no insurance, there were no appraisers and there were no real evaluations. There never was a return of any money. A prudent businessman would have asked for return of his money. [113] There were a number of contracts that were signed but then replaced shortly afterwards with new ones with different amounts. This was a further red flag. The Appellant's request for the return of the funds were all ignored. The Appellant did not bring his business acumen to this case. The appeal should be dismissed with costs. Analysis and Decision [114] As far as the Court is concerned there is no question that the Appellant was the victim of a substantial fraud from the beginning to the end. The Court is satisfied that this fraud commenced when the Appellant was contacted about profits to be made from buying and selling gems and this fraud continued with the purported efforts of the perpetrators to sell the gems. The Court is not satisfied that the evidence supports the figure of $529,926 agreed to by the parties in the value of the inventory because the indicia of the value by way of certificates produced into evidence by the Appellant as well as the evidence given by the Appellant were insufficient to establish this figure as a fair market value. They did not adequately describe the gems, the quality of the stones, the weight of the gems or the qualities or imperfections, to the extent that these certificates could be relied upon. [115] However, the Minister allowed the Appellant to deduct the inventory loss as claimed and therefore the evaluation is not relevant except to the extent that it indicates that the fraud, in all likelihood, extended to the amount paid for the gems in the first place. [116] In order for the expense to be deductible under paragraph 18(1)(a) of the Act, the taxpayer must show that the expenses were made "in respect of an outlay or expense to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property". [117] The second threshold is for the Appellant to establish "that the outlay or expense was reasonable in the circumstances". This is a requirement of section 67 of the Act. [118] Of considerable significance on the first issue is that according to the evidence, particularly that of Mr. Laurence, no secondary market for precious gems existed. That means that it was impossible for the Appellant to sell the gems in any event. Only dealers can dispose of gems in the market place. Under such circumstances, it is difficult to see how the Appellant could have been involved in a "business or property" in accordance with paragraph 18(1)(a) of the Act. Further, it is common ground that the Appellant was the victim of fraud from the beginning to the end so that there could not have been any business in place. [119] It was the Appellant's contention that the test under paragraph 18(1)(a) is a subjective test. It does not matter what we think of the actions or decisions as long as Mr. Hammill believed that he was involved in a business. [120] In answer to a question by the Court, counsel for the Appellant suggested that it does not matter how reasonable or negligent the actions of the Appellant might have been in making the expenses that he did so long as he believed that he was going to be able to sell his diamonds. Any expenditure that he made would be deductible under paragraph 18(1)(a). Tonn v. R., supra, suggests that proposition in so far as he was concerned. [121] However, the quoted portion of that case does require that "the expense must have been incurred within the business framework, bearing some relation to the income earning process". In other words, there must be a business in place; there must be a framework for the income; there must be indicia of a business; there must be a possibility of earning income or the expense is not deductible. [122] In any event, counsel for the Appellant was satisfied that the requirements of Tonn, supra, have been met and the Court should not substitute its own ideas of business acumen for that of the taxpayer. [123] In the present case there was no business structure in place; there was no possibility of a secondary sale; there was no framework of a business and the expenses which purportedly related to the possible sale were fraudulently claimed by the perpetrators from the beginning because there was no way that the gems could be sold as contemplated by the Appellant. It would be reasonable to conclude that if the Appellant had sought to do so he should have been able to find this out before he even became involved to any extent in purchasing the gems. He did no homework in this regard. He became a willing victim from the beginning, relying only upon his unsupported conclusion that he could earn a substantial profit from the ultimate sale of the gems and believing implicitly in the lies of Andrew Martin. [124] TheAppellant's counsel took the position that what is before the Court is Mr. Hammill's subjective purpose in making payments to or as directed by Andrew Martin. In that regard he said that the evidence was uncontradicted. Mr. Hammill believed that the payments that he made would facilitate the sale of his gem inventory at a profit. [125] This covers the Appellant's avowed intention of obtaining profit but it fails to address the issue as to whether or not this avowed intention was anything more than "wishful thinking". Under the first agreement he was expecting to earn a profit of $1,565,472, after spending $360,540; after the second agreement he was expecting to earn a