Tax Court of Canada Judgments

Date: 20000921

Docket: 98-1574-IT-G

BETWEEN:

DAVID BURKES,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

[1] The Appellant David Burkes appeals income tax assessments for 1992, 1993, 1994 and 1995 taxation years in which the Minister of National Revenue (“Minister”) denied claims by the appellant in computing his income,

for the 1992 taxation year,

i) the deduction of a portion of partnership operating loss, and

ii) the deduction of a portion of partnership work-in-progress[1]

and

b)            with respect to the 1993, 1994 and 1995 taxation years the Minister did not permit the appellant to deduct purported non-capital losses carried forward from 1992 and prior taxation years.

[2] The Minister also added to the appellant’s income for 1992 amounts of accounts receivable deducted by him in computing income for 1991. The appellant concedes that he erred in not including such amounts in his income for 1992.

[3] Finally, the Minister assessed a penalty against the appellant for 1992 in accordance with subsection 163(2) of the Income Tax Act (“Act”) on the basis that as a consequence of deducting a 1992 partnership operating loss and work-in-progress and in failing to include 1991 accounts receivable, he knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his 1992 income tax return.

[4] At all relevant times, and at time of trial, Mr. Burkes was a chartered accountant practising forensic and traditional accounting.

[5] In the autumn of 1989, Mr. Burkes joined the chartered accountancy firm of McCabe & Fynn to carry on his profession. Apparently the effective date the appellant became a partner was February 1, 1990. There was no written partnership agreement between the partners. Each of the three partners, Mr. Gary McCabe, Mr. Andrew Fynn and the appellant had a one-third interest in the partnership and each was entitled to one-third of the partnership income and was liable for an equal share of the partnership debt. Drawings also were to be made in equal portions.

[6] Mr. Burkes never “physically” saw any of McCabe & Fynn’s financial statements when negotiating to enter the partnership. He testified he was given verbal assurance that the partnership was in “good” financial position and its bank loan was “near zero”. Receivables, he was informed, were collected on a timely basis.

[7] Once Mr. Burkes entered the partnership he was informed of decisions after they were made, he stated. Mr. Burke said he had no “input” in the partnership’s financial statements but he was given monthly lists of work-in-process and accounts receivable.

[8] At the beginning of his association with McCabe & Fynn, Mr. Burkes “assumed things were going well”. He received regular draws and had no problems with his partners. Informal partnership meetings were held during lunch and there was no disagreement between the parties. He “assumed” the partnership was profitable; he later learned that it was not.

[9] The partnership’s fiscal year-end was January 31.

[10] Since Mr. Burkes joined the firm in late calendar year 1989 no income was allocated to him for 1990. He received a copy of the firm’s 1991 financial statements which, he believes, were “slipped under” his door sometime in March or April 1992. He was not happy with what he saw. The income of the partnership according to its financial statements was $257,189. The partnership allocated to him a loss of $102,374 for tax purposes for the period ending January 31, 1991 as follows:

McCabe Fynn Burkes Total

Income per F/S – Jan. 31/91 $ 85,729 $ 85,730 $ 85,730 $257,189

Add: 1990 WIP and A/R $148,014 $148,014 $ 24,487 $320,515

$233,743 $233,744 $110,217 $577,704

Less: 1991 WIP and A/R $212,591 $212,592 $212,591 $637,774

Income for Tax Purposes $ 21,152 $ 21,152    $(102,374)    $ (60,070)

[11] The work-in-process and doubtful accounts at the end of 1990 were allocated as to $24,487 to Mr. Burkes and the balance was allocated to Messrs. McCabe and Fynn equally. Apparently Mr. Burkes brought into the partnership work-in-process and receivables of $24,487 which, according to Mr. Fynn, was included in the appellant’s capital account.

[12] Mr. Burkes stated that the bulk of the receivables in 1991 was from clients of Messrs. McCabe and Fynn. The total accounts receivable as of January 31, 1991 was $505,287, of which 97%, according to Mr. Burkes, was over 120 days due. This was contrary to his experience. Bad debts for 1991 were $115,483, an amount that the appellant considered “high”. The total fees of the partnership for 1991 were $897,858.

