Citation: 2011 TCC 108
Date: 20110307
Docket: 2008-4065(IT)G
BETWEEN:
SOLANGE PALARDY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Hogan J.
I. Introduction
[1]
This is an appeal by
Solange Palardy (the appellant) from a reassessment made December 3, 2007,
pursuant to the Income Tax Act (the ITA) for the 2003 taxation year.
[2]
In making the
reassessment, the Minister of National Revenue (the Minister) included a gain
of $69,111 in the appellant's income as business income from the sale of a
house located in Sherbrooke.
[3]
The appellant submits
that the assessment is incorrect because the gain resulted from the disposition
of a house that was her principal residence. Paragraph 40(2)(b) of
the ITA provides a calculation that can reduce a capital gain resulting from
the sale of a taxpayer's principal residence to zero. However, this provision only
applies if the gain is on a capital account. The Minister submits that the gain
constitutes a gain in the nature of trade. The appellant submits that the
respondent has admitted that the assessment had been made after the normal
assessment period and it is for the respondent to show, in accordance with
subparagraph 152(4)(a)(i), that the appellant made a
"misrepresentation that is attributable to neglect, carelessness or wilful
default" in order for the Minister to reopen the 2003 taxation year. The
appellant submits that the issue in this case falls in a grey area and she
should be given the benefit of the doubt.
II. Summary of facts
[4]
To determine the
appellant's tax payable for the 2003 taxation year, the Minister relied on the
following presumptions of fact (paragraph 8 of the Reply to the Notice of
Appeal):
[translation]
a)
The appellant's principal residence during the
year in question was 657 Patricia Street, in Sherbrooke.
b)
During the same period, the appellant was also the
owner of a secondary residence located at Lac Aylmer, in Sherbrooke.
c)
The appellant has knowledge of and experience
with property transactions.
d)
The appellant's son, Marc Cameron, has been
working in the residential construction field for many years.
e)
On April 29, 2002, the appellant purchased a lot
on Alfred‑Desrochers Street, in Rock Forest for
$22,000 (the lot).
f)
The appellant built a residence on the lot, with
the address 3593 Alfred‑Desrochers Street (the property).
g)
The residence was built in part by her son for
free, and in part by third party contractors.
h)
Construction of the residence was completed in
the fall of 2002.
i)
On December 16, 2002, the appellant
transferred, by deed of gift, half of the lot on Alfred‑Desrochers
Street to her son.
j)
The appellant sold the property on August
27, 2003, for $155,000.
[5]
To reach the conclusion
that the appellant had made a misrepresentation attributable to neglect,
carelessness or wilful default when she filed her income tax report for the
2003 taxation year, the Minister states that he relied on the following facts
(paragraph 9 of the Reply to the Notice of Appeal):
[translation]
a)
The appellant has experience in, and knowledge
of, real estate transactions.
b)
The appellant's gain represents 65% of her
taxable income for the year in question.
A. Appellant's testimony
[6]
The appellant explained
that it was her dream to build a residence on the shore of the Magog River in Sherbrooke. To do so,
she purchased a large empty lot at 3593 Alfred‑Desrochers Street. The appellant testified that family members
volunteered to build the residence. Her son, Marc Cameron, had experience
building houses and he contributed the most time building the appellant's
residence. Other family members helped her son complete the job.
[7]
The appellant stated
that from the start of the construction work, she was harassed by the
Commission de la construction du Québec (the CCQ) that claimed she was working
as a general construction contractor without the appropriate licence. The CCQ
wanted to stop the construction on the basis of violations of the relevant
regulations. The appellant was required to hire a lawyer to defend herself and
had to pay $10,000 in fees.
[8]
During the
construction, she decided to divide the lot into two parcels and give one to her
son, Marc Cameron. She explained that it was a dream of hers to live in a
building next to her son's so she could see her grandchildren every day. After
moving into her new house and living there for a while, she now claims that, in
view of her physical and financial capacities, she could no longer continue
living in that house. As a result, she decided to sell the property and go back
to live in the part of the duplex she previously inhabited. She had rented her
former residence to a medical student for a short period of time so she was
able to move back at the end of the lease.
