Citation: 2006TCC306
Date: 20060531
Docket: 2003-699(IT)G
BETWEEN:
GEORGE C. PETRIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
2003-701(IT)G
MONT-BLEU FORD INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1] These appeals, heard on common evidence, are from assessments by the Minister of National Revenue ("Minister") increasing to $2,405,220 (taxable capital gain of $1,803,915) from the $208,992 (taxable capital gain of $156,744) declared by Mont-Bleu Ford Inc. ("Mont-Bleu") in its 1996 tax return the capital gain on the sale, on July 25, 1996, of two parcels of vacant land, namely, Lot 41-5 and Lot 42 in the former City of Gatineau (the "property"), to its sole shareholder, George C. Petric. This resulted in an increase of $1,647,171 in the taxable capital gain.
[2] Mont-Bleu was first assessed for its 1996 taxation year on July 21, 1997. It was then reassessed on April 25, 2000, and the proceeds of disposition of the property were adjusted to $2,777,370, which, according to the Minister, was the fair market value of the property at the time of disposition. In its tax return, Mont-Bleu had declared $1,965,800 as being the proceeds of disposition. The total fair market value of the property as at March 26, 1996, according to the appraisal report dated April 10, 1996, produced by the appellants' expert, André Faucher, A.A.C.I, was $1,964,000 (i.e., $634,000 for Lot 41-5 and $1,330,000 for Lot 42: see Exhibit R-1, Volume 3, Tabs 27 and 28).
[3] Mr. Petric, on the other hand, was first assessed personally for his 1996 taxation year on September 8, 1997. He was then reassessed on May 11, 2000, to increase his taxable income for that same year by an amount of $594,824 to take into account the appropriation of the property. This adjustment was based on a market value for the property of $2,777,370, and not $1,964,000 as declared by Mont-Bleu. The Minister relied on subsection 15(1) of the Income Tax Act ("Act") in so reassessing, and did so on the basis that Mont-Bleu had conferred a benefit on Mr. Petric in his capacity as a shareholder through the transfer of the property to him at less than fair market value. Both Mont-Bleu and Mr. Petric objected to the reassessments on July 18, 2000.
[4] On December 4, 2002, the Minister reassessed Mont-Bleu on the basis that the fair market value of the property at the time of the sale, that is, on July 25, 1996, was not $2,777,370, as first reassessed, but $4,270,000. As a result, the Minister determined that Mont-Bleu's capital gain on the transfer of the property was $2,405,220 and that the taxable capital gain was $1,803,915, which resulted in an increase of $1,119,473 in the assessed taxable capital gain. By the same token, Mr. Petric was reassessed on December 10, 2002, and had attributed to him an additional amount of $1,492,630, for a total of $2,087,454 added to his taxable income for 1996. This again was based on a market value for the property of $4,270,000, and not $2,777,370 as previously reassessed.
Issues
[5] It is not disputed that the December 2002 reassessments that are under appeal here were made beyond the normal reassessment period. Nor is it disputed that the respondent has the burden of showing that both appellants made a misrepresentation that is attributable to neglect, carelessness or wilful default if the Minister is to be able to reassess them beyond the normal reassessment period pursuant to subsection 152(4) of the Act.
[6] The respondent is of the view that the appellants did not demonstrate a bona fide intention to transfer the property at fair market value, that in filing their 1996 tax returns they misrepresented the fair market value of the property, and that that misrepresentation was attributable to neglect, carelessness or wilful default. The appellants, on the other hand, argue that they relied on the appraisal report dated April 10, 1996, by André L. Faucher, an accredited professional appraiser with the Appraisal Institute of Canada, who established the value of the property at $1,964,000 as at March 26, 1996. According to the appellants, it thus cannot be said that they misrepresented the fair market value of the property, as argued by the respondent.
[7] Furthermore, the appellants submit that the Minister first reassessed them within the normal reassessment period and determined the fair market value to be $2,777,370. According to the appellants, the Minister was in a position to establish the fair market value during that normal reassessment period and it is no longer open to the respondent to argue that the appellants misrepresented that fair market value and to rely on that argument in order to be able to reassess beyond the normal reassessment period.
