Date: 19991216
Docket: 97-1391-IT-G
BETWEEN:
CHRISTOPHER DeGEER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
GENERAL:
[1] References to section numbers relate to the Income Tax
Act ("Act") unless otherwise stated.
ISSUES:
[2] The issues in this appeal are:
(1) Whether the Appellant suffered a capital loss in the
amount of $800,000 in his 1992 taxation year producing an
allowable capital loss of $600,000 which can be carried forward
to his 1993 and 1994 taxation years to be applied against capital
gains realized in those years, and
(2) Whether the Minister of National Revenue
("Minister") properly assessed the Appellant for
penalties pursuant to subsection 163(2) of the Income Tax
Act for his 1993 and 1994 taxation years.
[3] Although the Appellant filed a Notice of Appeal in respect
of his 1992, 1993 and 1994 taxation years, the Appellant appears
to have filed Notices of Objection for 1993 and 1994 only.[1]. At the hearing,
the Appellant did not comment on the Respondent's allegations
in the Reply to the Notice of Appeal that the Appellant was not
challenging the amount of tax, interest or penalty assessed for
the 1992 taxation year and further that no Notice of Loss
Determination for that year had been issued. This pleading
suggests that tax was assessed for 1992 and also that no tax was
assessed. Obviously this cannot be the case. The documents filed
with the Court are of little assistance. Since no evidence of a
Notice of Objection having been filed for 1992 was adduced, the
purported Notice of Appeal for 1992 will be quashed.
FACTS:
Acquisition of farm from parents
[4] The Appellant is a lawyer and has been a member of the Law
Society of Upper Canada since 1987. An Agreement of Purchase and
Sale dated April 15, 1989 provides for the purchase of 87 acres
of farmland and buildings ("farm") by the Appellant
from his step-father and mother, John Alan Watson and Audrey
Eileen Watson for $1,300,000 The Appellant presented no expert
evidence as to the value of the farm at the date of that
purchase.[2] That
document provided that the down payment of $25,000 was to be made
by cash or certified cheque with a promissory note for the
balance. The Appellant testified that $950,000 of the purchase
price was allocable to land and $350,000 to the house on that
land. He said that his parents declined the $25,000 cash payment
and that he made and delivered to them a promissory note for
$1,275,000. He testified that that promissory note was lost and
that his parents made an affidavit dated June 15, 1990 stating
that the "aforesaid Promissory Note can no longer be located
in the hands of the undersigned". The Appellant said:
I had them swear an affidavit so that each of my sisters
wouldn't show up with an original.
That affidavit stated, in part, that:
The replacement promissory note in the amount of $1,275,000
Canadian has been requested as a replacement of, is intended to
be in lieu of, and not in addition to, the first promissory
note.
[5] A copy of this replacement note was produced in evidence.
Under it, the Appellant promised to pay the above sum
... jointly and severally to John Alan Watson and Audrey
Eileen Watson ...
It contains the provision that:
One-half of the aforementioned amount shall be payable to the
survivor, if any, of John Alan Watson and Audrey Eileen Watson
upon the death of either John Alan Watson or Audrey Eileen
Watson.
The entire amount or, if applicable, the balance of the entire
amount, shall in any event be paid to John Alan Watson or Audrey
Eileen Watson, or either of the estates thereof or, if
applicable, the estate of the survivor referred to above on or
before December 31, 1999.
The note contained no provision for interest. No security for
its payment was given. No payment thereon had been made at the
time of the hearing.
[6] The Appellant's parents have resided on the farm
continuously since the time of transfer.
[7] The aforesaid transfer was not registered in the
appropriate Land Registry Office because the Appellant did not
wish to pay land transfer tax. The Appellant's parents used
their lifetime capital gains exemption for qualified farm
property permitted under the Act, the result of which was
that no income tax was payable by them on the sale. The Appellant
admitted on cross-examination that he knew there was a lifetime
capital gains exemption for his parents of $500,000. That was
followed, on cross-examination, by this exchange:
Q. So that the available exemption to both of your parents
collectively was, roughly, the amount that you attributed to the
value of the farm property absent the house residential portion,
correct?
A. Coincidentally the value of the property.
[8] After extensive cross-examination respecting the value of
the promissory note the transcript reads:
A. My parents granted me favourable terms because I was their
son, favourable terms in the form of a note but not in price.
