Citation: 2008 TCC 427
Date: 20080908
Docket: 2006-3317(IT)G
BETWEEN:
CLAUDE DALPHOND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
When the appellant
filed his income tax return for the 2000 taxation year, he reported, inter
alia, the $277,875 taxable capital gain arising from the disposition of
50,000 shares in the company Tigertel, and in computing his taxable income he
claimed a capital gains deduction for qualified small business corporation
shares under subsection 110.6(2.1) of the Income Tax Act ("the
Act") in the amount of $277,875.
[2]
On June 28, 2001, the
Minister of National Revenue ("the Minister") made an initial
assessment with regard to the appellant, which allowed, inter alia, the
deduction, in the computation of his taxable income, of $223,088 as capital
gains from the disposition of qualified small business corporation shares.
[3]
Following an audit by the
Ministère du Revenu du Québec, the Minister was informed that during the 1999
taxation year the appellant held shares in Contour Telecom, and that during
that same year, Contour Telecom merged with Tigertel. After the merger, the new
Tigertel company became a wholly-owned subsidiary of the American public
company Applied Digital. As a result, Tigertel shares could not be considered
to be shares in a Canadian-controlled private corporation, and consequently the
disposition of the Tigertel shares by the appellant in January 2000 did not
qualify for the capital gains deduction claimed under subsection 110.6(2.1)
of the Act.
[4]
The Minister therefore
made adjustments for the 1999 and 2000 taxation years to take into account
Tigertel's merger with Contour Telecom in 1999. The following adjustments were
made.
For the 1999 taxation year:
(i) As a result of the
merger of the companies in 1999, the Minister determined a taxable capital gain
of $163,500 arising from the disposition by the appellant of the shares he held
in Contour Telecom, and allowed a $163,500 capital gains deduction for
qualified small business corporation shares;
For the 2000 taxation year:
(ii) The Minister, using
a higher adjusted cost base, computed a taxable capital gain arising from the appellant's
disposition of his Tigertel shares on January 10, 2000;
(iii) The appellant was
allowed no capital gains deduction for the 2000 taxation year because the
shares that were disposed of were not qualified small business corporation
shares.
[5]
Accordingly, on
February 25, 2005, the Minister reassessed the appellant for the 2000 taxation
year outside the normal reassessment period, determining a $90,639 taxable
capital gain and disallowing the $223,088 capital gains deduction for qualified
small business corporation shares.
[6]
The appellant served a
notice of objection to the reassessment for the 2000 taxation year on the
Minister on April 20, 2005. On August 25, 2006, the Minister confirmed the
reassessment, hence this appeal.
[7]
The only issue in this
appeal is whether the Minister was justified in reassessing the appellant for
the 2000 taxation year outside the normal reassessment period in order to determine
a $90,639 taxable capital gain and disallow the $223,088 capital gains
deduction for qualified small business corporation shares on the ground that
the Tigertel shares were not shares in a Canadian-controlled private
corporation and were not deductible under subsection 110.6(2.1) of the
Act.
[8]
The provision of the
Act under which the Minister may reassess a taxpayer outside the normal
reassessment period is subsection 152(4), which reads as follows:
152(4) Assessment and reassessment
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 . . .
.
[9]
The appellant retired
in 2000 after a career of some 30 years as pension plan manager at the STM. He
held a bachelor's degree in business from the École des Hautes Études
Commerciales de Montréal and was awarded a prize in economics during his
career.
[10]
As manager of the
pension plan, he was responsible for managing investment income for nearly
3,500 retirees. He worked with a team of managers, hired actuaries and made
sure that investments were diversified. It seems that his involvement was
profitable, since the retirement fund's assets grew from $30 million to
$2.5 billion under his management.
[11]
On a personal level,
the appellant began managing his own portfolio in 1995. The appellant has
always had a personal portfolio. In fact, he said that he was familiar with all
that because that was his job. Through brokers, he began to purchase shares in
various companies. This was the era of what he called "media
technologies", which he characterized as call centre types of thing.
Contour Telecom Management Inc. was one that seemed promising, and so in 1997
and 1998 he purchased over 200,000 shares in Contour Telecom. In total, he
purchased 233,000 shares between May 28, 1997, and October 26, 1998. The
details are as follows:
May 28, 1997 10,000
shares purchased
May 29, 1997 10,000
shares purchased
June 9, 1997 7,000
shares purchased
July 23, 1997 11,000
shares purchased
July 29, 1997 10,000
shares purchased
October 15, 1997 10,000
shares purchased
March 4, 1998 50,000
shares purchased
March 30, 1998 100,000
shares purchased
October 26, 1998 25,000
shares purchased
January 13, 1997 25,000
shares sold
In 1997
8,000 shares sold
On January 13, 1999, he sold 33,000 shares, and so at
that point he held a total of 200,000 shares.