[8] The appellants also argue that the fair market value as determined by the Minister is not representative of the actual fair market value at the date of disposition of the property, that is, July 25, 1996. The appellants relied on Mr. Faucher's appraisal report, which determined the value based on the direct comparison approach, which consists in the direct comparison of sales of similar properties. The Minister, on the other hand, relied on an appraisal report done by Gérard Martineau, a chartered appraiser working for the Canada Customs and Revenue Agency, who determined the value using an income approach. Mr. Martineau was of the opinion that at the relevant date for appraisal purposes, namely, July 25, 1996 (the date of disposition), the property was subject to a 50-year long-term emphyteutic lease agreement under which there would be an escalating rental and a reversionary value from the building upon termination of the lease. The appellants submit that on July 25, 1996, the emphyteutic lease was not yet in place and was subject to many conditions, which, if not met, could have caused the emphyteutic lease to never have legal effect. The appellants indeed argue that one main condition to be satisfied in order for the emphyteutic lease to take effect was the purchase of a third parcel of land (Part of Lot 41 in the former City of Gatineau), which was not even owned by Mr. Petric on July 25, 1996. Although a conditional offer to purchase that property was accepted on May 22, 1996 (Exhibit R-1, Volume 3, Tab 32 (6)), Part of Lot 41 was indeed officially purchased only on July 31, 1996 (Exhibit R-1, Volume 3, Tab 32 (12)), and the emphyteutic lease was actually put in place only on August 28, 1996 (the commencement date), at which time Mr. Petric started to receive income thereunder (Exhibit R-1, Volume 3, Tab 32 (13)).
[9] The appellants therefore argue that on July 25, 1996, the relevant date for the purposes of the appraisal, it was too early for one to be able to rely on the income stream from the emphyteutic lease in valuing the property, as there was only a conditional agreement at that time and, if all the conditions were not met, it was possible that the lease would never have become legally effective.
Facts
[10] Mont-Bleu is a Ford automobile dealership and has been carrying on business since 1983 at different locations in what is now the new City of Gatineauin the provinceof Quebec. In September 1985, Mr. Petric personally purchased for $490,000 from a numbered company represented by Roger Lachapelle a piece of land known as Lot 41-5 located in the former City of Gatineau(Exhibit R-1, Volume 3, Tab 32 (1)). The intent was to put a satellite Ford dealership there. Later on, the Ford Motor Company decided that it wanted to have the main dealership in the former City of Gatineau. In November 1991, Mr. Petric sold Lot41-5 to Mont-Bleu for $490,000 (Exhibit R-1, Volume 3, Tab 32 (2)). In December 1992, Mont-Bleu in turn purchased for $1,240,600, from a series of different companies not related to the appellants, another piece of land described as being Lot 42 in the former City of Gatineau(Exhibit R-1, Volume 3, Tab 32 (3)). This lot adjoined Lot 41-5, and the idea was expansion to accommodate the main Ford dealership there. In the end, however, the Ford Motor Company did not offer an acceptable price for leasing the assembled land, which was composed of Lot 41-5 and Lot 42 (the property). Mr. Petric then approached Provigo, which had in a previous year entered into an emphyteutic lease with him with respect to other land, located in the former City of Hull (Quebec), to see whether they would be interested in leasing the property. At first, Provigo declined the proposition. However, on February 28, 1996, Provigo, through a numbered company, 9031-7256 Québec Inc., came back with an offer stating that if Mr. Petric purchased another parcel of land (known as Lot 41 in the former City of Gatineau) adjoining the property, they would consider the possibility of entering into an emphyteutic lease on the property thus assembled (Lot 41-5, Lot 42 and Lot 41) (Exhibit R-1, Volume 3, Tab 32 (4)). Provigo was offering a 50-year lease at the following annual rentals:
|
Years 1 to 10
|
$375,000
|
|
Years 11 to 20
|
$425,000
|
|
Years 21 to 30
|
$480,000
|
|
Years 31 to 40
|
$540,000
|
|
Years 41 to 50
|
$610,000
|
[11] On May 7, 1996, Provigo, through the aforementioned Quebec numbered company, modified its offer, declaring itself ready to raise the annual rent for the first ten years to $400,000 from the $375,000 previously offered, provided again that Mr. Petric became the owner of Lot 41 prior to entering into the lease (see Exhibit R-1, Volume 3, Tab 32 (4), 3rd page).
