Docket: A-468-12
Citation: 2014 FCA 129
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CORAM:
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DAWSON J.A.
TRUDEL J.A.
NEAR J.A.
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BETWEEN:
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HER MAJESTY THE QUEEN
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Appellant
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and
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GEOFFREY LAST
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Respondent
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REASONS FOR
JUDGMENT
DAWSON J.A.
I.
Introduction
[1]
The respondent taxpayer, Geoffrey Last, appealed assessments
issued under the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.) (Act) in respect of the 2000, 2001 and 2002 taxation years. Generally,
at issue in the appeal was the determination of revenues and expenses from a
number of income-earning activities.
[2]
For reasons cited as 2012 TCC 352, 2012 D.T.C. 352, a judge of
the Tax Court of Canada allowed the appeal and referred the assessments back to
the Minister of National Revenue for reassessment on the basis of the Judge’s
findings.
[3]
The Crown appeals from the Court’s judgment only insofar as it
pertains to the treatment of the proceeds of disposition of certain shares. The
taxpayer cross-appeals from the Court’s judgment as it pertains to the same
share transactions, as well as certain rental income.
[4]
For the reasons that follow, I would dismiss both the appeal and
the cross-appeal and reserve the issue of costs in this Court.
II.
Factual Background
[5]
The Canada Revenue Agency assessed the taxpayer
under the Act for the 2000, 2001 and 2002 taxation years on income earned from
a number of sources. Only two sources are relevant for present purposes:
transactions involving the shares of InternetStudios.com,Inc. (ISTO shares)
during 2002, and payments received by the taxpayer in 2000 and 2001 on account
of renting his condominium on a short-term basis to persons in the
entertainment industry (rental income).
[6]
In order to understand the issues to be decided
on the appeal and the cross-appeal it is helpful first to review the findings
of the judge of the Tax Court that give rise to the appeal and cross-appeal.
III.
The decision of the Tax Court
[7]
At paragraph 3 of her reasons, the Judge
summarized in table form the competing positions of the Minister of National
Revenue and the taxpayer. It is useful to reproduce these tables (deleting
reference to income received from another uncontroversial source):
Income as assessed by the Minister
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2000
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2001
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2002
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Rental Income
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$ 69,523.99
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ISTO trades –
Cap. Gains
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$ 601,135.38
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Income as per the Appellant
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2000
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2001
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2002
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Rental Income
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$ 5,052.80
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$ 8,460.29
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$ 34,707.90
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ISTO trades –
Bus. Income
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$ 117,414.00
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[8]
As the Judge observed at paragraph 4 of her
reasons, the tables illustrate two unusual aspects of the taxpayer’s appeal.
First, the Minister treated the proceeds of disposition of the ISTO shares
transaction as a capital gain. Notwithstanding that income received on account
of capital is treated more favourably under the Act than business income, the
taxpayer argued that the proceeds of the share transactions should be taxed as
business income. Second, the taxpayer conceded that rental income should be
included in his income for the 2000 and 2001 taxation years, even though the
Minister had not included such amounts in her assessments.
(i)
ISTO share transactions – 2002 taxation
year
[9]
The taxpayer acknowledged that he realized gains
in the amount assessed by the Minister. However, as set out above, he took the
position that the gains were business income. This, in his submission, allowed
him to deduct expenses in the amount of $483,721 from the sale proceeds. The taxpayer
asserted in the alternative that if the proceeds were found to be on account of
capital, the expenses should be added to the adjusted cost base of the ISTO
shares.
[10]
The Judge found as a fact that the monies
expended by the taxpayer were not paid to defray expenses in relation to the
ISTO shares. Rather, they were loans made to ISTO. It followed that although
these expenses were deductible because they were incurred to earn income from
another source (the internet venture), they could not be claimed against the
sale proceeds. This finding is not challenged by the taxpayer.
[11]
As to the nature of the proceeds received by the
taxpayer, the Judge found that they resulted from trading gains and therefore
constituted income. The Crown argued that it would be proper for the Court to
order the Minister to reassess the income on the basis the gains were business
income, so long as the 2002 reassessment did not increase the taxpayer’s
overall tax liability for the 2002 taxation year.
