Snowball v. The Queen, 97 DTC 512, [1996] 2 CTC 2513 (TCC)

Bowman J.T.C.C.: — These appeals are from assessments for the appellant’s 1987 and 1988 taxation years. By those assessments the Minister of National Revenue added, for 1987, $29,675.46 and, for 1988, $39,868.59. The amounts represent the appellant’s share of profits from two real estate development projects in which he or his company engaged in partnership with one William Carefoot.

The assessments were issued beyond the three year “normal reassessment period” provided in section 152 of the Income Tax Act. The appellant challenges the right of the Minister to assess these amounts in his hands on two bases:

(a) he contends that the income belonged to his company, Snowball Trucking & Equipment Inc. (“STE”); and

(b) in any event in failing to declare the income in his personal return, he did not make “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” within the meaning of subparagraph 152(4)(a)(i).

Originally, Mr. Snowball carried on business as “Bob Snowball Trucking”. In the 1960s he bought a truck and expanded the business in the 1970s to acquire a bulldozer and an excavator. He bought three blocks of land at 12060 to 12080-7th Avenue for the purposes of the business. The land was registered in his own name and was mortgaged to the Federal Business Development Bank (“FDBD”).

In 1979, on the advice of his accountant, Mr. Robert Cockburn, the appellant incorporated STE to carry on the business. From that time on STE paid the mortgage payments on the 7th Avenue property, although it does not appear that the property was ever transferred to STE. Also, the property appeared on STE’s balance sheet.

In 1987, Mr. Snowball decided to embark on a new line of business, real estate development. A partnership with a Mr. William Carefoot was formed. They developed two pieces of property which they sold and realized a profit in 1987 of $59,350.92 and in 1988 of $79,737.19, divided equally between the two partners. The partnership was called Football Construction. It appears that the gross proceeds from the real estate development in 1987 were $505,000 and in 1988 $460,000. Mr. Snowball testified that Mr. Cockburn, his accountant, who is since deceased, advised him to “put the partnership income through the company”.

That the amounts assessed by the Minister are somebody’s income is undisputed. The question is, whose? The problem is, they were declared in nobody’s return. Had Mr. Snowball declared the 50 per cent share of the profits in STE I daresay the Department would probably have accepted this treatment. STE was a viable operating company with assets, other income and genuine financial statements, and I doubt that as a practical matter such treatment would have been questioned. Since no one declared the income I now have to decide, on a balance of probabilities, who was the partner. It is trite law that the profits of a business belong to the person who in fact carries it on.

The case for treating the company as the partner and therefore the owner of the profits is extremely tenuous:

(a) when money was borrowed from Citizen’s Trust Company in the amount of $432,000 for the purposes of the real estate development venture, the borrower is shown as Football Construction, and personal covenants were given by Mr. Snowball and Mr. Carefoot. STE does not appear;

(b) when the land was purchased for the purposes of venture the purchasers are shown as Messrs. Snowball and Carefoot and their respective spouses and not STE;

(c) the financial statements of STE record no property relating to the real estate ventures and no revenues or expenses in connection with them; and

(d) there was no written partnership agreement between STE and Mr. Carefoot or his company.

It is true that in other matters Mr. Snowball treated himself and his company as interchangeable but there is simply nothing to connect STE with the partnership apart from the fact that 50 per cent of the net proceeds from the real estate ventures were paid into the company’s bank account.

The auditor from the Department of National Revenue, Mr. Robert B. Norman, testified. It was only through a very thorough analysis of the material given to him by Mr. Snowball relating to the partnership that he kept in his garage that Mr. Norman was able to determine the partnership’s income. There was no income statement prepared for the partnership, either by Mr. Snowball or his accountant.

I have concluded that the evidence does not support the position that STE was the partner or that the income belonged to it. I think the preponderance of evidence establishes that Mr. Snowball was the partner with Mr. Carefoot and that the income was his and not STE’s.

It follows therefore that in failing to declare the share of the partnership income in his own return Mr. Snowball made a misrepresentation.

This does, of course, not end the matter. To justify assessing beyond the three year normal reassessment period, the Crown must establish not only a misrepresentation but a misrepresentation that is attributable to neglect, carelessness or wilful default. Wilful default is not suggested.

Mr. Snowball testified that he believed that the income was declared in STE and that he had given all of the papers to the accountant who inadvertently failed to include the income in STE’s return. From this, it is argued, two conclusions flow:

(a) it was the accountant and not Mr. Snowball who was neglectful or careless;

and

(b) the careless or neglectful misrepresentation related to STE’s returns and not Mr. Snowball’s.

With respect, I cannot accept the argument.

In the first place, and without meaning to impugn Mr. Snowball’s credibility, I am not satisfied that he gave the papers relating to the real estate venture to his accountant. He evidently gave bank statements to him, and they show the deposits to the company’s account, because the accountant recorded these as shareholder loans. I find it difficult to believe, however, that Mr. Cockburn, even though he was in his late 70s at the time, would simply have ignored records indicating revenues and expenses of that magnitude. The more likely hypothesis is that Mr. Snowball, who seemed to view bank statements as an adequate form of business record keeping, in that they showed what moneys came in what went out, believed that he had done all he needed to in order to inform his accountant of the results of the business in giving him the bank statements.

In any event Mr. Snowball testified that he went over the company’s returns carefully and I do not think one can say he was not careless in failing to observe the absence of any reference to the substantial revenues and expenses relating to the real estate ventures. In what way, however, does the failure to declare the income in STE’s return constitute neglect or carelessness in filing Mr. Snowball’s own return? I should not have thought him negligent simply by reason of an erroneous assumption that the income should be declared in STE’s return, if that was where he had put it. His negligence consisted, not in thinking that the income was the company’s, but in basing his failure to declare it in his own return on the assumption that it was in STE’s return without taking adequate steps to ensure that it was in fact there.

So far as the argument that the accountant was negligent is concerned, I do not think that this has been made out. To judge by the examples of his work that are in the record he seems to have been competent and careful and I cannot conceive that he would simply have ignored revenues of upwards of one-half of a million dollars in each of two years if he had been told about them. He was given records showing deposits to STE’s bank account and, without any other information, assumed they were loans to the company by Mr. Snowball. It is possible that he may have been somewhat remiss in not asking Mr. Snowball about the origin of the funds, but so too was Mr. Snowball in not telling him.

In any event, even if Mr. Cockburn was negligent it is no answer to an otherwise statute-barred assessment under subparagraph 152(4)(a)(i). It is quite true that the negligence of an accountant may be a defence to a penalty under subsection 163(2): Udell v. Minister of National Revenue, [1969] C.T.C. 704, 70 D.T.C. 6019 (Exch.). Subparagraph 152(4)(a)(i) is not a penal provision. It serves an altogether different purpose from subsection 163(2). Negligence in the preparation of an income tax return retains its consequences under subparagraph 152(4)(a)(i) whether it is the negligence of the taxpayer personally or that of the accountant or other tax return preparer who is his or her agent. In Nesbitt v. R., 96 D.T.C. 6045 (sub nom. Nesbitt v. Canada), 105 F.T.R. 233 Heald J. held that a taxpayer could not shield himself from the effect of subparagraph 152(4)(a)(i) by blaming his accountant. The same considerations apply here.

I have therefore concluded that the assessments of tax for the years 1987 and 1988 were properly made.

The appeals are dismissed with costs.

Appeals dismissed.