[13] Mr. Burkes first began to suspect something was awry with the partnership during the summer of 1991: he received no drawings in July and August. Mr. Fynn asked the partners to contribute $5,000 each to the partnership. Mr. Burkes also realized that Messrs. McCabe and Fynn were not trying to collect receivables from their clients and were “not doing a lot of billing”.

[14] By December 1991, Mr. Burkes insisted that a formal partnership meeting be held. He wanted information. He had not been invited to attend meetings with the partnership’s bank manager and clients. The relationship between him and the other two partners was deteriorating quickly. Meetings were held on December 23 and 24, at which facilitators were present to assist the parties. On December 26 Mr. Burkes wrote an eleven page note to himself “in order to synthesize the feeling of the meeting.” Mr. Burkes complained that:

[T]he decisions the partnership have made have been poor decisions for the partnership – may be good for our clients but not for the partnership – and I feel have placed us at the brink of financial disaster + ruin. The decisions made have either been unilateral (Gary) or with Andrew’s consent – but never with my input or just as bad with any post-decision informing(?) to myself but(?) Gary or Andrew.

[15] The appellant then reviewed some of these decisions specifically commenting on several outstanding accounts. Mr. Burkes’ notes state that he believed:

[W]hat . . . we have is a fundamental disagreement on how we bill, collect and even treat clients. When Ruth^* asked Gary if his other firm had the same problem vis-à-vis A/R he said no. – Although A/R $800k in other firm there was a bank loan of $700k.

My opinion is that it is the same problem. A/R is our money – the partnerships. We did the work – Our clients wanted our services – they got value for money – we billed and now they owe the fee. We are not a bank – In fact, in today’s economic environment, we are acting as lenders to high risk clients with no interest + no security – we are only acting to expose ourselves in the most significant sense – our livelihood.

Yet Gary seems to feel $700k in A/R is acceptable. I do not. And I believe a realistic review of the A/R will disclose not a bad debt rate of 20% but over 50%. This [is] not acceptable + could mean significant trouble.

^{___________________}

^* A facilitator

[16] By December, the appellant had “started to look around” to practice his profession elsewhere. Indeed Mr. Burkes spent several evenings in his office during December 1991 and January 1992 going “through all the files in the file room” . . . attempting to find the reason for “so large” receivables. He analyzed the partnership’s accounts and recorded the information for his own purposes.

[17] Another partnership meeting was held in January 1992 without any results. Finally a meeting was held in the firm’s offices on January 31, 1992 and after the meeting Mr. Burkes telephoned his real estate agent to instruct him to complete negotiations for the rental of office facilities from which he could continue his practice. After five o’clock that afternoon, Mr. Burkes advised Mr. McCabe that he was leaving the partnership.

[18] No financial arrangements were discussed at the time the appellant withdrew from the partnership. Obviously discussions ensued toward settlement and the appellant wrote to Mr. McCabe on April 7, 1992 setting out his understanding of what was agreed to at the previous day’s meeting. According to the letter the parties agreed, among other things, that:

a)        the appellant owed the firm $35,000,

b)        Messrs. McCabe and Fynn would release the appellant from all other debts of the partnership,

c)        the appellant would obtain an accounts receivable list and a work-in-process list of accounts allocated to him; the total of these accounts, as agreed, was approximately $153,000, and

d)        the appellant would be entitled to obtain copies of invoices and dockets of the partnership.

[19] Not included in the letter, Mr. Burkes testified, were any references to the firm’s financial statements, his contribution of $30,000 to $40,000 of billings on entering the partnership in 1989, the bad debt level and the allocation of work-in-progress for 1992.