[12]
The Judge disagreed. In her view, the effect of
this would be to allow the Minister to reassess beyond the limitation period
contained in subsections 152(4) and (4.01) of the Act. In her view, citing the
decisions of this Court in Pedwell v. Canada, [2000] 4 F.C.R. 616, 257
N.R. 148, and Canada v. Loewen, 2004 FCA 146, [2004] 4 F.C.R. 3, the
Minister, while generally able to advance new arguments and a new basis of
assessment on appeal, cannot do so if it results in an assessment outside of
the limitation period.
[13]
The Judge found that a reassessment that changed
the ISTO gains from capital to business income amounted to a reassessment
outside of the limitation period that would be statute-barred unless the
taxpayer had made a careless or negligent misrepresentation in his income tax
return. The Judge did not accept that the taxpayer had made such a
misrepresentation when the Crown’s principal argument on the appeal was that
the gains were on account of capital. As such, the Judge declined to order that
the proceeds be reassessed on that basis.
(ii)
Rental income – 2000 and 2001 taxation
years
[14]
The Judge next considered monies earned by the
taxpayer in the 2000 and 2001 taxation years in the respective amounts of
$5052.80 and $8460.29. She reasoned as follows:
• The
taxpayer did not report this income in his income tax returns and the Minister
had not included this income in the assessments at issue.
• The
taxpayer acknowledged the income in his amended notice of appeal.
• The
parties were in agreement that the amounts should be added to the taxpayer’s
income.
• The
Court was not bound by this agreement.
• This
Court has held that a court should give effect to the agreement of the parties,
unless the agreement is contrary to the Act (citing Petro-Canada v. The
Queen, 2004 FCA 158, 319 N.R. 261).
• On
the basis of the taxpayer’s failure to report the income it was reasonable to
conclude that the taxpayer had made a misrepresentation in his income tax
returns based on carelessness, neglect or wilful default.
• It followed from the finding of misrepresentation
that a reassessment to include this income would not be contrary to the Act
because the consequence of the misrepresentation was that the reassessment was
not statute-barred.
Therefore, the
amounts were to be included in the taxpayer’s taxable income.
IV.
The issues to be decided in the appeal
and cross-appeal
[15]
The issue raised in the appeal is whether the
Judge erred in law by failing to take into account the additional tax liability
that resulted from characterizing the gain realized from the sale of the ISTO
shares as business income when answering the ultimate question: whether the
taxpayer’s tax liability, as assessed, was too high?
[16]
The issues raised in the cross-appeal are
whether the Judge erred in law by:
i.
Failing to require the Minister to remove the
taxable capital gain arising from the disposition of the ISTO shares from the
taxpayer’s income and, failing to prohibit the Minister from including any
other amount in the taxpayer’s income in respect of the profit from the
taxpayer’s business of buying and selling shares of ISTO in the 2002 taxation
year.
ii.
Requiring the Minister to include rental income
in the taxpayer’s income for the 2000 and 2001 taxation years.
V.
The standard of review
[17]
It is well-settled law that judges of the Tax
Court must be correct when determining questions of law. Questions of fact or
mixed fact and law are reviewable for palpable and overriding error, unless
they exhibit an extricable question of law. An extricable question of law is
reviewed on the correctness standard (Housen v. Nikolaisen, 2002 SCC 33,
[2002] 2 S.C.R. 235, at paragraph 30).
[18]
In the present case, the errors asserted are
errors of law that are reviewed on the correctness standard.
VI.
Consideration of the issue raised on the
appeal
[19]
The Crown’s argument on the appeal may be
summarized as follows. For the 2002 taxation year the Tax Court found that the
taxpayer was entitled to additional deductions of $265,070 when calculating his
income. These additional deductions were unconnected to the ISTO shares. At the
same time, the Tax Court found that the taxpayer’s gain on the sale of the ISTO
shares, in the amount of $601,135, was business income, not a capital gain. The
consequence of this finding was that the taxpayer was required to include in
income that portion of the sale proceeds that would not have been included in
income if the proceeds were a capital gain. The amount now to be included in
income exceeded the additional deductions the taxpayer was entitled to. In the
result, the effect of the recharacterization of the ISTO share transaction did
not increase the taxpayer’s tax liability. Therefore, the taxpayer’s appeal for
the 2002 year should have been dismissed.