Q. That may be a perfectly satisfactory explanation of why
that was. But do you not agree that there is a difference, a
substantial difference in value between $1.3 million in cash and
$1.3 million to be paid in ten years and with no interest owing
on that note. Isn't that the case?
A. Yes.
[9] The Appellant then went on to spar with Respondent's
counsel respecting the valuation, ending with this exchange:
Q. Yes, so what you gave to your parents and what you consider
to be fair and full value for this farm was less than $1.3
million, isn't that true?
A. No.
[10] On cross-examination the Appellant said that the
allocation of the purchase price, namely $950,000 for land and
$350,000 for the house, did not appear in the agreement of
purchase and sale.
[11] The Appellant and John Alan Watson signed a Partnership
Agreement dated May 6, 1989 for conduct of the farming business
on the farm. The Appellant, in subsequent taxation years,
deducted restricted farm losses on the basis of such partnership.
That partnership was registered with the Ministry of Consumer
& Commercial Relations on June 28, 1989.
[12] The Appellant and his parents executed a Nominee
Agreement expressed to be made as of the 11th day of
August, 1990. That document provided that the farm would continue
to be registered in the name of John Alan Watson and Audrey
Eileen Watson who would hold the lands on behalf of the
Appellant. It provided that no supplement, modification or waiver
thereof would be binding unless executed in writing by all
parties. Such agreement has never been varied or cancelled.
[13] The Appellant described the area at Bracebridge, Ontario
where the farm was located as being a "hotbed of development
activity". He stated that the transfer had the advantage of
locking in some value and that it was his intent to develop that
land in about ten years. Specifically, he said:
My guess was that the land would be ten years developing and
so the promissory note was not due until the end of 1999. It was
thought at that time that there would then be some cash flow from
the sale of lots.
[14] The Appellant wrote a letter in December, 1989 to the
Ministry of Agriculture & Food advising that he was the new
owner of the farm. By letter of February 15, 1990 he advised the
Regional Assessment Commissioner that he was the owner of the
farm and that he had declined to register the Deed asserting no
concern about a fraudulent Deed being registered because the
legal title was in the name of his parents. He advised further,
in this letter, that he was disinclined to pay an approximate
Land Transfer Tax of $20,000 for protection against an unlikely
event. The Appellant wrote a letter dated January 23, 1991 to
Canada Post Corporation giving them a mailing address. He said
that he put his name on the mail box at the farm.
[15] The Appellant testified at some length about transferring
the farm to his parents in order to "creditor-proof"
himself because he expected to become a partner in a Toronto law
firm and did not want his assets exposed to partnership joint and
several liability. He said that the members of the law firm he
had joined "were very aggressive lawyers taking high risks
in their practices". He also spoke of discussions he had had
with a senior partner of that law firm about
"credit-proofing". He stated that he had approached his
parents about his creditor-proofing and that
... I was getting rid of all of my properties and they were
aware that it was because I had been asked ... well, asked , I
was told I was going to be asked to be a partner at Meighen &
Demers and so I went to my parents and said that I was getting
rid of all of my properties and in respect of the farm I wanted
to give it to them, that the other properties would be given to
Dina, my wife.
Transfer of farm back to parents
[16] A document entitled "Transfer/Deed of Land"
dated August 15, 1992 bearing the signature of the Appellant as
transferor and the signature of his wife, Dina DeGeer
("Dina") as consenting spouse, provided for the
transfer of the farm to the Appellant's parents as joint
tenants in consideration of natural love and affection and $1.00.
As was the case with the previous document, this Deed was not
registered. No reduction in the outstanding debt of $1,300,000
owing by the Appellant to his parents was made. The Appellant
testified that his wife shortly thereafter became very angry
because she would not be entitled to the property if he died. He
also testified that he told his mother, when he alone visited her
at the farm, about the deterioration in his marital relationship
because of his wife's anger about the transfer of the farm to
his parents. He then said:
Sometime, it was either that week or the following week, but
my mother phoned me in Toronto and she said to me that that was a
very nice gesture but she's talked to Al, my step-father,
about it and it's not that important to him to own the land
and if it would make Dina happy, she would be happy to return it.
