Citation: 2011TCC152
Date: 20110315
Docket: 2010-2625(IT)I
BETWEEN:
JOHN WIENS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1] The Appellant’s appeals relate to
the reassessment of his 2002 and 2003 taxation years. In both years amounts
were added to his income in relation to a retail store that he operated as a
sole proprietorship and in relation to certain sales of real property. The
following were the amounts that were added to his income:
|
|
2002
|
2003
|
|
Increase in income from the retail store:
|
$42,028
|
$2,667
|
|
Increase in income from the sale of real property:
|
$34,055
|
$179,206
|
|
Total increase to business income:
|
$76,083
|
$181,873
|
|
Reduction for taxable capital gain claimed:
|
|
($36,952)
|
|
Write-down of closing inventory (Dec.22, 2008
reassessment):
|
($6,160)
|
($18,999)
|
|
Net increase to income:
|
$69,923
|
$125,922
|
[2]
Section 18.12 of the Tax
Court of Canada Act provides that:
18.12 Where, before the start of the hearing of an appeal referred to in
subsection 18(1), it appears to the Court that
(a) the aggregate of all amounts in issue exceeds $12,000,
or
(b) the amount of the loss in issue exceeds $24,000,
as the case may be, the Court shall order that
sections 17.1 to 17.8 apply in respect of the appeal unless the appellant
elects to limit the appeal to $12,000 or $24,000, as the case may be.
[3]
Section 2.1 of the Tax
Court of Canada Act provides that:
2.1 For the
purposes of this Act, "the aggregate of all amounts" means the total
of all amounts assessed or determined by the Minister of National Revenue under
the Income Tax Act, but does not include any amount of interest or any
amount of loss determined by that Minister.
[4]
Since no penalties were
assessed under the Income Tax Act (the “Act”) against the
Appellant, for the purposes of the Tax Court of Canada Act “the
aggregate of all amounts” in this case would mean the taxes assessed under the Act.
In Maier v. The Queen, [1994] T.C.J. No. 1260, Justice Garon (as he
then was) held that the aggregate of all amounts in dispute means the aggregate
amounts in dispute under a particular assessment (or reassessment) and not
under a Notice of Appeal. When a Notice of Appeal relates to more than one
assessment (or reassessment) the issue is not whether the total amounts in
dispute under the Notice of Appeal exceed $12,000 but whether the total amounts
in issue in relation to any particular assessment or reassessment exceeds
$12,000. Therefore, if a person elects to limit an appeal to $12,000, the
limitation will apply to each assessment (or reassessment) that is the subject
of the appeal. In this case, the $12,000 limit will apply to the appeal from
the reassessment of the Appellant’s liability for his 2002 taxation year and a
separate $12,000 limit will apply to the appeal from the reassessment of the
Appellant’s liability for his 2003 taxation year.
[5]
Since the net increase
in the Appellant’s income for 2003 was $125,922, it appears that the aggregate
of the taxes assessed under the Act that are in issue in relation to the
reassessment for 2003 would be in excess of $12,000. At the commencement of the
hearing I read the provisions of section 18.12 of the Tax Court of Canada
Act to the agent for the Appellant and he confirmed that the Appellant was
electing to limit the appeal for each year to $12,000. To that end the agent
for the Appellant submitted a schedule with the title “Revised Statement of
Amounts in Dispute” which listed the following:
2002
Business Income Real Estate
Profit 22 Pembroke Road 31,799
Profit 428 Redonda Street 2,257
Business Income Dollar Store
Insurance Proceeds 10,914
Total Disputed Amount 2002 44,970
2003
Business Income Real Estate
Profit Lot 2, Springfield 59,827
Business Income Dollar Store
Insurance Proceeds 2,200
Total Disputed amount 2003 62,027
[6]
These real properties,
as well as the other three real properties listed in the Reply for 2003, are
all located in or near Winnipeg. The agent for the Appellant had indicated
that the evidence in relation to the real property transactions would be
limited to the properties listed in this schedule. However since the agent did
not ask either one of the two witnesses any questions in relation to these
three properties, the purpose of this schedule is simply to illustrate that the
Appellant’s agent had turned his mind to the restriction imposed on an appeal
under the informal procedure whereby the amount in dispute (taxes and, if
applicable, penalties assessed under the Act) is limited to $12,000.
There is also a copy of a letter in the Court file that was sent to the agent
for the Appellant on October 21, 2010 from the Department of Justice that
raises this issue of the limitation of the amount in dispute in an appeal under
the informal procedure to $12,000 and indicating that the Appellant could have
the appeal heard under the general procedure without limits.
[7]
It is clear that the
Appellant and his agent have received adequate notification of the limitations
related to appeals under the informal procedure and that the Appellant has
elected to limit the amount of taxes in dispute for each year to $12,000. As a
result, the hearing continued under the Informal Procedure.
[8]
There were only two
witnesses who testified at the hearing – the Appellant and his spouse. An issue
arose during the re-examination by the agent for the Appellant of his
witnesses. Counsel for the Respondent objected to questions that the agent was
asking of each witness during the re-examination of such witness by the agent
for the Appellant on the basis that:
MS. HURST: In my submission, reply is directed at issues that were
raised in cross that the Appellant could not have known in chief.
[9]
This was an informal
procedure hearing and I allowed the agent to ask questions on re-examination of
a witness in relation to matters that were raised during the cross-examination
of that witness but which had not been addressed during the direct examination
of that witness.
[10]
In R. v.
Evans, [1993] 2 S.C.R. 629, 104 D.L.R. (4th) 200,
Justice Cory writing on behalf of a majority of the Justices of the Supreme
Court of Canada, stated as follows:
Should the Question
Have Been Permitted on Re-examination
37 Even
though it has been determined that the evidence was admissible, it remains to
be seen whether the question should have been permitted on re‑examination.
38 The
issue is put very well by E. G. Ewaschuk in Criminal Pleadings & Practice
in Canada, 2nd ed., in these words at p. 16.29, para. 16:2510:
Questions permitted as of right on re-examination must relate to
matters arising out of the cross-examination which deal with new matters, or
with matters raised in examination-in-chief which require explanation as to questions
put and answers given in cross-examination.
[Emphasis
added by Justice Cory.]
Generally
speaking, the right to re-examine must be confined to matters arising from the
cross-examination. As a general rule new facts cannot be introduced in re‑examination.
See R. v. Moore (1984), 15 C.C.C. (3d) 541 (Ont. C.A.), per
Martin J.A. In this case, the cross-examination of Linda Sample referred to her
statements to police about the appellant. The police interview of December 30
was specifically alluded to during the cross-examination and had not been
dealt with in-chief. It was in response to this cross examination that
Linda Sample stated that, from the time of that meeting, she suspected the
appellant of committing the crime. It would seem that the Crown had the
right to re-examine Linda Sample as to precisely what she told the police at
that time with regard to the appellant. It was a subject that had not been
raised in the examination in chief but arose from the cross-examination.
The trial judge erred in failing to allow re-examination on this point.
(emphasis added)
[11]
It seems to me that
when the witness was being examined in chief the Crown would have known (or
could have known if the Crown would have asked the police) about the police
interview with the witness. Not having referred the witness during the
examination-in-chief to her statements that she had made to the police should
not have prevented the Crown from asking that witness questions about her
statements during the re-examination of that witness because the matter was
raised during the cross-examination of the witness. Therefore, even though a
matter was not raised during examination-in-chief of a witness, if that matter
is raised during cross-examination of that witness, the witness can be
re-examined in relation to that matter following cross-examination, even though
the agent or counsel who called the witness would have (or could have) known about
the matter prior to the cross‑examination of that witness.
[12]
In The Law of
Evidence in Canada (third edition) by Justice Bryant, Justice Lederman,
and Justice Fuerst all of the Superior Court of Justice for Ontario, it is stated at page 1164 as follows:
VII. RE-EXAMINATION
§16.183 The purpose of re-examination is
to enable the witness to explain and clarify relevant testimony which may have
been weakened or obscured in cross-examination. The witness is not ordinarily
allowed to supplement the examination-in-chief by introducing new facts which
were not covered in cross-examination.* The general rule is that re-examination
must be confined to matters which arose out of cross-examination.*
§16.184 The right to re-examine,
however, extends to rehabilitation of the credibility of the witness which may
have been impaired in cross-examination. This includes the right to ask the
witness to explain or clarify discrepancies between the witness’
evidence-in-chief and cross-examination.* In addition, this may entail the
introduction of a previous consistent statement to rebut the suggestion that
the witness’ evidence was a recent contrivance.*
§16.185 In addition to the right to
re-examine, the trial judge has a discretion to permit re-examination in
circumstances that do not accord with the principles stated above. It is a
discretion that is to be exercised sparingly, but extends to permit
re-examination on matters not touched on in cross-examination which may,
through oversight, have been omitted in chief. In such cases, the opposing
party will have a further right to cross-examine the witness.*…
(* denotes a footnote reference that is in the text but which has
not been included.)
[13]
Therefore even if a
matter has not been addressed during the examination-in-chief or during the
cross-examination of a witness, it is still possible to permit the matter to be
addressed during re-examination, with the opposing party having the right to a
further cross-examination of the witness.
[14]
The Appellant’s tax
liability for 2002 was originally assessed on October 14, 2003 and the
Appellant’s tax liability for 2003 was originally assessed on May 25, 2004. The
Appellant was reassessed to include the additional income referred to above by
notices of reassessment dated August 30, 2007. The notices of reassessment were
issued after the expiration of the normal reassessment period as defined in
subsection 152(3.1) of the Act. Subsection 152(4) of the Act
provides, in part, that:
(4) 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
(ii) has filed with the Minister a waiver in prescribed form within
the normal reassessment period for the taxpayer in respect of the year;
[15]
A waiver in respect of
“Business Income & Expenses & Real Estate Transactions” for the 2002
taxation year of the Appellant was dated October 10, 2006. The Appellant
acknowledged that the signature on the form appeared to be his signature but he
stated that he has no recollection of signing the waiver. No waiver was
submitted in respect of the 2003 taxation year.
[16]
The Appellant was not
well in 2006. He described his condition as follows:
Q. Mr. Wiens, I was asking you: Do you recall where you were
and what you were doing on October 10, 2006?
A. I was either in the hospital or out for a few days or on
day passes or so on. I was awaiting surgery.
