Prévost v. MNR, [1996] 1 CTC 2701 (TCC)

Archambault J.T.C.C.: — In 1978, François Prévost In (FPI) operated a real estate brokerage business in Québec. On November 27, 1978, that corporation submitted an offer to purchase the shares of Place Dalhousie Inc. (Dalhousie) to the trustee in bankruptcy of Rolland Gingras. The preconditions of the sale having been met, FPI purchased the shares on August 23, 1979. It resold them the next day to a numbered company belonging to Mr. Gingras, realizing a profit of $210,000.

On May 20, 1988, the Minister of National Revenue (Minister) reassessed FPI’s 1979 taxation year, taxing that profit as professional fees, whereas FPI had reported it as a capital gain. He also assessed a penalty because FPI apparently made a false statement. The latter claimed that it had acted in good faith in disclosing its capital gain in its return. It also raised the matter of the time limit of the reassessment of May 20, 1988 given that the Minister had delayed too long in amending the initial assessment of September 4, 1980 for the 1979 taxation year.

This appeal therefore raised three issues:

1. Did FPI realize a capital gain or did it earn business income?

2. Did FPI make a misrepresentation attributable to neglect, carelessness or willful default in filing its return?

3. Did FPI knowingly, or under circumstances amounting to gross negligence, make a false statement in its income tax return?

Facts

FPI is a company that has been incorporated since January 1, 1972 and carries on a real estate brokerage and real estate purchase, sale and management business. The principal shareholder, François Prévost, died a few months before the hearing of this appeal. Raymond Roy, trustee in bankruptcy, asked Mr. Prévost in 1978 to find a potential purchaser for property belonging to Dalhousie, a corporation belonging in equal shares to Mr. Gingras and Gestion Sillery Inc. (Sillery). These last two have been bankrupt since the end of 1977.

Mr. Gingras was the principal shareholder of Sillery, a family corporation which owned his Québec and Mont Ste-Anne homes as well as the shares of corporations including Dalhousie. Mr. Gingras’ principal asset and the main source of his income was Dalhousie, which owned a property situated on Rue St-André in Québec which was leased to the Government of Québec. The lease, which expired in 1979, could not be renewed by Mr. Gingras. It appears that one of his main difficulties was the scandal caused by his appearance before the Commission of Inquiry on Organized Crime. The government did not want to renew its lease as long as Mr. Gingras remained a shareholder of Dalhousie.

Mr. Roy tried, unsuccessfully, on a number of occasions to dispose of the assets of the bankruptcy, including approaching Mr. Prévost. FPI then decided to make a $1.7 million offer to purchase, which the bankruptcy inspectors rejected. According to Mr. Roy, the assets held by the bankruptcies were worth more than $3 million, while the debts amounted to about $2.4 million. The net value of the assets of the two bankrupts was thus $600,000. As the main asset was the property leased to the Government of Quebec, it was essential to renew the lease in order to maintain its value.

Mr. Prévost increased his offer to purchase the shares of Dalhousie and Sillery to $2.4 million. Although this price represented the amount of the debts, it was less than the market value of the assets; the trustee therefore wanted to obtain Mr. Gingras’ consent. He feared an action by the latter if his assets were sold for less than fair market value.

Mr. Roy thus introduced Mr. Prévost to Mr. Gingras, who did not know him. According to Mr. Gingras’ testimony, Mr. Prévost and he agreed at a subsequent meeting, though prior to November 27, 1978, that Mr. Prévost would intervene in the settlement of the bankruptcy. He would negotiate the lease with the government, facilitate financing of Dalhousie’s property and make possible the repayment of all the debts owed by Dalhousie and the two bankrupts. In consideration of his services, Mr. Prévost would receive from Mr. Gingras the sum of $100,000 when he remitted to him the shares purchased from the bankruptcy. A written agreement (first secret agreement) was signed and each kept a copy. [1]

On November 27, 1978, FPI submitted to Raymond Roy, in his capacity as trustee, an offer to purchase the shares of Sillery and Dalhousie and a deposit of $25,000. The offer was accepted and Mr. Gingras agreed to the sale. On the same day, Mr. Gingras, Mr. Prévost and FPI signed an agreement in which they admitted that FPI’s offer was made in order to nullify Mr. Gingras’ bankruptcy and to enable him subsequently to resume possession of the shares of Sillery and to permit the repayment of sums which Dalhousie owed him. Even though no explicit mention to this effect could be found and that it was stated that there were no other agreements, Mr. Gingras stated under oath that it also covered the shares of Dalhousie.