B. Jacques Savard's
testimony
[9]
The testimony of
Jacques Savard, auditor for the Canada Revenue Agency (CRA), is
essentially found in his memo under Exhibit I-4, Tab 4. Counsel for the
respondent invokes this interpretation of the facts as a basis for his argument
that the assessment should stand. The summary of facts states:
[translation]
The activity of buying and selling
property is considered a "business" pursuant to the definition of the
term at subsection 248(1). As a result, the profit of $69,111 you made
upon the sale of the residence located at 3593 Alfred‑Desrochers
Street in Sherbrooke, is considered business income pursuant to subsection 9(1).
This amount was therefore included in your income pursuant to section 3.
III. Issues
[10]
Was the Minister
justified in making a reassessment for the 2003 taxation year after the normal
assessment period?
[11]
Was the Minister
justified in adding business income of $69,111 to the appellant's income for
the 2003 taxation year?
IV. Analysis
[12]
The issue is whether,
in her income tax report for the 2003 taxation year, the appellant made a
misrepresentation attributable to neglect, carelessness or wilful default such
that the Minister may, pursuant to subparagraph 152(4)(a)(i) of the
ITA, make the assessment in question after the expiry of the normal
reassessment period. Subparagraph 152(4)(a)(i) provides:
152(4) Assessment or reassessment [period of limitation] — 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
…
[13]
Under this provision,
aside from a misrepresentation, the Minister must also show on a balance of
evidence that the misrepresentation is attributable to neglect, carelessness or
wilful default by the appellant.
[14]
The respondent submits
that the appellant made a misrepresentation by treating the profit from the
disposition of the property in question as a capital gain rather than a taxable
income gain. The minister relied on the fact the appellant had knowledge of
property operations and that the gain represents 65% of the appellant's income.
[15]
Regarding immovable property,
the Act does not provide any criteria to distinguish a capital gain from
business income resulting from a commercial transaction. Each case is unique
and we must review the circumstances surrounding it to address the issue. In Happy
Valley Farms Ltd. v. The Queen,
the Court considered the following factors in determining whether the sale of
real property was income:
a)
The nature of the
property sold and how the taxpayer used it;
b)
The length of the
ownership period;
c)
The frequency or number
of other similar transactions by the taxpayer;
d)
The work expended on or
in connection with the property;
e)
The circumstances
giving rise to the sale of the property; and
f)
The taxpayer's motive
regarding the sale of the property at the time of purchase.
[16]
The CRA auditor focused
on the second and third factors to justify his findings. Even if the
circumstances that led to the sale could be interpreted as supporting the
respondent's position, the real question is whether subparagraph 152(4)(a)(i)
applies to a taxation year that is otherwise time-barred when the facts
considered incorrect are presented because the taxpayer interpreted the
circumstances to favour the non-taxation theory since they fall in the grey
zone of tax law. I believe, in view of the case law, this question can be answered
in the negative where the taxpayer's position is not unreasonable.
[17]
The starting point is Regina
Shoppers Mall Limited v. The Queen.,
a Federal Court case, where the central issue was whether the taxpayer
should have included the profit of the sale of a lot in its income tax return
as a capital gain or as income. The taxpayer had included it as a capital gain,
and the Minister found that there was a misrepresentation that allowed him to
assess after the normal period. Addy J., at paragraph 10 of the decision,
explained that when a taxpayer files an income tax return on what he believes
to be the proper method, after thoughtful, deliberate and careful assessment,
there can be no misrepresentation. This ruling was accepted by the Federal
Court of Appeal at paragraph 7 of its decision.
[18]
Moreover, at paragraph
15 of his judgement, Addy J. explained that the legislation does not impose on
taxpayers a duty to report in a manner which the Minister prefers. If the
taxpayer carefully considers his position and does not attempt to deceive the
Minister, there is no misrepresentation.
[19]
Petric v. The Queen shows that the courts have broadly
interpreted the principle established in Regina Shoppers Mall. This case
was not about an issue of capital gain or income, but the fair market value of
the property. Madam Justice Lamarre stated:
38 …The matter of
fair market value is a controversial issue, to be settled on the basis of the
interpretation of the facts in evidence, as is the question of whether proceeds
of disposition should be characterized as income or as a capital gain (Regina
Shoppers Mall Limited) or of whether corporations are associated (1056
Enterprises Ltd.)…
[20]
And later, she added:
40 Although
fair market value is ultimately a question of fact to be resolved by the trier
of fact, it is mostly a question of opinion answered by analysing different
methodological approaches. Certainly the Minister is entitled to disagree
with a taxpayer's view of fair market value and can reassess, within the
limitation period, on the basis of his own evaluation. 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.