[20] Late in the afternoon of April 30, 1993, one day after Mr. Burkes filed his income tax return for 1992, McCabe & Fynn sent him by facsimile (“fax”) a statement documenting the firm’s calculation of taxable income of the partnership for the period ending January 31, 1992. In this document “income from financial statements” was $105,798. Work-in-process ($151,675) and accounts receivable ($486,099) deducted in 1991 were added to financial statement income. Income of the partnership for tax purposes was $743,572. The amount of $743,572 was allocated equally to the three individuals. No deduction was made at the partnership level for work-in-progress or accounts receivable at the end of 1992. The amounts of work-in-progress and accounts receivable from 1991 were circled and the following note entered by hand at the bottom of the document:

David this should relate

to the 1991 deduction you

enjoyed.

Andrew

From reading this document the appellant concluded that his former partners recognized he was a partner of a firm “for all of 1992”.

[21] At discovery Mr. Burkes obtained the financial statements of the partnership for the period ending January 31, 1992 that Messrs. McCabe and Fynn used to prepare their 1992 income tax returns. These documents were quite different from what was “faxed” to Mr. Burkes on April 30, 1993. According to the statement of income for 1992, the partnership earned net operating income of $95,798. Bad debts aggregated $205,897; fees for the year were $929,096. In calculating taxable income of the two partners for 1992 – Mr. Burkes was not considered in these statements to have been a partner at the end of January 31, 1992 – the partnership added to income only two-thirds of the 1991 accounts receivable and two-thirds of the work-in-progress at the end of 1991. The financial statement income of $95,798 was allocated only to the two remaining partners. Work-in-progress ($237,658) and accounts receivable ($282,214) at the end of 1992 were allocated equally to the two remaining partners and each partner deducted his one-half share in computing taxable income. Mr. Burkes was allocated no part of income for 1992 or work-in-progress and accounts receivable at the end of 1992.

[22] Taking advantage of what he learned in going through the firm’s files in December 1991 and January 1992 and material subsequently given to him by McCabe & Fynn. Mr. Burkes prepared his own financial statements for the partnership for the period ending January 31, 1992.

[23] About two weeks after leaving the partnership, the appellant recalled, he received a computer print-out of the firm’s accounts receivable and work-in-progress summary and work-in-progress for the period ending January 31, 1992, assigned to the appellant. The work-in-progress print-out contains asterisks entered by Mr. Fynn to indicate the work-in-progress of clients allocated to Mr. Burkes. The total work-in-progress at the end of 1992, according to the print-out, was $239,167.72 which Mr. Burkes rounded off to $240,000 when he prepared his statements.

[24] According to the statement of income Mr. Burkes prepared for 1992, the partnership had fees of $934,155 and bad debts of $466,074. The partnership had a net operating loss of $169,740. Mr. Burkes calculated the taxable income of the partnership for the period ending January 31, 1992 as follows:

Net Loss $(169,740)

Add 1991 work-in-progress 151,675

Less 1992 work-in-progress (240,068)

Net Loss for tax $(258,133)

Mr. Burkes allocated the loss equally among the three parties. He acknowledged at trial (and earlier, at the beginning of Revenue Canada’s audit of him) that he ought to have added to the net loss 1991 accounts receivable in the amount of $486,099 that were deducted in 1991 (as well as 1991 work-in-progress). Had the sum of $486,099 been so added in calculating taxable income, net income would have been reported at $227,966 and Mr. Burkes would have allocated $75,988 to each of the three partners. Thus it appears no non-capital loss would be available to Mr. Burkes to carry forward to other years.

[25] Mr. Burkes also explained that in preparing the statement of income for the partnership for 1992 he deducted bad debts in the amount of $466,074, as opposed to McCabe & Fynn’s claim for bad debts in the amount of $205,897. He said he tried to “get behind the high accounts receivable of the partnership”. He had reviewed each client of the firm individually in preparing his own schedule to arrive at the higher amount of the bad debts.

[26] During his review of files the appellant analyzed print-outs of work-in-progress and accounts receivable. He entered check marks on clients that were his and attempted to determine his portion of the receivables. He also wrote out on another sheet of paper the firm’s receivables that were more than 90 days old. These documents were produced as exhibits.

