Citation: 2012 TCC 309
Date: 20120906
Docket: 2010-2890(IT)G
BETWEEN:
SYLVIE GIGUÈRE,
Appellant
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal from
reassessments dated August 12, 2009, made under the Income
Tax Act, R.S.C. 1985, c. 1 (5th suppl.), as amended (the Act), for
the 2004, 2005 and 2007 taxation years. The reassessments of the 2004 and 2005
taxation years were made outside
the normal reassessment period.
[2]
In making the new
reassessments dated August 12, 2009, the Minister of National Revenue (the
Minister) added to the appellant’s income, following the sale of the family residences,
the amounts of $31,068, $44,729 and $29,872 as business income for her 2004,
2005 and 2007 taxation years. The Minister also applied to the business income
added to the appellant’s income for her 2004, 2005 and 2007 taxation years the
penalty prescribed in subsection 163(2) of the Act in the amounts of $3,264, $4,755
and $3,359, respectively.
[3]
In determining the tax payable
by the appellant for the 2004, 2005 and 2007 taxation years, the Minister
relied on the following assumptions of fact set out in paragraph 9 of the Reply
to the Notice of Appeal:
[Translation]
(a) The appellant is a police officer with the Service de police
de la Ville de Montréal [Montréal Police Service];
(b) During the years in issue, the appellant had a common law
partner, Yves Thellen;
(c) During the years from 2004 to 2007, Mr. Thellen was employed
by Master, in Boucherville, a company specializing in cooling and heating
systems and services;
(d) Moreover, Mr. Thellen was a 50 percent shareholder in a
company specializing in the sale and installation of fireplaces;
(e) In 2001, the appellant and her partner were residing in
Mirabel;
(f) From 2001 to 2005, the appellant and her partner built seven
single-family homes;
(g) Except for the first house built in Mirabel, the other six houses
were built in Blainville;
(h) The business income added to the appellant’s income for
2004, 2005 and 2007 was for the sale of the following three properties:
·
385 Fontainebleau, Blainville;
·
431 Fontainebleau, Blainville;
·
7 Des Iris, Blainville;
(i) The three properties in issue were sold in 2004, 2005 and
2007;
(j) For the three properties in issue, the ownership period
between the date of purchase of the land and that on which it was listed for
sale varied between 67 and 110 [sic] days, as shown in the table entitled
[Translation]
“Important Transaction Dates,” attached to this Reply
as Appendix A and forming an integral part hereof;
(k) In the case of the property at 385 Fontainebleau, the MLS listing
states that the house is under construction and that it will be delivered in January
2004;
(l) Between the date of purchase of the three lots and the date
of sale of the three properties in issue, the holding period varied between 281
and 615 days, as shown in the table entitled “Important Transaction Dates” of Appendix
A;
(m) In 2004, 2005 and 2007, the appellant reported only employment
income from the Service de police de la Ville de Montréal in her income tax
returns.
BUSINESS INCOME
385 FONTAINEBLEAU STREET, BLAINVILLE
(n) On August 28, 2003, the appellant
made an offer of purchase in respect of a vacant lot facing onto Fontainebleau Street, Blainville, and bearing civic number 385;
(o) Construction costs for said property shown in the appellant’s
table are overstated, considering the supporting documentation submitted;
(p) With regard to said property, the appellant did not provide all
her invoices and the invoices that she did submit were lower based on the
construction costs table filed by the appellant;
(q) Construction costs were assessed by the Canada Revenue
Agency at $312,942, as shown in the table entitled [Translation] “Construction
costs for the house,” attached to this Reply as Appendix B and forming an
integral part hereof;
(r) The construction costs in the table entitled [Translation] “Construction costs for the houses,” attached to this Reply as
Appendix B and forming an integral part hereof, are as follows:
·
Materials and subcontracting;
·
Unskilled labour work;
·
Contractor’s profit.