Messrs. Roy and Prévost continued the negotiations for the signing of the lease with the Department of Public Works and Supply. The lease was ultimately signed on July 17, 1979. This lease provided for a term of 15 years starting on May 1, 1979 and ending on April 30, 1994. The lease could be renewed. The rent represented a minimum of $5.4 million for the first 15 years.

Having renewed this lease, FPI could then obtain a commitment from the Montreal City and District Savings Bank (Savings Bank) for Dalhousie to lend the funds which would be used to pay all the debts of the bankruptcy and those of Dalhousie. Mr. Prévost and FPI had to guarantee this loan, however. They also had to submit a deposit of $27,000 to the Savings Bank.

The Savings Bank was in a position to advance the funds in August 1979. François Prévost prepared a document (list of payments) signed by him describing how the loan from the Savings Bank would be used. Out of the funds advanced to Dalhousie by the Savings Bank, FPI was refunded the $25,000 deposit made with the trustee and the $27,000 deposit made to the Savings Bank. Dalhousie advanced to Mr. Roy the money necessary to pay the bankrupts’ creditors. Subsequently, that is on August 23, 1979, Mr. Roy was able to transfer the shares of Dalhousie to FPI. The next day, FPI sold all the shares which it held in Dalhousie to 90152 Canada Inc. (90152) for the sum of $210,000 payable as follows: (a) $75,000 cash upon signing of the contract, (b) $75,000 on or before November 30, 1970 and (c) $60,000 on or before November 30, 1980.

A letter? [2] written to 90152 on September 10, 1979 on paper bearing FPI’s letterhead and sent by Francois Prévost, president, confirmed that the sum of $75,000 had been remitted to FPI on August 24, 1979 as a deposit in respect of the purchase price of $220,000? [3] In a letter of December 6, 1979 written to 90152 on FPI’s letterhead, François Prévost confirmed that he had received another sum of $75,000 representing the second payment of the $220,000 which was owed him. According to the list of payments, only one sum of $75,000 was paid to FPI on August 24, 1979. However, it was described as an advance against “brokers fees”. A cheque for $75,000 payable to FPI dated August 24, 1979 and signed by François Prévost for Dalhousie also described this sum as a fee instalment.

Pursuant to the contract of sale by FPI to 90152, FPI retained on deposit the Dalhousie share certificates as a guarantee in case of non- payment of the sum of $210,000. Furthermore, as Dalhousie’s sole shareholder, 90152 guaranteed that it would release Mr. Prévost and FPI as guarantors of the $2.7 million loan made to Dalhousie by the Savings Bank. 90152 and Dalhousie undertook to take the necessary steps to take over the guarantee of Mr. Prévost and FPI with respect to the Savings Bank. To guarantee that obligation, Dalhousie undertook to provide a $200,000 mortgage immediately subordinated to that of the Savings Bank. Dalhousie and Sillery also undertook to compensate Mr. Prévost and FPI for any income tax assessment by the Government of Quebec or that of Canada arising from the settlement of the bankruptcy except for the tax consequences of the $210,000. sum.

In that contract, Lois Royer declared himself the sole shareholder of 90152 and promised that no other shares would be issued by that corporation. He personally guaranteed that all the obligations of 90152, Sillery and Dalhousie would be met. FPI assigned to 90152 -all the rights arising from the offer to purchase of November 27, 1978 respecting the shares of Dalhousie and Sillery, including any surplus on the sums deposited with the trustee, in particular a sum of $1,300,000. 90152 also assumed all the obligations arising from that same offer by Dalhousie.