[12] In the meantime, Mr. Petric turned to Century 21 Accord Ltd., the real estate agency that had approached him with the lease offer from Provigo, to attempt to purchase Lot 41, which was owned by Roger Lachapelle. According to Mr. Petric, Mr. Lachapelle was aware that he had plans to develop the land, without knowing exactly what those plans were, and did not want to sell Lot41 for less than $15 per square foot. Mr. Petric agreed to that price and on May 21, 1996, made a conditional offer to Mr. Lachapelle that was accepted on May 22, 1996. The offer was conditional on the approval of the board of directors of the Quebec numbered company (acting for Provigo) within 45 days of the acceptance of the offer, and if that approval was given, the closing of the transaction was to take place 60 days after the date of acceptance of the offer to purchase (Exhibit R-1, Volume 3, Tab 32(6), 3rd page). Mr. Petric testified that he offered to pay three times the going price for similar properties in that area because he knew that Mr. Lachapelle would not lower his price. He had no choice but to accept it.
[13] Mr. Petric had previously approached Mr. Faucher for an appraisal of the property for the purpose of taking out a mortgage on it in order to finance the purchase of Lot 41. He said he did not advise Mr. Faucher at that time of his negotiations with Provigo regarding the emphyteutic lease. In his view, it was preferable to keep it quiet because, if it had become common knowledge, Mr. Lachapelle would have probably asked a lot more for Lot41, knowing that it would have complemented the land already assembled. As a matter of fact, a mortgage of $1.7 million was approved for the property on July 15, 1996, by the Toronto Dominion Bank on the basis of the value determined by Mr. Faucher (see the Banking Proposal in Exhibit R-1, Volume 2, Tab 23). A preliminary advance of $896,300 was to be made available by the bank on the closing of the purchase, subject to its being provided with the Agreement of Emphyteusis signed by Provigo, the balance to be available on provision of a copy of the emphyteutic lease (see the same Banking Proposal, Exhibit R-1, Volume 2, Tab 23, page 3).
[14] On July 12, 1996, an Agreement of Emphyteusis was signed between Mr. Petric and the Quebecnumbered company acting for Provigo, which agreement set out certain terms and conditions (Exhibit R-1, Volume 3, Tab 32 (10)). The annual rental offered was $50,000 more than initially proposed by Provigo in February 1996. Among the terms and conditions of this agreement, there is in clause 4 the provision that the emphyteutic lessee is entitled to examine the land and the title thereto within 30 days following the execution of the agreement. The emphyteutic lessee was given full access to the land to carry out the inspection and, in particular, to take such measurements and soil samples and to make such excavations as the emphyteutic lessee deemed useful. If the final deed was not executed, it was stipulated that the emphyteutic lessee was to restore the land to substantially the same condition as existed immediately prior to any changes made by the emphyteutic lessee. If, as a result of the inspection or other investigations, the emphyteutic lessee discovered any deficiencies, the owner was to remedy those deficiencies and the date of execution of the deed could be delayed for a reasonable period of time, not to exceed 60 days. If the deficiencies were not remedied to its satisfaction, the emphyteutic lessee had certain options, one of which was to terminate the agreement. It was also stipulated, in clause 2 of the agreement, that the term of the emphyteutic lease was to commence on the date on which the deed of emphyteusis was executed (the "commencement date"), and in clause 9, that the deed of emphyteusis was to be signed on the later of September 1, 1996, or the date on which the owner became the registered owner of Lot 41. If either party failed to sign the lease as provided in the agreement, the other party could cancel the agreement by giving notice to the defaulting party.
[15] On July 25, 1996, Mont-Bleu transferred Lots 41-5 and 42 (the property) to Mr. Petric for $1,964,000, which is the value determined by Mr. Faucher ($1,964,000 or $7 per square foot) (Exhibit R-1, Volume 3, Tab 32 (11)), and also the value at issue in the present case.