(s) The percentage of unskilled labour work performed by the appellant
was pegged at 45% for each of the three properties;
(t) On November 3, 2003, the residence at 385 Fontainebleau
Street was put up for sale;
(u) A promise to purchase was concluded on March 25, 2004, for
the residence of 385 Fontainebleau Street;
(v) On June 4, 2004, the residence at 385 Fontainebleau Street
was sold for $366,000;
431 FONTAINEBLEAU STREET, BLAINVILLE
(w) On June 7, 2004, the appellant made an offer to purchase a vacant
lot facing onto Fontainebleau Street, Blainville, and bearing civic number 431;
(x) The construction costs for said property shown in the
appellant’s table are overstated, considering the supporting documentation
submitted;
(y) With regard to said property, the appellant did not provide
all her invoices and the invoices that she did submit were lower based on the
construction costs table filed by the appellant;
(z) Construction costs were assessed by the Canada Revenue
Agency at $345,852, as shown in the table entitled [Translation] “Construction
costs for the houses,” attached to this Reply as Appendix B and forming an
integral part hereof;
(aa) On November 24, 2004, the residence at 431 Fontainebleau
Street was put up for sale;
(bb) A promise to purchase was concluded on July 7, 2005, for the
residence at 431 Fontainebleau Street;
(cc) On October 27, 2005, the residence at 431 Fontainebleau
Street was sold for $415,000;
7 DES IRIS STREET, BLAINVILLE
(dd) On September 7, 2005, the appellant
, the appellant made an offer to purchase a vacant lot facing onto Des Iris
Street, Blainville, and bearing civic number 7;
(ee) The construction costs for said property shown in the
appellant’s table are overstated, considering the supporting documentation
submitted;
(ff) The appellant did not provide any invoices based on the
construction costs table presented by the appellant;
(gg) The construction costs are assessed by the Canada Revenue
Agency at $307,358, as shown in the table entitled [Translation] “Construction costs for the houses,” attached as Appendix B;
(hh) On January 3, 2006, the residence at 7 Des Iris Street was
put up for sale;
(ii) On April 14, 2007, a promise to purchase was concluded for
the residence of 7 Des Iris Street;
(jj) On May 15, 2007, the residence at 7 Des Iris Street was
sold for $360,000.
[4]
The Minister also
relied on the following assumptions of fact set out in paragraph 10 of the
Reply to the Notice of Appeal:
[Translation]
(a) On September 26, 2003, the appellant was granted an
hypothecary loan of $296,000 from the Association de bienfaisance et de
retraite des policiers et policières de la ville de Montréal;
(b) On February 10, 2005, the appellant was granted an
hypothecary loan of $350,400 from the Association de bienfaisance et de
retraite des policiers et policières de la ville de Montréal;
(c) On September 13, 2005, the appellant was granted an
hypothecary loan of $274,400 from the Association de bienfaisance et de
retraite des policiers et policières de la ville de Montréal;
[5]
In imposing the penalty
prescribed in subsection 163(2) for the 2004, 2005 and 2007 taxation years and
in determining that the appellant made a
misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed fraud in filing the returns for the 2004 and
2005 taxation years, the Minister relied on the following assumptions of fact
set out in paragraph 11 of the Reply to the Notice of Appeal:
[Translation]
(a) The
facts mentioned in paragraph 9 above;
(b) The adjustments made to the appellant’s income are substantial
in relation to the income reported;
|
|
2004
|
2005
|
2007
|
|
Unreported income
|
$31,068
45%
$68,924
|
$44,729
63%
$70,700
|
$29,872
41%
$71,799
|
|
Reported income
|
|
Total income
|
$99,992
|
$115,429
|
$101,671
|
(c) The appellant is a police officer and is cognizant of the importance
of respecting the laws.
[6]
From 2001 to 2005, the appellant
and her ex-spouse sold seven residences of which six were self-built. The four
residences sold and which are not the subject of the reassessments of August 12,
2009, are the following ones:
- 11435 Gilles Villeneuve Street, Mirabel;
- 72 Matagami Street, Blainville;
- 39 Matagami Street, Blainville; and
- 41 Matagami Street, Blainville.
[7]
The lot at 11435 Gilles Villeneuve Street was purchased by the appellant on June 14, 2001, and the residence
built on it was put up for sale on September 10, 2001, that is, 88 days
following the purchase of the land. Said residence was sold on January 25,
2002, that is, following a holding period of 225 days.
[8]
The lot at 72 Matagami Street was purchased by the appellant on February 6, 2002, and the residence
built on it was sold unfinished on May 24, 2002, that is, following a holding
period of 107 days. Said residence was not lived in by the appellant.
