Citation: 2008TCC220
Date: 20080520
Docket: 2006-2353(IT)G
BETWEEN:
507582 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2006-2354(IT)G
AND BETWEEN:
JOHN FRANK KRMPOTIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2006-2355(GST)I
AND BETWEEN:
507582 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1] The parties agreed
that all of these cases would be heard on common evidence.
[2] The parties agreed
upon a Partial Agreed Statement of Facts as follows:
PARTIAL AGREED STATEMENT
OF FACTS
For the purposes of these appeals, the
parties agree to the facts in this partial statement of facts. The parties
agree that other evidence may be introduced by either party, to the extent that
such evidence is not inconsistent with the following facts:
1.
The Appellant 507582
B.C. Ltd. (“507582”) is a company incorporated under the laws of British
Columbia and is a Canadian-controlled private corporation as defined in
subsection 125(7) of the Income Tax Act (the “Act”).
2.
At all relevant
times, 507582’s fiscal taxation year ended on May 31.
3.
With respect to the
Goods and Services Tax (“GST”);
(a) 507582 was registered under the Excise Tax Act
effective June 1, 1996, and was assigned GST registration number 89419 1451;
(b) 507582 files GST returns and reported total GST
collectible of nil and total input tax credits (“ITCs”) of nil, in respect of
the period from June 1, 1997, to May 31, 2002 (the “Period”).
4.
At all relevant
times, the sole shareholder of 507582 was Kuna Enterprises Ltd. (“Kuna
Enterprises”), a British Columbia company and a “taxable Canadian corporation”
as defined in subsection 89(1) of the Act.
5.
At all relevant
times, the sole shareholder of Kuna Enterprises was Kuna Holdings Ltd.
(“Kuna Holdings”), a British Columbia company and a “taxable Canadian
corporation” as defined in subsection 89(1) of the Act.
6.
At all relevant
times, the sole shareholder of Kuna Holdings was the Appellant John Frank
Krmpotic, an individual resident in Canada for the
purposes of the Act.
7.
At all relevant
times, John Frank Krmpotic was one of two officers and directors of 507582. The
other officer and director was his father, John Ivan Krmpotic.
8.
At all relevant
times, John Frank Krmpotic was one of two directors of Kuna Holdings. The other
director was John Ivan Krmpotic.
9.
At all relevant
times, John Frank Krmpotic was one of two officers and directors of Kuna Enterprises.
The other officer and director was John Ivan Krmpotic.
10.
Mrs. Betty Krmpotic
is an individual resident in Canada for the
purposes of the Act. Mrs. Krmpotic is the mother of John Frank Krmpotic.
11.
At all relevant
times, 507582 carried on the business of residential real estate development,
construction and sales.
12.
In 1996, 507582
purchased real property in Whistler, British Columbia
having the civic address of 4405
Blackcomb Way, Whistler,
B.C. In 1996 and 1997, 507582 constructed a condominium/townhouse development
on this property called Granite
Court (the “Development”).
13.
In approximately July
1997, 507582 began settling units of the Development.
14.
507582 reported sales
of all the units of the Development other than the Property in its tax returns
for the taxation years in which the units were sold.
15.
507582 did not
include the cost of the Property on its balance sheet at the end of its 2000
taxation year or on its opening balance sheet for its 2001 taxation year.
16.
In preparing 507582’s
financial statements and corporate income tax returns for the taxation year
ended May 31, 2000, 507582’s external accountants deducted the cost of the
Property from 507582’s income as cost of sales. The amount deducted as cost of sales
was $224,361.
17.
In 2001, the British
Columbia Assessment Authority valued the Property at $442,000.00.
18.
507582 ceased to file
annual reports with the British Columbia Corporate and Personal Property
Registries after November 2001 and was dissolved for failure to file.
19.
On April 21, 2005,
the Minister of National Revenue (the “Minister”) reassessed John Frank
Krmpotic’s 2000 taxation year to add the amount of $442,000.00 to his income as
a benefit with respect to the transfer of the Property, and to levy a gross
negligence penalty under subsection 163(2) of the Act.
20.
The “normal
reassessment period” in respect of John Frank Krmpotic’s 2000 taxation year
ended on June 7, 2004. He did not file a waiver in prescribed form within the
normal reassessment period in respect of that year.
21.
On July 19, 2005, the
Minister reassessed 507582’s 2001 taxation year to include proceeds of
disposition in the amount of $442,000.00 with respect to the transfer of the
Property, and to levy a gross negligence penalty under subsection 163(2) of the
Act.
22.
On March 21, 2006,
the Minister assessed 507582 for net GST in the amount of $30,940.00, penalties
in the amount of $18,121.76, and interest in the amount of $4,516.30 with
respect to the transfer of the Property during the Period. The penalty amount
included a gross negligence penalty of $7,735.00 assessed under section 285 of
Part IX of the Excise Tax Act.
23.
The Appellants filed
Notices of Objection to the above assessments, which were subsequently
confirmed by the Minister.
DATED at the City of Vancouver, the Province of British Columbia, this
5th day of March, 2008.
This Partial Agreed Statement of Facts sets out the assessments
appealed from.
[3] In addition to the
Partial Agreed Statement of Facts, evidence was given on behalf of the
Appellant by John Frank Krmpotic. He testified that he was the sole shareholder
of Kuna Holdings Ltd. (“Kuna Holdings”) and he was one of two officers and
directors of 507582 B.C. Ltd. (the “Company”). He indicated that all relevant
times, the Company carried on the business of residential real estate
development, construction and sales. Between 1996 and 2000, the Company built
38 town homes at Whistler, British Columbia, commonly referred to as Granite Court (the “development”).
The civic address was 4405 Blackcomb Way, Whistler, British Columbia (the “property”). He
had a background in building and construction.
[4] In 1996, he saw
opportunities at Whistler, viewed the property and purchased it, it was zoned
and developed. He identified the auditor’s working paper found in Exhibit R-1 at
Tab 1 which is with respect to 2001 taxation year. He referred to this as the
sales record on this complex.
[5] In 1997, they had
reached their pre-sales requirements for this complex. They took it off of the
market as people were flipping them. As they reached the end, they put them
back on the market. The second last unit was sold for $299,000 as shown at Tab
1. They had one unit left and they wanted to keep it as an investment for later
on. It helped with the financing. Unit 102 was a second and third floor unit.
It was used as a show room so that it contained furniture.
[6] He identified Tab
27 of Exhibit R-1 which was the Freehold Transfer document for unit 102. It was
indicated on the document that it was executed on September 1, 1999 but the
witness said that he executed this document in advance. The document was
registered on December 1, 2000.
[7] The property was
transferred to his mother Betty Krmpotic who was described as a business woman
in Burnaby,
British Columbia.
[8] He wanted to
dissolve the Company because he did not want to pay for annual reports and
other expenses if the Company continued in operation. He also cut down on his
liability. By transferring the property to his mother he would still have an asset.
If he dissolved the Company any property that it owned would be forfeited to
the Crown. He had 10 years to revive the company. It was dissolved in November 2001.
[9] He identified the
trust document found at Exhibit R‑1, Tab 14 as a true copy of the
original trust document executed by Betty Krmpotic in favour of the Company with
respect to unit 102, 4405 Blackcomb Way, Whistler, British Columbia. This trust document
declared that Betty Krmpotic was holding the property in trust for the Company.
It further declared that she had no interest whatsoever in the said unit and
would transfer it to the Company for $1 when requested to do so.
[10] This document was
created by this witness on December 1, 2000 and it was signed by his mother. He
had received no legal advice with respect to the document.
[11] He explained the
document to his mother who acted as the secretary of the Company. She was
familiar with the Granite project. She understood it.
[12] The document was in
error in that it referred to 4450 Blackcomb Way, whereas it should have read 4405 Blackcomb Way. The Company never
owned 4450
Blackcomb Way. The property had never been used or rented. No one in the Company used
it for personal purposes.
[13] He identified the
T-2 return and schedule information found at Exhibit R‑1, Tab 15 for the
period ending May 31, 2000. Likewise he identified the T-2 return and schedule
information found at Exhibit R-1, Tab 16 as at May 31, 2000. This
document showed zero inventory of land and work in progress. Further, this was
an error as the Company still held property in trust. He was not in the country
at the time these documents were prepared by the Company’s accountants.
[14] He did not sign the
T-2 return and financial documents at Exhibit R-1, Tab 15 because he was
not in the country. He was in Croatia.