[16] On July 31, 1996, Mr. Petric, by deed of transfer, acquired Lot 41 for $873,196 ($15 per square foot) (Exhibit R-1, Volume 3, Tab 32 (12)). On August 28, 1996, the final deed of emphyteusis with respect to the three assembled lots was signed by Mr. Petric and the Quebecnumbered company acting for Provigo (Exhibit R-1, Volume 3, Tab 32 (13)). August 28, 1996, was therefore the commencement date of the emphyteutic lease. The annual rental was as previously agreed upon in the agreement of July 12, 1996. A $3 million building was to be erected on the land by the lessee, as agreed on July 12, 1996. Clause 14.12 of the August 28, 1996, deed of emphyteusis stipulates as follows, as reproduced from Exhibit R-1, Volume 3, Tab 32 (13), page 15:
14.12 Le Propriétaire et l'Emphytéote reconnaissent que les termes et conditions de l'Offre d'emphytéose (Agreement of Emphyteusis) en date du 12 juillet 1996 dont copie demeure annexée aux présentes après avoir été reconnue véritable et signée à des fins d'identification en présence du notaire soussigné feront partie intégrante des présentes à moins de contradictions avec les termes des présentes.
[17] Michelle Lafontaine, notary, who worked for the firm of notaries that executed all the deeds in the present case, testified that clause 14.12 was included in the final deed so that everything that was agreed upon in the Agreement of Emphyteusis of July 12, 1996, would be incorporated in that final deed. She said that although the agreement of July 12, 1996, forms part of the final deed of August 28, 1996, except to the extent that there are inconsistencies with the final deed, only the latter is the notarial act giving Provigo the right to use the property under the emphyteusis. She confirmed that the Agreement of Emphyteusis gave Provigo the right to inspect the property for soil testing. Without that preliminary agreement, the owner would not permit the eventual emphyteutic lessee to so inspect the property. Ms. Lafontaine also mentioned that it is not uncommon for the terms of the preliminary agreement to differ from those of the final deed and for negotiations to continue until the final deed is signed. She gave as an example the previous emphyteutic lease entered into between Provigo and Mr. Petric in the former City of Hull, which entailed environmental issues and issues of access to the site. She said that in commercial transactions such as the one involved here due diligence may show nothing to be wrong, or, on the other hand, may reveal the presence of contamination and therefore a need to renegotiate. Sometimes, the deal is not closed at all.
[18] Mr. Martineau, the respondent's expert, testified that he first appraised the property in a very cursory fashion to arrive at his initial evaluation of the property at $2,777,370. When he was mandated by the appeals officer to prepare a formal appraisal report (on March 15, 2001 - according to the Report on Objection, Exhibit R-1, Volume 1, Tab 7, page 2 - that is, after the normal reassessment period), he determined the value to be $4,270,000. In appraising the property, he discarded the direct comparison approach (comparable sales) because none of the comparable land sales involved a similar long-term emphyteutic lease agreement with respect to the land. He relied on the agreement of July 12, 1996, as there would be a 50-year emphyteutic lease to Provigo involving income-generating capacity from that lease, and proceeded to valuate the land using the income approach, which is based on the present value of the income from the cash flow to be generated. He used that method although the cash flow did not begin until the final deed was signed and registered at the municipal registry office on August 28, 1996. In his view, to identify the most representative market value applicable to the subject property in accordance with the highest and best use thereof, one has to consider the impact on the property's value of the 50-year emphyteutic encumbrance. Indeed, he is of the opinion that the signed contractual agreement with Provigo to enter into a 50-year emphyteutic lease, including the construction of a large retail store building whose cost was to be borne by the emphyteutic lessee, represented the property's highest and best use on July 25, 1996. He submits that, at that date, all the inherent conditions allowing the completion of the deal were met. He said that the acquisition of Lot 41 was secured by the acceptance of the conditional offer to purchase it, which was already binding in May 1996 because the conditions it contained were such as "usually lead to closing further down the line" (page 149 of the transcript). Furthermore, in Mr. Martineau's view, all the agreements and documents prior to July 25, 1996, constituted steps that were completed in order for the emphyteutic lease to take effect and the deal to go through. He therefore proceeded to estimate the market value of the entire property that was subject to the emphyteutic lease even though he recognized that the property being appraised was composed of only two of the three parcels subject to the lease agreement and that the three lots would be transferred under one ownership only after the date to which the appraisal applied. He estimated the market value of the subject property (Lot 41-5 and Lot 42) by deducting from the overall value the actual price paid by Mr. Petric for Lot 41.
