Citation: 2007TCC266
Date: 20070517
Docket: 2004-4455(IT)G
BETWEEN:
JOHN D. MCKELLAR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter, J.
Issue
[1] The issue before
this Court is whether it can be said that the Appellant acted reasonably in claiming
partnership losses he incurred in a Bahamian partnership known as The Group of
Eighteen ("Partnership") in 1992, 1993 and 1994 respective tax years
or, put another way, whether the Appellant in claiming the Partnership losses
for his share of the Partnership in 1992, 1993 and 1994 income tax years,
exercised care that would have been exercised by a wise and prudent person.
Facts
[2] This case was preceded by Bernick v. R.,
[2003] 4 C.T.C. 2494 affirmed in part [2004] 3 C.T.C. 191 (F.C.A.) where
Miller, J. discussed in detail the factual background. During 1992, 1993 and
1994, the Appellant was a partner in the Partnership which was made up of 1,800
partnership units – 1620 held by a Mr. Bernick and the balance held by 7
other partners including the Appellant who held 36 units. The Partnership owned
certain securities being a British Gas International Finance Zero Coupon Bond
with maturity value of $7.5 million U.S. ("U.K. Bond") and several
Japanese Fire and Marine Insurance Convertible Bonds with a maturity value of
147 million Yen ("Fire and Marine Bonds"). The ¨Partnership"
disposed of the U.K. Bond and the Marine & Fire Bonds (collectively the "Bonds")
over the three years in question and claimed losses of $2,264,770 U.S.,
$2,366,331 U.S. and $1,706,529 U.S. respectively. The
market value of a zero coupon bond before its maturity date is apparently less
than its value at maturity because it cannot yield a return to the purchaser
unless it is purchased at a discount. The market value of the UK Bonds in early
September 1992 was 9.34% of its maturity value, or US $700,500 and the market
value of all the Bonds acquired was approximately US $1,800,000 or $1,000 per
partnership unit outstanding. The losses
were based on an initial cost expressed and calculated on the basis of the maturity
value of the Bonds on the Partnership Financial Statements; the Bonds were
shown as having a cost value equal to the maturity value. These losses were
divided up proportionally among The Group of Eighteen individual partners.
The amount of losses attributable to the Appellant in 1992 was $54,772 (Cdn);
in 1993 $72,499 (Cdn); and in 1994 $34,425 (Cdn). The Appellant claimed
these losses in his individual tax returns for 1992, 1993 and 1994 and received
an assessment from the Respondent accordingly.
[3] After the Bernick
decision the Respondent conducted an audit of the Appellant and did a
reassessment of his 1992, 1993 and 1994 taxation years. The Appellant filed a
Notice of Objection and ultimately a Notice of Appeal which now comes before
this Court.
[4] The reassessment of the Appellant by the Respondent
was statute barred and the Respondent now seeks to rely upon the exception in
subsections 152(4) and 152(4.01) of the Income Tax Act ("Act").
[5] Mr. Graeme Jones,
a Canadian Chartered Accountant and also a partner in the Partnership and
holder of 36 units, provided an audit opinion that the 'financial statements
present fairly, in all material respects, the financial position of the Partnership
as at December 31, 1992 and the results of its operations and the changes in
its financial position for the period then ended in accordance with generally
accepted accounting principles'. Mr. Jones provided to each of the partners the
reported Partnership losses which related to them individually and which could
be offset against other incomes. The Appellant claimed his share of the
reported Partnership losses.
[6] The Appellant gave evidence on his own behalf. His
evidence concentrated mainly on his law practice, his experience as a lawyer
involved in financial matters and how he came to be an owner of units in the Partnership.
[7] The Appellant had been called to the Bar of Ontario in
1959 achieving Queens Counsel in 1973. He was a partner in a law firm in Toronto known as Weir & Foulds, LLP,
from 1965 to 2004 and indeed was Chairman of the firm for many years. He was
associated with the firm on a contract basis from 2004 to the date of trial.