Q. Can you describe what type of surgery you were waiting to
do?
A. I was going to take out my spleen. They said it was in danger
of a spontaneous rupture. They wanted to diagnose it or something. I don't
understand what the doctors do.
Q. Were you physically ill as a result of this?
A. Yes.
Q. Were you on medication?
A. A lot
of it.
Q. Do you
recall what that medication was?
A. Some of them were narcotics, but I know you have to get a
special prescription. If I was in the hospital I would get a whole bunch of
pills. My wife knew more of what I was taking at home. It would be a shot glass
of a whole bunch of different stuff. I don't know exactly what everything was.
Q. Would you say that you were your normal self and
functioning mentally properly at that time?
A. I couldn't drive. They told me that with the drugs I was
on I couldn't operate a motor vehicle.
Q. Were you dealing with your tax matters at that time?
A. No.
…
Q. In regard to taxes, to your mental and physical state,
your ability to make decisions; all that stuff.
A. My wife described me as a vegetable. I remember getting a
call when I was in the hospital ‑‑ I think it was in July ‑‑
or it was a message from a nurse to call the auditor. I asked my wife if she
could get the accountant at that time or a bookkeeper to take care of it. As
days went on, I got worse and worse. I was on more and more drugs, so I didn't
know what I was doing. I couldn't operate a car. I couldn't even walk.
Q. Carry
on.
A. My mental condition, I was probably close to how my wife
described me. I didn't know what I was doing. I didn't know anything.
…
Q. How far back do we go before you had your normal clarity
of thought? If we took October 10 as a benchmark, when did you start having
your memory and thinking capacity affected by your illness? That is what I'm
trying to establish.
A. I know I was admitted to the hospital in late July, I
think it was, of 2006, and I stayed there for a long time. While I was there I
was in pretty bad shape. Previous to that when we were having all the problems
with the store, I think I probably had some kind of nervous problem because I
was not very well there. You can imagine the effect if someone's house is
broken into once or so or twice, three times, five times, I don't even know how
many times it was. It was a big stress. I was paranoid, I guess. I didn't know
what was going on.
Q. What would you say your capacity was to look after your
own affairs ‑‑ especially around the audit ‑‑ during
that period of time?
A. None.
Q. Who
was looking after your affairs?
A. An accountant named Kathy Currie. I'm not sure if she is
an accountant or a bookkeeper.
[17]
In Nguyen v. The
Queen, 2005 TCC 697, [2007] 5 C.T.C.
2654, Justice Dussault of this Court
dealt with a waiver of a right to appeal that the taxpayer had signed but was
subsequently challenging. Justice Dussault made the following comments:
32 The
Appellant therefore accepted a settlement which he surely believed was in his
favour at the time, and assessments were done based on that settlement, that
is, with no penalty. He waived his right to object and appeal in respect of the
expenses the deduction of which was disallowed for the years 1997, 1998 and
1999. He did not offer any compelling evidence showing that he was unable, for
reasons related to his origin or language, to understand the consequences of
his waiver or that tax officials tried to mislead him, threaten him or apply
undue pressure in connection with the waiver. Subsections 165(1.2) and 169(2.2)
of the Act sanction such waivers.
33 It
is clear to me that a waiver of the right to object and appeal signed by a
taxpayer cannot be set aside except on a preponderance of evidence that the
taxpayer did not freely consent to the waiver or was unduly pressured. I do not
believe such evidence was put forward in this instance.
[18]
It seems to me that the
same principles should apply to a waiver of the normal reassessment period as
would apply to a waiver of the right to object and appeal. Justice Dussault
referred to setting aside a waiver on “a preponderance of evidence”. As a
result of the decision of the Supreme Court of Canada in F.H. v. McDougall,
referred to below, it seems me that there is only one standard
of proof and therefore the waiver in this case cannot be set aside unless the
Appellant establishes on a balance of probabilities the he did not freely
consent to the waiver. The question of whether a person has
consented would include the issue of whether the person had the capacity to
consent. In Chitty on Contracts (twenty-ninth edition) at page 579, it
is stated that:
Contractual incapacity. The incapacity
of one or more of the contracting parties may defeat an otherwise valid
contract. Prima facie, however, the law presumes that everyone has a capacity
to contract; so that, where exemption from liability to fulfil an obligation is
claimed by reason of want of capacity, this fact must be strictly established
on the part of the person who claims the exemption.
[19]
It also seems to me
that these comments should apply to the waiver in this case and would also
apply to any alleged incapacity arising as a result of any medication that the
Appellant was taking at the time, subject to the qualification that the
reference to “strictly established” does not impose a standard of proof that is
different from a balance of probabilities or impose a requirement on the trial
Judge to scrutinize evidence more carefully than such trial Judge would in
other civil matters. Based on the decision of the Supreme Court of Canada in F.H. v. McDougall,
referred to below, since the Appellant is claiming that he is not bound by
the waiver, the Appellant will need to establish on a balance of probabilities
that he did not have the requisite capacity to execute the waiver on October
10, 2006.
[20]
However, in this case
it is not at all clear whether the Appellant was in the hospital on October 10,
2006. No records from the hospital were introduced to show the date that he was
admitted to the hospital or discharged from the hospital. His recollection was
that he was admitted in late July 2006 and that he “stayed there for a long
time”. A long time is very subjective and of little assistance in determining
whether he was still in the hospital on October 10, 2006. For some people a
couple of weeks in a hospital may be a long time.
[21]
It is also not clear
what medication he was actually taking on October 10, 2006 or what his capacity
was on that date to understand the nature of the document that he was signing.
Simply not remembering that he had signed the document is not sufficient. It
seems to me that testimony from medical experts would have been important in
relation to the capacity of the Appellant on October 10, 2006 if the Appellant
wanted to establish that he lacked the capacity to understand the nature of the
document that he was signing on that particular day.
[22]
In relation to the onus
of proof, Justice Rothstein, writing on
behalf of the Supreme Court of Canada, in F.H. v. McDougall, [2008] 3 S.C.R. 41 stated that:
(4)
The Approach Canadian Courts Should Now Adopt
40 Like
the House of Lords, I think it is time to say, once and for all in Canada, that
there is only one civil standard of proof at common law and that is proof on a balance
of probabilities. Of course, context is all important and a judge should not be
unmindful, where appropriate, of inherent probabilities or improbabilities or
the seriousness of the allegations or consequences. However, these
considerations do not change the standard of proof. …
…
44 …. As Lord Hoffmann
explained in In re B at para. 2:
If a legal rule requires a fact to be proved (a "fact in
issue"), a judge or jury must decide whether or not it happened. There
is no room for a finding that it might have happened. The law operates
a binary system in which the only values are zero and one. The fact either
happened or it did not. If the tribunal is left in doubt, the doubt is resolved
by a rule that one party or the other carries the burden of proof. If the party
who bears the burden of proof fails to discharge it, a value of zero is
returned and the fact is treated as not having happened. If he does discharge
it, a value of one is returned and the fact is treated as having happened.
In my view,
the only practical way in which to reach a factual conclusion in a civil case
is to decide whether it is more likely than not that the event occurred.
45 To
suggest that depending upon the seriousness, the evidence in the civil case
must be scrutinized with greater care implies that in less serious cases the
evidence need not be scrutinized with such care. I think it is inappropriate to
say that there are legally recognized different levels of scrutiny of the
evidence depending upon the seriousness of the case. There is only one legal
rule and that is that in all cases, evidence must be scrutinized with care by
the trial judge.
46 Similarly,
evidence must always be sufficiently clear, convincing and cogent to satisfy
the balance of probabilities test. But again, there is no objective standard to
measure sufficiency. In serious cases, like the present, judges may be faced
with evidence of events that are alleged to have occurred many years before,
where there is little other evidence than that of the plaintiff and defendant.
As difficult as the task may be, the judge must make a decision. If a
responsible judge finds for the plaintiff, it must be accepted that the
evidence was sufficiently clear, convincing and cogent to that judge that the
plaintiff satisfied the balance of probabilities test.
47 Finally
there may be cases in which there is an inherent improbability that an event
occurred. Inherent improbability will always depend upon the circumstances. As
Baroness Hale stated in In re B, at para. 72:
Consider the famous example of the animal seen in Regent's Park. If it is
seen outside the zoo on a stretch of greensward regularly used for walking
dogs, then of course it is more likely to be a dog than a lion. If it is seen
in the zoo next to the lions' enclosure when the door is open, then it may well
be more likely to be a lion than a dog.
48 Some
alleged events may be highly improbable. Others less so. There can be no rule
as to when and to what extent inherent improbability must be taken into account
by a trial judge. As Lord Hoffmann observed at para. 15 of In re B:
Common sense, not law, requires that in deciding this question, regard
should be had, to whatever extent appropriate, to inherent probabilities.
It will be for
the trial judge to decide to what extent, if any, the circumstances suggest
that an allegation is inherently improbable and where appropriate, that may be
taken into account in the assessment of whether the evidence establishes that
it is more likely than not that the event occurred. However, there can be no
rule of law imposing such a formula.
(5)
Conclusion on Standard of Proof
49 In the
result, I would reaffirm that in civil cases there is only one standard of
proof and that is proof on a balance of probabilities. In all civil cases, the
trial judge must scrutinize the relevant evidence with care to determine
whether it is more likely than not that an alleged event occurred.
(emphasis added)
[23]
While the Appellant might
have lacked the capacity to execute a valid waiver on October 10, 2006, this is
not sufficient. The Appellant must establish that it was more likely than not
that the Appellant lacked the requisite capacity on October 10, 2006 to consent
to the waiver. The Appellant has failed to establish that it was more likely
than not that on October 10, 2006 the Appellant lacked the requisite capacity
to execute a valid waiver and therefore I find that the waiver is valid and the
Respondent had the right to reassess the Appellant for 2002.
[24]
In Hickman Motors Ltd. v.