[19] The appellant's expert, Mr. Faucher, testified that he was not aware at the time he did the appraisal of the property, in April 1996, that negotiations had taken place between Mr. Petric and Provigo regarding the emphyteutic lease. He was, however, very clear in stating that had he known, it would not have changed his valuation of the property. He also clearly indicated that that value would not have changed on July 25, 1996 either, as long as the lease was not signed and fully in effect at that date. He would have changed the property's value in accordance with the income approach used by Mr. Martineau only when the final deed was executed on August 28, 1996, or at best when the land assembly was completed on July 31, 1996. Mr. Faucher explained that the emphyteutic lease offer was based on an area of 342,000 square feet (Lot 41-5, Lot 42 and Lot 41), while at the date of his appraisal and on July 25, 1996, the property (Lot 41-5 and Lot 42) was only 190,000 square feet. Because the agreement could not take effect until Mr. Petric owned the complete lot, and because a valuation has to be done on an "as is" basis at the time of appraisal, he would in any case have discounted the Agreement of Emphyteusis until the subject matter of that agreement was actually realized. Mr. Faucher said that the possibilities of development were just that, mere possibilities, and that he does not evaluate possibilities but realities, because eventualities and business prospects are difficult to prove.
Arguments of the parties
[20] The respondent is of the view that the Minister was entitled to reassess after the normal reassessment period because the appellants made a misrepresentation with respect to the fair market value of the property.
[21] The respondent submits that the appellants were neglectful in their failure to advise the appraiser, Mr. Faucher, of the impending transaction with Provigo, toward which the parties concerned had begun working in February 1996.
[22] Counsel for the respondent argues that Mr. Faucher's testimony that this information would not have made any difference to his appraisal is not credible. At page 12 of his appraisal report, Exhibit R-1, Volume 3, Tab 27, Mr. Faucher states the following:
HIGHEST AND BEST USE
Definition:
That use which, at the time of the appraisal, is most likely to produce the greatest net return, in money or amenities, over a given period of time.
Factors governing the determination of highest and best use are: marketability, profitability, statutory limitation, regulatory controls, titular restrictions, physical and functional limitations, financial constraints, managerial constraints and societal constraints.
Since the subject property meets all of the conditions responsible for its acceptance, it is believed that the highest and best use of the subject property has [sic] vacant is to erect a commercial building, considering the demand for accomodation [sic] in the subject location.
[23] Counsel states that there is a great difference between the highest and best use of the property as envisioned by the appellants, which was clearly to enter into an emphyteutic lease with Provigo, and the highest and best use recorded in Mr. Faucher's appraisal report. The non-disclosure to Mr. Faucher of all the relevant facts created between the appellants and the expert an inconsistency as to what constituted the highest and best use of the property.
[24] Furthermore, counsel for the respondent states that there is in Mr. Faucher's report a further error attributable to the fact that he was not fully informed, and this appears at page 13 of the report:
MARKET HISTORY
The owner reports that the subject property is not under current aggreement [sic] of option and is not offered for sale on the open market. According to public records, the subject property has not changed hands during the past three years.
[25] According to counsel for the respondent, this statement is not true. The property was in fact on the market as of February 1996, when Provigo first approached Mr. Petric about entering into a 50-year emphyteutic lease on the property.
[26] Accordingly, the respondent is of the view that, in light of the misinformation that was provided to Mr. Faucher, there was misrepresentation by the appellants and this enables the Minister to assess beyond the usual period.
[27] Counsel for the appellants, on the other hand, states that there was no misrepresentation. The appellants used Mr. Faucher's appraisal, which established a value by a method that was the appropriate one at the time. The appellants acted on the advice of notaries. Furthermore, counsel argues that there was no necessity to advise the appraiser of the negotiations that were going on. The appellants were looking for a mortgage and they obtained it on the basis of Mr. Faucher's appraisal; there was no intention of hiding anything. Finally, Mr. Faucher clearly said that he does not evaluate ifs and that he would not have changed his value until the final deed was signed.