[12]
The Contour Telecom
shares were all purchased through brokers at the Royal Bank of Canada Financial
Group or Canadian Investors Protection Fund. Apparently a Mr. Leblanc had spoken
to the appellant about Contour Telecom. Mr. Leblanc is a manager and
specializes in building portfolios of small and medium-sized businesses. The shares
of Contour Telecom were traded on the Canadian Dealing Network (CDN) and the CDN
is not listed on the stock exchange. The companies whose shares are traded by the
CDN are thus not considered to be public corporations for the purposes of the
Act. Contour Telecom was therefore a Canadian corporation.
[13]
In September 1999,
Contour Telecom and Tigertel merged. The appellant apparently heard the news
from Mr. Leblanc. According to the appellant, that event did not make the
headlines. The outcome was that the 200,000 Contour Telecom shares became
50,000 Tigertel shares, but the appellant said he did not ask himself any questions
about this. He added that if there were Americans involved, he was not made
aware of it. However, the appellant acknowledged that he received some 30
documents from various companies and that he may have received documentation
concerning the merger, but he did not read everything. According to the appellant,
the period in question was around New Year 2000, and in that context, events unfolded
in rapid succession.
[14]
In November 1999, the appellant
received an offer to purchase his 50,000 Tigertel shares, and on January 10,
2000, he sold his shares, realizing a rather substantial gain.
[15]
The appellant filled
out his own income tax returns. He testified that he followed the form line by
line and consulted the guide. He said he could teach those whose job it is to
prepare tax returns a thing or two and did not see why he would pay specialists
to prepare his.
[16]
The appellant testified
that he relied on an article published in the Globe and Mail in
September 1999 in choosing the tax treatment for his sale of Tigertel shares. The
article said that Contour Telecom was a Canadian corporation, which made the
sale eligible for a capital gains exemption of up to $500,000. He had kept the
article in his files ever since it was published, and on consulting the guide when
preparing his 2000 income tax return he believed he was entitled to that
exemption. He also testified that until the sale of his Tigertel shares he knew
nothing about that company, because he had never received anything from Tigertel.
However, he received quarterly reports on his investments from Mr. Leblanc.
[17]
The appellant's tax
return was filed in evidence. On line 127 of the return, where taxable capital
gains are entered, it is indicated that Schedule 3 is to be completed and attached. The appellant
did not complete Schedule 3, and instead submitted a sheet attached to his
return on which he showed the sale of the Tigertel shares and the gain from the
sale. He said that most of the time he never completed Schedule 3 because
it did not have enough space and he had been doing it his way for a number of
years. The appellant said that he consulted the guide, which informs the reader
about the capital gains deduction that may be claimed at line 254. Line
254 of the guide refers to the capital gains deduction for gains realized on
the disposition of qualified small business corporation shares.
[18]
The respondent filed in
evidence form T657, used for calculating the capital gains deduction for
the 2000 taxation year. The Canada Revenue Agency recommends using the form if
a taxpayer has disposed of qualified farm property or qualified small business
corporation shares. The form also contains important information for the
taxpayer, such as the information that if a taxpayer has investment income, he
or she should complete another form, form T936, Calculation of Cumulative Net
Investment Loss (CNIL) to December 31, 2000. The appellant could not say
whether he had read form T657. He did not use it because, in his opinion,
everything was transparent. He also admitted that he did not use the other
form, form T936. He said he had prepared his return methodically.
[19]
When questioned about
his return, he acknowledged that he had not calculated his taxable income on
line 260, preferring to leave it to the Department of Revenue to finalize the
calculations and determine it to be $227,075.
[20]
When Revenu Québec did its
audit, the appellant was informed, on April 1, 2004, that he was not
entitled to that deduction on the ground that the Tigertel shares were not
shares in a Canadian-controlled private corporation. In his reply, the appellant
requested time to do his own research and consult a specialist, who he said
then confirmed this to be the case.
[21]
The respondent called
the Revenu Québec auditor, who explained his work, and in particular the result
of the audit. It was after a discussion with the appellant's representative
that adjustments were made for 1999 and 2000; the first adjustment concerned
the tax consequences of the merger and the second concerned the exemption.