[9]
The lot at 39 Matagami Street was purchased by the appellant on April 24, 2002, and the residence built
on it was put up for sale on September 28, 2002, that is, 157 days following
the purchase of the land. Said residence was sold on November 29, 2002, that
is, following a holding period of 219 days.
[10]
The lot at 41 Matagami Street was purchased by the appellant on December 12, 2002, and the residence built
on it was put up for sale on March 19, 2003, that is, 97 days following the
purchase of the land. Said residence was sold on August 19, 2003, that is,
following a holding period of 250 days.
[11]
Yves Thellen, the appellant’s
ex-spouse, testified at the hearing. He explained that he was partners with his
father and brother in a heating company (stoves and fireplaces) which they
opened in Blainville in 1995. The company employed 25 employees and had a
total sales figure of $5,000,000. He devoted 60 to 65 hours per week to the
business. After his father retired from the company in 2005 as a result of
illness, he purchased his father’s shares with his brother. Seeing as the
company was then experiencing financial difficulties and that the bank
threatened to call in its loans and foreclose on the company, Mr. Thellen fell
into a depression and towards the end of 2005 he took a sick leave for about a
month. He left his brother to manage the business alone until 2009, at which
time the company went bankrupt. From February 2006 to 2009, he was a sales
representative (stove and fireplace department) for the Master group. He worked
at the store located on Henri Bourassa Boulevard in Montréal. He was a salaried
worker and worked about 45 hours per week.
[12]
During his testimony, Mr.
Thellen explained that the purchase of lots and the construction of homes were
solely in the appellant’s name because it was easier for the appellant than him
to obtain financing from the banks. He stated that he hired subcontractors to
build the houses because it enabled him to obtain better quality materials. Following
the purchase of a lot by the appellant, he would be in charge of receiving two
to three bids by trades. He hired the subcontractors. He supervised and cleaned
the construction site and verified the progress of the work. He stated that for
each house he spent five to six hours per week on construction activities over
a period of about three months. He did not keep a log of the time he spent on
each house. According to him, there was a profit sharing agreement on the sale
of the houses between he and the appellant but seeing as no profit was derived
from the sale of the three houses in issue, there was no profit sharing.
[13]
Mr. Thellen cited the
couple’s problems and his trips to Morocco in February and March 2003 to justify
the sale of 385 Fontainebleau. The lot at 431 Fontainebleau was purchased by
the appellant because she did not wish to be separated and suggested rather
that they try living together again. Mr. Thellen cited his health problems
(herniated disk and his two bouts of depression, including the one that caused
him to take time off work for a month in fall 2005) to justify the sale of 431 Fontainebleau. According to him, the appellant purchased the lot at 7 Des Iris in order to
build a smaller home (a bungalow with 1,500 square feet of living space). Mr. Thellen
cited his health problems (acute anxiety attacks and depression) and his
problems with the Direction de la Protection de la Jeunesse concerning his 16-year-old
son to justify the sale of 7 Des Iris.
[14]
On cross-examination, Mr.
Thellen confirmed that the subcontractors were, in most cases, paid in cash by
the appellant from her bank account.
[15]
The appellant testified
at the hearing. She explained that she and her ex-partner self built the six houses
and that she knew nothing about construction. She never worked on the work
sites except when cleaning. She chose the model to build with her ex-partner. She
chose the plumbing fixtures and was in charge of decorating. She confirmed that
she purchased the lots in her own name because she was able to obtain financing
and because she wanted to protect this asset from the creditors of her ex-partner’s
company.
[16]
Based on the statement
of the seller’s disbursements dated June 4, 2004, prepared by the notary handling
the sale of 385 Fontainebleau, the net cash to the seller was calculated as
follows:
[Translation]
|
Sale
price
Hypothecary balance due
Notary fees
Brokerage fees
Adjustments
2003 deduction of municipal taxes
Net cash to seller
|
$366,000.00
$266,214.89
$467.82
$20,000.00
($8,791.19)
$500.00
$70,026.10
|
[17]
On the basis of the
statement of disbursements prepared by the notary handling the sale of 431 Fontainebleau, on October 27, 2005, the balance owing to the seller was calculated as
follows:
[Translation]
|
Sale
price
Sales commission
Municipal taxes
School taxes
Hypothec
Pro-Carbur Inc.