profit of $758,216 after spending an additional $139,410 and under the final agreement he was expecting to gain a profit of $5,668,510 after spending an additional $214,464[57]. [126] The Court is satisfied that the expectations were unreasonable. Mr. Hammill indicated in his own testimony that his expectations of profit at the beginning were rather less substantial than those amounts. Consequently, even at that point a red flag should have been raised and a reasonable businessman would have had substantial cause to question whether such a profit could be expected or whether he should investigate further before proceeding. [127] Gary Parker, forensic chartered accountant, indicated that it was his opinion that the payments were made in the course of business, were related to the pre-payment of fees and commissions and are deductible in the context of GAAP. However, one must conclude that this presupposes that there were revenue-generating activities in place in a cause and effect relationship and then the expenses are normally matched with the revenue in the accounting period in which the revenue is recognized. Nothing in this principle assists the Appellant where the whole transaction was a fraud from its inception. There could be no revenue-generating activities in place. [128] Counsel for the Appellant took the position that Mr. Parker testified that in accordance with the principles of GAAP, the payments of Mr. Hammill were deductible expenses. The Court does not accept that this witness expressed such a proposition, but even if he did so, the Court would not be bound by it. The Court must decide whether or not in any given situation the expenses are deductible. If the manner in which the expenses were handled was in accordance with GAAP, that may assist the Court in reaching its decision but it does not determine the issue. The thrust of Mr. Parker's evidence can only be that the Appellant claimed the expenses in accordance with GAAP. [129] As indicated by counsel for the Appellant in reference to Tonn, supra, the Court should not disallow bona fide business deductions solely because a taxpayer made a bad judgment call, where the expenses otherwise are valid business expenses. But again, this presupposes the existence of a bona fide business activity. In this case there was no such bona fide business activity in place. [130] Counsel for the Appellant referred to various cases where losses based upon theft or defalcation were valid deductions. However, the Court is satisfied that this line of cases is different from the case at bar and they can all be distinguished from the case at bar. In Parkland Operations Ltd. v. R., [1991] 1 C.T.C. 23, the Court concluded that the expenses in question were part of the normal revenue receiving activities of the company. It concluded that the funds came out of the company's operating funds, which constituted a part of the company's normal revenue receiving activities. In that case there was no question that there was a business in place. The funds had been earned in the normal course of business. In the case at bar, the whole question is whether or not the expenses were made in the ordinary course of business and related to it. [131] In Cassidy's Ltd. v. M.N.R., [1990] 1 C.T.C. 2043, Rip J. found that amounts stolen by an officer of the company who caused the corporation to pay his personal bills, were deductible under GAAP to determine that year's profits. Again, that was not the same situation as the case at bar because in that case there was no question that there was a business in place. Funds that were the subject matter of the theft had unquestionably been earned in the ordinary course of business or trade. [132] In the case of Agnew v. R., supra, O'Connor J. allowed deductions for one million dollars when partnership funds were used by the general partners on personal expenses. There again, those were funds that the company had earned in the ordinary course of business. There was no issue as to whether or not the funds which were the subject matter of the defalcation were funds which were related to the operation of a valid business. Those are not the facts in the case at bar. [133] Counsel for the Appellant referred to Interpretation Bulletin IT-185R which showed that the Minister's position is that losses through theft, robbery and shoplifting by strangers are an inherent risk for most businesses and are deductible where the losses are reasonably incidental to the income earning activities of the business. These were all cases in which there was no issue as to the relationship between the defalcated funds and the operation of a valid business. [134] There is no validity to the argument by counsel for the Appellant that in one case we are allowing a deduction for a defalcation by theft but in the case at bar one is not allowing a deduction for defalcation by means of fraud. This is an invalid comparison. [135] The determining factor is not whether the theft is by fraud or by defalcation but whether or not the expenses are related to the earning of income from a business. In all of the cases referred to above it was not a problem. In the case at bar, unfortunately, this is a problem. [136] Counsel for the Appellant admitted that Mr. Hammill's own evidence made it clear that he made questionable business decisions. He trusted a "con-man" so much that he paid as directed by him $1,651,766 in an effort to perfect the sale and Andrew Martin absconded with the gems as well. He said