[8] In terms of the Appellant's law practice, his
knowledge of financial matters and exposure to corporations and financial
statements, much of this information came forth through cross-examination by
the Respondent's counsel.
[9] The nature of
the law practice of the Appellant was basically described as a solicitor's
practice with an emphasis on leasing, real-estate, some wills and estates,
estate planning and some corporate including legal work for charities but he
was not a specialist in tax. The Appellant did some general corporate law such
as providing advice in the buying and selling of assets; corporate resolutions;
commercial leasing; corporate governance; entrepreneur business law; questions
of risk obligations and environmental. He acknowledged that he did know a
little about tax and he had no background or experience in accounting however
he was able to generally understand financial statements. He did provide some
tax advice when dealing with the issue of buying or selling shares or assets
and he did provide some tax information when doing estate planning but he
usually referred the client to a tax specialist whether it be legal or
accounting. He testified that his own firm did not have a tax specialist. He testified
that he annually prepared his own income tax returns.
[10] As Chairman of Weir
& Foulds he was not responsible for signing off on Financial Statements for
the practice each year but he may have signed them for bank purposes - he
certainly did not approve the statements. He described the Financial Statements
of the law firm as basically "cut and dry" – the Financial Statements
were shown to all the partners. He did not remember the presentation of the Financial
Statements to the Partnership meetings.
[11] The Appellant had extensive experience as a member of
Boards of Director of corporations including chairperson whether they be
charitable corporations or otherwise. He
described his duties and responsibilities as a Director to basically include
the purchase of assets, deal with issues of employees, dividends, future
direction of the company, current government issues and receive financial
statements, have the financial statements discussed and if any questions,
present those questions to the appropriate individuals, whether it be the
auditor or the appropriate vice-president within the company. The duties as a
director with respect to a charity were not unlike that of being a director of
a corporation.
[12] The Appellant
testified he had given speeches/lectures to various law
organizations/associations including the Canadian Tax Foundation where he spoke
on amendments to the Income Tax Act as they related to charities and how
they would affect the general practitioner but he did not recall the specific amendments.
He also gave legal advice to the Canadian Tax Foundation on their own
charitable registration and how they should obtain it. The tenor of the Appellant's
evidence was that he was a corporate counsel familiar with corporate Financial
Statements and the nuances of same and with the duties and obligations of
Directors of corporations.
[13] In terms of the
establishment of the Partnership, the Appellant testified that he had known Mr. Bernick for
about 30 years in a professional relationship. He had acted for him in a number
of real estate matters and provided him with advice in wills and estates. Mr. Bernick had
described to him his wish to invest in a long term international bonds
off-shore and asked the Appellant if he had any connections in the Bahamas. The
Appellant advised him he knew a Bahamian lawyer Mr. E.P. Toothe whom
he considered to be a fair and reasonable person and he suggested that Mr.
Bernick use Mr. Toothe. The Appellant followed up with contact with Mr. Toothe
and told him about Mr. Bernick asking him to look after Mr. Bernick
directly. He believed Mr. Toothe had called Mr. Bernick directly. The Appellant
was not involved with the exchange between them or specifically with the Partnership.
Mr. Toothe eventually became operations manager for the Partnership.
[14] The Appellant
testified that he became an investor of the Partnership at the request of Mr.
Bernick. Mr. Bernick thought it was a good investment and the Appellant felt
that Mr. Bernick would be hurt if he did not invest because he was his lawyer
for many years and the Appellant felt, knowing Mr. Bernick, that there was
little risk and some gain. He was not involved in the day to day operation of the
Partnership. The whole investment was based on his trust in Mr. Bernick –
he felt Mr. Bernick was an astute investor. His only concern was that Mr.
Bernick thought these long term bonds were good investments. He himself did not
do any research into the assets or what covenants there may or may not have been
or if they were long term bonds. The Appellant had known that Mr. Bernick and
another person close to Mr. Bernick were making a similar investment so he
relied upon his long term standing relationship with Mr. Bernick as well as Mr.