[15] He admitted that the
total cost of inventory was deducted in spite of the fact that they continued
to hold the property in question in his inventory. This was a mistake by the
accountants.
[16] In
cross-examination, he was referred to Exhibit R-1, Tab 27 which was the Freehold
Transfer under the Land Title Act and he said that when he was given a
batch of documents on September 1, 1999 to sign and there may have Strata documents
and other documents.
[17] He was questioned
about his answers given on examination for discovery and he said that his
answer to question 61 was not complete and he also should have indicated that
one of the reasons why he wanted to wind up the Company was because of
liability. He also said that he did not indicate that there was a concern that
the Crown might be able to take the property over because they never got into
that matter. Consequently, his answer to question 61 and questions 64 to 74
were not complete. He had 10 years to accomplish his purposes.
[18] He was referred to
the trust document and he said that it was drawn up in 2000 but it was not
submitted to Canada Revenue Agency (“CRA”) until 2006, after the Objection was
filed. He did not know why this was so. He was in and out of the country
because he finished working in Croatia in the year 2001. Mr. Desai was doing the accounting but
he did not have the trust document. This witness did not provide it to anyone to
give to CRA. He did not know why the corporation did not sign the trust
document as well as his mother.
[19] He referred to the
document in Exhibit R-1, Tab 16 and he said that he did not sign the T-2 return
for the year 1999. He was not in the country as far as he could remember. When
he was in the country he would sign documents. The reason that he did not sign
the documentation for the other years was because he would be out of the
country, and probably in Croatia. He did not advise Mr. Desai, his accountant, that
the corporation was going to hold on to unit 102. Mr. Desai still does the
Company’s returns and his own return.
[20] He was asked again
why he wanted to hold on to unit 102. He said that it was one of the larger
units, it was in the right position and it was near a helicopter pad. He
decided to hold onto unit 102 when he sold the second
last unit. The mortgage was paid off and the Company was in good shape.
[21] Mr. Desai had been
doing the Company’s returns and financial documents since the Company was
incorporated. He had been doing his personal returns before that. He also did
the statements and returns for Kuna Enterprises Ltd.
[22] The witness had a grade
12 education and had taken courses in construction, surveying and planning. He
had been involved in 8 to 9 different real estate and construction projects. He
had no accounting background.
[23] When asked why he
did not get legal advice for the drafting of the trust document, he said that
he felt safe doing it himself with his mother.
[24] In redirect, he said
that he incorporated the Company because it was an easier way of doing the
project. He also wanted to avoid liability.
[25] Betty Krmpotic
testified that she was the mother of John Krmpotic. She was familiar with the Company
in question. It was owned by her son and he had developed condos at Whistler.
She is not an officer the Company. She does filing, delivers papers to the
accountant, does bank transfers and has signing authority for the Company. She
had no involvement with the Granite Court project. She was aware of it, had received invoices
for and paid bills for it while the project was being completed.
[26] With respect to unit
102, she had been in it one or two times. It was a showroom. The title was registered
in her name, in trust, to hold for the Company until they decided what to do
with it. She signed the trust document after John brought it to her. She
had discussed it with him beforehand. She was holding the property for the Company.
She never signed such a document before. She signed it in her own home. She
never had personal use of the unit. She does not own it.
[27] In
cross-examination, she reaffirmed that she held the property in trust and
believed that her son had a lot of reasons for transferring the property to her
in trust until he did something with it. It was just a matter of signing the trust document
as far as she was concerned.
[28] She delivered all of
the cancelled cheques, stubs, transfers and banking documents to Mr. Desai on
behalf of the Company. She gave no instructions about preparing the Company
documents. She did not keep a copy of the trust document for herself.
[29] Manoharlal Desai testified
that he was a chartered accountant. He was the accountant for both Appellants
since 1990. He provides accounting services to small clients, including
personal and corporate services.
[30] Between 1996 and
2001, his office prepared monthly statements, GST returns and any returns
required to be presented to CRA on behalf of the Company. He had access to
sales information, bank statements, cheque stubs, deposit books, statements of
assessments for various properties, was familiar with the net amount of
receipts and disbursement of funds for the Appellant. This information comes
from Mrs. Betty Krmpotic. The information is entered into their software
programs and into the general ledger. He was familiar with the project at
Whistler.
[31] He was questioned
with respect to the various financial statements prepared by his office with
respect to the Company touching upon the present matter. He was very familiar
with these documents and he had access to statements of adjustments for the
various properties when each unit was sold.
[32] He identified
Exhibit A-1, which was a copy of the general ledger trial balance for the
Company dated November 30, 1999. He confirmed the statement of facts set out in
paragraphs 15 and 16 of the Partial Agreed Statement of Facts and explained
that he had thought that the sale of the last lot had taken place and it had
not. There was still one unit which was left after the year end and that was
the property in question.
[33] He was referred to
Exhibit R-1, Tab 15, which is a T‑2 return and schedule information
for the Company for the taxation year ending May 31, 2000. The
balance sheet indicated that there were no units left and the inventory was
listed as zero. He also identified Exhibit A-2, which was an excerpt from the
general ledger for the year ending May 31, 2000. He said that the general
ledger summarizes all transactions of the Company for that period of time. He was
referred to page 3 of the document which showed the cost of purchases of
$224,361.45. With respect to the unit in question, he agreed that the Company
had understated income because the total cost of the last unit was written‑off
when it should not have been.
[34] He confirmed that he
had not received the statement of adjustments with respect to the property in
question and he believed that all units had been sold. He was referred to Exhibit
R-1, Tabs 12 and 13 which were the Company’s returns for the periods ending May
31, 2001 and May 31, 2002. He said that if there is no inventory then they do
not prepare financial statements. In the return dated May 31, 2001, the
only income was for mortgages that the Company owned. With respect to the
period of May 31, 2002, there were no financial statements because there was no
income or expenses and the only assets were shown as cash of $3,310. None of
these documents were signed by John Krmpotic but Mr. Desai still filed the
returns.
[35] In
cross-examination, he said that his office employed three chartered accountants
and a staff of 10 people. The staff prepared the statements and they were
reviewed by the accountants. Most of the time, if he was in the office when the
materials were brought in, he would meet with the person who delivered them. The
Company normally does not sign its returns.
[36] He was referred to
the trust document and he said that he just saw it recently. He had not seen it
when he prepared the 2000 and 2001 returns. When the auditor made the
enquiries, Mr. Krmpotic showed him the documents. His office did not give the Company
or Mr. Krmpotic any advice or information with respect to the trust
arrangement. His office did not contact the Company before completing the
financial statements which give rise to the present actions. He never had a
statement of adjustments with respect to unit 102 and he never went back
and tracked the units but assumed that they were all sold.
[37] He identified
Exhibit A-3 which was a BC Company Summary for the Company showing its
reactivation with an expiry date of October 4, 2009.
[38] Jason Brown was an
auditor for CRA. He has 10 years experience. He issued the income tax
reassessment in this case. The GST reassessments were issued under another name
that flowed from his reassessment.
[39] He was referred to
his working paper contained at Exhibit R-1, Tab 1. He said that his work came about
as a result of another audit that he had been working on. He decided that the
Appellant Company and John Krmpotic were related shareholders of the Company
under audit. He looked up the company and found it to be involved in the
construction business. He looked through their data base for transfers of
property out of the Company and noticed a property transfer from the Company to
Mrs. Krmpotic for $1. He contacted the accountant for the company in November
2004. The accountant told him that all sales are properly recorded by the Company.
He asked for related documents to confirm the returns. When there was no
response he contacted them again and there was no response.
[40] In January 2005, he
contacted the accountant and asked for the Company’s documentation for 1998,
1999, 2000 and 2001. He gave them one to two weeks. By the end of January he
still had no documents from the corporation. He told them that he needed the
vendor’s statement of adjustments with respect to unit 102. He did not receive
it by the end of January. He created his working paper from what had been
recorded for tax purposes. He was trying to reconcile what had been reported
for sales.
[41] He found that in the
year 2000 there was one transfer, which was for the property in question, for
the consideration of $1. He found out that Mrs. Krmpotic was still the
registered owner of the property in question.
[42] He was referred to
Exhibit R-1, Tab 6 which is the Title Search printout with respect to the
property in question. It showed the registered owner as Betty Krmpotic. He
presumed that the entire inventory had been disposed of and recorded even
though unit 102 was still held.