that the difficulty in taking this approach is where to draw the line. Is it when he made his first payment to Andrew Martin or the second payment or the third payment and so on. He paid the amounts to clear up the alleged liens. To him these liens seemed to be legitimate. Should these payments be disallowed? [137] This Court does not accept counsel's argument that Cassidy's, supra, stands for the proposition that in defalcation cases, the general limitation of unreasonable expenses under section 67 does not apply. In fact Judge Rip said that the Respondent did not raise the issue but counsel for the Appellant in that case did argue that the amounts that were deducted were reasonable in the circumstances and therefore not prohibited by section 67 of the Act. [138] The Court can see no reason to conclude that section 67 does not apply in defalcation cases and it can see no reason why it should not apply in the case at bar. This Court can envision the situation in a defalcation case where the actions of the taxpayer could be considered to be unreasonable under section 67. Take the situation where a taxpayer continues to pursue recovery of a defalcated amount but is aware that every reasonable indication points to the fact that the amount is not recoverable. One could not conclude that thereafter expenditures made by the taxpayer to recover what would reasonably appear to be unrecoverable, would still be deductible. [139] Counsel referred to the case of Mohammed v. Canada, 1997 DTC 5503, on the question of the reasonableness of an expense. From that case the Court concludes that the test is both objective and subjective. In the case at bar the reasonableness of the expenditure can be quantified objectively by looking at the unreasonable expected profit in relation to the cost of the gems when they were purchased. A reasonable person could not have expected such a huge profit without something being amiss. [140] In this case counsel for the Appellant suggested that one could compare the magnitude of the expenses to the anticipated revenue and conclude that the payments made by Mr. Hammill were small in comparison to the promised profit and that they were paid over a three-year period. However, what that argument fails to consider is the reasonableness of the anticipated profits. The fact is that no reasonable businessman would anticipate such a huge profit without concrete reasons for believing so, such as knowledge of the market, supply and demand for the gems and knowledge as to why the profit anticipated could be so large. In this case, as indicated, Mr. Hammill testified that he did not contemplate such a huge profit margin. [141] Counsel referred to the decision in Belec v. R., [1995] 1 C.T.C. 2809, where Judge Bowman was discussing the issue of the Court substituting its business acumen for that of the taxpayer suggesting that the situation could not be looked at with the benefit of hindsight. There again Bowman J. concluded that the losses were all incurred solely in a business context but turned out to be wrong. That is not the situation that exists here. [142] Counsel referred to Gabco Ltd. v. M.N.R., supra, which cited with approval a decision of Justice Cattanach of the Exchequer Court, where he concluded that: "it is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable businessman would have contracted to pay such an amount having only the business consideration of the Appellant in mind". [143] In light of that decision, counsel for the Appellant said that since the evidence has shown that other businessmen paid similar amounts as the Appellant here, then the Minister cannot demonstrate that "no reasonable business person would have paid the amounts". The answer to that submission is simple; the other two businessmen were no more reasonable in their actions than the Appellant. [144] Counsel for the Appellant took the position that since Mr. Hammill made payments because he expected very large profits, this was a reasonable way in which to act and that one cannot question Mr. Hammill's actions in making payments on the eve of the conclusion of a very profitable sale. However, this belies the evidence that these payments were made without any real knowledge as to what they were for. The only information offered was that they were required to pay administrative costs. This reason was repeated over and over again and yet they were made under the same circumstances as earlier payments were made and where sales were not concluded. [145] In King v. R., supra, this Court allowed expenses that were questioned by the Minister on the basis that there was nothing in the evidence to indicate that the expenses incurred were so egregious that the Court should second guess the actions of the taxpayer. The same thing cannot be said on the basis of the facts in this case. The Court is satisfied that payment of these expenses was so egregious that they were patently unreasonable. [146] Counsel referred to Brian J. Stewart v. The Queen, 2002 DTC 6969 in respect to the reasonable expectation of profit test and said that that analysis is a "propos" to the application of reasonableness in this case. This Court does not find that the analysis in that case is particularly helpful here. [147] In Nichol v. Canada, 93 DTC 1216, [1993] 2 C.T.C. 2906 the Court held: "[the taxpayer] made what might, in retrospect, be seen as an error in judgment but it was a matter of business judgment and was not one so patently unreasonable as to entitle this