Lastly, the contract also stipulated that Mr. Prevost would remain director and president of Dalhousie for a period not extending beyond April 3, 1980. Mr. Prévost was not to receive any additional consideration for his administrative work during that period.

Mr. Royer admitted at the hearing that he had acted as a nominee for Mr. Gingras in respect of the shares which he held in 90152. He believed that it was Mr. Gingras who had incorporated 90152. He also confirmed that he had not negotiated the purchase price of Dalhousie’s shares; Messrs. Prévost and Gingras apparently negotiated it themselves. On January 20, 1981, Mr. Royer, no longer wishing to act as a nominee shareholder, transferred all his shares in 90152 to Michel Pouliot, Mr. Gingras’ accountant and friend. Mr. Pouliot agreed to replace Mr. Royer in his obligations toward Mr. Prévost and FPI. The latter intervened to consent to that sale. Mr. Gingras confirmed that his wife had purchased Dalhousie’s shares and that such a transfer was made between 1980 and 1982. She apparently paid a sum of about $10,000.

Lastly, Mr. Gingras admitted that he had signed a statement of facts (second secret agreement) on April 15, 1980 in which he admitted that he held no interest in the shares of Dalhousie or Sillery. He admitted the veracity of this statement, while adding that it could not have been true two days later. That agreement was apparently signed at the request of Mr. Prévost who, according to the rumours circulating at the time, did not want to be considered as Mr. Gingras’ straw man in the purchase of Dalhousie’s shares.

Pierre Jolicoeur, Mr. Prévost’s attorney at the time, confirmed that he had prepared the offer to purchase of November 27, 1978. He was not very enthusiastic about his client conducting a transaction with the bankruptcy of Mr. Gingras because of the latter’s reputation. Mr. Joliceur stated that he had known Mr. Prévost since 1960 and had become his lawyer around 1968. He said that Mr. Prévost had become a friend as well as a client. Mr. Jolicoeur stated that if Mr. Prévost had acted as a nominee for Mr. Gingras, he would have ceased to act in that file. He never knew that Mr. Prévost was acting as a nominee for Mr. Gingras. To explain the $75,000 which FPI received on August 24, 1979, he indicated that FPI had incurred costs, including in particular his fees and those of the Langlois Drouin attorneys for their services in negotiating the lease with the Government of Quebec.

Mr. Gingras confirmed that the sum of $100,000 payable to Mr. Prévost was increased to $210,000. It was of no importance to him whether that sum of $210,000 was paid in consideration of shares or otherwise. What counted was that Mr. Prévost succeed in obtaining the nullification of the bankruptcy and deliver the shares of Sillery and Dalhousie to him. Mr. Gingras confirmed that if FPI had sold the Dalhousie shares to a purchaser other than 90152, he would have objected to that sale. He would have reminded Mr. Prévost of the first secret agreement. He explained the increase in the cost by the fact that the settlement of the bankruptcy had been more difficult and had taken very nearly two years instead of one. He did not find that increase exorbitant, even though it went against the first secret agreement. He admitted that the settlement of his bankruptcy had cost him a lot in professional fees. It was not a $110,000 increase that would make a difference. He was satisfied with the work done by Mr. Prévost.

Mr. Royer confirmed that he had acted as an accountant for FPI. Apparently without any instruction from Mr. Prévost, Mr. Royer said that he had treated the gain resulting from the sale of Dalhousie’s shares by FPI to 90152 as a capital gain. In his view, FPI was not acting as Mr. Gingras’ agent when FPI purchased the shares from the bankruptcy because FPI and Mr. Prévost had given guarantees for the loan obtained for Dalhousie from the Savings Bank. Mr. Gingras, for his part, stated that, even though Mr. Prévost had guaranteed the loan from the Savings Bank, that loan was first guaranteed by the mortgage on the property owned by Dalhousie and that part of that loan was conditional on a new lease being obtained from the Government of Quebec. In his view, Mr. Prévost had no reason to be nervous because of his financial commitments.