[43] He wrote to their
real estate appraisers and was told that the assessed figure would suffice for
a value of the property of unit 102. He compared it to three other properties
that the Company sold most recently and unit 102 was the highest. He also obtained
the corporate information that he needed to determine who controlled the
corporation.
[44] He concluded that
the property was transferred to a non-arm’s length party for inadequate
consideration and that it should have been included in income. He received the trust
document after the reassessment. He received no documentation from the
corporation for the audit. The Company filed an Objection and that was when the
trust document was filed.
[45] The reassessment was
confirmed. The reason was that the bare trust agreement was not accepted
by CRA. According to him it was not signed, it was not witnessed and the Company
had not signed it. Also, the claimed beneficial owner had zero inventory as of
2001 according to the Company’s files with CRA.
[46] He was asked for
reasons for the penalties levied and he said that the amount in question was
one of the reasons. This was the only property sold in 2001 at a value of
$442,000. He considered Mr. Krmpotic’s history in the business and in other
companies. He also knew that the Company had been audited for GST in the late
1990s, Kuna Enterprises had been audited also and Mr. Krmpotic was
reviewed at that time. He believed that Mr. Krmpotic and the Company should
have been aware of what was going on. Further, he never received any
information from the accountant for the Company and so he concluded that the
records might not support the filings.
[47] He was referred to
Exhibit R-1, Tab 7, which was the letter dated January 31, 2005 that
he wrote to the Company through its accountant, Manu Desai. This was
referred to as a proposal letter. He indicated that he proposed to revise the
taxable income by adding $441,911 to the income. He asked if there was any
other information that the Company might have to support another amount.
[48] He talked to Mr.
Nick Smith, a lawyer, and asked him to respond to the proposed letter. By April
he had received no response so he advised the Company that he was going to make
the adjustment for the Company and Mr. Krmpotic and that they could appeal
the assessment.
[49] Again, with respect
to penalties, he said that they were confirmed at the objection stage for the
same reasons. He added that the bare trust agreement was given to the appeals
division and not to the auditor. He concluded that the property was transferred
through Mr. Krmpotic’s direction. The reasons were the same for rendering
penalties against Mr. Krmpotic and the Company.
[50] The penalties were
confirmed by the appeals division.
[51] In cross-examination
he said that he did not know why Mr. Desai had not provided the information he
requested. Both letters were sent to Mr. Desai as that was the Company’s address
provided on their data base.
[52] He indicated that he
had done the title search and found the registered owner to be Betty Krmpotic.
He was referred to paragraph 10(o) of the Reply and was asked what was the
basis for concluding that the beneficial and legal ownership was transferred to
Mrs. Krmpotic. He replied that the accountant had said that all of the sales
were reported and he assumed that total ownership had passed to Mrs. Krmpotic.
The bare trustee agreement was not accepted by the appeals division.
[53] When asked why they
had applied gross negligence penalties he replied:
1.
Materiality
of the amount ($442,000.).
2.
Mr.
Krmpotic’s background in business and related construction business.
3.
The Company had been
audited in the past (that was all that he knew about it).
4.
Kunar Enterprises had
been audited for income tax (that was all he knew about it).
5.
Information requested
from the Company had not been provided.
[54] With respect to Mr.
Krmpotic’s personal gross negligence penalties, he said that he should have
assessed himself and added it to his income.
[55] In redirect he
identified Exhibit R-3 as a Memo to File T2020, with respect to his conversation
with the Company and its representatives.
ARGUMENT ON BEHALF OF
THE APPELLANT
[56] Counsel for the
Appellant stated that the facts disclosed that the declaration of trust was
executed on December 1, 2000 by Mrs. Betty Krmpotic in the presence of John
Krmpotic. This declaration of trust evidenced a legally effective bare trust
relationship by which Mrs. Krmpotic held legal title to the property in trust
for the Company. However, the corporation remained the beneficial owner of the
property. This was confirmed by the evidence of John Krmpotic and Betty Krmpotic.
[57] There was no
evidence whatsoever that the declaration of trust was a sham or a fraud or that
it was created or executed at some other date than December 1, 2000.
These facts were established by the testimony of John Krmpotic and Betty
Krmpotic.
[58] On December 1, 2000,
they transferred title of the property to Mrs. Krmpotic. This document was
registered in the British Columbia Land Title Office as confirmed by the testimony
of John Krmpotic. A copy of the Land Title Act Form A is contained
in Exhibit R-1, Tab 27.
[59] From December 1,
2000 onwards, Mrs. Betty Krmpotic held legal title to the property although the
Company remained the beneficial owner of the property at all times. This was
confirmed by the testimony of John Krmpotic and Betty Krmpotic as well as
the trust document itself found in Exhibit R-1, Tab 14.
[60] The consideration
for the transfer of the property was $1. The Company considered itself to be
the beneficial owner of the property all of the time.
[61] Both John Krmpotic
and Manu Desai confirmed information contained in the financial documents filed
with CRA, including the financial statements. In preparing the financial
statements Mr. Desai reflected the costs of the development, including the
costs of the land, permits, surveys, construction costs, et cetera in the
balance sheet in the line item “inventory of the land and work in progress.”
[62] When the Company sold
units of the development, Mr. Desai wrote down the cost of the “inventory of
the land and work in progress” in the corporation’s financial statements to
reflect the disposition of those units. This was confirmed by the testimony of
Manu Desai and the financial statements.
[63] In determining the
net income or loss to the corporation for each fiscal period, Mr. Desai
reflected the cost of the units sold as “cost of sales” in the statement of
earnings and deficit for the Company.
[64] Mr. Desai testified that
on or about October 20, 1999, the Company sold a unit in the development having
the address 310 – 4405 Blackcomb Way, Whistler, B.C. This was the last sale of any units in the
development.
[65] On September 19,
2000, Mr. Desai completed the financial statements for the taxation year ending
May 31, 2000 of the Company. At that time, Mr. Desai mistakenly believed that
the unit sold on October 20, 1999 was the last remaining unit in the
development that was held by the Company. Mr. Desai believed that the
development had been completed and all units sold to purchasers.
[66] This was confirmed
in the financial statements found at Tab 15 and in Mr. Desai’s oral
testimony.
[67] In preparing the
balance sheet for the taxation year ended May 31, 2000, Mr. Desai wrote down
the cost of the “Inventory of land and work in progress” line item to nil to
reflect the fact that the corporation no longer held any further interest in
the development of the underlying property. This is confirmed in the financial
statements at Tab 15 and in the testimony of Mr. Manu Desai.
[68] Further, Mr. Desai
reflected the remaining cost of development in the “cost of sales” line item in
the statement of earnings and deficit. As a result, the cost of the property
was deducted in calculating the income of the Company for the taxation year ending
May 31, 2000. These facts are indicated in the testimony of Mr. Manu Desai and
in the financial statements at Tab 15.
[69] Mr. Desai wrote down
the cost of the corporation’s “inventory of the land and work in progress” and
deducted the cost of the development in the “cost\ of sales” based on his
mistaken belief that the corporation had sold the last remaining unit in the development
in the taxation year ending May 31, 2000. If Mr. Desai had known that the
Company continued to hold the property after May 31, 2000, he would not
have written down the cost of inventory and deducted the cost of the property in
calculating the corporation’s income for the year.
[70] The testimony of Manu
Desai confirms this position. Mr. Desai further testified that on October 3,
2007, the Company was restored to the corporate register as a corporation in
good standing. This is confirmed by Appellant’s Exhibit A-3.
[71] Consequently, in
accordance with the evidence adduced, on December 1, 2000, the
Company transferred legal title to the property only to Mrs. Betty Krmpotic.
Since that time, Mrs. Krmpotic has held title to the property as bare trustee
only. At all relevant times the Company has remained the beneficial owner of
the property.
[72] As a result, the
fair market value of the property transferred by the Company to Mrs. Krmpotic
on December 1, 2000 (that is, the legal title to the property) had a fair
market value of no greater than $1.
[73] As a result, the
Company realized proceeds of disposition of $1 in the transfer on December 1,
2000 and not proceeds of disposition of $442,000 as assessed by the Minister
under the Income Tax Act (“Act”).
[74] Further, the Goods
and Services Tax (“GST”) is payable on the $1 fair market value of the
consideration payable by Mrs. Krmpotic in respect of the supply of legal title
to the property and not of the deemed consideration of $442,000 as assessed by
the Minister under the Excise Tax Act.