Bernick's long standing knowledge of the bond market. He thought it was a fair price for him to pay for the
units, it was a fair price given the risk involved and the prospect for profit.
[15] The Appellant
testified that when he became a partner he acquired approximately 36 units (out
of a total of 1800 units) at a $1,000 each for a total of $36,000. His
interests later were expressed in terms of 2% in 1992 but then were reduced to
1.3889% in 1994. When he became a partner in the Partnership he made
suggestions with respect to the terms of the Partnership agreement documentation,
method of closing, the actual closing of the transaction and a variety of
resolutions. The bill to the Partnership by the Appellant's firm and the docket
entries of the Appellant in relation to the bill were introduced into evidence.
[16] The Appellant
testified he was not involved in the preparation of the financial statements.
He testified they were completed by Mr. Jones. He said he knew Mr. Jones
previously and dealt with him for many years and knew him to be a knowledgeable
tax accountant in Toronto, Ontario. He
received the Financial Statements of the Partnership and the statement of
losses each year as prepared annually by Mr. Jones. He did not really
understand how the losses were calculated but he assumed the total loss of the Partnership
was allocated as per the units. He had spoken to Mr. Jones about the
losses and it seemed he could claim in excess of his investment in terms of
losses. Mr. Jones said it was "okay" to claim the losses for Canadian
income tax purposes but it really was a tax deferral. As far as the Appellant
could determine the Canadian losses were fine as Mr. Jones had given an unqualified
report in his audit on the Partnership in each of the three years, 1992, 1993
and 1994. Mr. Jones prepared supplementary documents in terms of loss
statements and advised the Appellant that the losses were the result of the
difference in treatment between partners buying partnership interest in a
partnership and the partnership buying assets. The Appellant did not ask Mr.
Jones for his comments in writing; he did not put anything in writing to Mr.
Jones; and Mr. Jones, in turn, did not present anything in writing to the
Appellant. The Appellant said he felt he
was very satisfied with the result because it lowered his taxes and that he did
not know what the Partnership paid for the Bonds. The Appellant said that all
he was interested in was what he would have to pay tax on, what the Partnership
did or did not do was really of minor interest to him.
[17] As to what other steps the Appellant took when he was
presented with the Partnership Balance Sheet,
the Appellant did not ask Mr. Jones what was meant by the phrase "at
cost". He assumed it was the purchase price of the units. He did remember
discussing the difference between "at cost" and "maturity
value" of the Bonds. He did believe he spoke to Mr. Bernick about it and Mr.
Bernick said that this was the way things were done and all was satisfactory.
He acknowledged that he received his investment of $36,000 U.S. back within 1
year after he made the investment in September 1993 and received an
additional $8,000 U.S. in July 1994. He testified he had acted reasonably and
he had no intention of misleading CRA. He testified he did not keep formal
copies of his income tax returns as filed but he did keep his working papers
for 1992 and 1993 and he prepared similar working papers in 1994 but he could
not locate them. He did not believe he included the Partnership Financial Statements
with his income tax returns as provided by Mr. Jones of 1992, 1993 and
1994 but he did believe he did include a statement of losses for each year.
[18] Mr. Jones was
called to give evidence by the Respondent. He said he was asked by Mr. Toothe
as to whether he would conduct an audit of the Partnership. The Financial Statements
were actually prepared by Mr. Toothe as per the partnership agreement for
the Partnership and they were given to Mr. Jones with some documents to support
the transactions for each period in question. Mr. Jones testified that he
conducted an audit for the 1992, 1993 and 1994 taxation years. Mr. Jones confirmed that as
part of the audit he gave an unqualified opinion in each particular year that
the Financial Statements fairly presented the financial information relative to
the Partnership and that he was satisfied that he was able to express his
unqualified opinion. It was Mr. Jones' opinion that it was appropriate to
use those losses generated on the Bonds sales using Bahamian GAAP for Canadian
tax calculations.