Analysis

The Minister did not reassess FPI within the time limit prescribed by the Income Tax Act (Act). The reassessment was dated May 20, 1988, whereas the initial assessment was issued on September 4, 1980. In order to be able to reassess FPI, the Minister had to meet the conditions stated at subparagraph 152(4)(a)(i) of the Act which provides:

152(4) The Minister may at any time assess tax, interest or penalties under this Part 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 taxation 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 willful default or has committed any fraud in filing the return or in supplying any information under this Act....

It is recognized in the case law that it is the Minister who must establish whether FPI made a misrepresentation attributable to neglect or willful default. In Minister of National Revenue v. Foot, [1964] C.T.C. 317 64 D.T.C. 5196, at page D.T.C. 5199 (Exchequer Court) Dumoulin J. stated that the Minister had to show on a balance of probabilities, not beyond a reasonable doubt, that the taxpayer had made a misrepresentation.

The assessment also raised the assessment of the penalty of $3,397.54 under subsection 163(2) of the Act which provides:

163(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty ...

Under subsection 163(3), the onus is on the Minister to establish the validity of that assessment. As counsel for the Minister admitted, one can see that the burden of proof is more demanding for the application of subsection 163(2) since it requires that the taxpayer knowingly, or under circumstances amounting to gross negligence, has made a false statement or omission in his income tax return. For subparagraph 152(4)(a)(i) of the Act, he need only establish that there was a misrepresentation that is attributable to neglect, carelessness or willful default. However, gross negligence must be proved on a balance of probabilities.

A. Prescription

Counsel for FPI claimed that his client FPI had not made a misrepresentation in filing its income tax return for 1979. FPI reported the proceeds of disposition resulting from the sale of the shares to 90152 in 1979. The amount of the capital gain was calculated using the proceeds of disposition described in the deed of sale between FPI and 90152. The Minister therefore could not reassess FPI under subparagraph 152(4)(a)(i) of the Act.

The Minister claimed that FPI had received fees of $210,000 provided by the first secret agreement. That sum did not in any way represent the proceeds of disposition of the shares transferred by FPI to 90152. He said that FPI had acted as a nominee shareholder in that transaction.

The Court does not have an easy task in this appeal. It must sort out the facts of a case in which there were contradictory testimony, documents incompletely describing the transactions conducted and secret counterdeeds. Moreover, one of the principal players, François Prévost, died a few weeks before the hearing of this case. The Court must therefore rule on and determine the nature of the relations existing between FPI and Rolland Gingras. Did FPI act as a nominee shareholder when it purchased Dalhousie’s shares or did it act for its own account? Did the sum of $210,000 represent fees for services rendered or proceeds of disposition of shares?

First of all, I must observe from the trustee’s testimony that the assets of the bankrupts were worth at least $600,000. The trustee therefore believed that the shares of Dalhousie and Sillery were worth more than the $2.4 million offered by FPI. To avoid legal action in the administration of the bankruptcies, the trustee had to ensure he had Mr. Gingras’ cooperation. It was in this spirit that the trustee introduced him to Mr. Prévost.

Mr. Gingras stated in his testimony that he had agreed with Mr. Prévost that he would pay him the sum of $100,000 if the latter intervened in the settlement of his bankruptcy and managed to return his property to him, in particular his Mont Ste-Anne chalet and the shares of Dalhousie. All that mattered for Mr. Gingras was to have them back. The form of payment to Mr. Prévost was not important to him. FPI was free to adopt the tax treatment which it preferred. According to Mr. Gingras, Mr. Prévost had an obligation to remit the shares of Dalhousie to him. When counsel for the Minister asked him what he would have done if FPI had sold the shares to someone else, he stated that he would have invoked the first secret agreement. As the answers of this witness were not all given with all the candour one is entitled to expect, I must be careful in assessing his testimony. In particular, Mr. Gingras stated during his testimony that he was not involved when the transaction in which FPI assigned the shares of Dalhousie to 90152 was concluded. He was not a shareholder of that corporation.