[75] Further, Mr. John
Krmpotic did not confer any benefit to Mrs. Krmpotic under subsection 56(2) of
the Act in respect of the transfer of legal title to the property by the
Company to Mrs. Krmpotic in 2000 and so was not liable to any income tax in
respect of that transfer.
[76] No penalties are
applicable under the Act or the Excise Tax Act as there was no
additional income tax or GST payable by the Company or John Krmpotic in respect
of the transfer of legal title to the property by the Company to Mrs. Krmpotic
in the year 2000.
[77] With respect to the
bare trust that was created in favour of Mrs. Krmpotic, the usual accepted
meaning of the term “bare trust” is a trust where the trustee holds property
without any duty to perform except to convey it to the beneficiary or
beneficiaries on demand. See D. Waters, The Law of Trusts in Canada (3rd Ed.),
(Toronto: Carswell, 2005) at
page 32.
[78] In British Columbia, legal title to real
property may be registered in the name of the trustee or agent while the real
property is beneficially owned by another party (the beneficiary). See
Whistler Village and Assessor North Shore Squamish Valley, (1981) 121 D.L.R.
(3d) 284 (B.C.S.C.) (at pages 285-287).
[79] The Land Title
Act does not cause unregistered beneficiaries to be ineffective as against
the parties to the instrument even where the instrument is not registered on
title. Land Title Act, R.S.B.C. 1996, c.250, s.s. 20(1).
[80] The Land Title
Act does not require that land that vests in a trustee or personal
representative be registered on title. It provides that if land vests in a
personal representative or trustee, that person’s title may be registered, but
particulars of a trust created or declared in respect of that land must not be
entered in the registry. The language of the legislation is permissive. It does
not require all trust interests to be registered on title to property. The Land Title Act,
R.S.B.C. 1996, c.250, s.s. 180(1).
[81] Accordingly, it was
open to the Company to register the transfer of legal title of the property to
Mrs. Krmpotic under the Land Title Act while the corporation continued
to beneficially own the property. There was no requirement that the trust
document executed by Mrs. Krmpotic be registered on title to the property.
[82] With respect to the
application of the Income Tax Act and the Excise Tax Act
to a bare trust, counsel argued that these Acts rely on private and commercial law
concepts to determine particular income tax consequences. One must first
determine the nature of the relevant legal relationship before one can
determine how the Act applies. The Queen v. Lagueux & Frères Inc.,
74 DTC 6569 (F.C.T.D.); Dale v. The Queen, [1997] 2 C.T.C. 286
(F.C.A.); Sussex Square Apartments Ltd. v. The Queen, [2000] 4 C.T.C.
203 (F.C.A.) affirming [1999] 2 C.T.C. 2143 (T.C.C.).
[83] The Supreme Court of
Canada has recognized the interrelation between general law or commercial law and
the operation of the Act. See Continental Bank of Canada v. R, [1998] 2 S.C.R. 298 (S.C.C.).
See also P. W. Hogg, J. E. Magee and T. Cook, Principles
of Canadian Tax Law (3rd ed. 1999), at p. 2 where
the authors note:
The Income Tax Act
relies implicitly on the general law, especially the law of contract and
property. … Whether a person is an employee, independent contractor, partner,
agent, beneficiary of a trust or shareholder of a corporation they usually have
an effect on tax liability and will turn on concepts contained in the general
law, usually provincial law.
See Will-Kare Paving &
Contracting Ltd. v. The Queen, [2000] 1 S.C.R. 915 at paragraph 31.
[84] Counsel argued that
in the present appeal the tax liability of the Appellants turns on the legal
effect of the transaction involving the transfer of the property on December 1,
2000. The evidence is clear that the legal title of the property was registered
in the name of Mrs. Krmpotic on that date but the Company continued to be the
beneficial owner of the property because Mrs. Krmpotic held title to the
property as bare trustee only.
[85] Accordingly, the
Company did not transfer anything of value to Mrs. Krmpotic on December 1,
2000 and so it cannot be deemed to have disposed of the property for its fair
market value in order to realize proceeds of disposition of $442,000.
Similarly, Mr. Krmpotic cannot be said to have conferred a benefit on Mrs.
Krmpotic under subsection 56(2) of the Act because the registration of the
title to the property in Mrs. Krmpotic’s name under the bare trust did not
result in the conferral of any benefit to Mrs. Krmpotic.
[86] Further, subsection
104(1) of the Act excludes a bare trust from the concept of a “trust”
for income tax purposes. Subsection 104(1) provides that “a trust is deemed not
to include an arrangement under which the trust can reasonably be considered to
act as agent for all the beneficiaries under the trust with respect to all dealings
with all of the trust’s property”. He also takes the position that the
Minister’s long standing administrative policy with respect to bare trusts is
that where property is held by a bare trustee, the Minister will ignore the
trust for income tax purposes and will consider the transferor/settlor to be
the owner of the property for all purposes of the Act. The Minister has
stated that it generally views a trust under common law to be a bare trust
when:
a. the
trustee has no significant powers or responsibilities, and can take no action
without instructions from the settlor;
b. the
trustee’s only function is to hold legal title to the property; and
c. the
settlor is the sole beneficiary and can cause the property to revert to him or
her at any time.
See Income Tax Technical News
No. 7 (February 21, 1996). All of these criteria are present in the current
situation. Mrs. Krmpotic had no significant power or responsibility and took no
action with respect to the property. Mrs. Krmpotic’s only function was to hold
title to the property. The Company was the sole beneficiary and could cause the
property to revert to it at any time.
[87] Counsel argued that the
Appellant has introduced unchallenged and uncontradicted evidence with respect
to the trust document which “demolishes” the Minister’s assumptions in
accordance with the facts set out in the Supreme Court of Canada in Hickman
Motors Limited v. The Queen, [1998] 1 C.T.C. 213 (S.C.C.) at paragraphs 91 to
97. In these appeals, the Appellants have met the burden of proof by
demolishing the Minister’s assumptions while the Minister has failed to adduce
evidence to support its assumptions.
[88] The key assumptions
of fact made by the Minister in the Reply at paragraphs 10(o), (p) and (v) have
been demolished by the Appellants through the evidence adduced at the hearing
of these appeals.
[89] Mr. Krmpotic’s
understanding of the law of British Columbia regarding the dissolution of a corporation and the
forfeiture of real property to the province was correct. See Business
Corporations Act, S.B.C. 2002, c. 57, sections 422(1), 355 to 358 and 364
and the Escheat Act, R.S.B.C. 1996, c.120, s. 4.
[90] The Appellants have
made out a prima facie case that the Company did not transfer anything
other than bare legal title to the property to Mrs. Krmpotic on December 1,
2000. The Appellant’s evidence regarding the execution of the trust deed and
the intention that Mrs. Krmpotic would hold the property as a bare trustee is
unchallenged and uncontradicted evidence and so “demolishes” the Minister’s
assumptions.
[91] Consequently the
onus shifted to the Minister to rebut the prima facie case made out by the
taxpayer and the Minister must prove the assumptions. The only evidence the
Minister adduced in this regard was the testimony of the Minister’s auditor, Mr.
Jason Brown and the accounting records of the Company.
[92] Mr. Brown testified
that he assumed that the Company had transferred its entire interest in the
property to Mrs. Krmpotic on the basis of his review of information found in
the British
Columbia
property transfer tax records and British Columbia Assessment Authority records
which showed a transfer of title to the property to Mrs. Krmpotic.
[93] There is no doubt
that the Appellants did transfer title to the property to the name of Mrs.
Krmpotic on December 1, 2000. However, there was undisputed and unchallenged
evidence that beneficial ownership at all times remained with the Company and
the only title that passed was legal title. Mr. Brown could not provide any evidence
regarding beneficial ownership of the property other than his assumption that
it was transferred to Mrs. Krmpotic at the same time that title was registered
in her name.
[94] The Minister adduced
the financial statements for the taxation year ending May 31, 2000 which
evidenced in the balance sheet that the “inventory of the land and work in
progress” was reduced to nil as at May 31, 2000 and in the statement of
earnings, that the cost of all remaining units in the property was deducted in
calculating net income for the year ending May 31, 2000.
[95] However, Mr. Manu Desai
testified that he wrote down the costs of the corporation’s “inventory of the
land and work in progress” and deducted the cost of the development in the
“costs of sales” based on his mistaken belief that the corporation had sold the
last remaining unit in the development in its taxation year ending May 31,
2000. If Mr. Desai had known that the Company continued to hold the property
after May 31, 2000, he would not have written down the cost of inventory and
deducted the cost of the property in calculating the corporation’s income for
that year.