And I was quite relieved to hear the offer. My response was,
"well, I'll make the proposal to Dina and ... which I
did. That evening I just said to her, "Look, Mom says if
what you want is the farm back she and Al are prepared to do
it". And she just said to me, "Well do it". So
thereafter I drafted up yet another transfer of land ... and on
the next occasion I went up to the farm, which was the week-end
after I typed up the document, my parents executed it... Now
that's five weeks to the day after my original disposition to
them and that was done. I took the Deed home, I showed my wife
and she was satisfied.
[17] A Partnership Amendment Agreement signed by John Alan
Watson and the Appellant dated August 22, 1992 provided that the
farm would be made available for the use of the partnership for
no consideration.
[18] The Appellant testified that in April, 1991 he and his
wife bought raw land on a lake in Muskoka and began building
"a house as a cottage". He stated further that in
September, 1991 they purchased a home in Etobicoke.
[19] On cross-examination the Appellant acknowledged that he
had not done any development work on the farm even as at the date
of trial and that he had made no overtures to town authorities
respecting zoning, et cetera.
[20] The Appellant, in his 1992 income tax return, claimed a
capital loss of $800,000 on the transfer of the farm to his
parents giving rise to an allowable capital loss of $600,000.
Transfer of farm from parents to Appellant
[21] Thirty-five days after the transfer of the farm to his
parents, another document entitled "Transfer/Deed of
Land" bearing date September 19, 1992 provided for the
conveyance of the farm from the Appellant's parents to the
Appellant in consideration of natural love and affection and
$1.00. This document was not registered. A Partnership Amendment
Agreement, undated, provided that the Partnership Agreement would
read as originally executed.
[22] The Appellant described his attempt to obtain a valuation
of the Etobicoke home from a realtor. He stated that the realtor
was very angry when she learned that he was not listing the house
for sale but was simply attempting to obtain a valuation. He gave
no evidence respecting engaging or attempting to engage the
services of a qualified appraiser.
[23] The Appellant testified that in October, 1992, he was
advised that he would not be made a partner and, therefore, did
not continue the process of disposing of his properties because
there was no longer any need to do so, he having determined to
become a sole practitioner.
[24] The Appellant said that following the winter of 1992 and
1993:
... I guess in respect of my wife's concerns or my
wife's behaviour, my mother approached me some time in the
winter and I have ... I characterized the exchange at discoveries
as not being solicitor-client privilege but more in the nature of
a mother asking her son or a creditor asking her debtor because
the Crown seemed very adamant about knowing how this document[3] .. came about. My
mother came to me and said, "what if you die?" just as
my wife had been concerned. "What if you die, how do we get
paid on the note?" And I said, "well, my estate would
owe you the note" and she said "well, how would they
pay us?" I said, "well, it settles up all the
estate's property and pays off the liabilities to the extent
that it can". And my mother asked me, "who does
that?". I said, "my executor". She said, "who
would that be?". I said, "probably Dina".
[25] He then continued to discuss this matter resulting in his
mother saying that she would like a collateral charge and this
resulted in a document entitled "Charge/Mortgage of
Land" dated in May, 1993 which provided:
This Charge is granted as collateral security to a promissory
note from the Chargor to the Chargees dated the 15th
day of June, 1989.
The Chargees were his parents.
[26] An exchange, in respect of the capital loss on
cross-examination follows:
Q. I am suggesting that the two transactions of 1992 were
designed to crystallize a loss in your hands so that you might
benefit from those cystallized losses. That's what happened
isn't it Mr. DeGeer?
A. I was aware that the effect of the transfer would
crystallize a loss.
Capital gains against which Appellant set off
allowable capital loss on sale of farm to parents
[27] Dina was employed by Trimark Financial Corporation
("Trimark"). Prior to the initial public offering of
Trimark shares, Dina, as a senior employee, was entitled to
purchase certain shares of the company. In order to own the
shares equally with the Appellant without registering any of the
shares in the name of the Appellant, Dina executed Declaration of
Trust No. 1 wherein she declared that 35,000 common shares of
Trimark registered in her name were held in trust for the
Appellant. This document, which is undated, states that she had
held 35,000 common shares for the Appellant since March 31, 1992.
The Appellant said that Dina did not want his name to appear on
the share register because her employer would not like it.