[20]
The Crown supports this argument by noting that
the issue in a taxpayer’s appeal from the Minister’s assessment of tax is
whether the overall amount of tax assessed is correct (see for example, Harris
v. Canada (Minister of National Revenue - M.N.R.), [1965] 2 Ex. C.R. 653;
aff’d on other grounds [1966] S.C.R. 489).
[21]
On the basis of this and similar authorities,
the Crown submits that the judgment issued by the Judge did not accord with her
findings; having found the share proceeds were business income she was obliged
to issue a judgment in accordance with that finding, so long as the overall tax
liability of the taxpayer was not increased.
[22]
In my respectful view, the Judge did not err as
asserted by the Crown. I reach this conclusion for the following reasons.
[23]
Harris is
authority for the proposition that on appeal from an assessment, the question
to be answered is whether the Minister’s assessment is higher than it should
be. However, Harris is also authority for the proposition that a
taxpayer’s appeal cannot result in an increased assessment. This is because the
Act does not give any right of appeal to the Minister and any increase to an
assessment would in effect allow the Minister to appeal from her own
assessment. This principle is to be applied to each source of income.
[24]
This principle was applied by this Court in Petro-Canada
in the following circumstances. Petro-Canada claimed a deduction of
approximately $46 million in respect of the cost of certain seismic data. The
Minister reassessed Petro-Canada on the basis that the deduction claimed could
not exceed the fair market value of the seismic data at the time of its
acquisition. In the result, the Minister reduced the deduction claimed by
Petro-Canada from $46 million to approximately $8 million.
[25]
Petro-Canada appealed the Minister’s assessment
to the Tax Court. Petro-Canada also put in issue on its appeal the Minister’s
disallowance of certain scientific research and experimental development (SRED)
expenses totalling in the order of $700,000. The Crown ultimately agreed the
SRED expenses were properly claimed. The parties executed a consent judgment
with respect to the SRED expenses, which was given to the Tax Court Judge at
the start of Petro-Canada’s trial.
[26]
In the Tax Court the Crown argued that the cost
of seismic data was not properly deductible at all. The Crown did not argue
that Petro-Canada should be reassessed to disallow the $8 million deduction
allowed by the Minister because, as held in Harris, the Crown is not
permitted to appeal an assessment.
[27]
The Tax Court Judge accepted the Crown’s
submission that the cost of acquiring the seismic data was not properly
deductible and dismissed Petro-Canada’s appeal. The Judge also declined to give
effect to the consent to judgment. Petro-Canada then appealed to this Court.
[28]
Petro-Canada was unsuccessful on appeal with
respect to the deductibility of the expense incurred acquiring the seismic
data. This Court found that the trial judge correctly concluded that
Petro-Canada had been allowed a deduction that exceeded its entitlement.
However, the only consequence flowing at law from that conclusion was that
Petro-Canada could not obtain the remedy it sought - an increased deduction for
the cost of the seismic data. Harris precluded disallowance of the
deduction the Minister incorrectly allowed.
[29]
Moreover, the Judge’s refusal to allow
Petro-Canada’s rightful claim to the deduction for SRED expenses had the effect
of reducing Petro-Canada’s seismic data deduction by the amount of the SRED
expenses. This was wrong in law because it had the effect of allowing in part a
Crown appeal of the seismic data deduction.
[30]
The Crown argues that Petro-Canada should
be confined to its particular facts; namely, those situations where the Crown
has consented to judgment on an issue that was not before the trial judge. This
is said to flow from a line of cases beginning with Harris and including
Anchor Pointe Energy Ltd. v. Canada, 2007 FCA 188, [2008] 1 F.C.R. 839.
These cases affirm the principle that an income tax appeal is from the product
of the assessment - the quantum of the assessment.
[31]
In my view, Petro-Canada is dispositive
of the Crown’s appeal in this case. The Minister originally assessed the
taxpayer’s proceeds from the sale of the ISTO shares as a capital gain. By
characterizing the proceeds as a capital gain, the Minister set the taxpayer’s
liability from the source of income that was the ISTO shares. The Tax Court’s
conclusion that the proceeds of disposition were on account of income, not
property, could not result in an increase of the taxpayer’s liability from that
source because the Minister cannot appeal from her own assessment.