However, Mr. Royer, whose good faith I have no reason to doubt, clearly indicated that he had acted as Mr. Gingras’ agent or nominee in this transaction. He said that that corporation was formed as a result of Mr. Gingras’ efforts and the price of the purchase by FPI of the shares of Dalhousie for 90152 was negotiated by Mr. Gingras and Mr. Prévost.

In my view, all the circumstances attest to the accuracy of Mr. Gingras’ testimony respecting the existence of the first secret agreement. First of all, the transaction was essentially conducted as the agreement provided. As soon as the funds were put in place, the shares of Dalhousie and Sillery were transferred by the trustee to FPI on August 23, 1979. The next day, FPI assigned the shares of Dalhousie to 90152, a corporation with a single shareholder, Mr. Royer, who acted as Mr. Gingras’ agent and nominee. No longer wishing to act as such, Mr. Royer had himself replaced as sole shareholder of 90152 on January 20, 1991 by Michel Pouliot, a friend of Mr. Gingras. The Dalhousie shares were restored to the Gingras family estate. Mr. Royer confirmed the testimony of Mr. Gingras, who admitted that his wife had acquired ownership of the Dalhousie shares between 1980 and 1982. The circle was virtually complete. Mr. Gingras had achieved his objective.

It further seems clear to me that Mr. Gingras would not have agreed to the acceptance of the offer to purchase made on November 27, 1982 by FPI if there had not been an agreement guaranteeing that his assets would be returned. Being an astute businessman, Mr. Gingras was not anxious to see assets with a net value of at least $600,000 disappear from his estate. As that value depended to a large degree on the existence of a long-term lease with the Government of Quebec and as the latter did not appear to be prepared to negotiate such a lease with a corporation belonging to him, it is not surprising that Mr. Gingras was prepared to pay the sum of $100,000 to interpose a nominee between the government and himself. The increase to $210,000 may be explained by the greater difficulties and risks encountered by FPI, including the guarantee of the $2.4 million loan obtained from the Savings Bank. Mr. Gingras was prepared to pay such a sum in order to obtain the lease for Dalhousie which was needed to obtain financing from the Savings Bank and to pay the bankrupts’ creditors.

FPL s attorney at the time, Mr. Pierre Jolicoeur, stated that Mr. Prévost had purchased the Dalhousie shares as a long-term investment. The facts contradict his testimony, however. FPI held the Dalhousie shares for about 24 hours. They were immediately placed in a numbered company belonging to Mr. Gingras. It cannot be said that the offer made by 90152 was an attractive and irresistible offer in light of the testimony of Mr. Roy who estimated the value of Dalhousie’s property at $3 million. The $2.4 million loan obtained by Dalhousie thus left a net value of $600,000. In addition to Dalhousie’s shares, FPI also assigned to 90152 all its rights to the surpluses of the amounts deposited with the trustee in order to pay creditors.

Although one might entertain doubts as to whether FPI acted as a nominee in the purchase of the Dalhousie shares, the two documents in the late Mr. Prévost’s hand confirm that the sum of $210,000 was not paid to him as the proceeds of disposition of the shares, but rather as fees for having facilitated the nullification of Mr. Gingras’ bankruptcy. In fact on August 24, 1979, Mr. Prévost, as an officer of Dalhousie, signed a cheque for $75,000 payable to FPI bearing the inscription “fee instalment”. On October 14, 1980, Mr. Prévost signed the list of payments describing this sum as an advance against his brokerage fees. Letters on FPI’s letterhead dated September 10, 1979 and December 6, 1979, attempted to describe that sum as part of the payment of the proceeds of the sale by FPI to 90152. However, I do not attach much value to those documents. First, those documents were not signed and were subsequent to the August cheque. It may be supposed that their purpose was rather to justify the tax treatment that would be adopted by FPI.

These documents contradicted Mr. Jolicoeur’s claims that the sum of $75,000 represented sums remitted to FPI to reimburse some of his disbursements, including the fees which FPI owed to him as well as to Langlois Drouin for negotiating the lease with the Government of Quebec. Why would Dalhousie have paid FPI fees owed to Langlois Drouin when Dalhousie had personally received the services of those attorneys? His explanation was not very convincing. It is highly unlikely, based on the evidence as a whole, that two sums of $75,000 were paid to FPI, one for its services and the other for the alleged sale of the Dalhousie shares. The list of payments does not support this explanation by Mr. Jolicoeur. There was no other evidence of payment of an additional amount of $75,000.