[28] With respect to the valuation as such, counsel for the appellants argues that no reasonably informed purchaser would have paid $4,270,000 for the property on July 25, 1996.
[29] At that date, there were only prospects. Any slip and the prospective lessee could have walked away. The terms of the agreement were finally set on August 28, 1996. Before that, there was no binding agreement. Mr. Martineau, the respondent's expert, ignored all of the conditions in the July 12, 1996, agreement and, with the benefit of hindsight, determined that as at July 12, 1996, the property was worth $4,270,000. Mr. Martineau in fact established the present value of an income stream, but that income stream was not guaranteed on July 12, 1996. It only became real on August 28, 1996. The income stream had no present value on July 25, 1996. Finally, Mr. Martineau agreed that had the August 28, 1996, deed of emphyteusis not been signed, the direct comparison approach used by Mr. Faucher would have been the proper one for evaluating the property.
[30] In the respondent's view, in the land assembly and construction business, preliminary agreements prior to finalization by way of deed or notarial document are important for valuation purposes. On the basis of such preliminary agreements the appellants were able to make financing arrangements with the bank.
[31] In counsel's view, preliminary agreements of this sort, short of the final document, are part of commercial reality in terms of land assembly, leasing, purchases and sales. They are not to be discounted. He gives as an example the Banking Proposal dated July 15, 1996, whereby the TD Bank made available a preliminary advance on the closing of the purchase of Lot 41, subject to being provided with the Agreement of Emphyteusis signed by Provigo. The Banking Proposal is a forward-looking document which makes reference to other documents short of the final document. Although conditions were attached to the preliminary advance that was based on the promise to purchase, counsel says that those conditions cannot be considered as entailing any great possibility that the whole deal would fall apart (transcript, pages 222-23). Finally, counsel submits that Mr. Petric himself was ready to pay $15 per square foot for Lot 41. Thus, Mr. Martineau's appraisal at $15.31 per square foot as at July 25, 1996 - arrived at through the assessment of an income stream that was going to be producing income over a period of 50 years, to which he applied a discount rate to arrive at the present value - is not, in the circumstances, unreasonable.
Analysis
[32] The first question at issue is whether the appellants, in filing their 1996 tax returns, made a misrepresentation that is attributable to neglect, carelessness or wilful default such that the Minister is able to reassess after the normal reassessment period pursuant to subparagraph 152(4)(a)(i) of the Act, which reads as follows:
(4) Assessment and reassessment. Subject to subsection (5), the Minister may at any time assess tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, and may
(a) at any time, if the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or . . . .
[33] In Venne v. R., 1984 CarswellNat 210 (FCTD), Strayer J. stated at paragraph 16 that it is sufficient for the Minister, in order to invoke the power under subparagraph 152(4)(a)(i) of the Act, to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care.
[34] In Nesbitt v. R., 1996 CarswellNat 1916 (FCA), at paragraph 8, Strayer J.A., now speaking for the Federal Court of Appeal, stated that one purpose of subsection 152(4) is to promote careful and accurate completion of income tax returns. Whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable as at the time the return is filed. Strayer J.A. went on to say:
8 . . . A misrepresentation has occurred if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment. It remains a misrepresentation even if the Minister could or does, by a careful analysis of the supporting material, perceive the error on the return form. It would undermine the self-reporting nature of the tax system if taxpayers could be careless in the completion of returns while providing accurate basic data in working papers, on the chance that the Minister would not find the error but, if he did within four years, the worst consequence would be a correct reassessment at that time.
9 Thus it is irrelevant that the Minister might, despite the misrepresentation on the return form, have ascertained the true facts prior to the expiry of the limitation period. The faulty return was when submitted, and remained, a misrepresentation within the meaning of subparagraph 152(4)(a)(i) of the Act.
[35] In Nesbitt, the taxpayer had misreported a capital gain as a result of a mathematical error made by an accountant and the taxpayer conceded that the error in his return was a careless one for which he was responsible.
