Adams v. The Queen, 96 DTC 1737, [1996] 3 CTC 2592 (TCC) (Informal Procedure)

Bowman J.T.C.C.: — These appeals were heard immediately following those of Mike Adams (93-761(IT)I) and Adams Glass Ltd. (93-762(IT)I). The years involved are 1986, 1987 and 1988.

At the opening of trial counsel for the respondent informed me that the Crown was prepared to concede a number of points, as follows:

1. With respect to shareholder’s loan accounts in the 1987 taxation year, the Crown concedes that the amount of $39,527.11 included in the appellant’s income should be reduced by $6,943.00 to $32,584.11 and that the penalties should be reduced accordingly.

2. Similarly, for 1988 the amounts included in income in respect of shareholder loan accounts should be reduced by $4,000.00 from $27,306.48 to $23,306.48, with a corresponding reduction of the penalties.

3. The claim for the disability tax credit for 1986, 1987 and 1988 under section 118.3 is to be allowed.

4. Professional golf losses for 1987 and 1988 in the amount of $10,982.24 and $3,000.00 respectively is to be allowed.

5. The penalty on a CP survivorship benefit in the amount of $3,772.98 is to be deleted.

These adjustments will of course result in a reduction of interest payable and, to the extent that penalties were imposed in respect of any of those amounts by which there are to be reductions, they should also be deleted.

The remaining issue is the entitlement of the appellant to a lifetime capital gains exemption on gains realized by him on real estate, stock and currency transactions.

In 1986, 1987 and 1988 the appellant realized gains (or losses) on as follows:

In filing his income tax returns for those years the appellant did not include these amounts, as well as certain other amounts, in his income as declared. On assessing the Minister included the real estate gains in income and the currency and stock gains as capital gains and imposed penalties under subsection 163(2).

The appellant, along with his brothers Mike and Meshal and two companies, was prosecuted under section 239 of the Income Tax Act and was convicted in respect of certain items. In the Provincial Court of British Columbia the Honourable Judge P.A. Hyde held that the gains on the appellant’s real estate transactions were on capital account and held that if they were on capital account they would be exempt.

In his reasons for judgment Judge Hyde said:

I would exclude the monies involved in the real estate transactions of Nick Adams. On the evidence of Mr. Schmidt’s advice to Nick of the lifetime capital exemption no tax would be payable if the transactions were characterized as a capital transaction. I am not satisfied the Crown has proved beyond a reasonable doubt that the real estate transaction monies were incomes in themselves.

The appellant appealed to the Supreme Court of British Columbia. Mr. Justice R.A. McKinnon of that court in his reasons for judgment stated at pages 11-13:

The trial judge had a reasonable doubt with respect to the issue involving real estate transactions. The appellant argues that since the evidence on that issue applied equally to the issue of currency futures and stock gain, he should be absolved from any criminal responsibility there as well.

The doubt entertained by the trial judge on that issue arose as a result of the evidence of the accountant, Mr. Schmidt. In his reasons the trial judge made specific reference to that evidence and concluded that, insofar as the real estate transactions were concerned, he could not find guilt beyond a reasonable doubt. The transcript indicates a general discussion about what might have been in the appellant’s mind regarding his obligation to report income derived from capital gains. Page 143 of the transcript for November 1, 4, and 5 is taken up entirely with the topic of capital gain. In cross examination of Mr. Schmidt counsel asked the following question:

Line 30 : And you would have told him that a gain realized on sale of shares or (my emphasis) real estate held as capital property, if the — would not be taxable because the capital gains exemption would apply?

A. I would way yes.

I accept that there was no specific reference to currency futures, and only passing reference to stocks, but what was discussed was the exemption from tax on certain types of investments, namely investment attracting capital gain. No one disputes that income derived from investment in currency futures and stocks, in the context of Mr. Adams, would not or could not be a capital gain. It seems therefore, given the reasons of the Trial Judge, that if he had a reasonable doubt with respect to the real estate transactions, he must have had the same doubt for the stock and currency investments.

I will allow the appeal with respect to the finding on the stock and currency aspect but dismiss it with regard to the other issues. Counsel may appear at a convenient date to argue the effect of this upon the penalty.

The final reassessment treated the currency transactions, the real estate transactions and the stock transactions as being on capital account, and no penalties were imposed.

The Minister however refused to allow to the appellant the lifetime capital gains exemption under section 110.6. Subsection 110.6(6) read as follows:

Notwithstanding subsections (2), (2.1) and (3), where an individual has a capital gain for a taxation year from the disposition of a capital property and knowingly or under circumstances amounting to gross negligence

(a) fails to file a return of his income for the year within one year after the day on or before which he is required to file a return of his income for the year pursuant to section 150, or

(b) fails to report the capital gain in his return of income for the year required to be filed pursuant to section 150,

no amount may be deducted under this section in respect of the capital gain in computing his taxable income for that or any subsequent taxation year and the burden of establishing the facts justifying the denial of such amount under this section is on the Minister.

[For 1988 the subsection was amended to refer to subsection (2.1) but this is irrelevant to this appeal.]