[28] Another undated document, Declaration of Trust No. 2,
provides that Dina had held an option to purchase 50,000 shares
of Trimark for the Appellant since April 9, 1992. A document
entitled Variation of Trust Agreement dated April 21, 1993
provided that Dina, as trustee, granted to the Appellant the
right to veto any proposed exercise by her of her rights pursuant
to her legal ownership of the aforesaid option. That is
accompanied by a declaration described as being sworn before the
Appellant, dated December 21, 1992 in which Franco Balestra, a
brother of Dina, says that:
... my sister, Dina DeGeer, declared before me that she held
certain of her share securities in Trimark Financial Corporation
in trust for her husband, Christopher DeGeer.
Although my sister asked me to remember her declaration, I no
longer recall the exact date thereof.
I make this declaration to establish evidence of her trust
intention to the best of my current recollection, and for no
other or improper purpose.
[29] On cross-examination the Appellant said that Trust
Document No. 1 would have been made in the winter of 1992. He
said that there was no date on either document and then:
Q. Do you know whether these two documents were created on the
same date or different dates?
A. No, I don't remember.
[30] A document entitled "Trust Sale Agreement"
expressed to be made on the 12th day of May, 1993
provided for a sale by the Appellant to Dina of 99 percent of the
Appellant's right under Declaration of Trust No. 2. The
consideration for this was determined by a complex formula.
[31] The Appellant admitted that the Trimark shares were being
held for him as of March 31, 1992. He also acknowledged that he
didn't take any steps with respect to these shares to put
them beyond the reach of creditors.
[32] With respect to the trust agreement and the
Appellant's brother-in-law's recollection of an oral
declaration of trust, on cross-examination the following exchange
took place:
Q. You used the word "important" in your evidence,
Mr. DeGeer, correct?
A. I think it is important if you're claiming there is a
trust in existence to be able to prove it.
Q. And it is interesting to me, Mr. DeGeer, and perhaps you
can tell His Honour why it was, given your inclination to paper
most of your transactions, that you chose not to paper that
transaction and at the same time chose to ask a witness to
remember it?
A. Because on that date, I believe I explained yesterday, on
that date Dina was aware of what the fair market value of the
shares which was the subject matter of the trust were. And so we
were doing it as of that date. But I didn't have -- I guess I
didn't have the documents prepared on that date and they were
prepared later. Those are the undated ones you went on about
yesterday.
[33] Further cross-examination established that Dina disposed
of the option to the Appellant at the same value at which she
acquired it. This was followed by an exchange relating to the
capital gain:
Q. All right, but she paid no tax on that and you were
desirous of, to use your language of yesterday, of triggering a
gain in your hands. Isn't that true?
A. Of triggering it?
Q. Yes.
A. No.
Q. Well, that was your language Mr. DeGeer.
A. To trigger a gain?
Q. The record will reflect that that is exactly the words you
used. You wished to trigger a gain. And the reason you wished to
trigger a gain is because you knew that you had the losses, which
are the subject of this hearing, available for you, isn't
that true Mr. DeGeer?
A. No, no, no. That is not quite the exact statement. You
trigger the disposition because you want the money. Attendant to
that disposition may or may not be gains. In this case, I was
aware there were gains.
Q. That is why it was of interest to me that you used that
language yesterday, triggered the gain, because it does show, I
suggest Mr. DeGeer, that you recognize and plan and think about
and anticipate the tax issues associated with your business
dealings, isn't that true?
A. That is a fair statement. I try and consider all
matters.
Q. And one of the matters you were considering at the time
that you entered into this transaction on May 12, 1993 was that
you hoped the Department of National Revenue would recognize it
as a capital loss from the preceding year, correct? You had an
opportunity to apply that loss against the gain that you were
triggering on May 12, 1993 correct?
A. I was aware I had a capital loss at this date and I was
aware that if I recognized gains, triggered gains, as you say,
that they would relate to each other in my tax return yes.
Q. Yes. So you expected that, through this mechanism, you
would access the inherent value of the shares or the trust?
A. Yes.
Q. And you would not pay tax on it nor would your wife pay tax
on it, correct?
A. Not through the mechanism, no. This mechanism was the means
by which Dina would dispose of them.
[34] Later in cross-examination, it was demonstrated that on
examination for discovery the Appellant made no mention of
"creditor-proofing" himself as a reason for
transferring the farm to his parents.