Notary
Balance owing to the seller
|
$415,150.28
$23,350.08
$5,087.01
$421.00
$347,653.28
$265.88
$607.34
$37,765.69
|
[18]
On the basis of the
statement of disbursements prepared by the notary handling the sale of 7 Des
Iris, the remittance to the seller was calculated as follows:
[Translation]
|
Sale
price
Hypothec payment
Sales commission
Location certificate
Notary fees
Corporation des Roseaux sur le Lac
(2007 annual contribution)
Allocations
Remittance to seller
|
$360,000
$273,368.67
$20,000.00
$427.31
$700.00
$432.00
$2,075.07
$62,996.95
|
[19]
The appellant reiterated
the fact that she provided the auditor for the Canada Revenue Agency (the CRA)
with copies of invoices for the construction costs of the homes, except those
pertaining to 7 Des Iris, which were all misplaced. She stated that she had provided
invoices to obtain disbursements for hypothecs. According to the appellant, the
auditor did not take into account, in estimating the construction costs, invoices
paid in cash. She did, however, acknowledge that the amounts paid in cash were
not very specific and were based on estimates.
[20]
During her testimony, the
appellant also acknowledged that the residence at 385 Fontainebleau was put up
for sale on November 3, 2003, that is, even before construction had ended. The
expected delivery date was January 2004. She cited these as reasons for the
sale of said residence: her ex-partner’s trips to Morocco and the amount of the
hypothecary loan, which was too high. The residence at 431 Fontainebleau was
sold, according to her, owing to her ex-spouse’s health issues (back pain and
depression) when the hypothec on that residence was higher than that on the
residence at 385 Fontainebleau. Finally, she stated that she did not intend to
sell the residence at 7 Des Iris because that residence suited them perfectly
and because she believed it was to be their last. The residence was put up for
sale on January 3, 2006, and was sold on May 15, 2007. The appellant acknowledged
that she purchased as co-owner with her ex-spouse another residence located at
37 De L'Alsace Street following the sale of the residence at 7 Des Iris. She
explained that at the time, her ex-spouse was a salaried employee of the Chapters
group and no longer a business owner.
[21]
During her testimony, the
appellant provided explanations regarding the nature of the work performed by her
ex-spouse during the construction of the residences. According to her, her
ex-spouse did small jobs such as the installation of tile and insulating wool, and
performed finishing work such as the installation of moulding.
[22]
The appellant and her
ex-spouse did not hire professionals to prepare their tax returns and did not
claim a refund for the Quebec sales tax and Goods and Services Tax related to
the construction of the residences. The sale of the residences was not reported
in the appellant’s tax returns for the 2004, 2005 and 2007 taxation years.
[23]
The auditor for the
CRA, Marie-Pierre Genest, asked the appellant to provide her with invoices
related to the construction of the three residences in issue in order to establish
their construction costs. According to the information provided by the appellant,
the construction costs of 385 Fontainebleau totalled $348,868.05 (including selling
costs), which apparently yielded a profit of $17,131.95 from the sale of the residence
at the price of $366,000.00.
[24]
The construction costs
of 431 Fontainebleau allegedly totalled $436,927.96 (including selling
costs), which yielded a loss of $21,927.96 from the sale of the property at the
price of $415,000.
[25]
The construction costs
of 7 Des Iris allegedly totalled $418,500.30 (including selling costs), which
yielded a loss of $58,500.30 from the sale of the property at the price of
$360,000.00. Seeing as numerous invoices were missing, the appellant based her
calculations on an appraisal done by the financial institution for a hypothecary
loan, to which she added certain costs such as the cost of the lot, selling
expenses, the cost of the interlocking paving stone, etc.