[96] Clearly, tax is not
assessed under the Act on the basis of accounting entries but on the
actual transactions that took place. The Federal Court of Appeal has held that
accounting errors and incorrect entries do not confer shareholder benefits. See
Franklin v. the Queen, [2002] 2 C.T.C. 88
(F.C.A.) at paragraph 7.
[97] The same reasoning
applies in the present appeals. The books of the Company do not reflect the
facts. The financial statements for the year ending May 31, 2000 reflected that
the corporation did not hold any further units in the development as at that
date. This is clearly incorrect because at that time the Company continued to
hold both legal title and beneficial ownership of the property (since the title
to the property was not registered in Mrs. Krmpotic’s name until December 1,
2000).
[98] Since the books of
the Company do not reflect the actual facts, they cannot form the basis of an
assessment for tax. See Long v. The Queen, [1997] 1 C.T.C. 2995
(T.C.C.).
[99] In conclusion, counsel
argued that these appeals should be allowed and the reassessments under appeal
be vacated on the basis that the Company transferred legal title to the
property only to Mrs. Betty Krmpotic on December 1, 2000, and such legal title
was held by Mrs. Betty Krmpotic as bare trustee only and that the fair market
value of the property transferred was not in excess of $1.
ARGUMENT ON BEHALF OF THE
RESPONDENT
[100] Counsel for the
Respondent took the position that under the Land Title Act, supra,
sections 180(2), (3) and (4) the trust instrument must be filed with the Registrar
with the application for registration of title. Once the trustee decides to
register title he must comply with these provisions. Section 20, according to
her, is merely a protective provision for when unregistered instruments come
into play. It is not intended to be the way that parties conduct business and
the way that the Land Title Registry expects parties to conduct business. If
you are going to register on title you have to follow all the provisions.
[101] Counsel for the
Appellant referred to section 20. This is merely a protective provision which
applies when unregistered instruments come into play. It may well be a common
practice to avoid the property purchase tax in this way when registering
against title. However, it appears to be contrary to law.
[102] She took the position
that the numbered company had transferred the property to Betty Krmpotic in “fee
simple”. So far as the world at large is concerned, Betty Krmpotic holds fee
simple title. This can be seen from the document and the title search. When she
considers various legal definitions of “fee simple” she ultimately concludes
that what was transferred from the numbered company to Betty Krmpotic was
everything.
[103] Having done so the
Appellant cannot now assert the trust because what they are attempting to
accomplish is to represent to the world at large that the entire interest in
the property, an interest in fee simple, has been transferred to Betty Krmpotic
while retaining a beneficial interest in the corporation.
[104] She asks the question,
did the Appellants accomplish what they set out to accomplish in light of the
provisions of the Escheat Act, supra, because section 4 of
that Act determines that if a corporation is dissolved, the land owned
by the corporation or to which the corporation is entitled at the time of the dissolution
escheats to the Crown?
[105] Further, if the trust document
had been registered, it would have been clear to the world at large that the
beneficial interest remained in the corporation. If the corporation then sought
to dissolve, either by commencing dissolution or by failing to file annual
returns, as is the case here, would that beneficial interest have escheated to
the provincial government? The only way to accomplish both was to do what the
Appellant did, which was not to register the trust document, and have it appear
to the world that fee simple had been transferred to Betty Krmpotic so
that the property would not escheat.
[106] She referred to the
case of Freebird v. Canada (F.C.A.) 92 DTC 6031 in support of the
position that if one is taking steps to make something look like it is real, it
becomes real. A person cannot create a contractual fiction which is designed to
misrepresent a legal relationship, take advantage of it and later disavow it to
avoid the tax disadvantages.
[107] In the case at bar there
was a transfer of title on December 1, 2000 to Betty Krmpotic in
fee simple. There was no evidence of a trust. As far as the world at large was
concerned she held title in “fee simple”. There was no evidence led that the
property escheated to the provincial Crown, so it appears that the Appellant
accomplished what it set out to do. However, the consequence of that is that it
cannot now assert a trust. In the end result if you show to the world that what
you created is one situation, then for your own advantage, when taxed and
assessed, you cannot assert that the contract was never intended to create that
result. If the trust document is accepted then the Appellants have that
problem.
[108] The trust document
itself is fraught with a few problems. It was provided to the Minister approximately
five years after the fact, in 2006. This is after the assessment took place.
Further, the document is dated December 1, 2000. The freehold
transfer was executed on September 1, 1999, 15 months in advance of the
date of the trust document. The trust document is dated the same as the date on
which the freehold transfer was ultimately registered at the Land Title Office.
She asked the question, why does it not correspond with the date of signing of
the freehold transfer, rather than the date of registering at the Land Title Office?
This would appear to her to be peculiar. However, she admitted that she did not
ask Mr. Krmpotic in cross-examination as to any reasoning for this.
[109] Further, the document
is not signed by the two contracting parties and she described this as
atypical. Further there are no witnesses recorded on the trust document. It
lacks some of the formalities of an ordinary contract or agreement.
[110] She took the position
that what the Company did in their books and records reflects what actually
happened. Mr. Desai might have made a mistake in the records and he might not
have. However, this is of little consequence because if the trust document
transferred anything more than legal title it would not matter whether Mr.
Desai made a mistake or not. She did suggest that Mr. Desai’s evidence
about why he believes that all of the land was transferred because he believed
that he had received the last statement of adjustments appears to be contrary
to his practice with respect to the other units. He presumed that it was the last
lot even though it is clear that he did not receive a statement of adjustments
for the lot in question.
[111] She addressed the
issue of the benefits relating to Mr. Krmpotic under section 56(2) of the Act.
She referred to Neuman v. Canada (M.N.R.), [1998] 1 S.C.R. 770
but agreed that even though the facts were not particularly pertinent, what was
pertinent were the four preconditions that must be met in order for subsection
56(2) to apply:
(1) that
payment must be to a person other than the reassessed taxpayer;
(2) the
allocation must be at the direction or with the concurrence of the reassessed
taxpayer;
(3) the
payment must be for the benefit of the reassessed taxpayer or for the benefit
of another person whom the reassessed taxpayer wished to benefit; and
(4) the
payment would have been included in the reassessed taxpayer’s income if it had
been received by him or her.
[112] Precondition (1) has
been met as the payment was to Betty Krmpotic. Precondition (2) has been met
because the allocation was at the direction or with the concurrence of Mr. Krmpotic,
as per the Partial Agreed Statement of Facts, the transfer would have been made
at the direction of Mr. Krmpotic because of his connection to the numbered
company. Precondition (3) has been met because the payment would have been for
the benefit of Mrs. Krmpotic. Precondition (4) has been met because if the
property had been transferred directly to Mrs. Krmpotic subsection 246(1)
would apply and he would have had to include it in his income.
[113] On the final issue of
gross negligence penalties, counsel referred to the decision of Venne v. The
Queen, 84 DTC 6247 (F.C.T.D.). This case sets out what the Court views as a
test for the Minister to apply gross negligence and also a test for the
Minister to be able to open up a statute‑barred year. That is what
happened in the case at bar.
[114] The appropriate provision
is paragraph 152(4)(i). Under that provision, the taxpayer must have made “any
misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud in filing the return or supplying any information
under [the] Act”. However, the application is 163(2) which provides that “Every
person who, knowingly, or under circumstances amounting to gross negligence,
has made or has participated in, assented to or acquiesced in the making of, a
false statement omission in a return, form, certificate, statement … is liable
to a penalty …” and then the calculation of the penalty continues in the rest
of the provision. She then referred to page 6 of the Venne, supra, decision
where the Court said “I am satisfied that it is sufficient for the Minister, in
order to invoke the power under sub-paragraph 152(4)(a)(i) of the Act to show
that, with respect to any one or more aspects of his income tax return for a
given year, a taxpayer has been negligent. Such negligence is established if it
is shown that the taxpayer has not exercised reasonable care. This is surely
what the word ‘misrepresentation that is attributable to neglect’ must mean, particularly
when combined with other grounds such as ‘carelessness’ or ‘wilful default’
which refer to a higher degree of negligence or to intentional misconduct.
Unless these words are superfluous in the section, which I am not able to
assume, the term ‘neglect’ involves a lesser standard of deficiency akin to
that used in other fields of law such as the law of tort.”
