JAMES G. MULLEN,
HER MAJESTY THE QUEEN,
REASONS FOR JUDGMENT
V.A. Miller J.
In 1997, 1999 and 2001,
the Appellant received the amounts of $43,740, $1,952,540 and $472,177,
respectively, from the exercise of stock options which had been granted to him
by his employer, Bristol-Myers Squibb Co. (“BMS”). The Minister of National
Revenue (the “Minister”) determined that the Appellant had received a benefit
by virtue of his employment and included the above amounts in the Appellant’s
income. In accordance with paragraph 110(1)(d.1) of the Income Tax
Act (the “Act”), the Appellant was allowed stock option deductions
in the amount of $10,935, $488,135 and $236,089 in 1997, 1999 and 2001
respectively and the benefit included in his income was reduced to $32,805,
$1,464,405 and $236,089 respectively. The Appellant had not filed income tax
returns for 1997 and 2001 and the Minister assessed him pursuant to subsection
152(7) of the Act. With respect to the 1999 taxation year, the Minister
assessed the Appellant beyond the normal limitation period in accordance with
subsection 152(4) and he applied penalties pursuant to subsection 163(2) of the
Act. The Appellant appealed from those assessments.
Late filing penalties
were assessed for 1997 and 2001 but the Appellant has only appealed the
imposition of the late filing penalty for 2001.
These appeals were
heard on common evidence.
The witnesses at the
hearing were the Appellant and Paul Murphy, an international tax auditor with
the Canada Revenue Agency (“CRA”).
The question in the
1997 taxation year is whether the Appellant is taxable on the net amount of
$32,805 despite the fact that he was not resident in Canada in that year.
The question in the
1999 and 2001 taxation years is whether the Appellant was ordinarily resident
in Canada in those years.
I will first address
the issue raised for the 1997 year because the facts for this year are
generally agreed on by the parties. The parties disagreed on the application of
the law to those facts.
The Appellant is a
He was employed from
1980 to 1993, inclusive, by Mead-Johnson Canada,
a subsidiary of BMS, at its factory in Belleville, Ontario. During this period, the Appellant was promoted
several times and, by December 1993, he was the Director of Operations at the
In 1987, the Appellant
was nominated to receive stock options from BMS; and, on April 5, 1988, he was
granted 1,683 stock options which vested 25% each year and expired 10 years
from the date they were granted. The grant price was US$9.5683 per share and
there was no cost to the Appellant.
In 1993, BMS offered
the Appellant an assignment as the Director of Operations to supervise the
construction of its plant in Guangzhou, China. The assignment
was expected to last approximately three years.
The Appellant accepted the assignment and travelled to China
in January 1994. His spouse joined him in China
in August 1994.
On January 22, 1997,
the Appellant exercised the stock options which had been granted in 1988 when
he was employed and resident in Canada. He received CDN$43,740.
The Appellant has not
disputed any of the calculations associated with the value of the benefit
included in his income. It is his position however that the amount of the
benefit should not be taxable in Canada because he was not resident in Canada in 1997.
The Minister has
conceded that the Appellant was not resident in Canada
The relevant statutory
provisions of the Act are:
2(3) Tax payable by non-resident persons -- Where
a person who is not taxable under subsection (1) for a taxation year
employed in Canada,
(b) carried on
a business in Canada, or
of a taxable Canadian property,
at any time in
the year or a previous year, an income tax shall be paid, as required by this
Act, on the person's taxable income earned in Canada for the year determined in
accordance with Division D.
7(1) Agreement to issue securities to employees
[stock options] -- Subject to subsection (1.1), where a
particular qualifying person has agreed to sell or issue securities of the
particular qualifying person (or of a qualifying person with which the
particular qualifying person does not deal at arm's length) to an employee of
the particular qualifying person (or of a qualifying person with which the
particular qualifying person does not deal at arm's length),
(a) if the employee has acquired securities under
the agreement, a benefit equal to the amount, if any, by which
(i) the value of the securities at the time the employee acquired
them exceeds the total of
(ii) the amount paid or to be paid to the particular qualifying
person by the employee for the securities, and
(iii) the amount, if any, paid by the employee to acquire the right
to acquire the securities
is deemed to
have been received, in the taxation year in which the employee acquired the
securities, by the employee because of the employee's employment;
115(1) Non-resident's taxable income [earned] in
Canada -- For the purposes of this Act, the taxable income
earned in Canada for a taxation year of a person who at no time in the year is
resident in Canada is the amount, if any, by which the amount that would be the
non-resident person's income for the year under section 3 if
(a) the non-resident person had no income other
from the duties of offices and employments performed by the non-resident person
in Canada and, if the person was resident in Canada at the time the person
performed the duties, outside Canada,
In accordance with subsection
7(1), when the Appellant exercised his rights under the stock options in 1997,
he was deemed to have received a benefit in 1997 because of his employment.