Court or the Minister of National Revenue to substitute its or his judgment for it, or penalize him for having made a judgment call that, with the benefit of twenty/twenty hindsight, that Monday morning quarterbacks always have, I or the Minister of National Revenue might not make today". [148] In the case at bar, the decisions made by the Appellant are not such as could be considered to be errors in judgment but were so patently unreasonable as to entitle this Court to disallow them in light of the total circumstances under which these payments were made. [149] In light of the position taken by the Minister at trial, and in light of the evidence given by the RCMP, it is not significant, from the point of view of proving the expenditures were made, that the Appellant did not have complete receipts, since under the circumstances a phoney receipt would be no better than no receipt at all. However, the fact that he did not have receipts for such huge amounts of monies that were paid out which contained sufficient information to describe what the payments were for further indicates that the Appellant was not acting as a prudent businessman. [150] The case of Drozdzik v. R., [2003] 2 C.T.C. 2183 was referred to. Again, this was a case about the sufficiency of the receipts. There was no issue about there being a valid business in existence but one of the main issues was whether or not the Appellant had sufficient and proper receipts to support his deductions. All of the deductions that were allowed were found to have been business related. Some evidence was introduced to substantiate at least some of the payments and the Court found that this was satisfactory under the circumstances, particularly in view of the fact that it had a high regard for the Appellant's testimony. [151] The Court accepts the argument of Counsel for the Respondent when he referred to paragraph 15 of the Appellant's written argument and said that "after the dust has settled there seems to be an air of non-reality to it and the Appellant should have been alerted to the fact that this was a scam". [152] He referred to the case of Khaira v. R., supra, a decision of Mogan J., where the facts were not completely dissimilar from those in the present case. There, the Court decided that the Appellant had "bought the Brooklyn Bridge" and disallowed the deductions. The Court agrees that section 67 stands alone and it must stand for the proposition that in order for the expenses to be deductible, under all of the circumstances, they must be reasonable, regardless of how liberally one interprets the provisions of paragraph 18(1)(a) nor how liberally the Court considers the question as to whether or not the expenditures were made for the purposes of producing income from a business or property. Even if this is a subjective test, there has to be a limit to how far a taxpayer can go in saying, "I thought I was involved in business, I thought the expenditure was reasonable and I made the expenditure with the intention of gaining or producing income". [153] The Respondent's position is well taken when he says, "at some point in time objective reality has to replace subjective intention. Section 67 is the legislation's way of saying that the government is not going to be an insurer". [154] Counsel for the Respondent argued and this Court has already indicated that it is significant that there was no secondary market for the gems. Regardless of how intent the Appellant was on selling his gems, this could not have happened. That was the evidence. This information was available in 1987 but the Appellant took no steps to determine whether or not there was such a market. This is indicative of the lack of due diligence on behalf of the Appellant. This lack of due diligence existed throughout the whole period of time. [155] The Court is satisfied that the Appellant made an insignificant effort to determine the trustworthiness of those with whom he was dealing and the validity or invalidity of the various companies. At the beginning he was taking part in what would appear to have been a very simple transaction involving he as the vendor and Andrew Martin as his agent in selling the gems. After that a very large number of company names as well as the names of completely unknown persons were put forward and the Appellant made no real effort to determine whether or not these companies even existed. [156] Even a casual observation of the letterhead that was forwarded to the Appellant could have given some indication even to the casual observer that something was amiss. There was no return address on the envelopes, there was no telephone number, some of the names that appeared on the letterhead were repeated and would appear to have been merely the reversal of the last name of someone else that appeared on the letterhead. [157] In spite of the fact that Mr. Hammill allegedly spoke to a number of different people at the offices in New York when he called there, he knew nothing whatsoever about them and did not inquire as to who they were, he did not ask for any proof as to whom or what they represented. [158] Counsel for the Appellant admitted in his argument that the language used in the letters and in the agreements were surprising. Mr. Hammill said that he understood what they meant but it was obvious from questions put to him in Court that he did not and certainly the Court does not understand what many of these phrases meant. [159] Counsel for the Appellant referred to this in paragraph 