[115] In this case, counsel
submitted that the lowest test of negligence has certainly been met and it is
arguable that some of the higher degrees may have been met. If a Court accepts
that the Respondent’s version of events is correct, that the land title
transfer was executed as it was intended to be executed, the trust document was
kept veiled, as it was intended to be kept veiled, and if all of those circumstances
are found by the Court to be fact, and then the test set out by subsection 153(4)
has been met, and the Minister is entitled to open the statute barred year.
[116] There remains the
issue of gross negligence. Again counsel referred to Venne, supra,
at page 11 where it said,
‘Gross negligence’ must be taken to
involve greater neglect than simply a failure to use reasonable care. It must
involve a high degree of negligence tantamount to intentional acting, an indifference
as to whether the law is complied with or not. …
In this regard, if the Court finds
that the Respondent’s version of the events is correct then the test for gross
negligence has been met. It was more than a failure to use reasonable care in
that event, it would be a high degree of negligence in all likelihood that
occurred, and tantamount to an intentional act and indifference as to whether
the law was complied with. If the Respondent’s version of events is accepted by
the Court as fact, the Respondent submits that there is not indifference as to
whether the law was complied with or not, there was intention that the law would
not be complied with.
[117] Counsel submitted that
the assessment should be upheld and the appeal should be dismissed with costs.
[118] She agreed that the
GST informal procedure appeal would follow from the income tax appeals because
the GST assessed to the Appellant was GST arising from the transfer of unit
102.
REBUTTAL
[119] In rebuttal counsel
said that he was surprised that counsel for the Respondent did not think it was
of significance that Manoharlal Desai wrote down the inventory when he did so. He
was called as a witness and gave an explanation. He had financial statements
with a cost of $208,000 and he has not received anymore statements of
adjustments for a year. That is the reason why he assumed that the last unit
had been disposed of. That is a reasonable explanation for him believing that
all of the properties had been transferred. This was reasonable even though, in
answer to a question by the Court, he admitted that he had not gone back and
compared the inventory and matched up the statements of adjustment with the
different properties.
[120] The Appellant’s
submission is that if those statements are incorrect, as the Minister indicates
they were, and as Mr. Desai said they were, then why doesn’t the Minister
reassess the company for those taxation years and assess the additional tax
payable? It was open for the Minister to do that and it is still open for the
Minister to do that. That is for another year. That is for the 2000 taxation
year.
[121] Counsel argued that the
Minister seemed to be thinking that the fact that these properties were written
down somehow had a connection to the disposition of the property but the dates
are completely different. Mr. Desai wrote down the cost as of May 31, 2000. The
registration of title to Mrs. Krmpotic was only in December of 2000 so there
was no connection between the two. It cannot be alleged that Mr. Desai knew
about the sale and he wrote it down thinking that there had been a true sale to
Mrs. Krmpotic. That never could have occurred. It would not be consistent with
those financial statements. The financial statements really do not add anything
to the determination of what actually happened.
[122] Mr. Brown was
asked when he testifying as to what the Minister’s position was. Counsel now asks,
what is the Minister’s position here? Is he saying that the agreement that was
entered into was signed on dates other than the dates on the document? Was he
saying that the parties entered into that document but it was not legally
effective? Was he saying that it was a sham? Was he saying that they made up
this document after the fact to cover their tracks? Mr. Brown was unable to
tell the Court what the Minister’s position was.
[123] Counsel for the
Respondent appears to be trying to have it both ways because she raised some
issues with respect to the agreement. She questioned the validity of the trust
deed.
[124] One of the points
raised by counsel for the Respondent was that the document was not signed by
the two contracting parties. However, this was not a contract. It was a trust
declaration. No one ever said that it was a contract. It was a bare trust. The
question here is whether a bare trust exists. That is the fundamental question.
[125] Counsel for the
Respondent raised the issue that there were no witnesses and that normally
there are witnesses in ordinary contractual arrangements or agreements. Again,
this is not a contract. Contract features are not going to be present in this
document. It has nothing to do with being a contract. The only person making
the declaration is Mrs. Krmpotic. She is the one who signed it.
[126] Counsel for the
Respondent also raised the issue of the date of the signing the registration
document. However, she asked no question about this in cross examination
of any of the witnesses. The document was signed on September 1, 1999 even
though it was registered on December 1, 2000. It is not appropriate for counsel
for the Respondent to be casting aspersions now on the witnesses’ testimony in
terms of tying into the document when she did not ask them any questions about
it when they were on the stand.
[127] Further, no one ever
suggested there was an oral trust except counsel for the Respondent.
[128] Counsel referred to
the text book entitled, The Law of Evidence in Canada, 2nd
Edition, by John Sopinka, paragraph 16.147 in support of his position that if
counsel was going to be challenging a witness’s credibility on extrinsic
evidence or a document, she should have put that document to him when he or she
was on the stand.
[129] The rule applies not
only to contradictory evidence, but to closing arguments as well. But to the
extent that counsel for the Respondent is arguing that the trust declaration is
somehow a sham or a fraud, there is no evidence to that effect. In fact the
uncontradicted evidence is that the document was signed on the date that the
parties said it was signed and the parties believed it had a binding effect on
them.
[130] He argued that the
case of 1524994 Ontario Limited v. Canada, supra, as quoted by
counsel for the Respondent has nothing whatsoever to do with the factual
situation in this case. In that case, the parties had an agreement that they
carried on under, and then they tried to disavow it. In the case at bar, the
Appellants had a declaration of trust which was executed and kept, and the
parties behaved consistently with that and are not attempting to disavow that
agreement. This case and others cited by the Respondent are actually helpful to
the Appellant’s position.
[131] The legal relationship
in this case was a trust relationship. There was no evidence to the contrary
that there was not a trust relationship between Mr. Krmpotic and his
mother with respect to the property. The deed of trust has been presented, it
has been executed, the Court has received testimony on it. It meets all of the
requirements of a deed of trust.
[132] Counsel for the
Respondent assumed the position that what the Appellant did was unlawful. That
is absolutely incorrect. Section 20 is clear authority that there can be
unregistered instruments that can affect title between the parties to those
instruments. The fact that the trust was not registered on title does not
somehow invalidate the trust. Subsection 20(1) basically is the authority for
that provision. The register only trumps the trust with respect to unaffiliated
third parties.
[133] With respect to
section 180 of the Land Title Act, counsel took the position that
whether or not you state that you are a trustee is an optional matter. It is optional
whether the trust relationship is registered on title or not. Even if the
position of the Respondent is correct then what the parties have done here is
that they have failed to comply with the Land Title Act. That does not
mean that they voided their legal relationship. That means that they failed to
technically comply with the land title registration system in British Columbia. The trust deed sets
out the relationship and it is not trumped by the Land Title Act because
of section 20.
[134] There are many documents
that are not registered on title but they are still binding between two
parties. In other words, counsel took the position that subsection 180(3) of
the Land Title Act is a mandatory provision for the registrar. The other
effect is that the registration may be ineffective for registration under the Land
Title Act but it does not vitiate the trust agreement.
[135] Subsection 20(1) of
the Land Title Act includes the words “except as against the person
making it” then if it did not include those words what was registered under the
Land Title Act would trump any private agreements. Those words basically
say that two parties who enter into a contract or an agreement or have an
instrument between them, they are still binding on those parties, notwithstanding
what appears on title.
[136] With respect to the Escheat
Act, Mr. Krmpotic had some knowledge about its effect but he did not seek
any legal advice on it. However, it really showed what was in his mind when he
entered into the trust agreement and what he was trying to accomplish. This was
his motive in acting as he did. However, there can be no question that the
trust agreement was entered into. The witnesses were not challenged and the
document was not challenged. One must look to the document itself to see what
legal relationship was created. This is what a bare trust is. The Appellant has
met the criteria for a bare trust as referred to in the Appellant’s argument.
[137] The Respondent is
basically arguing that the Appellant registered title in Mrs. Krmpotic’s name
and it cannot now claim that she did not own it. However, this is what the
declaration of trust said. She had only legal title and not beneficial title.
It is true that they did not tell Mr. Desai about it but there is no obligation
to people who enter into a trust agreement to notify anyone about it. In any
event it was not asked at cross-examinations by counsel for the Respondent.
[138] Since counsel for the
Respondent did not ask any questions of the witnesses about why the document
was not presented to CRA before or given to the accountant they cannot during
the context of the trial or after suggest that there is something suspicious
about it.