[19] In describing how he became involved as an investor in
the Partnership, Mr. Jones testified that he was contacted by Mr. Bernick who said that there may be an
investment opportunity with a good return. He looked at the statement done by
Mr. Toothe as to the inventory in investments and he decided to join the Partnership
at the time because he knew Mr. Bernick had lots of expertise in this type
of security and it looked like a good investment. He did not realize what the
profit could be until he saw Mr. Toothe's Financial Statement in 1992. In the Financial
Statements the purchase price for the units were certainly less than their
market value or the inventory shown at cost and on realization of these
securities there would be a profit. The cost figure related to the maturity
value of the bonds. When he reviewed the Financial Statements he asked Mr.
Toothe if the statements were prepared in accordance with GAAP. Mr. Toothe
said these were done by a Mr. Darryl Butler in the Bahamas who
followed the Bahamian GAAP. Mr. Toothe had told him that he (Mr. Toothe) had
spoken to Mr. Butler and Mr. Toothe was told that the GAAP in the Bahamas allowed
the Partnership to use maturity value as the cost. He never contacted Mr. Butler.
[20] Mr. Jones
testified that a loss was suffered given how the bonds were shown on the books
because Bahamian GAAP used the maturity value for cost purposes.
[21] Although Mr. Jones did not specifically recall
having discussions with Mr. McKellar or other partners after they received
their respective statement of losses, he was not in the position to dispute anything
that Mr. McKellar had testified to in this regard. In particular he was not in
a position to dispute the advice that was suggested by Mr. McKellar that Mr.
McKellar had received from him, to the effect that it was correct to use the
Financial Statements in calculating Canadian tax income, and this would have
been the type of advice which he would have given at the time if he had been
asked. He testified it would have been fair and reasonable for the partners to
rely upon his statement of losses that he had prepared.
Analysis
[22] Subsection 152(4) of the Act states in part as
follows:
Assessment and
reassessment. The Minister may at any time make a ... reassessment ... of tax
for a taxation year ... except that a ... reassessment ... may be made after
the taxpayer's normal reassessment period in respect of the year only if
(a) the
taxpayer ....
(i) has
made any misrepresentation that is attributable to neglect carelessness or
wilful default or has committed any fraud in filing the return ...
[23] Subsection 152(4.01) of the Act states in part
as follows:
Assessment to which par. 152(4)(a)
... applies. Notwithstanding
subsection (4) ..., an ... reassessment ... to which paragraph (4)(a)
... applies in respect of a taxpayer for a taxation year may be made after the
taxpayer's normal reassessment period in respect of the year to the extent
that, but only to the extent that, it can reasonably be regarded as relating
to,
(a) where paragraph (4)(a)
applies to the ... reassessment,
(i) any misrepresentation made by
the taxpayer ... that is attributable to neglect, carelessness or wilful
default or any fraud committed by the taxpayer ...
[24] Here there is no
issue with respect to whether or not a misrepresentation occurred. The
misrepresentation was effectively admitted by the Appellant. The only issue is
whether or not the misrepresentation is attributable to neglect or carelessness
by the Appellant as described in section 152(4.01) of the Act. There is
no allegation of wilful default or fraud.
[25] In considering section 152(4.01) the burden rests upon the Respondent on the balance of
probabilities to establish that the misrepresentation by the Appellant was
attributable to the Appellant's neglect or carelessness. In Fukushima v. R.,
[1999] 2 C.T.C. 2312, (T.C.C.), Sarchuk, J. stated:
[16] The
Minister is required to prove at a minimum that an error has been made by the
taxpayer and while it may have been made in good faith, it was nevertheless not
one which a normally wise and cautious taxpayer would have committed. This
principle must be considered in the context of the taxpayer's experience with
accounting and tax matters and capacity to fully understand the details of a
provision of the Act. ...
[26] Bonner, J. in Jencik
v. Canada, [2004] T.C.J.
No. 202 (T.C.C.) stated:
[5] ...
The Minister's right to reassess for 1994 to 1998 (the "statute barred
years") was therefore dependant on the Appellant having made
misrepresentations attributable to neglect, carelessness or wilful default or
having committed fraud as set out in subparagraph 152(4)(a)(i) of the Act.