[27] The appellant did not know the reason Messrs. McCabe and Fynn reported the amount of $95,798 as net income for 1992 in the firm’s financial statements they prepared but informed Mr. Burkes by fax on April 30, 1993 that the firm’s income for 1992 was $105,798. Mr. Fynn believed the difference was due to a credit note in the amount of $10,000.

[28] In cross-examination Mr. Burkes testified that the partnership had no or little bank loan when he entered into the partnership in 1989, but by January 1992 the partnership owed the bank a total of $320,000. The letter of April 7, 1992 appears to have relieved him of his one-third share of the bank debt. He acknowledged that he did not share in the accounts receivable of the firm for 1992. He retained the work-in-progress and receivables of his own clients.

[29] In preparing the financial statements for 1992, Mr. Burkes acknowledged that Mr. Fynn provided him with documentation and information he requested but, it appears, Mr. Fynn did not volunteer anything extra.

[30] Mr. Basil Mohan, an officer of Revenue Canada at the time, was examined for discovery by the appellant’s counsel. Portions of his testimony were read into the record. The essence of his evidence is that in assessing the appellant, Revenue Canada relied on the financial statements of McCabe & Fynn and gave little, if any, consideration to any statements prepared by the appellant.

[31] Mr. Fynn gave evidence for the Crown. He recalled that the appellant joined McCabe & Fynn on February 1, 1990 and left “towards the end of January” in 1992. The appellant, however, first “joined” the firm in November 1989.

[32] When Mr. Burkes left the partnership, according to Mr. Fynn, he left work-in-progress and accounts receivable “on the books”. Any adjustments in the appellant’s capital account, work-in-progress and accounts receivable were “probably put through in 1993”, when the amounts and terms of settlement were known.

[33] Mr. Fynn declared that the firm billed monthly and each month sent out accounts receivable statements, “but not every month”.

[34] Mr. Fynn prepared the partnership’s 1991 financial statements. He confirmed that an account would be written-off as bad only when the client left the firm or became bankrupt. He acknowledged that the firm was “slow to work off accounts”. The firm was optimistic, thinking it would “recover” these accounts. Accounts receivable were “kept for more than 120 days for tax purposes”. Mr. Fynn admitted to the appellant’s counsel that “some accounts receivable were probably bad debts” that the firm would never collect.

[35] As far as Mr. Fynn is concerned, Mr. Burkes left the partnership before the end of the 1992 fiscal period of the partnership and therefore he was not entitled to any portion of the partnership’s work-in-progress at the end of 1992.

[36] Mr. Fynn declared he and the appellant never discussed bad debts, work-in-process and accounts receivable.

[37] To the extent that the evidence of Mr. Burkes and Mr. Fynn were in conflict, I prefer the evidence of Mr. Burkes. The appellant did not hesitate in answering questions and the answers were complete. Mr. Fynn was not always clear in responding to questions. He continuously looked away from his questioner and when I asked him to clarify an answer, for example, he avoided making eye contact with me.

[38] There are, therefore, three issues before me: (a) the quantum of bad debts of the partnership in 1992, and thus the partnership’s income or loss for that year; (b) whether the appellant is entitled to deduct one-third of the partnership’s work-in-progress at the end of 1992 pursuant to sections 34 and 96 of the Act in computing taxable income for 1992; and finally, (c) was the Minister correct in assessing a penalty pursuant to subsection 163(2) of the Act.

Bad Debts

[39] The question I have to answer is whose method of reporting income I prefer, the appellant’s or McCabe & Fynn’s?

[40] The respondent says I should accept the statements prepared by McCabe & Fynn. The two remaining partners, appellant’s counsel asserted, had a continuing vested interest in the partnership; they started the partnership and intended to continue to operate the partnership. Section 24 of the Partnership Act of Ontario,[2] Rule 8, states that any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of partners. The writing-off of bad debts, said counsel, is an “ordinary” matter. Counsel suggested that Messrs. McCabe and Fynn, two of the three partners, made a decision to write-off only certain debts and the appellant should not “dictate” to the majority partners when bad debts should be written-off.