[139] With respect to the
statute‑barred year and the gross negligence penalties, counsel took the
position that these are not relevant issues because there is no tax payable on
the transaction. However, if the Court accepts the Crown’s theory, that even
though Mr. Krmpotic and his mother entered into a trust agreement, because they
registered title in Mrs. Krmpotic’s name, that the trust agreement has no
validity now. How is Mr. Krmpotic supposed to know that, as a lay person? How
is that a misrepresentation on his part? As far as he knows, and as far as he
testified in Court, he has always believed that the trust agreement was valid.
So how can CRA say that he made a misrepresentation attributable to neglect or
carelessness? He always believed that the trust agreement was the governing
instrument. He did not believe that he conferred a benefit on his mother. He
had no reason to do so.
[140] Counsel’s submission
with respect to the personal income tax return for Mr. Krmpotic was that it was
statute‑barred. Again, the onus is on the Crown to open up the statute‑barred
year. The question is, what evidence did they lead to suggest that Mr. Krmpotic
knowingly or even carelessly understood that that trust agreement that he
signed was not valid and instead that this land title document, the land title
registration was the way to go? But they had not introduced any evidence to
that effect. The same argument applies to the gross negligence penalties.
[141] There would be no
gross negligence or negligence unless the parties were creating a sham. Even if
the Court accepted the Respondent’s position that the document was superseded
by what was on title. How was that negligent for Mr. Krmpotic? He always
understood that the trust agreement was binding. There was no evidence that he
understood that what was registered on title should govern, he had the trust
agreement. He was entitled to rely on that. So what the auditor, Mr. Brown said
was that he should have included the $442,000 in income, under subsection
66(2). He was expecting an ordinary taxpayer to know that the trust deed that
he entered into, that his company entered into with his mother is not valid,
for some legal technical problem, and that what he should have done back in
2000 was include the $442,000 in his income. That is not what is expected of an
ordinary taxpayer.
[142] Again, with respect to
the gross negligence penalties counsel agreed that “Gross negligence must
be taken to involve greater neglect that simply the failure to use reasonable
care. It must involve a high degree of negligence tantamount to intentional
acting, and indifference as to whether the law is complied with or not”. That
is the standard so there has to be intention or gross negligence. He was
prepared to admit that if the document was fraudulent, or made after the fact
or back‑dated, that was intentional acting and would be gross negligence.
However, if as he suggested, it was a bona fide legal relationship, and
somehow there was a technical problem that prevented the document from being capable
of being acted on, how could that be gross negligence? The onus of proving
gross negligence is on the Crown and there has been no evidence adduced
regarding the state of mind of the Appellant, either Mr. Krmpotic or his
company.
[143] Clearly neither Mr.
Krmpotic nor the Company had any reason to believe that their trust document
was not valid and that it was incapable of transferring any beneficial title to
the Company. There is no other evidence to the contrary.
[144] At the end of the day,
counsel’s position was that the trust agreement was valid and therefore there
was no transfer of funds, there was no taxable amount. There cannot be any
penalties, there cannot be anything owing by the Appellants.
[145] If the Court should
find that the document was legally ineffective then the appeal of the Appellant
Company should be dismissed except for gross negligence penalties. What the Company
really did was to transfer property with a fair market value of $442,000 to
Mrs. Krmpotic.
[146] Further, no gross
negligence penalties should be applicable to the Company. For Mr. Krmpotic
individually, he is statute‑barred because he was not negligent in
failing to report that income or that benefit he conferred on his mother and
there should be no gross penalties against Mr. Krmpotic.
ANALYSIS AND DECISION
[147] There is no real dispute
with respect to the facts in this case. The facts are substantially set out in
the Partial Agreed Statement of Facts and complimented by the evidence of the
three witnesses called on behalf of the Appellants and, to a lesser extent, the
evidence given by the witness called on behalf of the Respondent.
[148] The evidence of John
Krmpotic, Manu Desai and Betty Krmpotic were basically undisputed. Both Mrs.
Betty Krmpotic and John Krmpotic appeared to be truthful witnesses who gave
their testimony in a straight‑forward manner based upon their own
knowledge of the facts, their evidence was not questioned in any material
particularly during cross-examination and the Court is satisfied that it can
believe that evidence.
[149] Manu Desai also
testified in a very straight‑forward manner and his evidence was
undisputed in cross-examination or by any other evidence. Consequently the
Court accepts the evidence that he gave.
[150] The Court does have
some difficulty in understanding why Mr. Desai concluded that all of the
inventory of the Company had been disposed of even though he did not have a
statement of adjustments for the property in question here. It may very well
have been that because of the passage of time from the receipt of the last
statement of adjustment and the lack of activity on behalf of the Company
during that period of time, it could reasonably be concluded that the Company
had disposed of all of its inventory. In any event, his testimony was
undisputed and the Court concludes that in completing the statements as he did,
he merely made an error in drawing the conclusion that he did. There was no
deliberate attempt by him or anyone else to mislead CRA in filing the returns on
behalf of the Company.
[151] The Court accepts that
Mr. Desai made an honest mistake in concluding as he did and that neither the
company nor John Krmpotic under the circumstances, knew or should have known that
this mistake was made, until the matter was addressed by CRA during the
assessment process.
[152] The Court is satisfied
that if Mr. Desai has known that the Company continued to hold the property
after May 31, 2000, he would not have written down the costs of inventory and
deducted the costs of the property in calculating the corporation’s income for
the year. His actions were based upon his mistaken belief that the corporation
had sold the last remaining unit in the development in this taxation year
ending May 31, 2000. Even though, as the Court indicated, it has some
difficulty in satisfying itself that he should have reached this conclusion
based only upon the fact that he had not received a statement of adjustments
for any of the properties for some period of time. However, he did say that he had
not been notified that the last property had been sold. He readily admitted
that this was a mistake on his behalf.
[153] In the end result, the
Court can only conclude from the reasons he gave, that this conclusion was
justified based upon his experience with the parties involved and based upon
his experience as an accountant over many years.
[154] The trust document was
a simple declaration that Betty Krmpotic was holding the property 102 - 4405
Blackcomb Way in trust for the Company. She further declared that she had no
interest whatsoever in the said unit and she transferred it to the Company for $1
when requested to do so. She said that the document was signed on the date
shown on the document, which was December 1, 2000. There was no
contradiction of this evidence in any way. Any insinuation to the contrary is
unsupported by the evidence.
[155] In evidence both John
Krmpotic and Betty Krmpotic testified that the intention of the trust document
was to transfer only legal title of the property to Mrs. Krmpotic for the $1
consideration and the beneficial ownership of the property remained with the
Company. Again, there was no contradiction of this testimony. This was the
intention and the document was executed by Betty Krmpotic.
[156] No evidence was given
that would suggest that anything else had to be done to make the document legal
as between Betty Krmpotic and the Company after it was signed. On the face of
it the document appears to transfer legal title only to the bare trustee, leaving
beneficial ownership in the Company.
[157] According to the
evidence of Betty Krmpotic and John Krmpotic this is what the document was
intended to do. John Krmpotic gave evidence as to why he wanted to transfer the
property in this way and Mrs. Betty Krmpotic gave evidence that John Krmpotic
had reasons of his own for executing this document. She did not dispute those
reasons. Even though John Krmpotic did not receive legal advice with respect to
the drafting of this document and its legal effect, on the face of it, it
appears to have accomplished the purposes for which it was drafted.
[158] The Court does not
accept any argument by the Respondent and the suggestion by Jason Brown that
the document has to be in any other form, contain the names of any other
persons or be witnessed by anyone in order to make it a valid document,
accomplishing what it purported to accomplish.
[159] One has to bear in
mind, as counsel for the Appellant argued, what was being drafted was a bare
trust agreement and not some form of contract. What was being attempted was
rather simplistic and that was the transfer of the legal title to the property
to the trustee for $1 consideration and the Court concludes that the document
contained the necessary wording to accomplish that purpose.
[160] Whether or not Mr.
Krmpotic’s reasons for acting as he did were sufficient for him to accomplish
all that he intended, the results that he sought would have no import here. He
believed that the effect of the document would be to leave beneficial ownership
of the property in the Company while conveying the legal title to his mother,
until such time as the corporation decided to sell the property when the
beneficial ownership would be transferred back to the Company.