That employment refers to the employment which the Appellant had at the time
the option was granted in 1988. (See Hurd v. The Queen,  1 F.C.
554 (FCA) at paragraph 5).
Although the Appellant was not
resident in Canada in 1997, for the purposes of section 115, the benefit
he received is taxable income earned in Canada in 1997 from the duties of
employment performed by him at the time when he was resident in Canada.
By virtue of subsection 2(3), the
Appellant is subject to tax in 1997 on the taxable income he earned in Canada as
determined by section 115 because he was employed in Canada in a
A similar situation existed in Hurd
v. The Queen (supra) where Mr. Hurd had been granted options to
purchase shares of his employer. These options were granted while Mr. Hurd was
resident in Canada and employed in Canada. He exercised the options after he left Canada and was
no longer employed by the corporation which had granted the options. Urie J.
stated the following:
9 Bearing all those factors in mind it is abundantly clear to me
that the grant of the option arose only because of the appellant's employment
with the Company. It is equally clear that if he had been a Canadian resident
when he acquired the shares the benefit derived therefrom would have been
taxable in his hands in the year of acquisition by virtue of subsection 7(1),
paragraph (a). Moreover, in such a case the benefit would still have been
taxable in his hands even if he had left the employ of the Company as a result
of the operation of subsection 7(4) because it continues the application of
subsection 7(1) as though the appellant were still an employee and as though
the employment were still in existence.
10 I have earlier pointed out that for the reasons there given, I agree
with the learned trial judge that performance of the duties of the employment in
Canada during the
taxation year in which the benefit sought to be taxed is received is not
essential. Therefore, I must conclude that the fact that the appellant was not
a resident of Canada in 1973
when he acquired the shares does not differentiate his position from that of a
resident of Canada who acquired
the shares in similar circumstances. For this reason I am of the opinion that
the appellant must fail on this branch of his appeal.
The decision in Hurd
was confirmed by the Federal Court of Appeal in Hale v. The Queen,
 2C.T.C. 379. In the present appeal, the Appellant was not resident in Canada when he exercised his options but he continued to be
an employee of BMS. The effect of the combined application of subsection 2(3),
paragraph 7(1)(a) and subparagraph 115(1)(a)(i) is that in 1997
the Appellant was in the same position as “a resident of Canada who acquired the shares in similar circumstances”.
Counsel for the
Appellant tried to distinguish the decision in Hale from the present
appeal on the basis that in this appeal the Minister did not rely on subsection
7(4) when he made his assessment. However, the Minister did not have to rely on
subsection 7(4) in the present appeal because in 1997 the Appellant continued
to be an employee of BMS.
The appeal for the 1997
taxation year is therefore dismissed.
Residency in 1999 and 2001
The issue for the 1999
and 2001 taxation years is whether the Appellant was ordinarily resident in Canada in those years in accordance with subsection 250(3)
of the Act.
It was the Respondent’s
alternative position that, if I found the Appellant was not resident in Canada
in 1999, then he received a benefit in the amount of $851,035.89 when he
exercised the stock options which he received while he was employed and
resident in Canada. The details with respect to the grant and
exercise of all the stock options are given in the charts in Appendix A
attached to my reasons.
This is the second appeal
which the Appellant has had before this court involving the issue of residency.
In Mullen v. Canada, 2008 TCC 294, Justice Sheridan found that the
Appellant was ordinarily resident in Canada for the period January 1 to 7,
2002, the only period at issue in the appeal before her.
As previously stated,
the Appellant travelled to China in January 1994 to take up the position of
Director of Operations for the plant being constructed by BMS. His spouse
joined him in August 1994.