Her Majesty the Queen, [1997] S.C.J. No. 62, Justice L’Heureux-Dubé of the
Supreme Court of Canada made the following comments in relation to an Appellant's
onus of “demolishing” the Minister’s assumptions:
92 … The Minister, in making assessments,
proceeds on assumptions (Bayridge Estates Ltd. v. Minister of
National Revenue (1959), 59 D.T.C. 1098 (Can. Ex. Ct.), at p. 1101) and the
initial onus is on the taxpayer to “demolish” the Minister's assumptions in the
assessment (Johnston v. Minister of National Revenue, [1948]
S.C.R. 486 (S.C.C.); Kennedy v. Minister of National Revenue
(1973), 73 D.T.C. 5359 (Fed. C.A.), at p. 5361). The initial burden is only to
“demolish” the exact assumptions made by the Minister but no more: First
Fund Genesis Corp. v. R. (1990), 90 D.T.C. 6337 (Fed. T.D.), at p.
6340.
93 This initial onus of “demolishing” the
Minister's exact assumptions is met where the Appellant makes out at least a
prima facie case: Kamin v. Minister of National Revenue (1992),
93 D.T.C. 62 (T.C.C.); Goodwin v. Minister of National Revenue
(1982), 82 D.T.C. 1679 (T.R.B.). In the case at bar, the Appellant adduced
evidence which met not only a prima facie standard, but also, in my view, even
a higher one. In my view, the Appellant “demolished” the following assumptions
as follows: (a) the assumption of “two businesses”, by adducing clear evidence
of only one business; (b) the assumption of “no income”, by adducing clear
evidence of income. The law is settled that unchallenged and uncontradicted
evidence “demolishes” the Minister's assumptions: see for example MacIsaac
v. Minister of National Revenue (1974), 74 D.T.C. 6380 (Fed. C.A.), at
p. 6381; Zink v. Minister of National Revenue (1987), 87 D.T.C.
652 (T.C.C.). As stated above, all of the Appellant's evidence in the case at
bar remained unchallenged and uncontradicted. Accordingly, in my view, the
assumptions of “two businesses” and “no income” have been “demolished” by the Appellant.
94 Where the Minister's assumptions have
been “demolished” by the Appellant, “the onus shifts to the Minister to rebut
the prima facie case” made out by the Appellant and to prove the assumptions: Magilb
Development Corp. v. Minister of National Revenue (1986), 87 D.T.C.
5012 (Fed. T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted
to the Minister to prove its assumptions that there are “two businesses” and
“no income”.
95 Where the burden has shifted to the
Minister, and the Minister adduces no evidence whatsoever, the taxpayer is
entitled to succeed: see for example MacIsaac, supra, where the Federal
Court of Appeal set aside the judgment of the Trial Division, on the grounds
that (at pp. 6381-2) the “evidence was not challenged or contradicted and no
objection of any kind was taken thereto”. See also Waxstein v. Minister
of National Revenue (1980), 80 D.T.C. 1348 (T.R.B.); Roselawn
Investments Ltd. v. Minister of National Revenue (1980), 80 D.T.C.
1271 (T.R.B.). Refer also to Zink v. Minister of National Revenue,
supra, at p. 653, where, even if the evidence contained “gaps in
logic, chronology and substance”, the taxpayer's appeal was allowed as the
Minster failed to present any evidence as to the source of income. I note that,
in the case at bar, the evidence contains no such “gaps”. Therefore, in the
case at bar, since the Minister adduced no evidence whatsoever, and no question
of credibility was ever raised by anyone, the Appellant is entitled to succeed.
96 In the present case, without any
evidence, both the Trial Division and the Court of Appeal purported to
transform the Minister's unsubstantiated and unproven assumptions into “factual
findings”, thus making errors of law on the onus of proof. My colleague
Iacobucci J. defers to these so-called “concurrent findings” of the courts
below, but, while I fully agree in general with the principle of deference, in
this case two wrongs cannot make a right. Even with “concurrent findings”,
unchallenged and uncontradicted evidence positively rebuts the Minister's
assumptions: MacIsaac, supra. As Rip T.C.J., stated in Gelber v. Minister
of National Revenue (1991), 91 D.T.C. 1030 (T.C.C.), at p. 1033, “[the
Minister] is not the arbiter of what is right or wrong in tax law”. As Brulé T.C.J.,
stated in Kamin, supra, at p. 64:
the Minister should be able to rebut such [prima facie] evidence and
bring forth some foundation for his assumptions.
…
The Minister does not have a carte blanche in terms of setting out any
assumption which suits his convenience. On being challenged by evidence in
chief he must be expected to present something more concrete than a simple
assumption. [Emphasis added by Justice L’Heureux Dubé]
[25]
The British Columbia Court of Appeal in Northland Properties Corp. v.
British Columbia, 2010 BCCA 177, 319
D.L.R. (4th) 334 commented on this decision of Justice L’Heureux Dubé and stated
that:
26 The
use of "demolish" has carried through to the present: see Hickman
at para. 92; or, most recently, in Norton v. Canada, 2010 TCC 62 at
para. 59. The choice of word is unfortunate, because it tends to cloud the
actual nature of the standard of proof. "Demolishing" does not imply
a higher standard, and, in that regard, the careful statement of McQuaid J.A.
in Island Telecom Inc. v. P.E.I. (Regulatory and Appeals Commission)
(1999), 176 D.L.R. (4th) 356 (P.E.I.C.A.) at para. 22 is apposite:
[22] ... Once ... the assumptions have been
"demolished" or, to express it somewhat less emphatically, once
the taxpayer discharges the ... burden of showing that the facts or assumptions
relied upon by the assessor are incorrect, ... [Emphasis added.]
27 The
standard of proof in discharging this burden is nothing more or less than the
balance of probabilities. As Justice Lowry stated in Trac (at para. 30):
[30] ... The act of "demolishing" a ministerial
assumption entails proving on the balance of probabilities the material facts
that are within the taxpayer's knowledge if those facts do not support the
assumption.
28 Additional
confusion about the standard flowed from Justice L'Heureux-Dubé's use of "prima
facie case" in Hickman (at paras. 92-95):
[92] ... The Minister, in making assessments, proceeds on
assumptions ... and the initial onus is on the taxpayer to "demolish"
the Minister's assumptions in the assessment .... The initial burden is only to
"demolish" the exact assumptions made by the Minister but no more
....
[93] This initial onus of "demolishing" the Minister's
exact assumptions is met where the appellant makes out at least a prima
facie case: Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v.
M.N.R., 82 D.T.C. 1679 (T.R.B.). In the case at bar, the appellant adduced
evidence which met not only a prima facie standard, but also, in my
view, even a higher one. In my view, the appellant "demolished" the
following assumptions as follows: (a) the assumption of "two
businesses", by adducing clear evidence of only one business; (b) the
assumption of "no income", by adducing clear evidence of income. The
law is settled that unchallenged and uncontradicted evidence
"demolishes" the Minister's assumptions: see for example MacIsaac
v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87
D.T.C. 652 (T.C.C.). As stated above, all of the appellant's evidence in the
case at bar remained unchallenged and uncontradicted. Accordingly, in my view,
the assumptions of "two businesses" and "no income" have
been "demolished" by the appellant.
[94] Where the Minister's assumptions have been
"demolished" by the appellant, "the onus ... shifts to the
Minister to rebut the prima facie case" made out by the appellant
and to prove the assumptions: Magilb Development Corp. v. The Queen, 87
D.T.C. 5012 (F.C.T.D.), at p. 5018. Hence, in the case at bar, the onus has
shifted to the Minister to prove its assumptions that there are "two businesses"
and "no income".
[95] Where the burden has shifted to the Minister, and the
Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed:
see for example MacIsaac, supra, where the Federal Court of Appeal set
aside the judgment of the Trial Division, on the grounds that (at p. 6381) the
"evidence was not challenged or contradicted and no objection of any kind
was taken thereto". See also Waxstein v. M.N.R., 80 D.T.C. 1348
(T.R.B.); Roselawn Investments Ltd. v. M.N.R., 80 D.T.C. 1271 (T.R.B.).
Refer also to Zink, supra, at p. 653, where, even if the evidence
contained "gaps in logic, chronology, and substance", the taxpayer's
appeal was allowed as the Minister failed to present any evidence as to the
source of income. I note that, in the case at bar, the evidence contains no
such "gaps". Therefore, in the case at bar, since the Minister
adduced no evidence whatsoever, and no question of credibility was ever raised
by anyone, the appellant is entitled to succeed. [Emphasis in original
removed.]
29 Before
us, counsel for the Crown made persuasive submissions on the issue of the
so-called "prima facie" standard: L'Heureux-Dubé J.'s use of
"prima facie" was made in the context of a case in which the
Crown had not called any evidence whatsoever; it was relying solely on its
assumptions. It is certainly possible in such circumstances that a prima
facie case, or even one with "gaps", would be sufficient to
displace the Crown's assumptions, but the prima facie standard described
by Justice L'Heureux-Dubé should not be interpreted as having altered the usual
standard of proof in tax cases: see the comments in Sekhon v. Canada,
[1997] T.C.J. No. 1145 at para. 37; and Hallat v. The Queen (2000), [2001]
1 C.T.C. 2626 (F.C.A.).
30 The
other potentially confusing aspect of Hickman was Justice
L'Heureux-Dubé's statement (at para. 92) that the "initial burden [on the
taxpayer] is only to 'demolish' the exact assumptions made by the
Minister but no more: First Fund Genesis Corp. v. The Queen, 90
D.T.C. 6337 (F.C.T.D.), at p. 6340." [Emphasis in original.]
31 This
statement is consonant with the taxpayer's initial legal burden: The taxpayer's
only task is to rebut the Minister's assumptions so that the Minister does not
have the benefit of the assumption. If the Minister adduces alternate evidence
to support the assessment then there is a tactical burden on the taxpayer to
challenge it, but, in theory, the taxpayer need do "no more" than
bring evidence to unseat the assumptions.
32 The
taxpayer has a number of ways of meeting the Minister's assumptions: Pillsbury
at 5188. The taxpayer may
(a)
challenge the Minister's allegation that he did assume those facts,
(b)
assume the onus of showing that one or more of the assumptions was
wrong, or
(c) contend that, even if the assumptions
were justified, they do not of themselves support the assessment.
33 In
response to the taxpayer's submissions, the Crown may adduce its own evidence
to prove either that the assumptions are correct or to show that, even without
relying on the assumptions, the assessment is nevertheless valid: Pillsbury
at 5188; Pollock at 6053. The Crown may also challenge the taxpayer's
evidence, either on cross-examination, or by raising serious issues of
credibility. A court may draw a negative inference "from the taxpayer's
failure to adduce material evidence in the taxpayer's possession or
control" and conclude the taxpayer has not met its initial burden of
disproving one or more of the assumptions: Trac at para. 31. Once all
the evidence is in, the judge must weigh it and first determine whether
the taxpayer has met the initial legal burden with respect to the assumptions.