[161] According to the
document itself, Mrs. Krmpotic had no other interest in the property and was
bound to transfer the beneficial interest back to the Company when the Company
requested her to do so. The Court is satisfied that Mr. Krmpotic prepared the
trust document himself, that he discussed with Mrs. Krmpotic the registration
of title of the property in her name and reviewed the terms of the trust
document with her. The Court is satisfied that Mrs. Krmpotic executed the
trust document on December 1, 2000 at her home in the presence of Mr.
Krmpotic. The Court is satisfied that both Mrs. Krmpotic and the Company always considered that the true owner of
the property at all relevant times was the Company. The Court is satisfied that
Mrs. Krmpotic
understood the terms of the trust deed and she considered herself to be bound
by it at all times.
[162] Further, Mrs. Krmpotic
did not use the property for any personal purposes. She had only been in the
property a couple of times herself to attend to its maintenance and gained no personal
advantage from doing so.
[163] Whether Mr. Krmpotic’s
understanding of the law of British Columbia regarding the dissolution of a
corporation and the forfeiture of real property to the province was correct or
not is immaterial to the Court’s consideration of the issues here. The Court is
satisfied that he did appear to have a reasonable understanding of the Business
Corporations Act and to some extent the Escheat Act when he
took the action that he did.
[164] The Court is satisfied
that the fact that the document was not signed by the two parties is not
relevant. It was not a contract. It was a trust declaration.
[165] Counsel for the
Appellant argued, that question here is whether a bare trust exists. Some issue
has been made of the fact that the land title document, deed of transfer, was dated
September 1, 1999 but not registered until December 1, 2000. That was
the same date, December 1, 2000, that appeared on the trust document as the
date of execution thereof. However, no issue was made of this during the
examination of the witnesses, so the Court is satisfied that nothing turns on
these dates and so no issue can be made of the timing of the execution or
registration of any of the documents.
[166] There is no evidence
before the Court that would suggest that the trust declaration was a sham or a
fraud. In fact, the evidence was to the contrary. It appeared that the document
was signed on the date that the parties said it was signed and the parties
believed that it had a binding effect upon them.
[167] The Minister, in its
Reply to the Notice of Appeal, in paragraphs 10(o) and (p) presumed that
the Appellant transferred legal and beneficial ownership of the last unit in
the development being unit 102 ‑ 4405 Blackcomb Way to
Mrs. Krmpotic for $1 and that at all material times Mrs. Krmpotic’s was the
beneficial owner of the property.
[168] Mr. Brown was on the
stand to confirm this assumption based upon his review of information found in
the British Columbia Property Transfer Tax Records and the British Columbia Assessment
Authority Records. This was only on the basis that a transfer of title to the
property to Mrs. Krmpotic was shown. However, these assumptions were addressed
in the evidence of John Krmpotic and Betty Krmpotic. They testified that
beneficial ownership at all times remained in the Company. Mr. Brown could not
provide any evidence regarding beneficial ownership of the property other than
his assumption that it was transferred to Mrs. Krmpotic at the same time that
title was registered in her name as shown on the record.
[169] He further indicated
in his evidence that he concluded that the property was transferred between
non-arm’s length parties for inadequate consideration and that the real value
of the property was $442,000. He concluded that this amount should be included
in income.
[170] He did not see the
trust document until after the reassessments were added and he confirmed that
the bare trust document was not accepted. He said that it was not signed, it
was not witnessed and the beneficial ownership of the land appeared to be
contrary to the documents filed by the corporation. He never received the
information he sought from the accountant or the Company and so he concluded
that the records might not support the filing.
[171] The Court is satisfied
that in the absence of some statutory provision which would prevent the bare
trust document from being effective, the evidence has established that the
document in question meets the requirements of a “trust” because the trustee in
this case, Mrs. Krmpotic, held the property without any duty to perform except
to convey it to the beneficiary or beneficiaries on demand. She received legal
title to the property only. She held title to the property as bare trustee only
and at all relevant times the
Company remained the beneficial owner of the property.
[172] It is trite to say
that subsection 104(1) of the Act excludes a bare trust from the concept
of a “trust” for income tax purposes. The Minister’s administrative policy with
respect to bare trusts is that the Minister will ignore the trust for income
tax purposes and will consider the transferor or settlor to be the owner of the
property for all purposes of the Act. The trust in question here appears
to meet all of the Minister’s requirements in that:
a. the
trustee has no significant powers or responsibilities, and can take no action
without instruction from the settlor;
b. the
trustee’s only function is to hold legal title to the property; and
c. the
settlor is the sole beneficiary and can cause the property to revert to him or
her at any time.
[173] Counsel for the
Respondent took the position that the trust document in question is ineffective
because it did not comply with the Land Title Act, and in particular,
section 180 thereof. She took the position that in the actions of the Appellant
here were not within the law. She opined that as far as the world at large was
concerned Betty Krmpotic held fee simple title to the land, that is, all
interest in the land, according to her definition. Consequently Mrs. Krmpotic
cannot now assert, after she represented to the world at large that the Company
conveyed the entire interest of the corporation, that the Company retained a
beneficial interest.
[174] The question arises as
to whether or not the beneficial interest would escheat to the provincial
government in spite of the intention of the Appellant that this not happen. The
only way to accomplish both was to do what the Appellant did, and not register
the trust document, have it appear to the world that fee simple had been
transferred to Mrs. Krmpotic so that the property would not escheat. But, such
questions were not put to any of the witnesses when they testified and the
Court is unable to draw such conclusions from the evidence.
[175] The Court is satisfied
that what the Appellants did in this case was not unlawful or contrary to
section 20 of the Land Title Act. The fact that the trust was not
registered on title does not invalidate the trust. The Court accepts counsel
for the Appellant’s argument that section 20 is clear authority for the
proposition that unregistered instruments can affect title between the parties
to those instruments. Clearly the fact that the trust is not registered on
title does not invalidate the trust. Registration may be paramount with respect
to unaffiliated third parties.
[176] The Court does not
accept counsel for the Respondent’s interpretation of section 180 of the Land
Title Act. The Court is satisfied that this section makes it optional
whether or not the trust relationship is registered on title. Even if that is
not so then the parties had merely failed to comply with the Land Title Act.
That does not mean that the relationship that was created by the trust document
is invalid. Failure to comply technically with the provisions of the Act
does not invalidate the trust agreement.
[177] Counsel for the
Appellant was not prepared to suggest what the affect of failing to comply with
the Act would be and this was not discussed by counsel for the
Respondent. Rather, if that were the case then Mrs. Krmpotic might have held no
title at all and the registration itself might have been deemed to be invalid.
[178] At the end of the day
even if the words “in trust” did not appear on the title document and the
Appellants were offside section 180 of the Land Title Act, the
registration might be invalid. But this still does not change the legal
relationship between the company and Mrs. Krmpotic.
[179] As far as the Court is
concerned the provisions of section 180 are mandatory with respect to the
duties of the registrar. It requires him to effect registration in the name of
the personal representative, and make an endorsement containing any additional
information that the registrar considers necessary to identify the estate of
the testate, and make a reference by number to the trust instrument. This has
no legal effect on the validity of the bare trust document.
[180] In the case at bar there
was nothing on the document to indicate the trust provisions and the end result
may very well be that the registration might at some time be declared to be
invalid for the purpose of the Land Title Act. However that does not vitiate
the trust document.
[181] The Court is satisfied
that the effect of section 20 of the Land Title Act, where it includes
the words “except as against the person making it” is to confirm that the
document is still binding on the parties who have signed it, notwithstanding
what appears on title. In any event the Court is further satisfied that the
bare trust document is not vitiated as a result of any statutory provision. It
is binding upon the parties to it. It had the effect of transferring legal
title only to the trustee with the beneficial ownership remaining at all times
in the Company.
[182] In the end result the
Court is satisfied that the Appellants have met the burden of proof upon them of
satisfying the Court that the Minister’s assessments were incorrect. Consequently,
the onus shifted to the Minister to rebut the prima facie case made out
by the taxpayer and to prove the assumptions. As already indicated, the Court
is satisfied that the Minister has not done that either through
cross-examination or by any testimony that was given to the Court.
[183] The Court is satisfied
that the trust agreement was valid, set out the true relationship between the
parties. There was no transfer of property and there was no taxable amount.
There cannot be any penalties or interest owing.
[184] The appeals are
allowed and the reassessments are vacated. The Appellants shall have their costs
to be taxed.
Signed at Ottawa, Ontario, this 20th day of May 2008.
“T. E. Margeson”
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