[26]
CRA auditor Christian
Lanthier testified at the hearing. He explained that the appellant’s file was
audited owing to the high number of real property transactions. Marie-Pierre
Genest began the audit on November 20, 2007, but she transferred the file to
him on October 14, 2008. He also explained that Ms. Genest requested an
appraisal for each of the residences in issue as she noticed that the
construction costs submitted by the appellant appeared to be overstated
compared to the estimated potential profit. She drew that conclusion by comparing
the construction costs submitted by the appellant with initial selling price appearing
on the MLS listing:
[Translation]
|
|
385 Fontainebleau
|
431 Fontainebleau
|
7 Des Iris
|
|
Construction
costs
The initial
sale price
Profit (Loss)
|
$348,868
$374,000
$25,132$
|
$436,928
$474,000
$37,072
|
$418,500
$374,500
($44,000)
|
[27]
Moreover, Ms. Genest also
noticed that the construction costs submitted by the appellant were unreliable
because too many invoices were missing. The total number of invoices missing or
lost regarding 385 Fontainebleau was $63,591.99, whereas the amount of supporting
documents accepted regarding 431 Fontainebleau was $306,813.50 and that
the amount of supporting documents accepted regarding 7 Des Iris was
only $96,836.60.
[28]
The three expert
reports were filed in a bundle as Exhibit I-3 and Alain Papineau, chartered
appraiser, testified at the hearing to explain the method he followed, his
analysis of the relevant information and facts and the findings from his review.
The purpose of the three appraisals was to determine the cost of construction for
each of the houses under review by adding the purchase cost of the subjacent
land. The question, in fact, was to determine the replacement cost of each residence
at the time of their construction. For an informed buyer, the replacement cost represents
the maximum value the buyer should accept to pay to purchase the house.
[29]
During his testimony, Mr.
Papineau explained that he walked around the exterior of each house, that he
looked at the plans and specifications of each house provided by the appellant and
MLS listings. A verification of the titles of each house was conducted with the
Registry Office. Furthermore, the municipal data, the appraisals, zoning and
regulations were verified with the competent authorities.
[30]
The replacement cost of
each property was estimated on the basis of the Go-Estimation software of the Association
provinciale des constructeurs d'habitations du Québec Inc., which takes into
account the construction costs of a house with irregular dimensions.
[31]
Among the assumptions
made by the appraiser, one is to the effect that the costs were shared between
materials, labour and other indirect costs. In the case of the three residences
in issue, it was presumed that material and indirect costs represented 64% of
the total cost, whereas labour costs represented 36% of the total construction cost.
The average hourly rates per trade in 2004 that were used by the appraiser are
derived from the Régie du Bâtiment du Québec. As another assumption, the
appraiser estimated the developer’s profit and the profit from general and administration
costs at 15% for 7 Des Iris and at 20% in the case of the two other houses.
[32]
He also considered that
45% of the unskilled labour cost related to the appellant and her ex-spouse.
[33]
In the appraiser’s view,
the applicable allocation and construction cost for 385 Fontainebleau as of
July1, 2004, are as follows:
[Translation]
|
Land (purchase cost in 2003)
Residence (cost estimate in 2004)
Land improvements
Total cost (taxes included)
|
$57,972
$333,826
$0
$391,798
|
($114.13 / sq.ft.)
|
[34]
In the appraiser’s view,
the applicable allocation and construction cost for 431 Fontainebleau as of
July1, 2004, are as follows:
[Translation]
|
Land (purchase cost)
Residence (cost estimate in 2004)
Heated in-ground pool
Land improvements
Total cost (taxes included)
|
$60,000
$332,921
$16,679
$18,715
$428,315
|
($115.24 / sq.ft.)
|
[35]
In the appraiser’s view,
the applicable allocation and construction cost for 7 Des Iris as of February
1, 2006, are as follows:
[Translation]
|
Land (purchase cost in 2005)
Residence (cost estimate in 2006)
Land improvements
Total cost (taxes included)
|
$74,766
$285,577
$8,480
$368,823
|
($150.15 / sq.ft.)
|
[36]
In calculating the
profit from the sale of the properties in issue, the Goods and Services Tax and
the Quebec sales tax were recalculated and subtracted from the construction
cost of each residence.
Analysis
[37]
The provisions of the
Act that apply in this case are as follows:
DIVISION B
COMPUTATION
OF INCOME
Basic Rules
3.
The income of a taxpayer for a taxation year for
the purposes of this Part is the taxpayer’s income for the year determined by
the following rules:
(a) determine the total of all
amounts each of which is the taxpayer’s income for the year (other than a
taxable capital gain from the disposition of a property) from a source inside
or outside Canada, including, without restricting the generality of the
foregoing, the taxpayer’s income for the year from each office, employment,
business and property,
. .
.