If the taxpayer has failed to meet its burden, then the Crown need not go on to
discharge its conditional legal burden because the precondition has not been
met.
34 If
the taxpayer has successfully discharged its legal burden with regard to an
assumption, the Crown may not rely on that assumption in attempting to prove
the validity of the assessment. If unproven assumptions are necessary to the
assessment, the taxpayer will succeed. Assumptions not disproven are deemed
facts which, if sufficient to establish the Minister's case, will cause the
appeal to fail.
35 In
summary form, the proper approach on the appeal of a tax assessment may be
described thus:
i.
What are the assumptions?
ii.
Have some or all of the assumptions been disproven? (i.e., has the
taxpayer discharged the initial legal burden?)
iii.
If the taxpayer has successfully discharged the initial legal burden,
then has the Crown shown that the assessment is valid? (i.e., has the Crown
discharged the conditional legal burden?)
[26]
It seems to me that the
conclusion to be drawn is simply that the Appellant has the initial onus of
proving on a balance of probabilities (i.e. that it is more likely than not),
that any of the assumptions that were made by the Minister in assessing (or
reassessing) the Appellant with which the Appellant does not agree, are not
correct. This is a general rule and there are exceptions if the assumption that
is made is related to a matter which is within the knowledge of the Minister. In the decision of the
Federal Court of Appeal in The Queen v. Anchor Pointe Energy
Ltd., 2007 FCA 188, Létourneau J.A. stated
that:
[35] It is trite law that, barring
exceptions, the initial onus of proof with respect to assumptions of fact made
by the Minister in assessing a taxpayer’s liability and quantum rests with the
taxpayer. ...
[36] I agree with Bowman A.C.J.T.C.,
as he then was, that there may be instances where the pleaded assumptions of
facts are exclusively or peculiarly within the Minister’s knowledge and that
the rule as to the onus of proof may work so unfairly as to require a corrective
measure: see Holm et al. v. The Queen, supra, at paragraph 20.
[27]
This is not a case
“where the
pleaded assumptions of facts are exclusively or peculiarly within the
Minister’s knowledge and that the rule as to the onus of proof may work so
unfairly as to require a corrective measure”. Therefore the Appellant in this
case has the initial onus of proving that any assumptions, that were made in
reassessing the Appellant for 2002 with which the Appellant does not agree, are
not correct. There are two
items in dispute in relation to the reassessment of the Appellant’s 2002 tax
liability. One is related to the real property transactions and the other is
related to the amounts paid by the insurance company in relation to claims
filed by the Appellant.
[28]
The real property
transactions that have resulted in the reassessment of the Appellant for 2002
are the following:
|
Property
|
22 Pembroke Road
|
428 Redonda Street
|
|
Date purchased:
|
February 15, 2002
|
September 11, 2002
|
|
Date sold:
|
August 16, 2002
|
December 13, 2002
|
|
Total cost:
|
$90,520
|
$81,486
|
|
Net Proceeds of sale:
|
$122,319
|
$83,725
|
|
Gain:
|
$31,799
|
$2,257
|
[29]
The first property was
held for approximately six months and the second for approximately three
months. It is the position of the Appellant that any gain realized on the sale
of these properties is income of his daughter. If any gain is income of his
daughter, then it will not matter whether the gain is a capital gain or an
income gain as only the reassessment of the Appellant is in issue in this case.
How his daughter should have reported such gain (if such gain should have been
reported by her) is not in issue in this case.
[30]
It is the position of
the Respondent that the gains realized on the sales of these two properties in
2002 were income gains of the Appellant.
[31]
The Appellant and his
spouse have three children. Their daughter, Jessalyn, would have been 20 years
old in 2002. Their other two children would have been 17 and 13 in 2002. Jessalyn
Wiens graduated from high school in 2001 and worked part‑time at Smitty’s
restaurant and the retail store operated by the Appellant. It was assumed in
the Reply that Jessalyn Wiens was paid $4,000 for working at the store in 2002
and the Appellant has not established that this assumption was not correct. She
was living with the Appellant in 2002 prior to the purchase of the Pembroke Road property.
[32]
It is the position of
the Appellant that the money required to purchase the property located at 22 Pembroke Road was advanced to Jessalyn Wiens from a line of credit
that the Appellant and his spouse had with CIBC. It is not clear whether the
amount advanced from the line of credit was the full purchase price of $90,520
(including repairs and improvements) or a down payment amount (with the balance
being financed from another loan). Jessalyn Wiens graduated from high school in
2001. The property at 22
Pembroke Road was acquired on
February 15, 2002 which was before she started working at the retail store
operated by the Appellant. The Appellant did not start operating the retail
store until July 2002. Therefore it appears that the only income that Jessalyn Wiens
had from the end of June 2001 (when she graduated from high school) to mid
February 2002, would have been whatever income she earned from her job at
Smitty’s restaurant. It is more likely than not that Jessalyn Wiens did not
have any money to apply towards the purchase of the property located at 22 Pembroke Road.
[33]
The Appellant
introduced a letter from Currie Accounting Services Ltd. to the Canada Revenue
Agency. Attached to this letter is a schedule that is identified as “Jessalyn
Wiens Real Estate Transactions 2002 & 2003”. This schedule appears to list
various amounts borrowed by and repaid by Jessalyn Wiens. However, as noted
above, only two witnesses testified at the hearing. The first witness, the
Appellant’s spouse, did not address this schedule. The only testimony related
to this schedule was that of the Appellant. His testimony in relation to this
schedule was as follows:
Q. Mr. Wiens, if you
could take a look at the last page I was about to ask you something on where it
is entitled across the top "Jessalyn Wiens Real Estate Transactions 2002,
2003". It's the third page of the last exhibit. The bottom number on the
right hand corner is 245. We had some discussion earlier, and I think we came
to the agreement that this was prepared by your previous accountant. My first
question to you is: Have you seen this before?
A. No.
Q. Can you read what "Explanations"
says, and what that means to you, just to get familiar? For instance, the first
line under "Explanations", the "Borrowed from dad for
downpayment on first house," what would that mean to you?
A. There, there is $10,000 so that must have
been a loan to her.
Q. Do you see on the far right "Balance
owed to dad, $10,000"? Would that seem to be about how loaning your money
to your daughter was handled?
A. Yes. I have never seen this before, but it
seems to be something dealing with loans for houses.
Q. As you read down, you see that money was
paid out to various parties. As it is paid out down the right side of the page,
it appears that the balance owing to dad keeps increasing. Do you see that?
A. Yes.
Q. If we get right down to the bottom and we
look underneath the trust account and it says the trust account balance is
zero, it says the total paid back is $105,907.35 and then "Final balance
to dad" was $97,013.80. That is what it says there. If you look at that
and then you look at the bottom, immediately below that it says "Total
borrowed $148,000 and some. Total paid back, $245,000 and some". That
would appear to take us to the last statement, "September 30, 2003, Dad
holding $97,000 to purchase house in Lorette". Did that money go to your
daughter to buy the house in Lorette?
A. I think the house in Lorette was $75,000
but there were some improvements also done there, and they didn't have money. I
think they had a new baby then when they moved in. It's foggy. They didn't have
a lot of money. Between me and my daughter, we didn't keep this type of
accounting. It looks like somebody put a lot of work into this. They are
probably missing something. Between a father and a daughter, everyone knows you
are not going to strictly make her pay back everything she owes or not give her
money when she needs it. It is very loose accounting between me and her;
between me and my wife and her. Someone spent a lot of time going into
specifics. I agree ‑‑ and I'm sure Jessie would agree too ‑‑
that we were even after that house.
[34]
Since the first time
that the Appellant saw this schedule was during the hearing this schedule was
obviously not prepared by the Appellant or reviewed by the Appellant during
2002 or at any other time prior to the hearing. As well since the Appellant
stated that he and his daughter did not “keep this type of accounting” it
raises questions about whether it really was the intention of the Appellant
that he intended to create a debtor / creditor relationship with Jessalyn Wiens.
His statement that “everyone
knows you are not going to strictly make her pay back everything she owes”
confirms that he did not intend to create an enforceable obligation on the part
of Jessalyn Wiens to repay amounts used to purchase properties that were put in
her name. If they would have intended to create an enforceable obligation, then
presumably they would have maintained a schedule similar to the one submitted
at the hearing.
[35]
I find that there was
no intention to create an enforceable obligation for Jessalyn Wiens to repay
amounts used to purchase the properties that were in her name.
[36]
During
cross-examination of the Appellant, the following exchange took place:
Q. You are saying to us today that it is
Jessalyn who owns these properties. Do you agree with me so far?
A. I'm saying it was Jessalyn?
Q. Yes.
A. The land title said it was Jessalyn's.
Q. Your evidence today is that it was
Jessalyn. Would you agree with that?
A. As far as I know, yes.
[37]
The registration of the
title at the applicable registry office would simply relate to the legal title
to the property. For the purposes of this appeal the issue is whether Jessalyn
Wiens was the beneficial owner of the property, not whether she was the
legal owner of the property.
[38]
Jessalyn Wiens had no
money to contribute towards the purchase of the property located at 22 Pembroke Road, which was the first property that was acquired in
2002. The only evidence at the hearing was that the line of credit was used to
finance the purchase of the houses in 2002. The line of credit was a personal
line of credit of the Appellant and his spouse. A copy of the statement for the
line of credit dated July 10, 2002 was introduced at the hearing. This
statement shows that as of June 8, 2002 the amount outstanding under this line
of credit was $91,307 which was slightly more than the total cost of the
property located at 22
Pembroke Road. This was also
approximately one month before the retail store opened and approximately four
months after the Pembroke property had been acquired.
[39]
The Appellant also
stated that the proceeds realized from the sale of the properties were
deposited in the same account (which, since the only statement introduced in
relation to the line of credit shows that there was a balance outstanding under
the line of credit, would mean that the sale proceeds would be applied against
the amount outstanding under the line of credit). Jessalyn Wiens was not liable
under the line of credit with CIBC. The Appellant and his spouse were liable
under this line of credit. When the amounts received from the sale of the
properties were applied against the amounts outstanding under the line of
credit, the Appellant and his spouse received the benefit from the sale
proceeds since such proceeds reduced their indebtedness to CIBC.