[32]
Put another way, the proceeds of disposition on
the sale of the ISTO shares were $601,135. Treating the transaction as being on
account of business income would increase the taxpayer’s taxable income by
approximately $300,565. Had the Tax Court simply dismissed the taxpayer’s
appeal, the taxpayer would have been deprived of additional, unrelated
deductions of $265,070. The effect would be to increase the taxpayer’s income
by the difference between $300,565 and $265,070. This is inconsistent with the
principle that the Minister cannot appeal from her own assessment.
[33]
I disagree that Petro-Canada is
inconsistent with cases such as Harris and Anchor Pointe for the
following two reasons.
[34]
First, in Petro-Canada this Court applied
the Harris decision in order to reach its result.
[35]
Second, the question to be determined in Anchor
Pointe was whether the Minister was entitled to plead new facts as
assumptions of fact when confirming an initial assessment. This is not contrary
to any holding in Petro-Canada.
[36]
Thus, there is no need to confine Petro-Canada
to its facts.
[37]
Finally, the Crown argues that it can advance a
new basis or argument in support of the assessed quantum of tax liability. I
agree that this is specifically permitted by subsection 152(9) of the Act. However,
subsection 152(9) is subject to important limitations. The Minister cannot use
subsection 152(9) to reassess outside the time limitations contained in
subsection 152(4) of the Act. As well, the Minister cannot tax an amount
exceeding the amount in the assessment under appeal (Walsh v. Canada,
2007 FCA 222, 367 N.R. 127, at paragraph 18). It follows that subsection 152(9)
of the Act is of no assistance to the Minister in circumstances where the new
or additional argument would have the result of increasing the amount of the
assessment relating to the ISTO shares.
[38]
As I have found no error of law on the part of
the Judge, it follows that I would dismiss the appeal.
VII.
Consideration of the issues raised in the
cross-appeal
(i)
The ISTO shares
[39]
The Judge concluded that the taxpayer’s proceeds
from the sale of the ISTO shares was not a capital gain, but was on income
account; the taxpayer says that once that finding was made the Judge erred by
failing to further find that the taxpayer’s net taxable capital gain for the
year from the disposition of shares was nil.
[40]
This argument is premised on section 3 of the Act,
which determines the quantum of income. The income from each of the enumerated
sources is net of related deductions. Thus, taxable capital gains are net of allowable
capital losses. Similarly, current year losses attributable to the four
enumerated sources of income are deductible. The end result of this source by
source computation determines a taxpayer’s tax liability.
[41]
From this process the taxpayer submits that
because the Minister did not include in the reassessment for the 2002 taxation
year any amount in the taxpayer’s income from the source of trading shares, and
because the normal assessment period had expired, no amount could be included
in the taxpayer’s income from this source.
[42]
This argument must fail for the following
reason.
[43]
For the purpose of this argument, the relevant
income source is the ISTO shares which were either capital property or
inventory. In her assessment, the Minister took the position that the shares
were capital property so their sale gave rise to a capital gain. The Judge
concluded that the shares were inventory so the sale proceeds were business
income.
[44]
The consequence of this finding cannot erase the
taxpayer’s tax liability as a result of the sale of the shares. So long as the
taxpayer’s tax liability in respect of the sale proceeds does not exceed the
amount assessed by the Minister as a capital gain, the tax liability from the
source constituted by the shares does not increase. As the taxpayer’s tax
liability from that source does not increase, the Judge did not err.
[45]
Before leaving this issue, it is important to
note that at all times the taxpayer knew the proceeds of disposition from the
sale of the ISTO shares were in issue. He failed to file a tax return for the
2002 year. On the basis of a review of brokerage statements the Canada Revenue
Agency assessed the taxpayer for capital gains earned on the disposition of the
shares. The parties agreed upon the amount received by the taxpayer on account
of that disposition. After the assessment, the taxpayer filed an income tax
return reporting the sale of shares on capital account. He maintained this
position in his notice of objection and in his original notice of appeal. This
transaction was always in play and no injustice flows to the taxpayer from
including the proceeds of disposition, treated as a capital gain, in his
taxable income.