It is settled law that the onus is on the Respondent to establish that such
misrepresentations were made.
...
[11] The
well-known rule Johnston v. M.N.R., ]1948] S.C.R. 186 which places on
the taxpayer the onus of establishing that facts as found or assumed or
assessment are incorrect does not apply in appeals from statute-barred
reassessments unless the Minister first establishes facts which show that he
was entitled to reassess when he did.
[12] ...
The onus which rested on the Minister included proof of the factual elements of
that premise.
[13] I
should add that the onus encompasses not only proof of the falsity of the Appellant's
representations regarding his business income but also proof that they were
attributable to neglect, carelessness or wilful default as pleaded.
[27] The applicable test or what must be proven has been
discussed on a number of occasions.
[28] In Canada v. Regina
Shoppers Mall Ltd., [1991] F.C.J. No.
52 (F.C.A.), MacGuigan, J. stated in part:
...
Where the Act
is unclear, or the characterization of the facts doubtful, the Trial Judge
correctly stated that "the care exercised must be that of a wise and
prudent person and ... the report must be made in a manner that the taxpayer
truly believes to be correct."
[29] Further,
expressed in another way by Lamarre, J. in Petric v. Canada, [2006]
T.C.J. No. 230 (T.C.C.) stated:
40 ...
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.
[30] Finally, Rip, J. (as he then was) in
Markakis v. The Minister of National Revenue, 86 DTC 1237 (T.C.C.) stated
in part at page 1238 as follows:
... Therefore,
the notices of reassessment for these years can only stand if the Minister
first can establish that Mr. Markakis has made a misrepresentation in each of
the three years that is attributable to neglect, carelessness or wilful default
or committed a fraud in filing his return for the year or in supplying any
information under the Act ...
Rip,
J. continued at page 1240:
To assess beyond the four-year limit as set out in subsection 152(4)
the Minister must establish a taxpayer made a misrepresentation that is
attributable to neglect, carelessness or wilful default, or that the taxpayer
committed a fraud in filing his income tax return. It is not enough to suggest
a misrepresentation or fraud. The Minister's evidence was not sufficient to
meet his onus under subsection 152(4) and consequently I must find that Mr.
Markakis cannot be said to have made a misrepresentation in 1976.
[31] Given that there was a misrepresentation by the Appellant,
the question is whether this representation was attributable to the Appellant due
to the Appellant’s carelessness or neglect. The evidence is clear what the
Appellant did or did not do in the course of claiming these tax losses. The
Appellant did his own income tax annually. The Appellant made his investment at
the request of a client Mr. Bernick, in whom he had confidence in terms of his
investment strategies and whom he had known for many years. He looked at the
investment and felt it was a reasonable investment and he felt he could make a
reasonable return. He was not involved in the management of the Partnership; he
only looked at some of the legal issues when the Partnership was originally
formed.
[32] After the first year when the 1992 Financial Statements
were made available to the Appellant, he noted that they were given what is
known as a "clean audit"- that there is an unqualified opinion
provided by a Chartered Accountant, Mr. Graeme Jones, a person whom the
Appellant knew professionally for many years and whom he described as a well
versed tax accountant in Toronto, Ontario. According to the Appellant, he
specifically questioned Mr. Jones on the propriety of the losses. Mr.
Jones provided to the Appellant not only the Financial Statements with an unqualified
opinion but also Mr. McKellar's specific statement of losses which he
could use in the particular tax year. Mr. McKellar inquired of Mr. Jones about
the basic propriety of these losses and was reassured they were appropriate according
to the opinion of Mr. Jones. He also made similar inquiries to the person
who was the back-bone of the entire Partnership, Mr. Bernick, and he received
additional assurances.