Prior to going to China, the Appellant was advised to sever his ties with
Canada so that he would not be considered a resident and would not be taxable
in Canada. The Appellant and his spouse sold their
home and moved some of their furniture into their cottage located on Old Highway #2 in Belleville, Ontario (the
“Belleville Property”). They sold their cars and purchased a car for each of
their children who were attending university. They rented apartments for their
son and daughter and leased their Belleville Property to teachers at the local
college from August 1994 until August 1996 for $1200 monthly.
It was the Appellant’s
evidence that he was advised to lease the Belleville Property to arm’s
length individuals so that it would not be available to him on a continuing
basis and CRA could not use its availability to say that he was resident in
Canada. However, when he was unable to lease the Belleville Property to an
arm’s length party in September 1996, the Appellant’s son, with one of his
friends, moved into the property. His daughter also moved into the Belleville
Property after she graduated from university in Ottawa.
While in China, the Appellant and his spouse lived in a large
furnished suite in the Pearl Ramada Inn (the “Hotel”) which was paid for by his
employer. The Appellant paid monthly income tax in China
on the wages he earned while he was there. BMS had his returns prepared and
filed on his behalf. The Appellant had bank accounts in New York as well as an
account in Canada with the Royal Bank of Canada (“RBC”). In China, he and his
spouse bought antique Chinese furniture and slowly replaced some of the hotel
furniture with their own furniture. The Appellant worked long hours and was
successful. He was first promoted to acting general manager and then to general
Nonetheless, in 1997,
the Appellant was informed that he was “not the future for the company” in
Asia. He was offered a position with BMS in the United States but, according to the Appellant, he liked the life
and benefits of an expatriate, and he refused the offer to work in the United States. His employment was terminated effective April 1998.
His Entrance Visa to
China expired in early March 1998, so the Appellant left China on March 2, 1998. He shipped his antique Chinese
furniture to the Belleville Property; he gave away some personal items and he
stored some books and records with the Hotel. It was his evidence that he
stored items at the Hotel because he intended to continue his residency in China. As he gave his evidence, the number of boxes that he
said he stored with the Hotel increased from 3 to 4 to 5 to 6.
It was the Appellant’s
evidence that he negotiated an arrangement with the Hotel so that there would
be a small suite available to him in the Hotel at no cost until April 1999. He
had a “Foreigner Residence Permit” (the “Residence Permit”) from the Chinese
government which allowed him to travel within China
once he had a valid Entrance Visa to enter the country. The Residence Permit
was valid until the end of November 1999.
When the Appellant and
his spouse left China, they immediately returned to the
Belleville Property in Canada where both his son and daughter were now
residing. He purchased two vehicles, one for himself and one for his spouse. He
financed the purchase of a home for each of his children and he took a
non-interest bearing charge on the properties. In his words the charge was to
prevent his son from selling the home and “walking away” with his money.
Aware that the stock
options which had been granted to him by BMS were increasing in value, the
Appellant said that he sought advice on “how to maximize his income while
mitigating the taxes” when he exercised the stock options. According to his
evidence, he was told that he should not exercise the options when he was in
Canada or while he could be considered a resident of Canada.
In 1999, the Appellant
and his spouse undertook a series of transactions to divest themselves of the
Belleville Property and the vehicles which had been purchased on their return
from China. Those transactions were as follows.
On March 18, 1999, the
Appellant transferred his share of the Belleville Property to his spouse for
$2. She, in turn transferred it, on September 7, 1999, to their son and
daughter, as joint tenants, in exchange for a demand mortgage in the amount of
$300,000 with an interest rate of 5% per annum. Both the Appellant and his
spouse were listed as the mortgagees even though the Appellant no longer had an
interest in the Belleville Property. No payment of either principal or interest
was ever demanded by the Appellant or his spouse and none was paid by their
children. I note that at this time the Appellant’s son and daughter each had
their own homes in the Belleville area.
Prior to receiving
title to the Belleville Property and its contents, the Appellant’s son and
daughter, on August 31, 1999, granted their parents a security interest of
$100,000 in the contents and furnishings in the property.