[35] Further, when asked by Respondent's counsel whether
his wife was present during discussions in which the subject of
the return of the farm to his parents was raised he
responded:
I don't remember.
[36] He then said that it was possible that she was present
because she was often up north with him.
[37] On further cross-examination the Appellant stated that he
didn't have a land transfer back to him drafted immediately.
This exchange followed:
Q. And if you acted and obtained a transfer back from your
parents immediately after your parents had agreed to transfer the
property back we wouldn't be here today would we Mr.
DeGeer?
A. I don't know.
Q. We wouldn't be here today Mr. DeGeer because you do
know that the superficial loss rules would have applied to you
and the capital loss that you would have been seeking would have
been reduced to nil by operation of the Income Tax Act. You knew
that, didn't you Mr. DeGeer?
A. I know that now.
Q. You knew that at the time didn't you Mr. DeGeer?
A. No.
Q. Come now.
A. No, I did not.
Q. So it is pure coincidence, is it Mr. DeGeer, that the
transfer back thirty-five days after the original transfer, being
the first Saturday outside of the thirty day period prescribed by
the superficial loss rules, well past the time when your mother
had agreed to have it transferred back, was done purely by
coincidence and without your knowledge and specific intention in
regard to the Income Tax Act? Purely coincident, is that right
Mr. DeGeer?
A. First of all, I don't know that it was well past. It
was probably the first opportunity that I had to go up there.
Q. It was not on your ...
A. It was, the first opportunity I had to go up there because
I would have attended to that right away. Now, unfortunately,
counsel, it is the closeness to what turned out to be the thirty
day rule that is the reason that we are here as expressed by Mr.
Vantil's[4]
comments to me on January 2, 1997.
Q. By the way ...
A. You guys are ticked it was so close and I'm sorry that
was the first Saturday I was up with that Deed.
[38] The Appellant, in his 1993 income tax return, reported
taxable capital gains of $238,357.47. This sum is 75 percent of
the total of $127,500 from the sale of the capital interest of
the aforesaid trust and capital gains of $190,309.97 from sale of
Trimark shares, the total being $317,809. The Appellant claimed a
capital loss carry forward from his 1992 taxation year of
$238,357.47 to reduce his taxable capital gain in 1993 to
nil.
[39] The Appellant reported taxable capital gains of
$466,350.99 in his 1994 taxation year. This is 75 percent of the
total capital gains of $235,000 from sale of the capital interest
in the trust, capital gains of $291,699 from the disposition of
10,000 Trimark shares and an elected capital gain in the amount
of $95,102.33, the total being $621,801. The Appellant claimed a
capital gains deduction of $71,326.75 and a capital loss carry
forward from his 1992 taxation year in the amount of
$386,092.28.
[40] The Minister reassessed the Appellant disallowing the
allowable capital loss claim in 1992, 1993 and 1994 and assessed
penalties in respect of the claim of that amount.
APPELLANT'S SUBMISSIONS:
[41] The Appellant's submissions were almost entirely
devoted to establishing that his transactions were not subject to
the provisions of section 245, the General Anti-Avoidance Rule.
Because I have determined that the purported transfer of the farm
was invalid and legally ineffective, section 245 need not be
considered.
[42] Respecting whether there was a "disposition" of
the farm to his parents in August, 1992, the Appellant stated
that the transaction was a valid disposition of land effected by
the execution and delivery of prescribed Form I under the Ontario
Land Registration Reform Act. He stated that that Deed
purported to convey the "fee simple" which, under the
Ontario Conveyancing and Law of Property Act conveys all
of the transferor's interest in the subject land. He further
stated that registration of a Deed was not required under the
Registry system in order to effect a transfer. He referred to an
act to amend the Land Transfer Tax Act[5]. It provided that "a disposition
of a beneficial interest in land" included a sale, transfer
or assignment, however effected, of any part of a beneficial
interest in land. Section 2(a)(2) reads as follows:
If there is a disposition of a beneficial interest in land,
tax at the rates otherwise determined under section 2 is payable
to the Treasurer on the thirtieth day after the date of the
disposition as if the disposition were a conveyance of land
tendered for registration.
ANALYSIS AND CONCLUSION:
[43] Obviously, the Appellant's purpose in referring to
these forms and provisions was to persuade the Court that the
1992 transfers were made in compliance with statutory
requirements and were not required to be registered.