[40]
I find that Jessalyn
Wiens did not acquire any beneficial interest in the property located at 22 Pembroke Road or 428
Redonda Street in 2002.
[41]
The next question is
whether the Appellant was the beneficial owner or whether the Appellant and his
spouse were the beneficial owners of these properties. The only source of funds
that was identified in relation to the purchase of the properties in 2002 was
the amount that was borrowed under the line of credit. When the amount was
borrowed to purchase the property located at 22 Pembroke Road, both the Appellant and his spouse were liable to repay
the amount borrowed from CIBC since both individuals are identified in the
statement for the line of credit. There is no indication that the Appellant
used any of his own funds in relation to the purchase of either one of the two
properties in 2002. It appears that the proceeds from the sale of the property
located at 22 Pembroke Road were applied against the amount
outstanding under the line of credit (which benefitted both the Appellant and
his spouse) and that the line of credit was again used to finance the purchase
of the property located at 428
Redonda Street. Again the
proceeds from the sale of this house were applied against the amount
outstanding under the line of credit (which again benefitted both the Appellant
and his spouse).
[42]
As a result it does not
seem to me that the Appellant acquired all of the beneficial interest in the
properties in 2002 but rather that he acquired one-half of the beneficial
interests in these properties. Therefore, in my opinion, the Appellant should
only be required to report one-half of the gain realized on the sales of these
properties. It is not necessary to find that there was any partnership between
the Appellant and his spouse, it is only necessary to find that he was only the
beneficial owner of a one-half interest in the properties.
[43]
The next question is
whether the gain realized should be reported as an income gain or as a capital
gain. In Friesen v. The Queen, 95 DTC 5551, Justice Major
writing on behalf of a majority of the Justices of the Supreme Court of Canada
stated as follows:
The concept of
an adventure in the nature of trade is a judicial creation designed to
determine which purchase and sale transactions are of a business nature and
which are of a capital nature. This question was particularly important prior
to 1972 when capital transactions were completely exempt from taxation. The
question was succinctly stated by Clerk, L.J. in Californian Copper
Syndicate v. Harris (1904), 5 T.C. 159 (Ex., Scot.), at p. 166:
Is the sum of gain that has been made a mere enhancement of value by
realising a security, or is it a gain made in the operation of business in
carrying out a scheme for profit-making?
The first
requirement for an adventure in the nature of trade is that it involve a
'scheme for profit-making'. The taxpayer must have a legitimate intention of
gaining a profit from the transaction. Other requirements are conveniently
summarized in Interpretation Bulletin IT-459 'Adventure or Concern in the
Nature of Trade' (September 8, 1980) which references Interpretation Bulletin
IT-218 'Profit from the Sale of Real Estate' (May 26, 1975) for a summary of
the relevant factors when the property involved is real estate. IT-218R, which
replaced IT-218 in 1986, lists a number of factors which have been used by the
courts to determine whether a transaction involving real estate is an adventure
in the nature of trade creating business income or a capital transaction
involving the sale of an investment. Particular attention is paid to:
(i)
The taxpayer's intention with respect to the real estate at the time of
purchase and the feasibility of that intention and the extent to which it was
carried out. An intention to sell the property for a profit will make it more
likely to be characterized as an adventure in the nature of trade.
(ii)
The nature of the business, profession, calling or trade of the taxpayer
and associates. The more closely a taxpayer's business or occupation is related
to real estate transactions, the more likely it is that the income will be
considered business income rather than capital gain.
(iii)
The nature of the property and the use made of it by the taxpayer.
(iv)
The extent to which borrowed money was used to finance the
transaction and the length of time that the real estate was held by the
taxpayer. Transactions involving borrowed money and rapid resale are more
likely to be adventures in the nature of trade.
(Emphasis added)
[44]
In Canada Safeway
Limited v. The Queen, 2008 FCA 24, 2008 DTC 6074, [2008] 2 C.T.C. 149, Justice Nadon, writing on behalf of a majority of
the Justices of the Federal Court of Appeal, stated that:
61 A
number of principles emerge from these decisions which I believe can be
summarized as follows. First, the boundary between income and capital gains
cannot easily be drawn and, as a consequence, consideration of various factors,
including the taxpayer's intent at the time of acquiring the property at issue,
becomes necessary for a proper determination. Second, for the transaction to
constitute an adventure in the nature of trade, the possibility of resale, as
an operating motivation for the purchase, must have been in the mind of the
taxpayer. In order to make that determination, inferences will have to be drawn
from all of the circumstances. In other words, the taxpayer's whole course of conduct
has to be assessed. Third, with respect to "secondary intention", it
also must also have existed at the time of acquisition of the property and it
must have been an operating motivation in the acquisition of the property.
Fourth, the fact that the taxpayer contemplated the possibility of resale of
his or her property is not, in itself, sufficient to conclude in the existence
of an adventure in the nature of trade. In Principles of Canadian Income Tax
Law, supra, the learned authors, in discussing the applicable test in
relation to the existence of a "secondary intention", opine that
"the secondary intention doctrine will not be satisfied unless the
prospect of resale at a profit was an important consideration in the decision
to acquire the property" (see page 337). I agree entirely with that
proposition. Fifth, the viva voce evidence of the taxpayer with respect
to his or her intention is not conclusive and has to be tested in the light of
all the surrounding circumstances.
[45]
The Appellant’s stated
intention in acquiring the Pembroke
Road property was to provide
his daughter with a place to live. He stated that she did live there for a few
months. As noted, the statement of the Appellant’s intentions is not conclusive
and must “be tested in the light of all the surrounding circumstances”. In this
case it appears that the full amount of the purchase price of 22 Pembroke Road was financed by amounts borrowed from the line of
credit of the Appellant and his spouse. It seems to me that a line of credit
would be a short term form of financing and not, in general, a long term form
of financing. The use of short term financing to purchase the property would
support a conclusion that the sale of the property was an adventure in the
nature of trade.
[46]
The personal line of
credit statement dated July 10, 2002 indicates that the previous balance was
$91,307 and that this increased to $108,761 by July 10, 2002. The Appellant’s
income for 2002, not including the loss related to the store, consisted of:
Employment income: $32,500
Dividends $1,250
Total: $33,750
[47]
The Pembroke Road property did not produce any income (except the
income arising as a result of the sale of the property). This property was
acquired on February 15, 2002 which was approximately 4.5 to 5 months before
the Appellant started to operate the retail store in July 2002. The only
evidence in relation to the income of the Appellant’s spouse in 2002 is that
she was not paid while she was working at the retail store. The Appellant
introduced into evidence an excerpt from his tax return for 2003. The excerpt
included the first page of this return but the net income amount for his spouse
was redacted. Therefore the only sources of funds that were identified at the
hearing that could be used to repay the amount borrowed from the line of credit
to purchase this property, other than any amount realized from the sale of this
property, were the employment income and dividend income of the Appellant as
stated above. Since the amount owing on the line of credit was increasing
during a period of time when no properties were being acquired, it appears that
his income was being used for other expenditures. The Appellant would presumably
have to use his income for the living expenses for himself and his spouse and
his two other children who were living at home after February 15, 2002. If reselling
the property was not an important consideration when the property was acquired
in February 2002, how would the amount borrowed against the line of credit be
repaid?
[48]
The property located at
428 Redonda Street was acquired approximately one month after
the property located at 22
Pembroke Road was sold. It
was acquired for $81,486. There was no indication of the balance of the line of
credit on September 11, 2002 but since this was after the retail store was
operating and since the Appellant indicated that he was losing money in
operating this store, it seems more likely than not that there was an
outstanding balance owing under the line of credit when the Redonda Street
property was acquired. It would again seem that the only feasible way that the
amount borrowed against the line of credit to purchase this property could be
repaid would be if this property was sold.
[49]
The very short holding
periods (approximately six months for the Pembroke Road property and three months for the Redonda Street property) support a finding that the purchase and
sale of these properties was an adventure in the nature of trade. The use of
the line of credit to finance the purchase of these properties (which would be
a form of short term financing) would also support a finding that the purchase
and sale of these properties was an adventure in the nature of trade.
[50]
As a result I find that
the gain on the properties sold in 2002 was an income gain and not a capital
gain. I also find that one-half of this gain should have been included in
determining the income of the Appellant for 2002 as he held one-half of the
beneficial interest in these properties.
[51]
The other item in issue
for 2002 is the amount paid by the insurance company in relation to claims
filed in respect of break-ins at the retail store. The retail store was the
target of a number of break-ins. The amount included in the Appellant’s income
for 2002 in relation to the insurance payments was $10,914. A copy of the fax
from ING Insurance dated September 1, 2006 was introduced at the hearing. In
this fax it is indicated that the amount paid was in relation to two separate
claims:
Claim for Break and Enter on
November 14, 2002: $7,281
Claim for Break and Enter on
November 17, 2002: $3,633
Total: $10,914
[52]
In a subsequent fax
from ING Insurance dated September 14, 2006 it is stated that:
For the first claim of November 14, 2002; the client had claimed a
loss of $4,238.99 consisting of lost property – namely 55 cartons of
Cigarettes, Cash ($500.) and a Cash Register. We paid the client $3,738.99
which was the loss amount less the $500 policy deductible. The rest of the
payments were to contractors for repair of the glass, door and lock. These
repairs were done in December, after the time of all 3 losses. Hence, no repair
expenses claimed in the next 2 losses. Part of the expense payment was an
emergency call to “board-up” the broken glass until permanent repairs could be
made. This was done immediately after the first loss.
For the Second Claim of November 17, 2002; the client claimed a loss
of $4,133.00 which again consisted of Cigarettes, Cash ($50. - $60.) and a Cash
Register. We paid the client $3,633.00 which was the loss less the $500 policy
deductible.
[53]
Therefore, of the
$7,281 paid in relation to the first claim, $3,739 was paid to the Appellant
and the balance of $3,542 was paid by the insurance company to the contractors
who did the repair work. As noted by Justice Rothstein in F.H. v. McDougall, above:
48 Some alleged events may be
highly improbable. Others less so. There can be no rule as to when and to what
extent inherent improbability must be taken into account by a trial judge. As
Lord Hoffmann observed at para. 15 of In re B:
Common sense,
not law, requires that in deciding this question, regard should be had, to
whatever extent appropriate, to inherent probabilities.