[Emphasis
added]
[21]
In Savard v. The
Queen,
the Tax Court of Canada stated again that taxpayers have the right
to disagree with the Minister in their interpretation of the Act, and that will
not necessarily be considered as a misrepresentation. Tardif J. stated:
78 Does a
person have to include, when he or she fills out a tax return, everything that
might be income, based not on his or her own analysis but on speculation as to
what the Agency might want to attribute to him or her? I do not believe so.
In this case, there was enough information to justify the interpretation
adopted by the Appellant: that he had no obligation to declare the payments of
fees by his employer as taxable benefits. In fact, the debate as to who really
benefited from the services for which the fees were paid is clear evidence of
how complex the case was and how much confusion surrounded it.
[Emphasis
added]
[22]
Recently, in Chaumont
v. The Queen,
the taxpayer's interpretation of the legislation was clearly incorrect, but
since he had acted in good faith, the Court held that there had been no
misrepresentation. Tardif J. stated:
15 Although
the appellant's submissions were unusual and even surprising, they were neither
far-fetched nor unreasonable enough for it to be concluded that he made a
wilful default or mistake with the intent to escape from his Canadian tax
obligations.
16 Firstly,
he expressed his objection, and secondly, he took initiatives to show that his
allegations had merit, while taking into consideration the fact that certain
income, specifically, pension income paid to a citizen who lives in a country
other than the one that pays the pension, is not taxed.
…
18 To
conclude that the appellant's conduct was a wilful default or that it
constituted a sufficient error to permit the Minister to assess beyond the
normal period, would affect any taxpayer's right to contest the merits of an
assessment, and would cause the limitation period imposed by Parliament to be
essentially theoretical.
[23]
In the light of the
above-noted case law, it appears that the adoption, by the taxpayer, of a
thoughtfully considered position that contradicts the Minister's position does
not in itself mean that he has made a misrepresentation that would allow the
Minister to assess outside the normal period.
[24]
I do not believe the appellant's
interpretation of the facts can be considered unreasonable. First, I think the
CRA auditor exaggerated a great deal about the appellant's real estate
experience. Mr. Savard noted that the appellant told him she had
previously been a real estate agent. The appellant confirmed this, but stated
that this was back in 1978 when she was a newlywed. When the building in
question in this appeal was sold, the appellant was around 60 years old. She
had stopped working as a real estate agent at least 25 years earlier. Since
then, many things have changed in the real estate field and in tax matters. The
appellant's subject knowledge is rather far in the past.
[25]
Additionally, the
respondent exaggerated the taxpayer's experience with buying and selling real
estate. The evidence shows that the appellant was the owner of a duplex on Patricia Street in Sherbrooke. This building had been acquired more than
40 years earlier. The appellant lived in the apartment on the main floor, from
the acquisition date to the date she moved into the building in question in this
case. During the entire period, this apartment was the appellant's principal
residence. The appellant was also the owner of a cottage in the same region on
the shore of Lake Aylmer
for at least 40 years. Aside from the building in question in the present case,
the only other property operation the appellant made was to purchase a 15-unit
apartment building. The appellant stated that she purchased this building to
generate income since her husband died when she was only 55 years old. The
appellant has not worked since she was 50 years old. At the time her husband
died, the estate was made up of the buildings on Patricia Street and at Lake
Aylmer. The building on Patricia Street provided rental income of around $400 a month, a fact
the appellant did not contest. The appellant also received liquid assets
totalling $30,000. This was not a sufficient annual net income that would meet
the appellant's needs. Her goal was to sell the building on Patricia Street to help finance the purchase of the 15-unit building
and finance the construction cost of the building in question in the present
case. According to the appellant, the 15-unit building provided her with
adequate income during the period she was not yet eligible for her old age
security. This explanation is completely reasonable in the light of the
appellant's circumstances; she could rely on her son's help with maintenance of
the multiplex building and rent collection.
