Citation: 2011TCC298
Date: 20110617
Docket: 2008-3291(IT)G
BETWEEN:
JOHN D'ANDREA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
This is an appeal by
John D’Andrea from the reassessment of his 1999 taxation year in which the
Minister of National Revenue (the “Minister”) included the amount of $1,877,500
in income pursuant to subsection 56(2) of the Income Tax Act (the
“Act”). The notice was issued pursuant to subsection 152(4) and
penalties were assessed under subsection 163(2) of the Act.
[2]
In making the
reassessment, the Minister relied on the following assumptions of fact:
(a) on October 14, 1988, the Appellant with family members
and friends incorporated a group of 27 shareholders (the Group).
(b) the Appellant having been very active and very successful
over the years as a broker and developer of real estate in Sarnia, the Group appointed him as the
company’s business manager.
(c) the Group purchased the “Holmes Foundry” property (the
Property) for $1.2 million on December 7, 1989.
(d) in the late 1990’s a number of offers were made to the
Group to acquire the Property but none were accepted.
(e) in 1998, M. Frank Fazio, a real estate lawyer, was
retained by both the Group and the Appellant personally and he obtained
rezoning for the Property to allow a casino development.
(f) in 1998, the Chippewas of the Thames Land Claim Trust
(the Chippewas) retained Mr. Charles Brudenell and Mrs. Brenda Reid, two real
estate agents to find sites for potential casinos.
(g) in August 1998, the following joint venture was proposed
by Mr. Fazio to Brudenell, Reid and the Chippewas:
- the Chippewas would purchase 50% of the land value
while the Appellant would supply the rest;
- the Chippewas were to supply either 50% of the land or
by way of 50% ownership of the joint venture corporation which the other 50%
would be owned by the Appellant;
- the Appellant was to supply either 50% of the land or
by way of 50% ownership in the same joint venture corporation;
- the value of the property on (as) sic set out
in the documentation was $213,000 an acre for 17 acres of land for a total
value of $3,612,000;
- the Chippewas were to supply the bingo license and the
Appellant was to supply his development expertise.
(h) in February 1999, the Appellant made representations to
the shareholders of the Group to inform them that he had found a buyer that
would purchase the property for $1.8 million. He also told them that he had no
connection with the buyer.
(i) on February 9, 1999, an amalgamation took place between
1075111 Ontario Inc., a corporation owned by Titen Real Estate which in turn
had the Appellant as its sole shareholders and 1317424 Ontario Inc., a
corporation owned by the Chippewas to create a new corporation, 1317424 Ontario
Inc. which is now owned 50% by the Chippewas and 50% indirectly by the Appellant
through 1075111 Ontario Inc.
(j) the Appellant knew before March 31, 1999, that the
property was worth not less than $3.7 million.
(k) on March 18, 1999, Mr. Ben Lansink, a professional
appraiser, set the value of the property somewhere between $4,755,000 and
$5,000,000.
(l) on March 31, 1999, the Group sold the property to
1317424 Ontario Inc. for $1,810,050, that amount was advanced by the Chippewas.
(m) in consideration for closing the transaction, Mr.
Brudenell was paid a commission of $181,005 which represented 5% of $3,612,000.
(n) in July of 1999, the Appellant handed a statement of
adjustments to the Group’s accountant, who recorded the sale in the
corporation’s books at $1,810,050 in accordance with the statement.
(o) the Group reported the sale at $1,810,050 in its income
tax return for its 1999 taxation year.
(p) the Appellant’s uncle, Mr. Peter Frezza, who was a
shareholder in the Group, found out that the Appellant was a partner with the
Chippewas in purchasing the property.
(q) Mr. Frezza reported the events to the Ontario Provincial
Police and the Appellant was later charged for fraud on April 20, 2000.
(r) on July 11, 2002, the Appellant was found guilty of fraud
by deceiving his victims knowing that the $1.8 million paid was only half the
value of the property.
(s) the scheme of the Appellant resulted in the transfer of
half the property to 1317424 Ontario Inc. without any consideration.
(t) 1075111 Ontario Inc. owning half the shares of 1317424
Ontario Inc., it received the ownership of 50% of the property.
(u) the Appellant’s plan for 1317424 Ontario Inc. was to
develop a casino on the property.
(v) at the time of the events, the Appellant had “de facto”
control of the Group.
(w) The Appellant admitted that he was very concerned in 1999
that there was a tax problem with the sale of the property.