It will be for
the trial judge to decide to what extent, if any, the circumstances suggest
that an allegation is inherently improbable and where appropriate, that may be
taken into account in the assessment of whether the evidence establishes that
it is more likely than not that the event occurred. However, there can be no
rule of law imposing such a formula.
[54]
In this particular case
the event in question is whether the Appellant would have deducted the amount
paid by the insurance company to the contractors for the repairs in determining
his income from the sole proprietorship. Since the Appellant did not pay the contractors,
it seems to me that it was inherently improbable that this occurred. As a
result it seems to me that it is more likely than not that the Appellant would
not have claimed a deduction for the amount paid to the contractors for repairs
and therefore no amount should have been added to the Appellant’s income for
this amount. If this amount were to be added to the Appellant’s income, then he
would be entitled to claim a deduction for repairs in the same amount and
therefore no net amount would be added to his income. As a result, the
Appellant’s income is reduced by the amount of $3,542 (which is the amount paid
by the insurance company to the contractors).
[55]
With respect to the
balance of the amount paid in relation to the first claim ($3,739) and the amount
paid in relation to the second claim ($3,633), no breakdown was provided for
the amount claimed for the loss of cigarettes and the loss of the cash
register. In
Transocean Offshore Limited v. R., [2005] 2 C.T.C. 183,
2005 DTC 5201,
Sharlow J.A. of the Federal Court of Appeal stated as follows:
For the purposes of Part I of the Income Tax Act, the answer
to that question requires the application of a judge-made rule sometimes called
the "surrogatum principle", by which the tax treatment of
a payment of damages or a settlement payment is considered to be the same as
the tax treatment of whatever the payment is intended to replace.
[56]
It seems to me that
this principle will apply to the payments made to the Appellant for the lost
cigarettes (which would be lost inventory) and for the lost cash. The amount
received for the cigarettes that were stolen is a payment for this lost
inventory. If the Appellant would have sold these cigarettes, any amount
received would have been revenue. The payment made by the insurance company is
a payment to replace revenue that the Appellant would have received if the
cigarettes would have been sold, even though the amount received may be less
than the amount that the Appellant may have received on a retail sale of the
cigarettes. There was no indication that the cash that was stolen (and for
which the Appellant received payment from the insurance company) was cash that
was on hand otherwise than from sales. Therefore it seems to me that the cash
that was stolen would have been cash from the sale of items and therefore would
have been revenue. The payment of the amount for the lost cash is a payment
made to replace the lost revenue. Therefore the payment in relation to the loss
of inventory and cash would be income to the Appellant.
[57]
However if any portion
of the payment was for the lost cash register, it would be treated as proceeds
of disposition of depreciable property of the same class of property as the
cash register. Paragraph (c) of the definition of “proceeds of disposition” in
subsection 13(21) of the Act provides that proceeds of disposition, for
the purposes of determining the undepreciated capital cost of depreciable
property, includes “any amount payable under a policy of insurance in respect
of loss or destruction of property”.
[58]
The Appellant’s
explanation of how he treated the amounts paid by the insurance company was as
follows:
Q. Where it says:
"The auditor adjusted the dollar net income as follows:
Increase to gross revenues, insurance proceeds, 2002 and 2003." (As Read)
That was how the CRA handled the money
from the insurance claim. It would indicate by what I'm reading that they
increased your income by the amount of the insurance payout.
A. I believe I remember ‑‑ I may
be wrong ‑‑ I didn't add that to income. I took it off of expenses
when I was doing my income tax.
Q. Can you explain why you wouldn't add it to
your income?
A. It was just replacing smashed or stolen stuff.
Q. Was that amount of money more than your loss?
A. The amount the insurance paid?
Q. Yes.
A. That would be far less.
Q. So you were in a net loss position. Is that correct?
A. Yes; because of the deductible and the
insurance company is pretty stingy.
Q. You didn't see the money the insurance
company paid you as a financial gain to be reported?
A. No, I didn't. I don't exactly recall.
…
A. To the best of my recollection, I deducted
the insurance from expenses. I had a lot of bills and so on go missing, but I
can't really remember what happened. I know I grossly understated my losses.
[59]
In relation to the
Appellant’s general ability to remember what occurred, he testified that:
Q. Mr. Wiens, how would you define your
ability to remember things today?
A. I think I can remember some things. I did
have chemotherapy, and I have a foggy condition.
…
Q. ... What would you say that your mental
faculty is now, and did it start getting better? If so, when?
A. It did. I have good days sometimes, but I
have blank spots in my memory. I can't remember a lot of things like I used to be
able to. Some days I can't think of ‑‑ I don't know anything. There
have been times when I don't know even know who I am. All of a sudden I have
this thing in my head. I don't know what I'm doing, who I am or what is going
on, but that's rare. I'm smart enough to know I'm not as smart enough as most
people.
[60]
The only evidence
presented by the Appellant in relation to whether the amounts received from the
insurance company were included in the Appellant’s income or deducted from
expenses was the testimony of the Appellant. No financial statements of the
Appellant were introduced. This evidence is not sufficient to support a finding
that the Appellant had reduced expenses by the amount of the insurance. If the
Appellant had taken the insurance into account in determining his income
(either by including the amount in income as revenue or reducing his expenses
by the same amount) then no adjustment would be made to his income for the
insurance as it is the amount of his liability for taxes that is in dispute. If
the Appellant had reduced expenses by the amount of the insurance received and
if the insurance amount is added to his income, then the Appellant would be
entitled to claim the additional expenses (that he had not previously claimed) and
his net income would remain the same. However, the Appellant has failed to
establish that it is more likely than not that he reduced his expenses by an
amount that was equal to or more than the amount that he received from the
insurance company. While he might have reduced his expenses by such an amount,
this is not sufficient.
[61]
The Appellant has also
failed to establish what part, if any, of the amount received from the
insurance company was paid in relation to the loss of the cash register. If the
claim for the cash register was less than $500, then because the deductible
amount was $500, the full amount received could have been for the lost
cigarettes and cash.
[62]
As a result, no
adjustment will be made with respect to the amount included in the Appellant’s
income for 2002 in relation to the balance of the amount paid in relation to
the first claim ($3,739) and the amount paid in relation to the second claim
($3,633).
[63]
With respect to the
reassessment of the Appellant’s tax liability for the 2003 taxation year, the
reassessment of this taxation year was issued after the normal reassessment
period and the Appellant did not sign a waiver in relation to the reassessment
of this taxation year.
[64]
Then Chief Justice
Bowman in Mensah v. The Queen, [2008] T.C.J. No. 302, 2008 DTC 4358 stated that:
8 The
fourth preliminary point is that the assessment for the 1993 taxation year is
statute-barred. The onus is upon the Minister to establish the facts justifying
the reassessment of the 1993 taxation year beyond the normal reassessment
period. The provisions of the Income Tax Act permitting the Minister to
open up statute-barred years have evolved and the evolution was summarized in 943372
Ontario Inc. v. R., 2007 D.T.C. 1051; [2007] 5 C.T.C. 2001 at paragraph 18:
18 The evolution of these provisions can be briefly summarized as
follows: originally, subsection 152(4) permitted the Minister to open up a
statute-barred year for all purposes if he could find any misrepresentation of
the type described in subsection 152(4), however small, and reassess any items
whether the subject of any type of misrepresentation or not. This obviously
appeared somewhat unfair and the result was paragraph 152(5)(b) which
was introduced in 1973-1974 with effect from 1972. This provision permitted the
taxpayer to establish that the omission of an amount of income was not the
result of a misrepresentation that was attributable to neglect, carelessness,
wilful default or fraud. Nonetheless it did cast on the taxpayer an onus.
Subsection 152(4.01) was therefore introduced and its effect, according
to Mr. Kutkevicius, is to remove that onus from the taxpayer and put a two-fold
onus on the Minister to establish:
(a)
that there was misrepresentation, and
(a)
that the misrepresentation was attributable to neglect,
carelessness, wilful default or fraud.
I think this is the correct interpretation. If the onus
that was imposed on the taxpayer under former paragraph 152(5)(b)
survived the amendment to subsection 152(5) and the enactment of subsection
152(4.01), subsection (4.01) would have no purpose.
(emphasis added)
[65]
Therefore the onus was
on the Respondent to not only establish that there was a misrepresentation with
respect to the statements made by the Appellant in his tax return for 2003, but
also that the “misrepresentation was
attributable to neglect, carelessness, wilful default or fraud”.
[66]
In this case the
alleged misrepresentations for 2003 are in relation to the amounts realized on
the sale of houses in 2003 and the amount received in relation to insurance
claims in 2003.
[67]
The real property
transactions that have resulted in the reassessment of the Appellant for 2003
are the following:
|
Property
|
1581 Rothesay St.
|
Lot 2, SE ¼ 19-11-6E RM Springfield
|
453 Phelan Road
|
165 Crestwood Crescent
|
|
Date purchased:
|
April 25, 2003
|
June 13, 2003
|
March 2003
|
November 2003
|
|
Date sold:
|
August 1, 2003
|
September 30, 2003
|
October 2003
|
December 2003
|
|
Total cost:
|
$44,023
|
$48,113
|
$33,886
|
$97,154
|
|
Net Proceeds of sale:
|
$74,295
|
$107,940
|
$114,000
|
$113,500
|
|
Gain:
|
$30,272
|
$59,827
|
$80,114
|
$16,346
|
[68]
There were four
properties that were sold in 2003. Each of these properties was also acquired
in 2003. The longest period of time that any of these properties was held was
approximately 7 months (453
Phelan Road was purchased in
March and sold in October).
[69]
The property located at
1581 Rothesay Street was acquired in the name of the
Appellant’s spouse. The Appellant stated that this property was acquired as a
home for his second daughter. However she did not receive any of the proceeds
from the sale of this property nor could she have occupied it for any
significant period of time as it was sold a little more than three months after
it was purchased.
[70]
There were two sources
of funds identified in 2003. One was the personal line of credit with CIBC and
the other was Tedhil Enterprises Ltd. As stated below, I find that the amount
of approximately $40,000 that was borrowed from Tedhil Enterprises Ltd. was
used to finance the purchase of the Springfield property.