It was the Appellant’s
evidence that he wanted to transfer the vehicles belonging to him and his
spouse to his children. To avoid paying $1500 in provincial taxes on the
transfer to his children, he caused 1361272 Ontario Limited (the “corporation”)
to be incorporated on August 25, 1999 with his spouse, his daughter, his son, a
third party and himself as equal shareholders. He and his spouse then
transferred their vehicles into the corporation. The corporation owned no other
property and it carried on no business. It had its head office at the
On March 27, 1999, the
Appellant was issued an Entrance Visa to China
with an expiry date of June 27, 1999. It was his evidence that he returned to China with the intention that he would resume his residence
there. He paid for the rental of a suite at the Hotel and he looked for a job.
However, his job search was in vain because he was not able to get any
The Appellant testified
that during the period April 1999 to September 15, 1999 he travelled throughout
Asia on several occasions. He travelled to Canada in July and December 1999. Each time that he returned
to China he rented a suite at the Hotel. In Canada, he lived in the Belleville Property.
I am not sure when the
Appellant decided that he would give up his attempt to get a job in China; but,
on May 22, 1999 he signed a sale and purchase agreement for a furnished
condominium unit in Kamala Beach, Phuket,
Thailand with a closing date of August 30, 1999. It
was his evidence that his spouse joined him in Thailand in September 1999 and they were resident there for the rest of 1999
all of 2000 and 2001.
In Thailand, the Appellant upgraded their condominium unit,
subscribed to a local newspaper and arranged for phone and internet connection.
The Appellant registered for membership at a local hospital and opened a bank
account in Singapore and Malaysia. In 1999, 2000 and 2001 during the periods
December/January and March/April, the Appellant rented out the condominium unit
to vacationers through the condominium administration who withheld the tax on
the rental income. They also prepared and filed the necessary returns on behalf
of the Appellant.
Sometime in 2001, the
Appellant decided that the political situation in Thailand was not stable and in June, 2001, he purchased a condominium in Costa Rica with the intention of residing there. The Appellant
and his spouse obtained temporary residence status from Costa Rica’s tourism department. However, in January 2002, his
father-in-law became ill and he and his spouse returned to Canada to live. The Appellant owned the condominium in Thailand until 2006.
Subsection 2(1) of the Act
provides that income tax shall be paid on taxable income for each taxation year
of every person resident in Canada at any time in the year. Pursuant to
subsection 250(3), a person resident in Canada includes a person who was, at
the relevant time, ordinarily resident in Canada.
The question of
residency is a factual finding. The seminal decision on residence of an
individual is the decision of the Supreme Court of Canada in Thomson v. Minister
of National Revenue,  C.T.C. 51 (S.C.C.) and the most quoted portions
of that decision are the following observations of Rand J.:
47 The gradation of degrees of time, object, intention, continuity
and other relevant circumstances, shows, I think, that in common parlance “residing”
is not a term of invariable elements, all of which must be satisfied in each
instance. It is quite impossible to give it a precise and inclusive definition.
It is highly flexible, and its many shades of meaning vary not only in the
contexts of different matters, but also in different aspects of the same
matter. In one case it is satisfied by certain elements, in another by others,
some common, some new.
48 The expression “ordinarily resident” carries a restricted
signification, and although the first impression seems to be that of
preponderance in time, the decisions on the English Act reject that view. It is
held to mean residence in the course of the customary mode of life of the
person concerned, and it is contrasted with special or occasional or casual
residence. The general mode of life is, therefore, relevant to a question of
49 For the purposes of income tax legislation, it must be assumed
that every person has at all times a residence. It is not necessary to this
that he should have a home or a particular place of abode or even a shelter. He
may sleep in the open. It is important only to ascertain the spatial bounds
within which he spends his life or to which his ordered or customary living is
related. Ordinary residence can best be appreciated by considering its
antithesis, occasional or casual or deviatory residence. The latter would seem
clearly to be not only temporary in time and exceptional in circumstance, but
also accompanied by a sense of transitoriness and of return.
50 But in the different situation of so-called “permanent
residence,” “temporary residence,” “ordinary residence,” “principal residence”
and the like, the adjectives do not affect the fact that there is in all cases
residence; and that quality is chiefly a matter of the degree to which a person
in mind and fact settles into or maintains or centralizes his ordinary mode of
living with its accessories in social relations, interests and conveniences at
or in the place.