Subject to the question of issue estoppel, which I shall deal with first, the question would be whether the respondent has established that the failure to report the capital gains was done knowingly or under circumstances amounting to gross negligence. I should note that, with respect to the real estate transactions, the very issue of their taxability was considered by Judge Hyde. I repeat what he said:

On the evidence of Mr. Schmidt’s advice to Nick of the lifetime capital exemption no tax would be payable if the transactions were characterized as a capital transaction.

He concluded that no tax would be payable “if the transactions were characterized as a capital transaction”. They were, in fact, characterized as a capital transaction by the subsequent reassessment.

In the cases of Mike Adams and Adams Glass Ltd. (court files numbers 93-761 (IT)I and 93-762(IT)I), decided concurrently with this case, I had to consider the question whether issue estoppel applied where four amounts, the taxability of which those appellants sought to challenge in this court, were included in the global amounts on which the appellants were prosecuted and convicted. The specific issues raised in this court in that case were, according to the record before me, not dealt with as separate, identifiable issues by the provincial court judge, but I concluded that they were fundamental to his finding of guilt and that therefore the doctrine of issue estoppel prevented me from reconsidering the issue.

Here, Judge Hyde dealt specifically with the question of the entitlement of the appellant to the lifetime capital gains exemption in respect of the real estate gains. A conviction for income tax evasion requires the existence of a number of elements, including taxability and mens rea. Judge Hyde appears to have put his exclusion of the real estate transactions on the basis that no tax would be payable, not on the basis of reasonable doubt as to mens rea.

For a taxpayer to claim the benefit of the lifetime capital gains exemption he or she must report the capital gain and claim the exemption.

That right is lost if the gain is not reported and the failure to report it is done knowingly or in circumstances amounting to gross negligence. The onus is upon the Crown to establish that the failure to report the gain was done either knowingly or under circumstances amounting to gross negligence.

The finding by Judge Hyde, which is based in part upon the evidence of the accountant Mr. Schmidt, as to the right of the appellant to the exemption, would appear to subsume a finding that the failure to report the gain was not done knowingly and was not attributable to gross negligence. There was certainly some evidentiary basis for his conclusion. Mr. Schmidt testified before me - and it appears from the decision of McKinnon J. that he said the same thing to Judge Hyde — that he had informed the appellant that capital gains were subject to the capital gains exemption. The appellant testified that he acted on the basis of the advice when, in the following years, he did not report the gains. This evidence, which is supported by that of Mr. Schmidt, would appear to make out a prima facie case that Nick Adams’ failure to report the gains was not done knowingly or in circumstances amounting to gross negligence — a case which the Crown, who had the onus of establishing the contrary, has not rebutted. Moreover, the Minister’s failure to impose a penalty in respect of these amounts under subsection 163(2) is inconsistent with the assertion that those very conditions (“knowingly or under circumstances amounting to gross negligence”) exist for the purposes of subsection 110.6(6) when they do not exist for the purposes of subsection 163(2). Accordingly, if it were for me to reconsider the decisions of Judge Hyde and McKinnon J. which it is not I would have held that the appellant was entitled to the exemption.

It is not, however, for me to decide. If I am to give any effect to the doctrine of issue estoppel and to the decision of the Federal Court of Appeal in Van Rooy v. Minister of National Revenue, (sub nom. Minister of National Revenue v. Van Rooy) [1988] 2 C.T.C. 78, 88 D.T.C. 6323 (F.C.A.), I cannot simply ignore the specific conclusion of Judge Hyde on the taxability of the gains on the real estate, reconsider the issue, and if I reach a different conclusion, substitute my own view. The same considerations that compelled me to refrain from acting upon my own conclusions of fact in the appeal of Mike Adams prevent me from considering afresh whether Nick Adams knowingly or under circumstances amounting to gross negligence failed to report the gains. It was essential to the British Columbia courts’ conclusion that he was not taxable that they should have concluded that the conditions to his non-taxability had been met. I shall not repeat the authorities cited in the Mike Adams appeal. I am of course cognizant of the fact that the test in a criminal prosecution differs from that in a civil appeal. “Gross negligence” and “wilfully” are obviously not coterminous.

Nonetheless the issues before Judge Hyde, McKinnon J. and before me are sufficiently similar on this point that to exclude the doctrine would require an unduly narrow and mechanical reading of the principles enunciated by the Federal Court of Appeal in Van Rooy.

So far as the currency gains are concerned, Judge Hyde did not deal with them specifically. Moreover, unlike the real estate gains, the Minister has, according to the pleadings, always treated these as being on capital account. I make no comment on whether speculation in foreign currencies is an activity giving rise to capital gains. That issue is not before me and the Minister and the British Columbia courts (both Judge Hyde and Justice McKinnon) have accepted that they are capital transactions. Justice McKinnon of the British Columbia Supreme Court has directed that the gains realized on the currency transactions be treated in the same way as the real estate transactions. I believe that I must treat this decision in the same manner as that in which I have treated the finding of Judge Hyde with respect to the real estate transactions. As a judge of the first instance, I must follow the principles enunciated by the Federal Court of Appeal and since the British Columbia Supreme Court has dealt with this very issue I should not at this stage ignore its disposition of the matter.

The appeals are allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment to give effect to these reasons and to the concessions made by the respondent. The appellant is entitled to his costs, if any.

Appeals allowed.