[41] McCabe & Fynn did not, in my view, give much thought or consideration to whether a debt was good, doubtful or bad. Mr. Fynn’s evidence convinced me of this. As long as the client was still a client of the firm and not yet bankrupt, his or her debt was not considered to be a bad debt according to the firm. These were the two criteria considered by the firm even though, as Mr. Fynn acknowledged at trial, some of the receivables were “probably bad”.

[42] It is not for a court of law to make business decisions; this is the purview of the businessman or businesswoman. However, in determining whether a debt is good or bad the businessperson must act prudently.[3] In 1953 the Tax Appeal Board[4] found that the following factors are to be considered by the taxpayer in determining whether an account had become doubtful:

[T]he time element, the history of the account, the financial position of the client, the past experience of the taxpayer with the writing off of his bad debts, the general business condition in the country in a case like in the present one where the taxpayer is doing business all over Canada, the business conditions in the locality where the client lives, the increase or decrease in the total sales and accounts receivable at the end of the year for which the deduction is claimed, as compared with the previous years.[5]

The same factors apply in determining whether a debt has become bad.

[43] In the case of a chartered accountant, the chartered accountant knows or ought to know the client’s financial position and thus has more knowledge available to make a decision on the status of a client’s debt than other businesspersons. My concern is which of the appellant’s or McCabe & Fynn’s financial statements are more accurate (or less inaccurate). Accuracy of financial statements is not decided by a vote.

[44] In Flexi-Coil Ltd. v. The Queen,[6] the Federal Court of Appeal cited by my colleague Judge Archambault’s statement of case law interpreting paragraph 20(1)(p) of the Act. Archambault J.T.C.C. stated, in part, that:

[t]o decide whether a taxpayer is entitled to a deduction for bad debts, the Court must be satisfied that the taxpayer itself made the determination that the debts had become uncollectible and that in making such determination, it acted reasonably and in a pragmatic business-like manner, applying the proper factors.

[45] The Federal Court of Appeal agreed that the Tax Court Judge was entitled to decide that Flexi-Coil Ltd. had not acted reasonably in determining the amounts of bad debts.

[46] In Berretti v. M.N.R.,[7] Judge Sarchuk found that the taxpayer had not acted in a pragmatic businesslike manner in concluding that the debts had become bad. Evans J. dismissed the taxpayer’s appeal in Richardson v. The Queen,[8] on the basis that the taxpayer had not established that he honestly and reasonably believed that the loan had become uncollectable in the year.

[47] Now, it should be noted that paragraph 20(1)(p) of the Act permits a taxpayer, in computing income for the taxation year from a business, to deduct “debts owing to the taxpayer that are established by the taxpayer to have become bad debts in the year . . .”. If a taxpayer knows that a debt is bad in one year but keeps the debt on the books until a later year, the debt cannot be deducted in the later year. However, this issue is not before me; it is not part of the assessments nor is it raised in the pleadings.

[48] Nevertheless, it is questionable whether Messrs. McCabe and Fynn ever made a bona fide business decision to write-off debts in the year they knew the debts were bad. The decision was made for them, either when the firm lost a client or a client became bankrupt. This is not what a prudent businessperson does. Mr. Fynn acknowledged the firm carried accounts on its books for as long as possible. These debts may have been retained for tax purposes, he said.

[49] On the other hand, the appellant made a very conscious and deliberate attempt in December 1991 and January 1992 to determine which of the partnership’s debts were good, doubtful and bad. His concern with McCabe & Fynn’s practice to carry over debts from year to year before writing them off comes across in the notes he prepared on December 26, 1991. His bad debt analysis was produced at trial. The only problem I have with the amount of debts the appellant determined to be bad, namely, $466,074, is that according to his analysis the amount of bad debts (including debts of bankrupt clients) is $440,997. The appellant acknowledged he was unable to “get an exact reconciliation”.