Revenu Québec also obtained a waiver from the appellant so that it could assess
him after the normal assessment period. The auditor pointed out that the appellant's
case was complex but said that the deduction of a substantial loss reported by
the appellant with respect to one of his investments was rather unusual in view
of the application of the criteria for allowing the capital gains exemption for
the Tigertel shares. The auditor also considered the question of whether the
taxpayer had reported all of his income. The case was then forwarded to Revenue
Canada.
[22]
The appellant's file
was given to Maryse Lévesque, a reviewing officer at the Canada Revenue Agency
office. She reviewed the appellant's return, his capital gains and losses and
the exemptions claimed. She checked the schedules and saw that Schedule 3
had not been completed. She testified that if Schedule 3 had been completed, it
would have been easy for her to see errors in the figures and to see
calculations that were different. She also realized that the deduction claimed
was a large amount and that the fact that it was not applicable was going to
increase the taxpayer's capital gain substantially.
[23]
She therefore prepared
a draft assessment and sent the appellant and his representative a letter, but
received no response from them. She therefore assessed the appellant
accordingly.
[24]
The issue is therefore
whether the appellant made a misrepresentation that was attributable to neglect,
carelessness or wilful default in filing his return for the 2000 taxation year.
If so, the Minister would be authorized to assess after the normal assessment
period. The burden is on the Minister to prove this, on a balance of
probabilities.
[25]
The objective of
subsection 152(4) was summarized very well by Strayer J.A. of the
Federal Court of Appeal in Nesbitt v. Canada, [1996] F.C.J. No. 1470, in
which he wrote, at paragraph 8:
. . . It appears to me that one purpose of subsection 152(4) is to
promote careful and accurate completion of income tax returns. Whether or not
there is misrepresentation through neglect or carelessness in the completion of
a return is determinable at the time the return is filed. A misrepresentation
has occurred if there is an incorrect statement on the return form, at least
one that is material to the purposes of the return and to any future
reassessment. It remains a misrepresentation even if the Minister could or
does, by a careful analysis of the supporting material, perceive the error on
the return form. It would undermine the self-reporting nature of the tax system
if taxpayers could be careless in the completion of returns while providing
accurate basic data in working papers, on the chance that the Minister would
not find the error but, if he did within four years, the worst consequence
would be a correct reassessment at that time.
[26]
There is no doubt that
in this case there was a misrepresentation by the appellant when he filed his
tax return for the 2000 taxation year. Not only were there incomplete calculations
and a schedule that was not completed, but, first and foremost, there was an
ineligible deduction of capital gains arising from the disposition of shares.
Was that an error made in good faith in this case?
[27]
Counsel for the appellant
argued that his client had acted with care and diligence in filing his tax
return for the year in question. His was an honest mistake relating to the characterization
of proceeds, that is, his Tigertel shares were not eligible for the exemption. Counsel
went on to say that the appellant is an educated taxpayer who believed he was
entitled to the exemption in light of the advice he was given by Mr. Leblanc
and the article published in the Globe and Mail. He added that the Act
does not require that a taxpayer consult an accountant to prepare his or her
tax return, nor does it require a taxpayer to do research on the Internet and seek
information about the control of the corporation in which he or she holds
shares. In the case at bar, the appellant had no reason to believe that
Tigertel was controlled by American interests because the merger of Contour Telecom
and Tigertel had been carried out by third parties and was beyond the appellant's
control.
[28]
Counsel for the respondent,
for his part, argued that the appellant's training and work experience in
investment management supported the argument that he was negligent. His
training in economics and his career experience put the appellant in a position
to be able to keep up with events and made him an informed taxpayer. In this
case there was a substantial capital gain, and so the issue, that is, whether
the taxpayer is eligible for the exemption, is an important one. Counsel for
the Respondent also argued that the appellant failed to follow the guide or
complete Schedule 3, which the Agency uses to enter data in its system,
and that what we have in this case is not a mere error. In conclusion, he
submitted that the appellant had not been diligent in his handling of his tax
affairs.
[29]
The judgment cited in
nearly all decisions on this issue is Venne v. Canada, [1984] F.C.J. No.
314, in which Strayer J., then of the Federal Court, summarized the powers
of the Minister under subsection 152(4) of the Act as follows:
I am satisfied that it is sufficient for the Minister, in order to
invoke the power under sub-paragraph 152(4)(a)(i) of the Act to show that, with
respect to any one or more aspects of his income tax return for a given year, a
taxpayer has been negligent. Such negligence is established if it is shown that
the taxpayer has not exercised reasonable care. This is surely what the words "misrepresentation
that is attributable to neglect" must mean, particularly when combined
with other grounds such as "carelessness" or "wilful
default" which refer to a higher degree of negligence or to intentional
misconduct. Unless these words are superfluous in the section, which I am not
able to assume, the term "neglect" involves a lesser standard of
deficiency akin to that used in other fields of law such as the law of tort.