In The Queen v. Reeder,
 C.T.C. 256 (F.C.T.D.), Mahoney J. listed some of the factors which have
been found to be material in determining the question of residence as follows:
13 While the defendant here is far removed from the jet set,
including any possible imputation of a preconceived effort to avoid taxation,
the factors which have been found in those cases to be material in determining
the pure question of fact of fiscal residence are as valid in his case as in
theirs. While the list does not purport to be exhaustive, material factors
past and present habits of life;
regularity and length of visits in the jurisdiction asserting residence;
ties within that jurisdiction;
permanence or otherwise of purposes of stay abroad.
The matter of ties within the jurisdiction asserting residence and
elsewhere runs the gamut of an individual's connections and commitments:
property and investment, employment, family, business, cultural and social are
examples, again not purporting to be exhaustive. Not all factors will
necessarily be material to every case. They must be considered in the light of
the basic premises that everyone must have a fiscal residence somewhere and
that it is quite possible for an individual to be simultaneously resident in
more than one place for tax purposes.
It was the Appellant’s
position that even though he was physically located at the Belleville Property
from March 1998 until March 1999 he did not intend to become a resident of Canada nor did he re-establish residency in Canada. He was simply sojourning as he searched on the
internet for positions in China. He stated that he resumed his residency
in China when he returned there in March 1999. In
September 1999 he became a resident of Thailand and he continued to be resident there in 2000 and 2001.
Appellant’s actions in 1998 and 1999 do not support his stated intention. According
to the testimony of Paul Murphy, the Appellant filed income tax returns in
Canada for the 1998 and 1999 years as a resident of Canada. The Appellant is now saying that those
returns were incorrect. At any rate, a taxpayer’s intention may help to
determine the “settled routine” of his life but it is not determinative of his
Unlike the situation in
Reeder, I have concluded that the Appellant was jet setting to avoid paying
taxes in Canada. After reviewing the evidence in this
appeal, I find that the Appellant was resident in Canada
in 1999 and 2001. In reaching this conclusion I have considered the following.
There are some factors
which supported the Appellant’s position. During the period, he did not use
OHIP; he paid for his own private health insurance. He paid for internet at the
Hotel in China when he was there. He owned a condominium
unit in Thailand which he insured privately. In Thailand, he paid for internet connection in his condominium
unit; he had a membership card with the Phuket International Hospital, a subscription with the Phuket Gazette and a Shopper Card from the
Phuket Gazette. The Appellant had bank accounts in New York, Singapore and Malaysia. While his investment broker was located
in Belleville, Ontario, I note that the statement for his Trading
Summary contained his mailing address in Thailand.
However, there was no
evidence that would lead me to find that the Appellant’s mode of living was
centered in either China or Thailand. When he returned to China in 1999, he took with him only his clothes and
personal belongings. He rented a suite in the Hotel and his family, including
his spouse, remained in Canada. It was his evidence that he travelled
from China to Malaysia to Thailand on several occasions and I infer from his evidence that, when he
travelled, the suite he rented in the Hotel would be rented out to others. It
was not for his exclusive use. The only portion of his passport which was
tendered as evidence showed that the Appellant had an Entry Visa to China which was issued on March 27, 1999 and expired on
June 27, 1999. It also showed that he was admitted to Thailand on May 15, 1999 as a visitor who could remain only until June 13,
1999. The purchase agreement for the condominium unit in Thailand identified the Appellant as a Canadian national who
was resident at the Belleville Property. This agreement was dated May 22, 1999.
The Appellant has not established that he had any ties to China in 1999 and I find that he was not resident in China in 1999.