Subdivision b
Income or Loss from a Business or Property
Basic Rules
9. (1) Subject to this Part, a
taxpayer’s income for a taxation year from a business or property is the
taxpayer’s profit from that business or property for the year.
. .
.
152. (3.1) Normal Reassessment Period — For
the purposes of subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal
reassessment period for a taxpayer in respect of a taxation year is
(a) if at the end of the year the taxpayer
is a mutual fund trust or a corporation other than a Canadian-controlled
private corporation, the period that ends four years after the earlier of the
day of sending of a notice of an original assessment under this Part in respect
of the taxpayer for the year and the day of sending of an original notification
that no tax is payable by the taxpayer for the year; and
(b) in any other case, the period that ends three years
after the earlier of the day of sending of a notice of an original assessment
under this Part in respect of the taxpayer for the year and the day of sending
of an original notification that no tax is payable by the taxpayer for the
year.
. . .
152. (4) Assessment
and reassessment [limitation period] — 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
. . .
152. (4.01) Assessment
to which paragraph 152(4)(a),
(b) or (c) applies — Notwithstanding
subsections (4) and (5), an assessment, reassessment or additional assessment
to which paragraph (4)(a),
(b) or (c) applies in respect of a
taxpayer for a taxation year may be made after the taxpayer’s normal
reassessment period in respect of the year to the extent that, but only to the
extent that, it can reasonably be regarded as relating to,
(a) where
paragraph 152(4)(a)
applies to the assessment, reassessment or additional assessment,
(i) any misrepresentation made by the
taxpayer or a person who filed the taxpayer’s return of income for the year
that is attributable to neglect, carelessness or wilful default or any fraud
committed by the taxpayer or that person in filing the return or supplying any
information under this Act, or
. . .
163. (2) False
statements or omissions -- Every
person who, knowingly, or under circumstances amounting to gross negligence,
has made or has participated in, assented to or acquiesced in the making of, a
false statement or omission in a return, form, certificate, statement or answer
(in this section referred to as a “return”) filed or made in respect of a
taxation year for the purposes of this Act, is liable to a penalty of the
greater of $100 and 50% of the total of
. . .
PART XVII
INTERPRETATION
248. (1) In this Act,
“business” includes a profession,
calling, trade, manufacture or undertaking of any kind whatever and, except for
the purposes of paragraph 18(2)(c),
section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern
in the nature of trade but does not include an office or employment;
[38]
The first issue is whether
the construction activities and the sale of single-family homes were undertaken
by the appellant in the course of a business or in the course of an activity
that generated capital gains against which the principal residence exemption
could be claimed.
[39]
As I stated in Ayala
v. The Queen, 2010 TCC 206, at paragraphs 9, 10 and 11, the applicable
principles when real property is sold are as follows:
[9]
. . . [T]he
Act does not have a criterion that allows for a distinction to be made between
capital gain and business income (including income from an adventure in the
nature of trade), requiring the Court to refer to the criteria developed in the
case law. However, there is no criterion to determine with certainty whether a
transaction leads to a capital gain or business income. Each situation is a
specific case to be analyzed in light of the facts.
[10]
Among the criteria developed by the case law, the
following are of note:
i. The nature of the property sold;
ii. The length of time the taxpayer was in possession as owner
of the property;
iii.
The frequency and number of operations carried
out by the taxpayer;
iv.
The improvements made by the taxpayer to the
property;
v.
The circumstances surrounding the sale of the
property; and
vi.
The taxpayer’s intention at the time the
property was acquired, as indicated by the taxpayer’s actions.
[11] In addition to
these criteria, Canadian courts have developed the "secondary
intention" criterion that may apply even when the taxpayer's main
intention has been established as making a long-term investment. This criterion
applies if, at the time the property was acquired, the taxpayer had considered
the possibility of selling the property for a profit if the long-term
investment project could not be achieved for whatever reason.
[40]
In this case, the
appellant sold seven single-family homes between 2001 and 2007 of which six
were self-built by the appellant and her ex-spouse. The appellant’s modus
operandi consisted in purchasing one vacant lot at a time, in building a
single-family home on it, in living in it for a few months and in selling it
for a profit. In the case of 385 Fontainebleau, the residence was put up for
sale even before its construction was completed.