[3]
The Respondent
tendered, as an exhibit, the Reasons for Judgment given by McGarry J. of the
Ontario Superior Court of Justice at the Appellant’s criminal trial. McGarry J.
found that, on March 31, 1999, the fair market value (“FMV”) of the Property
was approximately $3.6 million. This finding was affirmed by the Ontario Court
of Appeal.
[4]
In the Notice of Appeal
and at the hearing of this appeal, the Appellant disputed that the FMV of the
Property at the time of the sale was $3,612,000. It was his evidence that in
1999, he believed that the FMV of the property was around $2 million. He
believed that the Group received full value for the Property and he did not
receive a benefit.
[5]
The Minister reassessed
the Appellant on the basis that the FMV of the Property at the time of the sale
on March 31, 1999 was no less than $3,755,000.
[6]
Prior to the hearing of
this appeal, counsel for the Appellant informed the court and counsel for the
Respondent that the Appellant was no longer disputing the FMV of the Property.
It was therefore not an issue before me.
Appellant’s Evidence
[7]
It was the Appellant’s
evidence that in the late 1990s, there was a rumour that a charity casino, which
would be run by the Ontario government, would locate in Sarnia. The Group retained Frank Fazio, a real estate
lawyer, who succeeded in having the Property rezoned to allow for a casino
development.
[8]
Shortly thereafter,
Frank Fazio told the Appellant that Benchmark Realty (Mr. Charles Brudenell and
Mrs. Brenda Reid) had a client, the Chippewas, who was interested in purchasing
a property on which they could develop a casino.
[9]
Frank Fazio insisted on
showing the Property to Benchmark Realty and the Chippewas. Most of the
communications with respect to the sale was through Frank Fazio.
[10]
In late 1998, Frank
Fazio told him that the Chippewas were interested in purchasing the Property.
However, they had a limited amount of cash and they would not buy unless they
could find a real estate developer who would form a joint venture with them.
[11]
Frank Fazio proposed
that the Appellant consider entering a joint venture with the Chippewas. Frank
Fazio made the proposal to the Chippewas and he wrote the joint venture
agreement.
[12]
The Appellant gave several
reasons for accepting the transaction which Frank Fazio had negotiated. He
stated that there was in-fighting among the shareholders of the Group and the
Group had become totally dysfunctional. The Group had held the Property for 10
years and it was his opinion that the FMV of the Property was not more than $2
million. His opinion was informed by the sale of other properties in the area
and the environmental problems contained within the Property. In addition, the
Appellant was having matrimonial problems and his spouse was a member of the
Group.
[13]
It was the Appellant’s
evidence that he entered the agreement with the Chippawas so that the Group
could obtain the $1.8 million. He wanted to help the Group “out of a bad deal”.
[14]
The Appellant stated
that it was Benchmark Realty who led the Chippewas to believe that the Property
was worth more than $1.8 million. Benchmark Realty hired an appraiser, Ben
Lansink, who stated that the FMV of the Property was approximately $4.7
million. Contrary to the Minister’s assumption in paragraph 2(j) above, the
Appellant stated that he did not know or believe that the Property was worth
not less than $3.7 million. It was only at his trial for fraud that he learned
that Ben Lansink had made an appraisal of the Property. However, he disagreed
with Lansink’s conclusion with respect to the FMV of the Property.
[15]
The Appellant thought
that Frank Fazio was representing him and the Group. After the sale of the
Property, he learned that Frank Fazio had received a commission from Benchmark
Realty as well as from the Group.
[16]
The tenor of the
Appellant’s evidence was that he was not trying to justify what he did. In his
opinion, the only problem with his actions in 1999 was that he did not disclose
to the shareholders of the Group that he retained an interest in the Property.
[17]
In conclusion, the
Appellant stated that he relied heavily on his lawyer, Frank Fazio, for advice.
[18]
The three issues before
me were:
(a)
Did the Minister
correctly include the amount of $1,877,500 in the Appellant’s income pursuant
to subsection 56(2) of the Act?
(b)
Is the reassessment
valid pursuant to subsection 152(4) of the Act on the basis that the
Appellant made a misrepresentation attributable to neglect, carelessness or
wilful default?
(c)
Was a penalty pursuant
to subsection 163(2) of the Act correctly imposed?
Subsection 56(2)
[19]
Subsection 56(2) of the
Act reads as follows:
56(2) Indirect payments -- A payment or transfer
of property made pursuant to the direction of, or with the concurrence of, a
taxpayer to some other person for the benefit of the taxpayer or as a benefit
that the taxpayer desired to have conferred on the other person (other than by
an assignment of any portion of a retirement pension pursuant to section 65.1
of the Canada Pension Plan or a comparable provision of a provincial
pension plan as defined in section 3 of that Act or of a prescribed provincial
pension plan) shall be included in computing the taxpayer's income to the
extent that it would be if the payment or transfer had been made to the taxpayer.