[50] I am not bound by either the partnership’s financial statements or those of the appellant. In the appeal at bar I want some degree of comfort that financial statements I rely on accurately reflect the partnership’s profit for the year. As Thurlow, J., as he then was, explained in Silverman v. M.N.R.:[9]

[S]ince what is declared to be the income from a business is the profit therefrom for the year, the method adopted must be one which accurately reflects the result of the year’s operations, and where two different methods, either of which may be acceptable for business purposes, differ in their results, for income tax purposes the appropriate method is that which most accurately shows the profit from the year’s operations.

[51] I have no confidence at all in the manner in which McCabe & Fynn determined – if they made such determination – what accounts were bad and the amount of the bad debts in any particular year. Mr. Burkes made great efforts to determine the status of the partnership’s accounts and in my view his statements reflect more accurately the income of the partnership. As he stated in his note of December 26, 1991 a “realistic review” of the accounts receivable was necessary and it was he who performed the review.

[52] Revenue Canada accepted the financial statements prepared by the partnership. No employee of Revenue Canada reviewed the accounts receivable nor did anyone at Revenue Canada contact any client whose account receivable, according to Mr. Burkes, was bad. Mr. Mohan thought it was “not necessary”.

[53] Revenue Canada also did not make any inquiry to determine the reason McCabe & Fynn allocated income for accounting purposes in 1992 equally among the three partners in the financial information the firm provided to the appellant but in their own financial statements for 1992 they did not show the appellant as a partner.

[54] I therefore accept the basis of Mr. Burkes’ calculation of the partnership’s income for 1992 that the bad debts were in excess of those claimed by the partnership. However, I would reduce the amount of bad debts to the amount of $440,997 that he established to be bad. Therefore the amount of $440,997 will be deducted from fees in computing the partnership’s income for 1992 so that the net operating loss of McCabe & Fynn for the period ending January 31, 1992 was $144,663.

Work-in-Progress

[55] On the assumption that Mr. Burkes was not a partner of McCabe & Fynn at the end of the firm’s 1992 fiscal period, Messrs. McCabe and Fynn each deducted one-half of the partnership’s 1992 work-in-progress in calculating their taxable income. Mr. Burkes, assuming he was a partner, deducted one-third of the partnership’s 1992 work-in-progress. The Minister assessed the appellant on the basis he was not a partner and therefore not entitled to deduct the amount of $80,022 of 1992 work-in-progress of the partnership.

[56] The appellant was a partner of McCabe & Fynn for the whole of the 1992 fiscal period of the partnership. He gave notice of the withdrawal from the partnership to Mr. McCabe after 5:00 p.m. on January 31, 1992. The partners had met during the afternoon with respect to their personal business relations. January 31, 1992 was a Friday. It is not unreasonable to conclude that in the circumstances the partnership carried on no business after 5:00 p.m., if not earlier, on January 31, 1992. The business of the partnership had closed for the day and the year at the time Mr. Burkes gave notice to Mr. McCabe. In any event, in the material sent to Mr. Burkes by fax on April 30, 1993, Messrs. McCabe and Fynn recognized that for purposes of allocating income, Mr. Burkes was a partner for all of 1992. That he left the partnership ought not to affect his right to deduct his share of the partnership’s 1992 work-in-progress. A valid election by the partnership under section 34 of the Act to exclude work-in-progress still existed; the partners had not revoked the election in the manner required by paragraph 34(b) so as to adversely affect the appellant.

Penalty

[57] The appellant was assessed a penalty for 1992 under subsection 163(2) of the Act on the basis that knowingly, or under circumstances amounting to gross negligence, he made a false statement or omission in his 1992 tax return that reduced his income by $298,635.[10] The additional income is the aggregate of “1991 Addback of opening WIP and A/R” of $162,033,[11] “1992 Disallowed operating loss” of $56,580 and “1992 Disallowed closing works-in-progress” of $80,022. I have held that the appellant was correct in calculating the partnership’s operating loss and in claiming 1992 work-in-progress. I also question whether penalties should be assessed under subsection 163(2) where there is a legitimate dispute between partners. In the appeal at bar Revenue Canada, for no apparent reason, preferred one partner’s information over the other’s. The amounts added to income from these two items ought not be part of the penalty.