In my view, the sum of $210,000 did not represent the proceeds of disposition of the Dalhousie shares. Mr. Prévost and FPI knew that it represented the remuneration paid to FPI for taking part in obtaining the 15-year lease with the Government of Quebec, obtaining financing from the Savings Bank, the guarantees provided to that bank and, in a more general way, for having acted as a nominee in all those transactions.

Having concluded that FPI received fees for the services rendered to Mr. Gingras and that FPI knew it, I must conclude that FPI made a misrepresentation that was attributable to neglect, carelessness or willful default. The Minister therefore had the power to reassess FPI beyond the time limit provided under subsection 152(4) of the Act.

Even if I had concluded that FPI had purchased the Dalhousie shares for its own account and not as a nominee for Mr. or Mrs. Gingras, I would nevertheless have come to the conclusion that FPI made a misrepresentation that was attributable to neglect, carelessness or willful default. Counsel for FPI contended with a great deal of conviction that the transaction was a true disposition of shares and that the calculation of the capital gain resulting from the disposition of the shares on August 24, 1979 was consistent with the facts. The proceeds of disposition were those appearing on the August 24, 1979 contract of sale to 90152 and their amount represented the amount which FPI apparently paid to the trustee at the time of its purchase of the shares in accordance with the commitment to purchase of November 27, 1978. According to counsel for FPI, there could have been no misrepresentation resulting from an error in characterizing the gain arising from that disposition. On this point, he cited a decision by Judge Tremblay of this Court in Gauthier v. Minister of National Revenue, [1992] 1 C.T.C. 2522, 93 D.T.C. 728, at pages 2562 (D.T.C. 756-57) in which he states:

It therefore appears from this information concerning the years 1972, 1973, 1974 and 1975 that the appellant cannot be reproached for having made “a misrepresentation [through] carelessness or wilful default” within the meaning of subsection 152(4) of the Act, cited above (4.01), particularly since the respondent’s main reproach was that the Act was not applied with respect to the accounts receivable. Furthermore, I am of the view that, although the conclusion was reached that the appellant’s advances to Prodimpex did not constitute running expenses, one could not reproach it to the appellant under subsection 152(4) which relates to negligence, etc., just as one could not do so for a taxpayer who would have considered the business profit resulting from the disposition of a property as a capital gain. These years 1972, 1973, 1974 and 1975 are therefore statute-barred, and the reassessments must be set aside.

I agree with Judge Tremblay who states that a taxpayer cannot be reproached for having made a misrepresentation when that error results from a mischaracterization of the income or a misinterpretation of a provision of the Act. I hasten to add, however, that that error must be an error made in good faith. Judge Addy wrote as follows in Regina Shoppers Mall Limited v. R. (sub nom. Regina Shoppers Mall Ltd. v. Canada) [1990] 2 C.T.C. 183, 90 D.T.C. 6427 (F.C.T.D.) at page 186 (D.T.C. 6428):

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. R., [1989] 2 C.T.C. 1, 89 D.T.C. 5287). In Levy v. Minister of National Revenue, [1989] C.T.C. 151, 89 D.T.C. 5385 at page 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 should be noted that this decision was confirmed by the Federal Court of Appeal, (sub nom. Regina Shoppers Mall Ltd. v. Canada) [1991] 1 C.T.C. 297, (sub nom. R. v. Reginal Shoppers Mall Ltd.) 91 D.T.C. 5101. At page 299 (D.T.C. 5105), MacGuigan J. expressed his agreement with the third paragraph of the passage cited above.