As a result, I find that the purchase of the Rothesay Street property was financed by the line of credit with
CIBC. Both the Appellant and his spouse were liable to repay amounts borrowed
under the line of credit. It also appears more likely than not that the
proceeds from the sale of the house were also applied against the amount
outstanding under the line of credit. Therefore both the Appellant and his
spouse benefitted from the sale of this house as they each had their liability
under the line of credit reduced by the proceeds of sale that were applied
against the amount outstanding under the line of credit.
[71]
No statements from the
line of credit for 2003 were introduced at the hearing but since the statement
for July 10, 2002 indicates that, at that time, the Appellant and his spouse
owed CIBC $108,761 under the line of credit and since the Appellant indicated
that he incurred significant losses in operating the retail store that he
opened around that time, it seems more likely than not that the Appellant and
his spouse continued to owe amounts under the line of credit throughout 2003.
As a result, I find that when the Rothesay Street
property was sold, the proceeds would have reduced the liability of not only
the Appellant’s spouse but also the Appellant under the line of credit.
Although the Appellant had stated that only his spouse had received the money
from the sale of this property, I find that both the Appellant and his spouse
received the proceeds since the proceeds reduced their joint liability to CIBC.
I find that the Appellant should have included one-half of the gain realized on
the sale of the Rothesay
Street property in
determining his income for 2003.
[72]
With respect to whether
the gain on the sale of the Rothesay
Street property was a capital
gain or an income gain, it seems to me that the lack of any other source of
funds to pay the line of credit is relevant in determining the Appellant’s
intention in purchasing the property. The Appellant submitted an excerpt from
his 2003 tax return. The only sources and amounts of income identified in this
excerpt are the following:
|
Item
|
Amount
|
|
Employment income:
|
$36,500
|
|
Taxable amount of dividends:
|
$1,250
|
|
Taxable capital gains:
|
$7,500
|
|
Business income:
|
($29,654)
|
|
Total income:
|
$15,596
|
[73]
With only these sources
of income (one of which arises from the sale of the real properties in 2003),
how could the Appellant expect to repay the amount borrowed from CIBC to
acquire the property unless the property was sold? It seems to me that “the possibility
of resale, as an operating motivation for the purchase, must have been in the
mind of the” Appellant when the property was acquired. The short holding period
(approximately three months) confirms this intention. As well the number of
similar transactions (six in 2002 and 2003)
is also relevant in determining the Appellant’s intention. The use of the line
of credit to fund the purchase price is also relevant, as discussed above. As a
result the Appellant’s gain on the sale of the property was an income gain.
[74]
The Appellant did not
report any part of the gain realized on the sale of the property located at 1581 Rothesay Street in his tax return for 2003. The failure to
report his share of the gain (which would be one-half of the gain) was a
misrepresentation.
[75]
The Springfield property was purchased on June 13, 2003. The property
was purchased in the name of the Appellant’s daughter (Jessalyn Wiens). It is
not entirely clear whether the purchase of this property was financed with a
loan that the Appellant had received from Tedhil Enterprises Ltd. or from
amounts borrowed under the line of credit with CIBC. Tedhil Enterprises Ltd. is
a private company in which the shares were held by the Appellant and other
members of his family. The Appellant confirmed that he had borrowed
approximately $40,000 from this company but he was not sure when he had
borrowed this amount or how the funds were used. When counsel for the
Respondent had suggested that the funds were used to finance the purchase of the
Springfield property, the Appellant indicated that he
thought that it was for the Rothesay
Street property but he was
not certain. It is clear that the loan was repaid on October 17, 2003 as a
cheque for $41,500 payable to Tedhil Enterprises Ltd. and drawn on the line of
credit was introduced as an exhibit.
[76]
It seems to me that it
was more likely than not that the funds were borrowed from this company to
finance the purchase of the Springfield property. It seems clear that the
preferred source of funds for the Appellant was the line of credit with CIBC.
Therefore it seems to me that if the Appellant could have utilized the line of
credit to finance the purchase of a property that he would have done so. The Rothesay Street property was purchased on April 25, 2003. Prior to
that time the proceeds from the sales of the two properties in 2002 would have
been used to reduce the amount outstanding under the line of credit. As well
amounts would have been borrowed to finance the purchase of the Redonda Street property in September 2002 and the Phelan Road property in March 2003. Therefore the net affect of
these four transactions (all of which occurred after July 10, 2002 – the date
of the statement from the Personal Line of Credit that was introduced at the
hearing) on the amount outstanding under the line of credit as of the time
immediately before the Rothesay Street property was purchased was as follows:
|
Item
|
Increase / (Decrease) in the amount owing under the
line of credit
|
|
Proceeds from sale of Pembroke Road property
|
($122,319)
|
|
Purchase of the Redonda Street property
|
$81,486
|
|
Proceeds from sale of Redonda Street property
|
($83,725)
|
|
Purchase of Phelan Road property
|
$33,886
|
|
Net result:
|
($90,672)
|
[77]
Therefore the result of
these transactions would have been a reduction in the amount owing under the
line of credit of $90,672. Therefore it seems more likely than not that the
line of credit would have been used to finance the purchase of the Rothesay Street property. When the Springfield property was acquired on June 13, 2003, both the properties located on
Rothesay Street and Phelan Road had been purchased and neither one of these had been sold. As well the
retail store would have still been operating and presumably continuing to incur
losses. As a result, in June 2003 there would not have been as much credit
available under the line of credit as there would have been in March or April
and therefore June 2003 would have been the time when the Appellant would have
needed an additional source of funds. As well, the Springfield property was sold on September 30, 2003 and the cheque to Tedhil Enterprises
was dated October 17, 2003. As a result it seems to me that it was more likely
than not that the funds were borrowed from Tedhil Enterprises Ltd. to finance
the purchase of the Springfield property.
[78]
It is the position of
the Appellant that the Springfield property was his daughter’s property and
therefore that she should have reported the gain. During re-examination of the
Appellant by his agent, the following exchange took place:
Q. Would you borrow money from Tedhil to
benefit your daughter?
A. No.
Q. You wouldn't?
A. If I borrowed money from the company I had
to take responsibility to make sure it was repaid. I don't remember borrowing
money on her behalf, and I would never do that. I would have to make sure that
money was repaid. The way I understand it, you are not allowed loans from a
company to go over a tax year. Then you would get T‑4'd for them. I
have to make sure that I'm reliable enough to ‑‑ it is my
responsibility from the company to make sure that everything was repaid properly
and the books all balanced.
[79]
It seems to me that it
was the Appellant who borrowed the money to finance the purchase of the Springfield property. It was his money that was used to purchase
this property, not Jessalyn Wiens’ money. The proceeds from the sale of the
property were, more likely than not, used to repay the indebtedness of the
Appellant to Tedhil Enterprises Ltd. As a result I find that the Appellant was
the sole beneficial owner of the Springfield property.
[80]
The Appellant clearly
understood that if he borrowed money from Tedhil Enterprises Ltd. that he had a
limited amount of time within which to repay the debt to avoid being taxed on
the amount borrowed. His understanding of the time period results in a shorter
time than is actually permitted by subsection 15(2.6) of the Income Tax Act. However for the purposes of this appeal,
the Appellant’s understanding of the requirement to repay loans from a company
in which he is a shareholder indicates that the Appellant must have had the
intention to sell the property at the time he acquired it. The only means
available to the Appellant to repay the debt to Tedhil Enterprises Ltd. was
from the proceeds that would be realized on a sale of the property. The short
holding period (approximately 3.5 months) also confirms that the possibility of
reselling the property must have been in his mind when the property was
acquired and must have been an operating motivation for the purchase. As a
result I find that the gain realized on the sale of the Springfield property
should have been included in the income of the Appellant and that this gain was
an income gain. The failure of the Appellant to include this gain in his tax
return was a misrepresentation.
[81]
The properties located
on Phelan Road and Crestwood Crescent were both acquired in the name of the Appellant. In
filing his tax return for 2003 the Appellant only reported the gain realized on
the sale of the Crestwood Crescent property and this gain was reported as a taxable
capital gain. No explanation was provided for the failure of the Appellant to
report any gain realized on the sale of the property located on Phelan Road in his 2003 income tax return. In the Reply it is
noted that in reassessing the Appellant his income was reduced by $36,952 for
taxable capital gains. Since he only reported a taxable capital gain of $7,500
in his 2003 tax return, the Appellant must have subsequently reported or been
assessed (or reassessed) for a taxable capital gain of $29,452, presumably in relation to the sale of the
Phelan Road property.
[82]
The purchase of these
properties was financed by the line of credit. Since both the Appellant and his
spouse were jointly liable to repay amounts borrowed from the line of credit,
it seems reasonable to conclude that the Appellant and his spouse each
beneficially acquired a one-half interest in these properties. Therefore each
of the Appellant and his spouse should have reported one-half of the gain
realized on the sale of these properties. As well, since there was no means to
repay the amount borrowed under the line of credit to purchase these
properties, other than from the proceeds that would be realized on a sale of
these properties, they must have had an intention to sell the properties at the
time that the properties were acquired. The short holding periods
(approximately seven months and one month) confirm this intention as does the
use of short term financing (the line of credit).
[83]
As a result the gain
realized on the sale of these properties (Phelan Road and Crestwood
Crescent) was an income gain.
The failure of the Appellant to report any amount in his tax return for 2003 in
relation to the gain realized on the sale of the Phelan Road property was a misrepresentation.
[84]
With respect to the
disposition of the Crestwood
Crescent property, the
Appellant did report a taxable capital gain in relation to the disposition of
this property (which would be one-half of the capital gain) in his tax return
for 2003. The amount that he reported as a taxable capital gain was $7,500. As
noted above, I find that he should have reported one-half of the gain realized
on the sale of this property as an income gain. The agent for the Appellant at
the commencement of the hearing indicated that the Appellant was not disputing
any of the amounts as set out in the Reply and therefore the gain realized on
the sale of this property was $16,346. The Appellant therefore should have
reported the amount of $8,173 as an income gain. Since both taxable capital
gains and income gains are included in determining the income of the Appellant
for the purposes of the Act the net affect on his income for the
purposes of the Act would be that his income should be increased by
$673.