[36] In a previous case, The Queen v. Regina Shoppers Mall Limited, 91 DTC 5101 (FCA), the Minister reassessed on the basis that the taxpayer had reported as a capital gain proceeds of disposition of a piece of real estate that, in the Minister's view, should have been reported as income. The taxpayer had appealed the matter in a prior proceeding with respect to previous taxation years and the Federal Court of Appeal had held in favour of the Minister. During the court proceedings, however, the taxpayer filed a tax return for a subsequent taxation year, again treating the gain on the same transaction as being capital in nature. The Minister reassessed the subsequent taxation year outside the normal reassessment period on the basis that the taxpayer had made a misrepresentation by treating the amount as a capital gain rather than income. MacGuigan J.A., speaking for the Federal Court of Appeal, adopted the words of the trial Judge as follows, at pages 5102 and 5103:
[Issue]
The Trial Judge correctly identified the issue as follows (Appeal Book II at 326):
The determination of the issue of whether the reassessment for 1979 is in fact statute-barred as being over four years after the date of the original assessment, depends entirely on whether the plaintiff, in filing its T-2 return for that year, made any misrepresentation attributable to either neglect, carelessness, wilful default or fraud.
[Analysis]
He continued (at 326-7):
When the Minister issued his original assessment in December 1980 confirming the income and treatment thereof as reported by the plaintiff, the Department had before it all of the information and knowledge that it had when the Minister issued the reassessment some seven years later, namely on November 3, 1987. Revenue Canada knew of the reassessments for 1976, 1977 and 1978. It knew of the plaintiff's Notices of Objection thereto and it knew how the plaintiff had treated its reserves when filing its 1979 tax return.
The 1979 return as filed continues to treat the proceeds of the sale as a capital gain since the plaintiff was disputing the Minister's position that the proceeds should be treated as income. The onus is on the defendant to establish that, in so doing, the taxpayer made a misrepresentation that is attributable to neglect, wilful default, carelessness or fraud in order for the defendant to escape the four-year limitation imposed by paragraph 152(4)(b) [M.N.R. v. Taylor [61 DTC 1139], [1961] C.T.C. 211].
Where a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152 [1056 Enterprises Ltd. v. The Queen [89 DTC 5287], [1989] 2 C.T.C. 1]. In Joseph Levy v. The Queen [89 DTC 5385], [1989] C.T.C. 151 at 176, Teitelbaum, J. quotes with approval the following statement by Muldoon J. in the above case:
Subsection 152(4) protects such conduct, and perhaps only such conduct, where the taxpayer thoughtfully, deliberately and carefully assesses the situation as being one in which the law does not exact the reporting of that which the taxpayer bona fide believes does not exist.
It has also been established that the care exercised must be that of a wise and prudent person and that the report must be made in a manner that the taxpayer truly believes to be correct. . . .
. . .
It is quite clear from the evidence that the failure to reassess in time was not due to any misrepresentation on the part of the plaintiff but simply to a total failure on the part of the defendant to consider the information which it had before it. The witness for the defendant admitted that the Department by mistake or for some unknown reason failed to follow its normal procedure when there is continuity of reserves, until after the four-year period had expired. This was not a question of having to dig into old files but, on the contrary, the whole issue was being vigorously contested. There was a note made on the file of the Department when the 1976, 1977 and 1978 years were reassessed that the matter should be followed in later years. This in fact was done for 1980 but was not done for 1979. I fully accept the evidence of the experts called on behalf of the plaintiff to the effect that it was proper practice for the plaintiff to file as it did. The defendant has failed to discharge the onus that, in the filing of the 1979 return, there was any misrepresentation attributable to neglect, carelessness or wilful default or fraud on the part of the plaintiff or its agent.
These vigorous and admirable reasons for judgment by Addy J. serve to respond as well to the issues on appeal as to those at trial . . . .
[37] In 1056 Enterprises Ltd. v. The Queen, 89 DTC 5287 (FCTD), the matter raised in the assessments was whether the plaintiff corporations were associated with another corporation within the meaning of section 256 of the Act. The Court had to determine whether the Minister was statute-barred under subsection 152(4) of the Act from effecting any reassessment of the plaintiffs for the taxation years at issue. Muldoon J. concluded at page 5293 that "the non-reporting of such an association was . . . the absolute antithesis of neglect, carelessness or wilful default. It was a deliberate, thoughtful and bona fide non-reporting".