[46]
Put another way, the concerns about fairness
that animated the courts in decisions such as Continental Bank Leasing
Corporation v. The Queen, [1998] 2 S.C.R. 298 and Pedwell do not
arise.
(ii)
Rental income for the 2000 and 2001
taxation years
[47]
For ease of reference, I briefly repeat the
Judge’s findings on this issue. The Judge held that the net rental income
realized by the taxpayer in the 2000 and 2001 taxation years should be added to
the taxpayer’s income, even though the Minister had not reassessed the taxpayer
to include these amounts in income. In doing so, the Judge found as a fact that
the taxpayer had made misrepresentations in his income tax returns by failing
to report the income. Those misrepresentations were based on carelessness,
negligence or wilful default.
[48]
The taxpayer does not dispute the Court’s
finding with respect to the quantum of net rental income for the years. Rather,
he asserts that the Judge erred by:
i.
Including the amounts in income, contrary to
subsection 152(5) of the Act (which expressly precludes the inclusion of any
amounts in computing the income of a taxpayer for a year, after the taxpayer’
normal reassessment period in respect of that year has ended).
ii.
Ordering the Minister to reassess tax payable on
the rental income after the normal reassessment period under subparagraph
152(4)(a)(i). This is said to be an error because:
a.
The Crown did not plead in its amended reply
that there was a misrepresentation in the taxpayer’s returns of income; and
b.
The issue of misrepresentation was not raised in
oral or written argument by either party.
[49]
For the following reasons, I have not been
persuaded that the Judge erred in law as the taxpayer asserts.
[50]
Dealing first with the applicability of
subsection 152(5), it is important to situate this issue in its factual matrix.
As the Judge noted at paragraph 112 of her reasons, the taxpayer admitted realizing
net rental income in 2000 and 2001. Further, at trial the parties agreed that
specified amounts should be added to the taxpayer’s income for the 2000 and
2001 taxation years on account of this rental income.
[51]
I accept the submission of the Crown that implicit
in the taxpayer’s admission that the amount should be included in income is an
admission of the factual element of misrepresentation attributable to
carelessness, negligence or wilful default. Without such admission, the rental
receipts could not be included in income.
[52]
Moreover, had the Minister known that the
taxpayer would, on appeal, resile from his admission, the Minister could have
reassessed the rental income under subsection 152(4) of the Act and issued a
new notice of assessment to that effect. In these circumstances the taxpayer
should not be allowed to resile from his admission.
[53]
My conclusion that, in the circumstances of this
case, an admission of misrepresentation is implicit in the taxpayer’s admission
that the rental income should be included in income is dispositive of the
taxpayer’s assertion that the Judge could not apply subsection 152(4) of the
Act because the issue of misrepresentation was neither pled nor raised in
argument. However, there is also a second basis for disposing of this argument.
[54]
The taxpayer did not put in issue before the
Judge the argument that he could not be assessed on this income because the
normal reassessment period had expired. In the absence of such an allegation,
the Crown was not required to plead or establish misrepresentation (Naguib
v. Canada, 2004 FCA 40, 317 N.R. 88).
[55]
As the taxpayer has failed to establish on the
cross-appeal any error of law on the part of the Judge it follows that I would
dismiss the cross-appeal.
VIII. Conclusion and Costs
[56]
As explained above, I would dismiss both the
appeal and the cross-appeal.
[57]
I would reserve the issue of the costs in this
Court. I would do so because there was an interlocutory motion to settle the
content of the appeal book. The costs of that motion (including responsibility
for disbursements incurred by the over inclusion of documents in the appeal
book) were ordered to be reserved to the panel which heard the appeal and
cross-appeal. However, at the hearing of the appeal we received no substantive
submissions on this issue.
[58]
If costs are not agreed, the appellant shall
serve and file submissions on the costs of the appeal, cross appeal and
interlocutory motion within 14 days of the date of these reasons, such
submissions not to exceed 5 pages in length. The respondent shall have 14
days to serve and file responding submissions, such submissions not to exceed 5
pages in length. Thereafter, the appellant has 5 days to serve and file any
reply submissions, not to exceed 2 pages in length.
“Eleanor R. Dawson”
“I agree.
Johanne Trudel J.A.”
“I agree.
D.G. Near J.A.”
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