[44] Execution of forms of conveyance does not, of itself,
effect a disposition of property. The Appellant's purported
transfer to his parents on August 15, 1992 was not a
"disposition" of property within the meaning of
paragraph 40(1)(b) which describes:
a taxpayer's loss for a taxation year from the disposition
of any property.
[45] The term "disposition", described in paragraph
54(c) is not a definition. It includes certain specific
transactions and is, accordingly, not helpful in this situation.
Obviously, disposition means parting, unconditionally,
with beneficial ownership of property. The evidence does not
support a conclusion that the Appellant unconditionally parted
with beneficial ownership of the farm to his parents on August
15, 1992. The facts persuade me that the Appellant engineered the
purported transfer in order to "trigger" a capital
loss. This was followed thirty-five days later by a purported
transfer from his parents to him with the intent that he would
still own the farm, having reacquired same beyond the thirty day
limit within which such reacquisition, if valid, would have
resulted in his capital loss being deemed to be nil as a
"superficial loss"[6].
[46] The Appellant's knowledge of the provisions and
workings of the Act respecting transactions with his parents and
Dina was, despite his protestations, extensive.
(a) He admitted knowledge of the fact that each parent could
take advantage of a $500,000 capital gains exemption on the
disposition of farm property. He acknowledged that the 1989
acquisition, while benefiting his parents and effecting an estate
freeze, gave him a cost amount for tax purposes of that property
equal to the sale price to his parents.
(b) The Appellant was aware, in early 1992, that his wife had
shares which could produce a substantial capital gain and he
prepared documents by virtue of which she held shares and options
in his name for the purpose of him disposing of same and using
the purported capital loss from the farm transactions and his
capital gains exemption to reduce those gains for tax
purposes.
(c) The Appellant used the term LCGE which indicated his
knowledge of an acronym for Lifetime Capital Gains Exemption,
underlining his familiarity with the Act and sing its
provisions in planning.
(d) He was fully aware that, with respect to Trust Document
No. 2, the cost base to Dina would be equal to her proceeds of
disposition.
(e) The Appellant acknowledged that "triggering" a
capital gain would be offset by the purported capital loss.
(f) The Appellant prepared a "roll-over" election
form and readily referred to it in evidence as a T2059, thus
indicating his degree of familiarity with and sophistication in
the area of taxation.
(g) The Appellant was aware of the potential for restricted
farm losses, which he claimed, resulting from entering into a
partnership arrangement with his step-father.
[47] He described the terrible time he was having with Dina
following the transfer of the farm to his parents on August 15,
1992. This domestic travail was said to have commenced very
shortly after the transferring document was executed in spite of
the fact that such document contained a consent to same executed
by Dina. It is noted that Dina was not produced as a witness. It
is further noted that although his mother testified briefly, his
step-father was not produced as a witness. In
O'Brien v. Her Majesty the Queen, [1988] 4 CTC
2772, Christie, J. said, at 2775:
With respect to the $10,000.00, again there is no convincing
evidence establishing what part of it, if any, should be allowed.
There are no documents in evidence about this and the
appellant's wife was not called upon to testify. This
omission was not explained. Had she testified, counsel for the
respondent would have been able to cross-examine regarding
precisely what services she rendered in the asserted capacity of
independent contractor for the $10,000.00. Enns v. Minister of
National Revenue (1987), 87 D.T.C. 208 (T.C.C.) involved
the failure to call witnesses whose testimony in the opinion of
the trial judge, Sarchuk, T.C.J., would have been of considerable
assistance to the Court. In this regard His Honour said at page
210:
In The Law of Evidence in Civil Cases, by Sopinka and
Lederman, the authors comment on the effect of failure to call a
witness and I quote:
In Blatch v. Archer (1774), I Cowp. 63, at p. 65 Lord
Mansfield stated:
It is certainly a maxim that all evidence is to be weighed
according to the proof which it was in the power of one side to
have produced, and in the power of the other to have
contradicted.
The application of this maxim has led to a well-recognized
rule that the failure of a party or a witness to give evidence,
which it was in the power of the party or witness to give and by
which the facts might have been elucidated, justified the Court
in drawing the inference that the evidence of the party or
witness would have been unfavourable to the party to whom the
failure was attributed.