According to the
Appellant’s estimate he spent 77 days in Thailand in 1999 and 140 days there in 2001. The majority of these years was
spent travelling and when asked about his social ties in Thailand, the Appellant only spoke of helping others pick up
the trash on the beach in front of the condominium complex. As an owner of the
condominium unit he was automatically a member of the golf club attached to the
complex. Aside from the purchase of the condominium, there was no evidence that
the Appellant had established ties in Thailand beyond those
which were necessary to allow him and his spouse to enjoy a certain lifestyle
During the years in
question, the Appellant’s ties with Canada were
extensive. He had a joint bank account with his spouse at RBC in Belleville and he had a RBC Visa card. He had a Canadian
driver’s licence, a Canadian passport, a Sears account which had been opened
since 1979 and an American Express Card which he had received in 1982. In March
1999, he opened a $50,000 line of credit with the RBC in Belleville. An Equifax Consumer Report dated April 7, 2005
indicated that his address for his credit cards and line of credit was the Belleville
Property. It also indicated that the Appellant had reported the Belleville
Property as his address since March 1998. He used his Canadian passport to
travel and he kept his Ontario health card even though he did not use it.
In 2001, his investment broker was ScotiaMcLeod in Belleville, Ontario and the Appellant made trades while he was in Canada.
In 1999 and 2001, the
Appellant received interest income from Citibank and dividends from BMS through
Chasemellon Shareholder Services. Each of these companies had the Belleville
Property as the Appellant’s mailing address. BMS considered the Appellant to be
a resident of Canada and no tax was withheld in the United States when he exercised his stock options.
It was the Appellant’s
evidence that his son moved into the Belleville Property in 1999 and the
telephone was listed in his son’s name. This testimony was self serving and
was not supported by the evidence. His son, Jeff, had his own home at Colonial Road during this time and, according to Paul Murphy’s
testimony, he reported Colonial
Road as his residence when he
filed his income tax returns.
The Appellant tried to
demonstrate that he was seldom in Canada during 1999
and 2001 and he gave a list of the dates and places to which he and
his spouse travelled in 1998 to 2001. These dates indicated that the Appellant
was in Canada approximately 180 days over the three year
period from 1999 to 2001 inclusive. The dates were not supported by any
documentary evidence as it was the Appellant’s evidence that his passport for
this period was lost when the tsunami struck in Thailand. During cross examination, counsel for the Respondent was able to show
that on certain occasions the Appellant was in Canada
longer than his evidence respecting the dates had indicated.
By divesting himself of
his real property and vehicles, the Appellant attempted to give the impression
that he had severed his ties with Canada and was no
longer a resident in this country. However, the ownership of both the
Belleville Property and the vehicles was always kept within the family unit and
was continuously available to him when he returned to Canada.
He testified that he returned to Canada for Christmas, New Years and during the
summer to meet with family and friends as his emotional ties were in Canada. I find that this was the only “settled routine” in
the Appellant’s life during this period. I believe that the Appellant never
severed his ties with Canada nor did he actually intend to sever the
ties. He had the Belleville Property transferred to his children but he ensured
that he continued to exercise control over it. He held a demand mortgage on the
property and a security interest in its contents and he never demanded payment
of either the principal or the interest on the mortgage. The Appellant’s ties
with Canada did not just consist of physical ties. He
had both social and emotional ties with Canada
and they could not be severed. Considering all of the above, I find that the
Appellant ordinarily resided in Canada in 1999 and 2001.
Counsel for the
Appellant argued that since the Appellant was in Canada
only 60 days each year, he should not be considered a resident. Although one of
the factors which must be considered is the regularity and length of time the
Appellant spent in Canada, it is nevertheless only one of many
factors which must be considered. In Johnson v. The Queen, 2007 TCC 288,
Paris J was also faced with a situation where the taxpayer had returned to
Canada only three or four times each year for a period of two years. He found that
the taxpayer had not severed his ties with Canada when he went to work in the United Arab Emirates because he maintained his houses, which he
rented, his RRSPs, his driver’s licence, his credit cards and his investments.
The taxpayer in Johnson was found to be ordinarily resident in Canada..
The Appellant had
reached a stage in life where he had the ability to be mobile. His children
were adults and he was no longer employed. He had decided to retire. However,
the comments of Mahoney J in Reeder are applicable:
15 The defendant was at a stage in life when he was highly mobile.
He was able, willing, even eager, to travel. In that, he was not atypical of
his contemporaries and the relevant factors must be considered in that context.
It is not contested that he was, before March 29, 1972, and has, since December
1, 1972, been resident in Canada. Throughout, his ties of whatever description have all been with Canada, save only those ties, undertaken
during the term of his absence, which were necessary to permit him and his
family to enjoy an acceptable and expected lifestyle while in France. That absence was temporary even
though, strictly speaking, indeterminate in length. The ties in France were
temporarily undertaken and abandoned on his return to Canada.