22 of his argument where he referenced the fact that the Appellant was required to make two payments to Titus Private Holdings under a document on Titus letterhead totalling $30,937. There was a reference to a non-specified third party holding a $50,000 position continuing to hold it and "is accepted into the payout of this transaction". This was pure "gobbledegook" which was so common in these documents. The Court does not accept Mr. Hammill's statement that he understood what those statements meant. They do not mean anything. [160] Certainly at that point, and well before that point, any reasonable businessman would have been put on guard that something was really amiss. He did nothing except continue to make these unreasonable payments to people of whom he knew very little and under very suspicious circumstances. [161] He was asked to send funds to the Turks and Caicos Islands, not to one bank but to two different banks. He told the Court that he wondered about this but he obviously did nothing about it. In various correspondences, new companies were named, new persons were named, and new entities were used and different initials were given that meant nothing to the Appellant and he made none but the most cursory inquiries as to what these meant. [162] At one point the agreement referred to the Law of Texas as being the appropriate forum for handling any dispute that arose out of the agreement but Texas had nothing whatsoever to do with this transaction that appeared to be taking place mostly in New York. [163] With respect to the liens that were allegedly placed on the gems, the Court finds that the actions of the Appellant were most unreasonable in paying out large sums of money to release these liens when he knew that when his gems were turned over to Andrew Martin they had no liens upon them whatsoever. He also turned the gems over to Andrew Martin under very exceptional circumstances, by handing them to him on the street in Toronto. This should have given him some cause for concern. Again, with respect to the liens he made nothing but the most cursory inquiries as to whether or not these liens were valid and at the end of the day he was so anxious to sell his gems that he would have paid almost any amount to make sure that the transactions would go through. He said as much in Court. These are not the actions of a reasonable businessman. [164] The Court is not satisfied that Mr. Hammill was acting reasonably with respect to these liens by merely speaking to Patrick Cox at another gem company. He confirmed to him that the story was plausible and said that he had been to the office of Royce Management in New York City and it was a "proper operating office". This would have told him nothing and would not have been a basis for sending such large amounts to the perpetrators of this fraud for the purpose of clearing these so-called liens with so-called authorities in New York without inquiring further as to whether or not the bodies actually existed and as to what their authority was. [165] Even when the time arrived when it became obvious that these sales were not going to be concluded, the Appellant did nothing reasonable to obtain the return of his deposits, the return of his gems, to find out what was going on and he was content to continue on by making further payments. He was so anxious to complete a sale and so impressed by the size of the profits that he thought he was going to obtain that he would have done anything to complete the sale, as he indicated in Court. He was content merely to ask Andrew Martin what amounts were required in order to have the sales go through. It seemed immaterial to him what these payments were for. [166] A reasonable businessman would not have sent out the payments that he did without having some substantial verification that the payments were indeed required and an explanation as to what they were for. [167] Further, any reasonable businessman would have required that his deposit be returned after each failed sale. Any reasonable businessman would have insisted upon the return of the gems when the first sale fell through. [168] In the document entitled Asset Purchase Agreement, between Mr. William Hammill and Transpacific Enterprises Incorporated, there appears to be a name crossed out and the name Transpacific Enterprises Incorpated is inserted. This was a further red flag. [169] Counsel for the Respondent appeared to indicate that there might have been some basis for making the payments to the extent of $360,540, bearing in mind that the inventory cost at that point was $292,788 and the selling price on the first agreement was $2,218,800. However, he argued that any payments made thereafter were unreasonable. [170] The problem with that submission is that the Court would have to determine that there was a reasonable basis for the Appellant to have acted as he did up to that point in time. Neither counsel attempted to point to any actions of the Appellant up to that point in time which could have been considered to be reasonable and the Court is satisfied that the Appellant acted throughout in much the same manner. [171] There was very little change in the amount of knowledge that the Appellant had with respect to the payments, with respect to the personalities involved, or the various legal entities involved which could have served as a proper basis for any payments that had been requested. The transactions became more complicated with various new entities and persons becoming