[41]
The holding period of
the seven residences varied between 107 days and 615 days: 281 days for 385 Fontainebleau; 507 days for 431 Fontainebleau and 615 days for 7 Des Iris. The number of
days before the residences were put up for sale varied between 67 days and 157 days:
67 days for 385 Fontainebleau; 170 days for 431 Fontainebleau and 118 days for 7
Des Iris.
[42]
The land subjacent to
the seven residences was acquired by the appellant between 2001 and 2005, one in
2001, three in 2002 and one in (the course of) each of the years 2003, 2004 and
2005. The land was normally purchased by the appellant a few days following the
sale of a residence or sometimes a few days prior to the sale of a residence. For
385 Fontainebleau, the land was purchased nine days following the sale of 41
Matagami whereas for 431 Fontainebleau, the land was purchased three days
following the sale of 385 Fontainebleau. For 7 Des Iris, the land was
purchased 50 days prior to the sale of 431 Fontainebleau.
[43]
At the time of acquiring
the land subjacent to 385 Fontainebleau and building said residence, the
appellant had at least the secondary intention, if not the primary intention, to
resell it at a profit. At the hearing, the appellant was unable to establish, in
the light of the circumstances surrounding the acquisition of the property, that
her intention was to live in it long term as she put the house up for sale even
before its construction was completed.
[44]
As for 431 Fontainebleau, the appellant put it up for sale less than six months following the date of
acquisition of the subjacent land and purchased the land subjacent to 7 Des
Iris 50 days prior to the sale of said residence. These two factors concerning
the appellant’s conduct tend to show that at the time of acquiring the land subjacent
to 431 Fontainebleau and building said residence, the appellant’s intention was
not to make a long-term investment.
[45]
The same goes for the
residence at 7 Des Iris, which was put up for sale within four months of
purchasing the subjacent land.
[46]
The three residences in
issue were sold through a realtor and their sale did not result from
unsolicited offers received by the appellant.
[47]
The reasons cited by the
appellant and her ex-spouse for the sale of the three residences in issue,
namely, the couple’s family problems, the health of the appellant’s ex-spouse
and the high amount of the hypothec, do not appear to me to be the real reasons
for selling the residences. The testimony of the appellant’s ex-spouse revealed
inconsistencies in the dates of his trips to Morocco and the impact of said
trips on the sale of 385 Fontainebleau. The ex-spouse’s health issues do not
appear to have prevented him from building in fall 2005 the residence at 7 Des
Iris. The amount of the hypothec on each of the three residences was about
$296,000 for 385 Fontainebleau, $350,400 for 431 Fontainebleau and $334,400 for
7 Des Iris. According to the appellant’s testimony, there is nothing to show
that she had difficulty obtaining the financing required to build the three residences
or that she had any difficulty covering the carrying costs of the homes considering
that the amount of the hypothec on each of the residences remained relatively
constant.
[48]
According to the
evidence, the appellant and her ex-partner were very active in completing the construction
work of the three residences in issue. The appellant purchased the land subjacent
to the residences and was responsible for obtaining the financing required to
build. She shopped for such materials as plumbing fixtures and was in charge of
decorating. Her ex-partner obtained bids from the subcontractors and orchestrated
completion of the work in addition to being in charge of installing insulating
wool, tile, partitions and finishings.
[49]
A review of the
criteria applicable in the case at bar leads me to conclude that the appellant carried
on an activity in the nature of trade by building and selling the three
residences in issue the profits of which were to be included as business income
in computing the appellant’s income.
Computing the profit from the sale of the residences
[50]
The CRA auditor Genest
had to call upon a chartered appraiser to determine the construction costs of
each residence in the light of the absence of invoices in the case of 7 Des Iris
or missing or incomplete invoices in the case of the other two residences.
[51]
No one appeared on
behalf of the appellant to determine the construction costs of each residence
or to contradict the working assumptions of the CRA appraiser. The appellant alleged
that the cost of the unskilled labour undertaken by the appellant and her
ex-partner appraised at 45% was unrealistic considering her ex-partner’s
financial problems and his health conditions but she was unable to provide at
the hearing any records that would make it possible to establish a different
percentage. The appellant also claimed that all of the home equity lines of
credit taken out for each residence were used to pay the construction costs but
no testimonial or documentary evidence supporting that claim was offered at the
hearing.