[20]
The four preconditions
to the application of subsection 56(2) are within the subsection itself. They
are:
(a) the transfer of property must be to a person
other than the reassessed taxpayer;
(b) the allocation must be at the
direction or with the concurrence of the reassessed taxpayer;
(c) the transfer of property must be for
the benefit of the reassessed taxpayer or the benefit of another person whom
the reassessed taxpayer wished to benefit; and,
(d) the transfer would have
been included in the reassessed taxpayer’s income if it had been received by
him[1].
[21]
The four preconditions
necessary to invoke subsection 56(2) have been met in this appeal.
[22]
Prior to the sale of
the Property, on February 9, 1999, the Appellant arranged that 1075111 Ontario
Inc. (a corporation owned by Titen Real Estate which in turn had the Appellant
as its sole shareholder) was amalgamated with 1317424 Ontario Inc. (a
corporation owned by the Chippewas) to create a new holding company, 1317424
Ontario Inc. (Newco). Newco was owned 50% by the Chippewas and 50% by the
Appellant through 1075111 Ontario Inc.
[23]
The Appellant directed
the sale of the Property from the Group to Newco.
[24]
The transfer of the
Property to Newco was for the benefit of 1075111 Ontario Inc. and the
Chippewas. I conclude that the Appellant desired to confer the benefit on
1075111 Ontario Inc. as it was wholly owned by him.
[25]
If the Property had
been transferred directly to the Appellant and the Chippewas, 50% of the value
of the Property would have been included in the Appellant’s income pursuant to
subsection 15(1) of the Act.
[26]
As a consequence, I
conclude that the Minister was correct to include $1,877,500 in the Appellant’s
income subject to his satisfying the onus which is upon him in subsection
152(4).
Subsection 152(4)
[27]
The question then becomes
whether the reassessment dated March 13, 2006, which was issued pursuant to
subsection 152(4) of the Act, was valid.
[28]
Neither party stated the date of
the original assessment in their pleadings or at the hearing of the appeal.
However, as a result of the issues raised by the Appellant in his Notice of
Appeal, I assume that the Notice of Reassessment dated March 13, 2006 was
issued beyond the limitation period for the Appellant’s 1999 taxation year.
[29]
At the hearing of this appeal,
counsel for the Respondent made submissions only with respect to subsection
56(2). He made no submissions concerning subsections 152(4) and 163(2).
[30]
Subsequent to the hearing, I asked
the parties to give me their representations with respect to subsection 152(4).
[31]
The relevant portion of
subsection 152(4) of the Act reads as follows:
152(4) Assessment
and reassessment [limitation period]
-- The Minister may at any time make an assessment, reassessment or additional
assessment of 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, except that an assessment, reassessment or additional assessment may be
made after the taxpayer's normal reassessment period in respect of the year
only if
(a)
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
[32]
The onus is on the Minister to
prove that he was entitled to reassess the Appellant beyond the normal
reassessment period. As stated by Strayer J.A. in Nesbitt v. Canada:
5 The
issue before the Trial Division was whether such a reassessment was invalid as
being issued beyond the four year limitation period. It was common ground that
for the reassessment to be valid when made after that period the Minister would
have to demonstrate that the taxpayer had made a "misrepresentation ...
attributable to neglect, carelessness or wilful default ..." as provided
by subparagraph 152(4)(a)(i) of the Income Tax Act.[2]
[33]
In order to satisfy that onus, the
Minister must first prove that the Appellant made a misrepresentation in filing
his income tax return or in supplying information under the Act. Second,
he must also prove that the misrepresentation was attributable to neglect,
carelessness or wilful default[3].
Any Misrepresentation
[34]
In subparagraph 152(4)(a)(i)
the word misrepresentation is preceded by the word “any”. In Taylor
v. M.N.R., the Exchequer Court
interpreted this phrase to mean any representation that was false in substance
and in fact at the material date. It stated:
24 It
is to be noted also that the section refers to "any
misrepresentation" and it would be improper, therefore, to construe that
term as excluding a particular sort of misrepresentation such as an innocent
misrepresentation. I have reached the conclusion that the words "any
misrepresentation", as used in the section, must be construed to mean any
representation which was false in substance and in fact at the material date,
and that it includes both innocent and fraudulent misrepresentations[4].