[33] What would a wise and prudent person have otherwise
done? I am of the view that the Appellant's course of conduct herein is
consistent with that of a wise and prudent investor. He consulted a
Professional. He consulted with persons whose expertise and opinions he
respected. The burden upon the Respondent was not discharged; the Respondent
has not established on the balance of probabilities that a wise and prudent
person, on the facts of this particular case would have done anything other
than what Mr. McKellar had done. If Mr. McKellar did not consult a
Chartered Accountant or a tax professional or did not at least take the step of
consulting someone who knew their way around these types of investments such as
Mr. Bernick, then the burden would have been likely discharged. However Mr.
McKellar took these steps, albeit, he consulted with someone who had as
much to lose as he did, who had a vested interest in the investments because
they held the same number of shares as he did, but then again, that person had
as much to lose as he did on the investment by giving improper tax advice. As it
turned out he (Mr. Jones) did lose as much as the Appellant as per his own
evidence.
[34] Of particular importance in this particular case is the
evidence of Mr. Jones. He was the only witness called by the Respondent and
relied upon to assist the Respondent in discharging the burden coupled with the
cross‑examination of the Appellant. Mr. Jones gave evidence which did not
help the Respondent in any manner whatsoever in discharging the burden.
[35] The cross-examination of Mr. Jones by the Appellant's counsel
basically slammed the door shut on the Respondent discharging the burden the
Respondent carried. Mr. Jones confirmed the evidence of the Appellant in
terms of:
a) preparation of the
Partnership Financial Statements;
b) preparation
of the individual statement of losses for each of the partners;
c) how the
losses occurred in terms of using Bahamian GAAP vs. Canadian GAAP;
d) advice he
provided or would have provided to each of the partners on claiming the losses
of individual tax returns;
e) his own unqualified
audited opinion of the Partnership Financial Statements in each of the three
years, 1992, 1993 and 1994.
[36] In many ways the Appellant was a very good witness for
his own cause. He was succinct and to the point; he appeared knowledgeable in many
areas; he was also a very smooth witness however, his presentation in many
aspects, was not impressive to me.
[37] The Appellant only answered the specific question when
it was presented without expansion and tried to narrow down the question by asking
questions of counsel of the Respondent. The Appellant remained very much in
control during the entire time giving his evidence. When he appeared to want
to, he was vague and not sure of certain things and he avoided giving direct
answers when direct answers were required. The Appellant would not even admit
to the obvious comment - $1,800,000 was paid for 1800 units of the Partnership when
the units were priced at a $1,000. When asked as to whether or not the cost
referred to the maturity value he stated – "I still don't know the cost".
This is what the whole case is about. This is what the litigation has been
about for years and indeed what was litigated in Bernick supra at
both the trial and on the appeal. There are certain aspects of the Appellant's
evidence which did not ring true; there were certain aspects in which the
Appellant was avoiding the obvious; there are certain aspects of the
Appellant's evidence in which he tried to play down his business acumen. The
Appellant was obviously a very senior corporate counsel in Toronto, Ontario,
with a very significant practice, which would have involved a sufficient
knowledge of reading and reviewing Financial Statements that he would
understand the implications of or at least be aware if there was an issue in
relation to how the losses were presented in the Financial Statements of the
Partnership. However, he did take those steps which a wise and prudent person
would do. I think Mr. McKellar did what he had to do in order to appear that he
was not careless and neglectful. I find the Appellant's conduct was such that
he was not careless and not neglectful. As a result of the foregoing,
notwithstanding my concerns with respect to some of the manner in which the
Appellant gave evidence, I find the Respondent has failed to discharge the
burden. This burden was certainly an onerous burden given the age and
circumstances of this case but it might have been discharged if Mr. Bernick,
Mr. Toothe and/or Mr. Butler had been called to give evidence to
explain the strategies behind the investment, the preparation of the Financial
Statements, the accounting advice sought and given, and the communications
between/amongst themselves including the Appellant in terms of the losses
incurred by the Partnership claimed by the Appellant.
[38] In any event I find the Respondent has failed to discharge
the burden. The exception under subsection 152(4.01) of the Act is not
available to the Respondent in the case at bar. The appeal is allowed with
costs in favour of the Appellant.
Signed at Vancouver, British Columbia, this 17th day of May, 2007.
"E. P. Rossiter"
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