[52]
On the basis of the
appraisals done by the appraiser, the sale of 385 Fontainebleau generated
a net profit of $31,068, that is, 8.48% of the proceeds of disposition, whereas
the sale of 431 Fontainebleau generated a net profit of $44,729, that is, 9.9% of
the proceeds of disposition, and the sale of 7 Des Iris generated a net profit
of $29,872, that is, 8.29% of the proceeds of disposition. Those profit percentages
appear reasonable to me in the circumstances.
Assessments outside the normal reassessment period
[53]
The respondent has the
burden of proof with respect to the 2004 and 2005 taxation years as the Notices
of Reassessment were sent after the normal reassessment period (see subsections
152(3.1), 152(4) and 152(4.1) cited at paragraph 37 above).
[54]
The Minister submits
that the appellant made a misrepresentation that is
attributable to neglect, carelessness or wilful default in failing to report
the business income of $31,068 and $44,729 for the 2004 and 2005 taxation years,
representing 45% and 63% of her reported income for each of the taxation years,
respectively.
[55]
In Venne v. Canada,
[1984] F.C.J. No. 314 (QL), Justice Strayer made the following comments with
respect to the Minister’s burden of proof:
. .
. 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
neglects" 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. . . .
[56]
In this case, it is
clear to me that the appellant did not show reasonable care in preparing her tax
returns for the 2004 and 2005 taxation years. She should have consulted with an
accountant or a tax lawyer considering her particular situation related to the
number of residences built and sold, to their holding period and to the circumstances
surrounding the sale of the residences. The residence at 385 Fontainebleau was
put up for sale even before construction was completed, which demonstrates that
she had intended to resell the property at a profit.
[57]
In view of the fact that
the appellant did not claim the tax rebates to which she was entitled with
respect to the construction of the residences and of the fact that she did not
keep a log of the hours worked on the construction sites and invoices from material
suppliers and subcontractors, it can be inferred that the appellant did not
show reasonable care in the circumstances.
[58]
In my opinion, the Minister
was justified in making reassessments for the appellant’s 2004 and 2005
taxation years.
Imposition of the penalty
[59]
Subsection 163(2) of
the Act imposes a penalty on a taxpayer who, knowingly, or under circumstances
amounting to gross negligence, has made or has participated in, assented to or
acquiesced in the making of, a false statement or omission in a return (see
subsection 163(2) cited at paragraph 37 above).
[60]
As in the case of the
assessments made outside the normal reassessment period, the Minister has the
burden of proving the circumstances warranting the imposition of a penalty under
subsection 163(2).
[61]
Judge Archambault
described the Minister’s burden as follows in Corriveau v. Canada, 2008 FCA 241:
26
. . . he must prove: (1) that the
taxpayer made a false statement or omission in a return, and (2) that the false
statement or omission was made knowingly or under circumstances amounting to
gross negligence.
[62]
In Venne, supra,
Justice Strayer specified the interpretation of the notion of “gross
negligence” as follows:
. .
. . "Gross
negligence" must be taken to involve greater neglect than simply a failure
to use reasonable care. It must involve a high degree of negligence tantamount
to intentional acting, an indifference as to whether the law is complied with
or not. . . .
[63]
In the case at bar, the
appellant made or participated in, asserted to or
acquiesced in the making of a false statement or omission in her income tax
returns for the 2004, 2005 and 2007 taxation years. The adjustments made
to the appellant’s income are significant, 45%, 63% and 41%, respectively, compared
with the reported income. Those false statements or
omissions are tantamount to intentional acts
on the part of the appellant and demonstrate an indifference
as to whether the law is complied with or not. The appellant is a police
officer and is aware of the importance of respecting the laws. The absence of
records and the missing invoices from material suppliers and subcontractors are
tantamount, in my opinion, to intentional acting
on the part of the appellant and demonstrate an indifference
as to whether the law is complied with or not.
[64]
In the circumstances,
the Minister was justified in applying the penalty under subsection 163(2) of
the Act on the business income added to the appellant’s income for her 2004,
2005 and 2007 taxation years.
[65]
For these reasons, the
appeals are dismissed with costs.
Signed at Ottawa, Canada, this 6th day of September
2012.
“Réal Favreau”
Translation certified true
on this 6th
of February 2013.
François Brunet, Revisor
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