[35]
In Nesbitt v Canada[5], Heald J.
agreed with Crown counsel that an incorrect statement in an income tax return
amounts to misrepresentation. He made the following statement:
22 On
the other hand, the submission by counsel for the Defendant that the erroneous
amounts set out in the Plaintiff's tax return constitute a
"misrepresentation" within the meaning of paragraph 152(4)(a)(i),
is supported by the relevant jurisprudence. In the case of Minister of
National Revenue v. Foot,11 the Exchequer Court dealt
with subsection 42(4)(a) of the 1948 Income Tax Act, a
predecessor to paragraph 152(4)(a)(i), the relevant paragraph in this
case. The Court addressed the issue of what constituted a
"misrepresentation" within the meaning of the applicable section at
that time. It was held that the phrase "any misrepresentation" was
synonymous with the expression "incorrect". It was the submission of
counsel for the Defendant that any incorrect statement amounts to a
"misrepresentation" as that term is used in paragraph 152(4)(a)(i),
supra. I agree with that view of the matter.
[36]
As I have already concluded that
the Appellant did receive an indirect benefit which should have been included
in his income, I also find that the Appellant made a misrepresentation in
filing his income tax return.
Neglect, Carelessness or Wilful Default
[37]
At the hearing of this appeal,
counsel for the Respondent asked the Appellant no questions about his failure to
include the reassessed amount in his 1999 income tax return. No evidence was
elicited surrounding the Appellant’s filing of his 1999 income tax return.
Counsel also made no submissions at the hearing with respect to subsection
152(4) of the Act. Quite simply, the issue with respect to subsection
152(4) was not addressed by counsel at the hearing.
[38]
In his written submissions,
counsel stated that the Appellant’s misrepresentation was attributable to
wilful default. He based his assertion on statements made by McGarry J. in his
Reasons for Judgment at the Appellant’s criminal trial.
[39]
First, I find that the statements
referred to by counsel explain why the Appellant arranged his affairs so that
the Property was held by Newco.
According to McGarry J., “the deal was restructured in order that there be no
taxation on anything”.
[40]
Also according to McGarry J., the
Appellant perceived that the transaction between him and the Chippewas would
result in a future tax on profits. There was also reference in McGarry J.’s decision
that the Appellant was instructed about avoiding any tax implications for the
Chippewas.
[41]
I interpret these statements to
mean that the Appellant thought that he had arranged his affairs so that he did
not have to report the transaction in his 1999 income tax return.
[42]
The statements, in McGarry J.’s
Reasons for Judgment which the Respondent has relied on, ought to have been
posed to the Appellant so that he could offer an explanation. It would then
have been up to me whether or not I accepted that explanation.
[43]
The evidence relied on by the
Minister has left me with more questions than it has answered. Did the
Appellant seek advice prior to filing his 1999 income tax return? Was the
Appellant’s view of the transaction so unreasonable that it could not have been
honestly held?
[44]
It is not enough to suggest wilful
default. There must be some evidence to support a finding of wilful default.
The evidence relied on by the Minister in McGarry J.’s decision was not
sufficient to meet the Minister’s onus under the second element in subparagraph
152(4)(a)(i)[6].
[45]
Although McGarry J. found that the
Appellant had committed a fraud on the shareholders of the Group, this fraud does
not automatically pertain to a finding under subsection 152(4) of the Act.
The precise finding by McGarry J. was as follows:
I find in this case that the accused, through non-disclosure to
others, was acting in a deceitful and dishonest manner and further, that it was
not necessary for the Crown to establish the full value of the land but rather,
the imperiling of economic interest. In this case, clearly the accuse(d) sic
received a benefit to the detriment of other shareholders by retaining a
half interest in the land.
…
Therefore based on the foregoing, I am satisfied beyond a reasonable
doubt that by means of fraud and deceit that the accused did deprive the
shareholders and that there will be a conviction registered
[46]
Subsection
152(4) reads that the misrepresentation is with respect to the filing of the
return or supplying of information in the income tax return.
[47]
When a taxpayer has
been assessed beyond the limitation period, the Minister cannot meet his onus
pursuant to subsection 152(4), if counsel fails to address the issue at the
hearing.
[48]
The Respondent has failed to
demonstrate that the Appellant’s misrepresentation was attributable to
negligence, carelessness or wilful default.
[49]
The appeal is allowed and the
assessment is vacated.
Signed at Ottawa,
Canada, this 17th day of June 2011.
“V.A. Miller”
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