16 I am satisfied that had the defendant been asked, while in France, where he regularly, normally or
customarily lived, Canada must
have been the answer. I find that the defendant was resident in Canada throughout all of 1972.
In the present appeal,
when the Appellant purchased the condominium unit in 1999 in Thailand he was
asked where he lived and he gave the Belleville Property in Canada as his address.
Subsections 152(4) and 163(2)
Is 1999 statute-barred
because the Minister reassessed the Appellant beyond the normal assessment
period? Subparagraph 152(4)(a)(i) provides that the Minister may
reassess at any time if the taxpayer filing the return has made any
misrepresentation which is attributable to neglect, carelessness or wilful
default. The onus is on the Minister to establish the conditions in
In paragraph 22 of Nesbitt
v. R. (1996), 105 F.T.R.(FCTD), Heald J defined misrepresentation as
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.
In 1999, the Appellant
failed to report any of his gains from the exercise of his stock options, even
those gains from options which had been granted to him when he was employed and
resident in Canada. Those gains totalled $851,035.89 and were
taxable in Canada even if the Appellant was not resident in Canada.
The Appellant testified
that he sought advice from various accountants with respect to his exercise of
the stock options. He said that he had an honest belief that he was not a
resident in Canada in 1999. It was his evidence that Price
Waterhouse had been responsible for preparing and filing his 1997 income tax
return and they did not file his 1997 return when he was not resident in Canada. Their failure led him to believe that the gain from
those options which had been granted to him when he was employed and resident
in Canada were not taxable if he was not a resident in Canada.
In spite of the
Appellant’s evidence, I have concluded that the Appellant did make a
misrepresentation in his 1999 tax return.
misrepresentation attributable to neglect, carelessness or wilful default? I
find that it was attributable to wilful default and the Minister has met his
onus to reassess the Appellant beyond the normal reassessment period. According
to the Appellant he asked many accountants and read numerous documents about
how he could exercise his stock options without paying tax on the sale of the
shares he received. He said that the advice he received was to establish
himself as a non-resident of Canada when he exercised the options. The
evidence does not reveal the facts the Appellant gave these accountants nor
does it reveal if he consulted anyone with respect to the steps he should take
to become a non-resident of Canada. The Appellant’s testimony was self
serving and was not corroborated. Suffice it to say that the question posed by
the Appellant and the actions taken by him demonstrate that he never intended
to report any of the amounts he received from his exercise of the options. His
actions also demonstrate that he did not really intend to sever his relations
with Canada. He intended to maximize his income by not
paying taxes on his gains from the exercise of his stock options. He arranged
his affairs to give the impression that he had severed his ties in Canada. In my view, the act of creating the impression that
he was a non-resident demonstrates wilful default. In spite of the Appellant’s
evidence that he had an honest belief that he was not resident in Canada in 1999 and 2001, I conclude that he knew he did not
sever his ties with Canada. When he was interviewed by Paul Murphy,
why would he tell Paul Murphy that he had sold the Belleville Property and the
vehicles but not tell him to whom they were sold? The Appellant told Paul
Murphy that he had no documentation with respect to the stock options and that
he could not obtain any of the documentation from BMS because they had had a
fire. Mr. Murphy however had no problems getting the documentation from BMS.
All it took was a phone call and a letter. The Appellant was not forthright or
cooperative with the auditor and I have drawn a negative inference from his
The Minister also
imposed penalties pursuant to subsection 163(2) of the Act and the onus
was on the Minister to show, on a balance of probabilities, that the Appellant
knowingly, or under circumstances amounting to gross negligence, made a false
statement or omission in his tax return for 1999. Based on my statements above,
I find that the Minister has satisfied this onus and that the Appellant
knowingly made an omission when he filed his 1999 tax return.
The Appellant did not
provide a due diligence defence for his failure to file his 2001 income tax
Neither counsel made a
treaty argument before me.
The appeals are
dismissed with costs to the Respondent in appeal 2009-2337(IT)G.
Signed at Ottawa, Canada, this 30th day of April 2012.