In the instant case, counsel insisted that FPI had relied on the tax treatment adopted by its accountant Mr. Royer in filing its income tax return, apparently without FPI having influenced its judgment. In his view, this demonstrated FPI’s good faith in filing its income tax return. I cannot share this view, however. I am convinced that FPI did not communicate all the relevant facts to the accountant. If the latter had known them, I believe he would have reported this gain as business income. I believe that Mr. Prevost did not communicate the content of the first secret agreement. There was no evidence to the contrary. Even presuming that FPI became the true owner of the Dalhousie shares at the time of their purchase on August 23, 1979, FPI had to resell them at a profit of $100,000. However, this first secret agreement was entered into before the commitment to purchase of November 27, 1978 was filed. That agreement was essential in order to obtain Mr. Gingras’ consent to the filing of that offer. Moreover, Mr. Gingras intervened in that commitment to purchase of November 27, 1978. In light of these facts, it is therefore noted that Mr. Prévost and FPI were well aware before filing the commitment to purchase of November 27, 1978 that FPI would resell those shares to Mr. Gingras at a profit. This transaction may therefore be considered as part of the normal operations of FPI, which carried on a real estate brokerage and real estate purchase and resale business.

Even if that operation had not been consistent with FPI’s operations, it would have constituted one of the best examples of an adventure in the nature of trade. Even before it filed its commitment to purchase the shares, FPI knew that it was going to resell them to Mr. Gingras at a profit of $100,000.

Counsel for FPI tried hard to convince the Court that there were numerous examples in the case law in which a taxpayer could in good faith have doubts as to the characterization of the gain resulting from the disposition of an asset. In particular, he cited the facts of Morin c. Ministre du Revenue national (sub nom. Morin v. Minister of National Revenue) 94 D.T.C. 1747.

In that case, the taxpayers had purchased a property for the sum of $275,000 in 1986 and resold it the same day to a friend for $350,000. However, the short holding by the taxpayers was the only fact similar to the instant case. In Morin, the taxpayers sold the property in a series of transactions designed to finance the ultimate purchase of that property. The taxpayers had had numerous financial difficulties. After purchasing the property in question, the friend leased it to a corporation of the taxpayers for a 10-year period. In addition to the lease, the friend granted a buy-back option, which expired in 1988, for the sum of $367,400. The taxpayers again became the owners of the building in 1994 and continued to lease it to their company.

It may therefore be seen that the purchase and resale transaction by the taxpayers was integrated with what was essentially a financing operation and that the property in question was not really subject to speculation, contrary to the facts of the instant case. I therefore cannot share the view of counsel for FPI that there may be doubt as to the tax treatment of the gain resulting from the purchase and resale of Dalhousie. Mr. Prevost was a real estate broker for numerous years. He must have known that the gain arising from a speculative transaction constituted business income. In my view, presenting the gain as a capital gain, when he knew or at least should have known that the gain represented business income, constituted a misrepresentation.

B. Penalty

The burden of proof was also on the Minister to show that his assessment of the penalty was valid. In particular, he had to show that FPI knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in preparing and filing its income tax return.

Having concluded that FPI knew that the sum of $210,000 which it received constituted fees for its services in obtaining the nullification of the bankruptcy and the return of the assets to Mr. Gingras, in particular the shares of Dalhousie and Sillery, I conclude that FPI knowingly, or under circumstances amounting to gross negligence, filed a false income tax return. The cheque for $75,000 representing the first payment of that sum of $210,000 clearly bears the inscription that the amount is an advance against its fees. Mr. Prévost himself signed that cheque. In the list of payments describing the use of the proceeds of the loan from the Savings Bank, Mr. Prévost himself admitted that this sum of $75,000 represented an advance against brokerage fees. When Mr. Prévost, as president, signed FPI’s return, he certified that he had examined it, including the appended financial statements, and declared it true, accurate and complete. Since, at page 6, the financial statements show the $210,000 as a capital gain, Mr. Prévost, as president of FPI, could not ignore that this accounting and tax treatment of that sum of $210,000 was incorrect. The Minister therefore discharged his burden to prove that FPI acted knowingly, or under circumstances amounting to gross negligence, in filing that income tax return.

For these reasons, the appeal is dismissed and the assessment for the 1979 taxation year is confirmed.

Appeal dismissed.