[58] The penalty, then, relates only to the appellant’s failure to include the 1991 accounts receivable in income for 1992.

[59] The appellant has been a chartered accountant for over 15 years and is assumed to have a degree of knowledge in preparing income tax returns that is greater than the average person. The appellant filed his 1992 income tax return on April 29, 1993, more than one year after leaving the partnership.

[60] A day after filing his 1992 tax return Mr. Burkes received by fax a statement for 1992 from his former partners which added 1991 accounts receivable to the partnership’s 1992 financial statement income. Mr. Burkes apparently ignored this statement perhaps because he did not agree with it, for some other reason or for no reason.

[61] Appellant’s counsel argued that April 30 is a busy time for accountants and therefore the appellant was not able to give his full attention to the faxed statement on its receipt. This may be so, but Mr. Burkes received the fax at about 4:00 p.m. on April 30, 1993 and apparently ignored it until he learned he would be audited by Revenue Canada. I would have thought that when Mr. Burkes prepared his 1993 tax return in 1994 he would have reviewed the previous year’s return for information and realized his error. It was only on March 26, 1996, at a meeting with the tax auditor, that Mr. Burkes brought his error to the attention of Revenue Canada.

[62] Appellant’s counsel referred to the reasons of Strayer J. in Venne v. The Queen,[12] in which the learned judge explained, at page 6256, that:

“Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.

[63] Mr. Venne had very limited education and experience and relied completely on his bookkeeper to complete his tax returns. This is not the situation in the appeal at bar and the facts in Venne, supra, do not assist Mr. Burkes.

[64] Mr. Burkes prepared his 1992 tax return during April 1993. This is over one year after the emotion and stress of experiencing a split with his partners. By 1993 he was carrying on practice as a sole practitioner and apparently was preparing tax returns for clients – his counsel implied that Mr. Burkes was very busy in April. He knew how he reported income for 1991 and in preparing his 1992 tax return would, in the normal course as a professional carrying on such a business, verify his tax records from previous years, including 1991. Obviously, he did so since he did include in his income for 1992 his share of the 1991 work-in-progress that he deducted.

[65] I understand Mr. Burkes’ reaction to any financial information he may have received from his erstwhile partners. The appellant may have been blind to any information sent to him by his former partners. I refer to the fax of April 30, 1993. If he was not satisfied with the information, he could have requested clarification from Mr. Fynn. Mr. Fynn had not denied him any information in the past. Mr. Burkes failed to do so. He obviously put the fax in a file, only to review the file when the fisc came calling in 1996. Mr. Burkes knew or ought to have known that he deducted his share of accounts receivable over 120 days in computing his income for 1991. As an accountant, he knew these receivables had to be included in 1992 income. The amount of the receivables is not insignificant. Mr. Burkes was grossly negligent in not adding the accounts receivable from 1991 in calculating taxable income for 1992.

[66] The appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the following bases:

a) The appellant was a partner of McCabe & Fynn during all of the partnership’s fiscal period ending January 31, 1992;

b) In its fiscal period ending January 31, 1992, McCabe & Fynn had bad debts aggregating $440,997 which are to be deducted in computing its net income for the period;

c) In calculating income for tax purposes the appellant is entitled to deduct one-third of the firm’s work-in-progress at the end of 1992;

d) The penalties assessed under subsection 163(2) of the Act shall apply only to the appellant’s failure to include in income for 1992 his share of the accounts receivable deducted by the partnership in computing income for tax purposes for the fiscal period ending on January 31, 1991, and;

e) To the extent the appellant incurred a non-capital loss, if any, in 1992 or in prior years, he is entitled to apply the loss in computing taxable income in 1993, 1994 and 1995 in accordance with paragraph 111(1)(a) and subsection 111(8) of the Act.

Signed at Ottawa, Canada this 21st day of September 2000.

"Gerald J. Rip"

J.T.C.C.

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