[85]
In Nesbitt v. The
Queen, 96 DTC 6588, Justice Strayer, on behalf of the Federal Court of
Appeal, stated that:
8 Even assuming that the letter of
August 6, 1986, could be taken to prove the Minister's knowledge by that date
(two months prior to expiry of the four-year limitation period) of the true
facts and that there had been a misrepresentation, I do not believe this
assists the appellant. It appears to me that one purpose of subsection 152(4)
is to promote careful and accurate completion of income tax returns. Whether or
not there is misrepresentation through neglect or carelessness in the completion
of a return is determinable at the time the return is filed. A
misrepresentation has occurred if there is an incorrect statement on the return
form, at least one that is material to the purposes of the return and to any
future reassessment. …
(emphasis added)
[86]
The question is whether
the incorrect statement made by the Appellant in his 2003 tax return in
relation to the amount reported as a result of the disposition of the Crestwood Crescent property is material. The discrepancy in reported
income ($673) in my opinion is not material. In many situations it would be
material whether a particular amount is reported as a taxable capital gain or
as an income gain since only one-half of capital gains are included in income.
In this case because I have found that the Appellant only owned a one-half
interest in the property, the quantum of the amount added to income is
approximately the same whether, as he had filed his return, he was the sole
owner of the property and realized a capital gain (and therefore would include
one-half of the capital gain in his income as a taxable capital gain) or
whether he owned a one-half interest and realized an income gain. However if
the Appellant would have claimed allowable capital losses (which may be claimed
against taxable capital gains but not income gains) or if the property would
have been eligible and the Appellant would have claimed a capital gains
deduction under section 110.6 of the Act or a reduction in the capital
gain based on the property being his principal residence (as provided in
subsection 40(2) of the Act), then it would have been material whether
the amount was reported as a capital gain or an income gain. However there was
no evidence that the Appellant had claimed any allowable capital losses or any deduction
in relation to any capital gain that he claimed.
[87]
As a result, in my
opinion the Appellant did not make an incorrect statement that was material for
the purposes of his 2003 income tax return in relation to the gain realized on
the sale of the Crestwood
Crescent property. Since the
reassessment of his 2003 taxation year was issued after the normal reassessment
period, the Respondent could not have reassessed the Appellant in relation to
the gain realized on the sale of the Crestwood Crescent
property.
[88]
It appears that the
Respondent, in reassessing the Appellant, also reduced his income by the amount
of the taxable capital gain that he had claimed in his tax return in relation
to the disposition of the Crestwood
Crescent property ($7,500).
The Minister cannot appeal his own assessment (Valdis v. The Queen, [2001] 1
C.T.C. 2827). However, in this case, it does not seem to me that if the amount
claimed as a taxable capital gain were to be restored that this would be a
situation where the Minister is appealing his own assessment. It is simply a
recognition that the Minister did not have the right to reassess the Appellant
in relation to the gain realized on the sale of the Crestwood Crescent property and that the
income of the Appellant should therefore be restored to what it was before the reassessment. As a result,
the Appellant’s income is reduced by the amount added by the reassessment
($16,346 as income from an adventure in the nature of trade) and the taxable
capital gain claimed by the Appellant ($7,500) is reinstated.
[89]
The next question is
whether the misrepresentations arising as a result of the failure of the
Appellant to report his share of the gains arising on the sale of the Rothesay
Street property, the Springfield property, and the Phelan Road property (or any
one or more of them) were attributable to
neglect, carelessness, wilful default or fraud”.
[90]
In The Queen v. Regina
Shoppers Mall Limited, [1991] 1 C.T.C. 297, 126 N.R. 141, 91 DTC 5101 the
Federal Court of Appeal approved the following comments of Justice Addy:
7. …Where a taxpayer thoughtfully, deliberately and carefully
assesses the situation and files on what he believes bona fide to be the proper
method there can be no misrepresentation as contemplated by section 152 (1056
Enterprises Ltd. v. Canada, [1989] 2 C.T.C. 1, 89 D.T.C. 5287). In Levy
(J.) v. Minister of National Revenue, [1989] C.T.C. 151, 89 D.T.C.
5385 at 176 (D.T.C. 5403), Teitelbaum, J. quotes with approval the following
statement by Muldoon, J. in the above case:
Subsection 152(4) protects such conduct, and perhaps only such
conduct, where the taxpayer thoughtfully, deliberately and carefully
assesses the situation as being one in which the law does not exact the
reporting of that which the taxpayer bona fide believes does not exist.
[Emphasis added by Justice Addy and Justice MacGuigan.]
It has also been established that the care exercised must be that of
a wise and prudent person and that the report must be made in a manner that the
taxpayer truly believes to be correct. ...
[91]
The purchases of the Rothesay Street property and the Phelan Road property were each funded by amounts borrowed under the line of credit,
which would be short term and not long term financing. The Appellant was
jointly liable with his spouse to repay amounts borrowed under this line of
credit. The properties did not produce any income (other than income arising as
a result of the sale of the properties) and, based on the income of the
Appellant, the Appellant would only be able to repay his share of the amount
borrowed to purchase these properties if these properties were sold. These
properties were only held for approximately three months and seven months,
respectively. When the Appellant filed his tax return for 2003 he would have
known that each of these properties had been bought and sold in 2003 and also
that the Crestwood Crescent property would have been bought and sold
in 2003. He would also have known that two properties had been bought and sold
in 2002.
[92]
As well, no amount was
reported in the Appellant’s income tax return for 2003 in relation to the gain
realized on the sale of the Phelan
Road property. This was a
property that was registered in the Appellant’s name and a significant gain
($80,114) was realized on the sale of this property.
[93]
As a result, I find
that in this case the failure of the Appellant to include his share of the gain
realized on the sale of these properties (the Rothesay Street property and the
Phelan Road property) in his income as an income gain was not what a wise and
prudent person would have done and that the Appellant could not have truly
believed that this was correct. As a result the reassessment of the Appellant
in relation to the inclusion in his income of one-half of the gain realized on
the sale of these properties as an income gain is valid. The Appellant’s income
as reassessed is reduced by one-half of the gain realized on the sale of these
properties.
[94]
The Appellant alone
borrowed the money from Tedhil Enterprises Ltd. to fund the purchase of the Springfield property. He knew that when he borrowed this money he
had a limited period of time within which to repay the debt to Tedhil
Enterprises Ltd. to avoid having the amount of the debt included in his income.
This property did not produce any income (except as a result of the sale of
this property) and the only source of funds that would have been available to
repay the debt to Tedhil Enterprises Ltd. would have been the proceeds from a
sale of this property. As a result, I find that in this case the failure of the
Appellant to include the gain realized on the sale of this property in his
income as an income gain was not what a wise and prudent person would have done
and that the Appellant could not have truly believed that this was correct. As
he was the sole beneficial owner of this property all of the gain from this
property was his income. Therefore no adjustment to the income of the Appellant
will be made in relation to the sale of this property.
[95]
The other item for 2003
is the amount included in the Appellant’s income for 2003 in relation to the
amounts received as a result of the insurance claim filed by the Appellant. The
amount added to his income for 2003 was $2,200.
[96]
As noted above, the
Respondent has the onus of proof to establish that the Appellant made a
misrepresentation and that the misrepresentation was attributable to neglect,
carelessness or wilful default. The Appellant’s position is that he had greater
losses from the operation of the retail store than he reported. In this case
the amount of additional income that the Respondent has added to the
Appellant’s income is $2,200. The additional unclaimed expenses might have been
less than this amount, equal to this amount or greater than this amount.
[97]
The memo from the
insurance company dated September 14, 2006 stated the following in relation to
the insurance claim of June 23, 2003:
The Fourth claim of June 23, 2003; we paid $2,200. Unfortunately, I
do not have further details on the conditions regarding this loss at this time.
[98]
In the memo from the
insurance company dated September 1, 2003, the amount is stated to be $2,000
for this claim. No explanation was provided for this discrepancy. Therefore it
is not clear whether the amount should be $2,000 or $2,200 or whether any of
this amount was paid to contractors (as was a portion of the claims for 2002)
or was for the loss of inventory or cash or for property damage. While the
amount might have been for loss of inventory or loss of cash and, if included
in the Appellant’s income, might have been material in determining his income
for 2003, this is not sufficient to discharge the onus of proof. The Respondent
failed to establish that the Appellant made an incorrect statement in his tax
return that would have been material to the amount of his income for 2003 from
the retail store in relation to the amount paid by the insurance company in
2003. Therefore the Respondent could not reassess the Appellant to include this
amount of $2,200 in his income for 2003 and his income for 2003 is reduced by
this amount.
[99]
As a result, the
Appellant’s appeal is allowed, with costs, and the matter is referred back to
the Minister of National Revenue for reconsideration and reassessment on the
basis that:
(a)
in determining the
income of the Appellant for 2002, the Appellant’s income shall be reduced by
the following amounts:
|
Item
|
Amount
|
|
To adjust for the one-half interest of Kathryn Wiens
in the property located at 22
Pembroke Road:
|
($15,900)
|
|
To adjust for the one-half interest of Kathryn Wiens
in the property located at 428
Redonda Street:
|
($1,128)
|
|
To adjust for the amount paid by the insurance
company to the contractors:
|
($3,542)
|
|
Total adjustments (reduction in the income of the
Appellant):
|
($20,570)
|
(b)
in determining the liability
of the Appellant under the Act for income taxes for 2003, the amount of
taxes payable by the Appellant for 2003 shall be reduced by the lesser of:
(i) the amount by which his liability for
income taxes under the Act would be reduced if his income was adjusted
by the following amounts:
|
Item
|
Amount
|
|
A reduction for the one-half interest of Kathryn
Wiens in the property located at 1581 Rothesay Street:
|
($15,136)
|
|
A reduction for the one-half interest of Kathryn
Wiens in the property located at 453 Phelan Road:
|
($40,057)
|
|
A reduction for the amount added as income from an
adventure in nature of trade in relation to the sale of the property located
at 165 Crestwood Crescent:
|
($16,346)
|
|
An addition to restore the amount claimed as a
taxable capital gain:
|
$7,500
|
|
A reduction for the amount paid by the insurance
company:
|
($2,200)
|
|
Total adjustments (reduction in the income of the
Appellant):
|
($66,239)
|
and
(ii) $12,000.
Signed at Ottawa, Canada, this 15th day of March, 2011.
“Wyman W. Webb”
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