In the case of a plaintiff who has the evidentiary burden
of establishing an issue, the effect of such an inference may be
that the evidence led will be insufficient to discharge the
burden. (Levésque v. Comeau, [1970] S.C.R.
1010, (1971). 16 D.L.R. (3d) 425) [emphasis added in the original
text]
See also Markakis v. M.N.R., 86 DTC 1237 (TCC),
Sedelnick Estate v. M.N.R., 86 DTC 1563(TCC) and
Christensen v. The Queen, 98 DTC 1893.
[48] No explanation having been proffered respecting the
failure to produce those two witnesses, but particularly, Dina,
presents the obvious question as to the reason for such failure.
The logical inferences are that they did not wish to testify
and/or that the Appellant did not want them subjected to
cross-examination.
[49] In light of the broad knowledge of tax matters brought to
bear upon all of the transactions in which the Appellant was
involved and which he orchestrated, his statement that he was
unaware of the superficial loss rule of thirty days is not
believable. Other factors underlining the fragility of the
Appellant's capital loss claim are:
(1) The Appellant's stated ambition, upon learning that he
would become a partner in a Toronto law firm, was to
creditor-proof himself by conveying the farm to his parents and
the other properties to his wife. When the Appellant was asked on
examination for discovery about the reason for conveying the land
to his parents he made no mention of creditor-proofing. The
evidence is clear that the Muskoka property, owned since April,
1991, was not conveyed to his wife and the evidence is clear that
the Etobicoke residence, owned since September, 1991, was not
transferred to his wife. Further, at the time that he seemed so
concerned with creditors he was beneficial owner of Trimark
shares and options.
(2) In May, 1993 he gave his parents a charge on the farm
equal to the value of the promissory note. A charge of that
nature could have been made on the land at the time of initial
acquisition from his parents and this would have left the land
without value so far as some potential creditor was
concerned.
(3) The Appellant dealt with the farm pursuant to his mother
having stated that he could do "whatever you want to
do".
(4) There was no reduction of any amount on account of the
promissory note obligation on the purported transfer of the farm
by the Appellant to his parents on August 15, 1992. That note
remained valid and unchanged.
(5) In spite of the Appellant's firmly stated belief in
creditor proofing he did not mention that on examination for
discovery. Further, he did not convey any assets to Dina even
though a substantial period of time had elapsed between the
acquisition of those properties and his learning that he would
not become a partner.
(6) The Appellant obtained no valuation of the farm on the
initial acquisition from his parents.
(7) The Appellant obtained no valuation upon the purported
transfer to his parents in August, 1992.
(8) The foregoing two amounts selected by him appear to be
convenient for his purposes, no evidence regarding those amounts
having been presented to the Court.
[50] Combined with all the foregoing factors is the
Appellant's conduct during the hearing. His obdurate nature
asserted itself with continued denial that the promissory note
given to his parents payable, without interest, ten years after
its delivery, had, in fact, a value equal to the promissory note
amount. That position which is patently absurd fuels a challenge
of his credibility. His responses, on cross-examination, became
increasingly vague and sarcastic in respect of questions with
which he was obviously uncomfortable.
[51] These factors have let me to the conclusion, that the
Appellant set up the circumstances around the transfer of land to
his parents so that a capital loss to be applied in reduction of
expected capital gains would arise. The timing of the
transactions connected with the purported sale support that
conclusion. There was, in my opinion, no intention of parting
unconditionally with beneficial interest in the farm and hence no
disposition of the farm on August 15, 1992 by the Appellant to
his parents. Accordingly, no capital loss arises therefrom.
[52] Every person who, knowingly has made a false statement in
a return file as required by the Act is liable to a penalty under
subsection 163(2) as computed therein. The Appellant was so
required. He, knowingly, having made invalid deduction claims in
respect of a capital loss, is subject to the penalties
assessed.
[53] The Appellant's appeals from the reassessments made
under the Act for the 1993 and 1994 taxation years are
dismissed and the penalties are affirmed as properly
assessed.
[54] The purported appeal from the reassessment made under the
Act for the 1992 taxation year is quashed.
[55] Costs are awarded to the Respondent.
Signed at Ottawa, this 16th day of December,
1999.
"R.D. Bell"
J.T.C.C.
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