See Jet Metal Products Limited v. The Minister of National Revenue (1979), 79 DTC 624, at 636-37 (T.R.B.).
[30]
Thus, all Canadian
taxpayers have a duty to exercise reasonable care and to ensure that when they
file their tax returns, the information given in those returns and in the
documents is accurate and complete and discloses all of their income. Indeed,
taxpayers attest to this by signing their declarations. It is therefore the
breach of that duty that constitutes the neglect or carelessness referred to in
subsection 152(4) and allows the Minister to assess outside the normal
assessment period. The misrepresentation must relate to a fact that is material
to the purposes of the return and to any future reassessment, as
Strayer J.A. said in Nesbitt, supra.
[31]
In this case, the appellant
signed his tax return on April 27, 2001, nearly 14 months after the
sale of his Tigertel shares. He said that in claiming the deduction he had
relied on what Mr. Leblanc had said and on an article published in the Globe
and Mail in September 1999 that he had kept until he prepared his return.
He stated, moreover, that he was unaware that Tigertel was a wholly-owned
subsidiary of an American public corporation, Applied Digital Solutions Inc.
[32]
I had before me a
taxpayer who had spent his entire professional career managing pension funds
and making various investments in the performance of his duties, and who had for
a number of years been managing his own investment portfolio. It is hard to
believe that a person working in this field would not know the ins and outs of
certain investments, and particularly the tax benefits or tax consequences of
those investments. There can be no doubt that purchasing qualified small
business shares sometimes involves a high risk, but let us not forget that the
incentive provided by the deduction in subsection 110.6(2.1) of the Act makes
them very attractive all the same.
[33]
In my opinion, when the
appellant acquired all his shares in Contour Telecom, he was not unaware of the
deduction available in the event that he realized a gain on the disposition
thereof. It is hard to believe that having realized such a substantial gain on the
disposition of his Tigertel shares, the appellant did not wonder at all, between
the time of that disposition, January 10, 1999, and his signing his tax return
on April 27, 2001, whether it was eligible for that deduction. The appellant
is by no means a neophyte in this field.
[34]
The appellant chose to
prepare his tax return for the 2000 taxation year himself, and that was his
choice. He testified that he was as competent as a tax preparer and did not see
why he would pay specialists, and that was also his choice. However, the appellant
must provide all of the information required and complete the tax return form
and accompanying schedules and do the calculations. Even though the appellant maintains
that he prepared his return line by line following the guide, it is obvious in
this case that he did not do so. It is not sufficient, in preparing a tax
return, simply to give the CRA the information and leave it to the CRA to do
the calculations, or to claim deductions without worrying about whether one is actually
entitled to them.
[35]
In my opinion, the appellant
was not unaware that, in order for him to be entitled to the deduction, his
shares had to be qualified shares, and if he was in possession of the Globe and
Mail article when he prepared his tax return, he would certainly have seen
that he had to have held the shares for two years before he could claim the
deduction under subsection 110.6(2.1). Yet the majority of his shares,
175,000 in total, were purchased on or after March 4, 1998.
[36]
It is the duty of all
taxpayers to prepare their tax returns with care, providing accurate and
complete information, and they must moreover attest to having done this by
signing their returns. When taxpayers claim a deduction, they must do more than
simply think they are entitled to it, particularly when the benefit obtained
through the deduction is substantial. In this case, a simple check would have
enabled the appellant to see that the consequence of the merger was that his
new shares did not qualify under subsection 110.6(2.1) of the Act.
[37]
I reiterate
Strayer J.A.'s comments in Nesbitt, supra, which I have reproduced
in paragraph 25 of these Reasons, and I find that in the present case there
was misrepresentation by the appellant when he filed his tax return for the
taxation year in question in that he claimed a deduction to which he was not
entitled, and that this misrepresentation was attributable to neglect on his
part. In my opinion, if taxpayers are required to make a reasonable effort to report
all of their income, the same is true when it comes to claiming deductions.
[38]
The appeal is dismissed
with costs.
Signed at Montreal, Quebec, this 8th day of September 2008.
"François Angers"
Translation certified
true
on this 30th day
of June 2009.
Erich Klein, Revisor
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