involved. The Appellant received no information of any sort that could reasonably have given him any comfort to act as he did. It is impossible for the Court to conclude that the actions with respect to one expenditure were reasonable and the actions with respect to another were unreasonable. The Court is satisfied that the Appellant basically acted the same way throughout. [172] There were many times when red flags should have been raised to the Appellant that something was wrong. Some of the "gobbledegook" which appeared in some of the agreements is illustrated at Tabs 4, 14, 23, 36 and 55. [173] These were all red flags that should have registered indelibly on the mind of any reasonable businessman that something was surely remiss. The Appellant ignored the contradictions in the information presented and declined to secure further information from Andrew Martin to explain the documents that he viewed. The wording of the documentation made it impossible for him to know what was going on. [174] He admitted in his evidence that the letterhead had no return address, there was no telephone number, there was no fax number and he took out no insurance on the gems. There were no adequate appraisals done, there were no adequate evaluations done and he did not insist upon the return of any of his deposits in spite of the failed transactions. He did not ask for the return of any of his prepaid expenses, as any reasonable businessman would have done once the transaction failed. [175] There were a number of contracts that were signed by the Appellant and the purported purchasers that were replaced shortly afterwards with new ones, with different amounts contained therein. This was a substantial red flag which would have caused a reasonable businessman to act far differently than the Appellant did. Various clauses in the Agreements that called for the return of funds if the sales did not proceed were all ignored. [176] Counsel for the Respondent argued that the Appellant failed to bring any business acumen to these transactions. In doing so, he failed to act as a reasonable businessman would have done before making the expenditures that he did. [177] In this case, due to the fraud that was perpetrated upon the Appellant and due to the large amount of money involved, the Court has great sympathy with the position of the Appellant. However, the Court also has great sympathy for the taxpayers of Canada that would have to bear the brunt of these losses in the event that the appeal were to succeed. [178] The Appellant has already been allowed deductions for the lost inventory and that should be of some consolation to him. The Court has no jurisdiction to deal with those amounts at this point in time except to say that it may very well be that this loss was not deductible either. [179] At the end of the day, the Court is satisfied that the expenses in issue in this case cannot be deducted because they are prohibited by the provisions of paragraph 18(1)(a) and section 67 of the Act. The Court finds that these expenses were not made or incurred by the taxpayer for the purpose of gaining or producing income from a business or property and the Court is satisfied that these expenses were not reasonable under the circumstances. [180] The Respondent shall have its costs of this action to be taxed. Signed at New Glasgow, Nova Scotia, this 13th day of September 2004. "T. E. Margeson" Margeson J. CITATION: 2004TCC595 COURT FILE NO.: 2001-2051(IT)G STYLE OF CAUSE: William Hammill v. The Queen PLACE OF HEARING: Kitchener, Ontario DATE OF HEARING: February 10 and 11, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice Theodore E. Margeson DATE OF JUDGMENT: September 13, 2004 APPEARANCES: Counsel for the Appellant: George G. Voisin Counsels for the Respondent: Roger Leclaire Michael Ezri COUNSEL OF RECORD: For the Appellant: Name: George G. Voisin Firm: Voisin, Lubczuk Law Firm For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] Exhibit A-1, Tab 6. [2] Exhibit A-1, Tab. 3. [3] Exhibit A-1, Tab 1. [4] Exhibit A-1, Tab 1. [5] Exhibit A-1, Tab 10. [6] Exhibit A-1, Tab 17. [7] Exhibit A-1, Tab 14. [8] Exhibit A-1, Tab 20. [9] Exhibit A-1, Tab 1. [10] Exhibit A-1, Tab 22. [11] Exhibit A-1, Tab 23. [12] Exhibit A-1, Tab 36. [13] Exhibit A-1, Tab 43. [14] Exhibit A-1, Tab 51. [15] Exhibit A-1, Tab 1. [16] Exhibit A-1, Tab 3. [17] Exhibit A-1, Tab 4. [18] Exhibit A-1, Tabs 2 and 4. [19] Exhibit A-1, Tab 6. [20] Exhibit A-1, Tab. 10. [21] Exhibit A-1, Tab 12. [22] Exhibit A-1, Tab 13. [23] Exhibit A-1, Tab 14. [24] Exhibit A-1, Tab. 16. [25] Exhibit A-1, Tab 14. [26] Exhibit A-1, Tab 16. [27] Exhibit A-1, Tab 17. [28] Exhibit A-1, Tab 22. [29] Exhibit A-1, Tab 20. [30] Exhibit A-1, Tab 23. [31] Exhibit A-1, Tab 27. [32] Exhibit A-1, Tabs 28 - 31. [33] Exhibit A-1, Tab 32. [34] Exhibit A-1, Tab 24. [35] Exhibit A-1, Tab 14. [36] Exhibit A-1, Tab 28. [37] Exhibit A-1, Tabs 34 and 35. [38] Exhibit A-1, Tab 36. [39] Exhibit A-1, Tab 38. [40] Exhibit A-1, Tab 39. [41] Exhibit A-1, Tab 40. [42] Exhibit A-1, Tab 42. [43] Exhibit A-1, Tab 43. [44] Exhibit A-1, Tab 46. [45] Exhibit A-1, Tab 43. [46] Exhibit A-1, Tab 46. [47] Exhibit A-1, Tab 46. [48] Exhibit A-1, Tabs 47 and 48. [49] Exhibit A-1, Tab 50. [50] Exhibit A-1, Tab 43. [51] Exhibit A-1, Tab 52. [52] Exhibit A-1, Tab 46. [53] Exhibit A-1, Tab 53. [54] Exhibit A-1, Tab 54. [55] Exhibit A-1, Tab 55. [56] Exhibit A-1, Tab 59. [57] See table set out in paragraph 10 of the Admissions and Agreed Statement of Facts.