[26]
What was the change
that led to the sale of her residence on Alfred-Desrochers Street? The appellant explained that the dream she had of
living near her son and her grandchildren was harder than her physical and
financial abilities allowed. The appellant wanted to divide the vacant lot she
had purchased into two and sell one of the lots to finance the construction of
her building. Part of the lot was very steep which complicated the construction
of the building; moreover, the lot was not suitable for a family with children.
The appellant finally gave the lot to her son, I believe in part to thank him
for the construction services he had provided. Therefore, the appellant's
operation was not in the nature of trade. This is also true in part because of
the manner in which the appellant financed the acquisition of the building. The
appellant testified that the harassment the by the CCQ spoiled her dream. I
have no trouble believing that a 60-year-old may have found it difficult to
oversee this project. The evidence that indicated the appellant had to defend
herself against the CCQ actions was not challenged. This experience may have
left the appellant bitter. It is not unreasonable for her to have considered
the profit as a capital gain, considering the failure of her project to live in
the residence on Alfred-Desrochers
Street in the long term.
[27]
I must review the last
point raised by the respondent. The CRA auditor submits that the appellant did
not live in the house in question or did not live in it long enough for it to
be considered her principal residence. On this, I note that Interpretation
Bulletin IT-120R6, "Principal Residence" published by the CRA on July
17, 2003, comments as follows on the issue:
5. Another requirement is that the
housing unit must be "ordinarily inhabited" in the year by the taxpayer
or by his or her spouse or common-law partner, former spouse or common-law
partner, or child.
The question of whether a housing unit is ordinarily inhabited in
the year by a person must be resolved on the basis of the facts in each
particular case. Even if a person inhabits a housing unit only for a short
period of time in the year, this is sufficient for the housing unit to be
considered "ordinarily inhabited in the year" by that person. For
example, even if a person disposes of his or her residence early in the year or
acquires it late in the year, the housing unit can be considered to be
ordinarily inhabited in the year by that person by virtue of his or her living
in it in the year before such sale or after such acquisition, as the case may
be. Or, for example, a seasonal residence can be considered to be ordinarily
inhabited in the year by a person who occupies it only during his or her
vacation, provided that the main reason for owning the property is not to gain
or produce income. With regard to the latter stipulation, a person
receiving only incidental rental income from a seasonal residence is not
considered to own the property mainly for the purpose of gaining or producing
income.
[Emphasis
added]
[28]
This confirms the state
of the law on the subject: even if a person occupies a building for a short
time, it can be considered his or her principal residence. The respondent
wanted to show using circumstantial evidence that the appellant did not occupy
the building. However, the respondent does not challenge the fact that the
appellant leased the residence she occupied on Patricia Street to a medical student. She challenges the duration of
the rental. I find the appellant credible on this point. I infer from the
appellant's actions that she was intimidated by the audit procedures and the
process in the courtroom. I feel that such is the explanation for the
appellant's hesitations. Moreover, the respondent noted that the building was
not insured, relying on the fact the auditor verified with the insurance
company Industrial Alliance. The appellant's building on Alfred-Desrochers Street was mortgaged and I have no trouble
believing that the financial lending institution required the building to be
insured. The appellant's explanation that she had been required to take out
insurance with another company is very plausible because insurance companies
are not always willing to take higher risks, as is the case during the
construction of a building, especially for the same premium.
[29]
Lastly, the auditor
insisted on two other facts. First, he noted the lack of telephone lines at the
new residence. The appellant explained that she used her cellular phone. This
is plausible because many people now prefer cellular phones to land lines, as
they are a more convenient means of communication. Second, he noted that in the
notarized contract of sale for the building the appellant indicated that the Patricia Street residence was her principal residence. I note that
the Interpretation Bulletin recognizes that a taxpayer may have more than one
principal residence. A secondary residence may be considered a principal
residence under the legislation. Also, it is very likely that the notary put
this information in the contract of sale, which appears to be of little
importance. The buyer and seller were much more concerned with the conditions
of the operation, in particular the price and payment terms. In the end, the
benefit of the doubt should be given to the appellant because she is a credible
witness.
[30]
For all these reasons,
the appeal is allowed, the assessment is vacated and the costs awarded in
favour of the appellant.
Signed at Ottawa, Canada, this
7th day of March 2011.
"Robert J. Hogan"
on this 9th day of
May 2011.
François Brunet,
Revisor
Email this Content