[38] To the extent that we can reconcile the above decisions, it is my view that the present case resembles the situation in Regina Shoppers Mall Limited and 1056 Enterprises Ltd. more than that in Nesbitt. The matter of fair market value is a controversial issue, to be settled on the basis of the interpretation of the facts in evidence, as is the question of whether proceeds of disposition should be characterized as income or as a capital gain (Regina Shoppers Mall Limited) or of whether corporations are associated (1056 Enterprises Ltd.). The mathematical error in Nesbitt, by contrast, is a clear-cut issue, which even the taxpayer in that case conceded to be non-controversial.
[39] Furthermore, as with the capital gain issue in Regina Shoppers Mall Limited, the fair market value question in the present appeal is the subject of an ongoing dispute inasmuch as the respondent disputed during the normal reassessment period the appellants' view of fair market value and issued within the time limit reassessments to which the appellants objected. It was only after the normal reassessment period had expired that the appeals officer for the Minister requested a formal appraisal report from his own expert, Mr. Martineau. Like Regina Shoppers Mall Limited, this is not a case of the Minister having to "dig into old files". The Minister knew during the audit that the appellants' view of fair market value, rightly or wrongly, differed from his.
[40] The fact that the appellants did not divulge the negotiations that had been going on since February 1996 to their appraiser, Mr. Faucher, when he did his appraisal is not in my view something that can be characterized as a misstatement by the appellants in filing their tax returns. First, when they approached Mr. Faucher, it was for mortgage purposes and we have seen that Mr. Petric obtained his loan based on Mr. Faucher's valuation. Second, the appellants were of the opinion that, for valuation and tax purposes, the emphyteutic lease agreement, as it was not legally effective until August 28, 1996, was a factual element that should not be considered in the determination of the property's fair market value as at July 25, 1996. The land assembly required in order for the lease agreement to become effective had not even been completed at the time of the disposition (i.e., July 25, 1996). Mr. Faucher, at trial, confirmed the validity of that approach. Mr. Martineau did not. If the two experts diverged in that regard, it is plausible that the appellants judged the method used by their appraiser to be the proper one for estimating the fair market value of the property as at July 25, 1996. Although fair market value is ultimately a question of fact to be resolved by the trier of fact, it is mostly a question of opinion answered by analysing different methodological approaches. Certainly the Minister is entitled to disagree with a taxpayer's view of fair market value and can reassess, within the limitation period, on the basis of his own evaluation. However, where the issue is whether the Minister should be allowed the benefit of an exception to the application of the limitation period, it must be shown that the taxpayer made a misrepresentation in filing his or its tax return. In the case at bar, I am of the view that unless it can be said that the appellants' view of fair market value was so unreasonable that it could not have been honestly held, there was no real misstatement. I do not find that the appellants' view of the fair market value as at July 25, 1996, was unreasonable. Although I am not sure I agree with the appellants' analysis of the fair market value of the property at that date, which is mostly based on the fact that the emphyteutic lease agreement was conditional upon certain terms being satisfied in the near future,[1] I can certainly see that they believed bona fide that that agreement, being conditional on future events, did not affect the value of the property at the time of disposition. There is definitely an argument to be made along those lines in the context of the civil law.[2] Besides, even if the Minister was of the opinion that there was misrepresentation, the fact is that he did not rely on the misstatement as he obtained his own appraisal, knowing of the existence of the emphyteutic lease, and even reassessed the appellants on the basis of that appraisal in 2000, within the limitation period. At that point, there was no further reliance on any representation made by the appellants in filing their tax returns.
[41] In conclusion, I find that the respondent did not establish that the appellants, in filing their tax returns, made a misrepresentation that is attributable to neglect, carelessness or wilful default within the meaning of subparagraph 152(4)(a)(i), which had to be done in order for the Minister to assess outside the normal reassessment period.
[42] The appeals are therefore allowed with costs.
Signed at Ottawa, Canada, this 31st day of May 2006.
"Lucie Lamarre"
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