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Citation: 2006TCC153
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Date: 20060315
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Docket: 2004-665(IT)G
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BETWEEN:
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FREDERICK W. COADY,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sarchuk J.
[1] By Notice of Reassessment dated April 18, 2002, the Minister of National Revenue advised the Appellant that his tax liability for the 2000 taxation year had been increased by the inclusion in his income of the amount of $197,740 as business income from the disposition of property in that year, which had not been reported on his return. Furthermore, the Minister imposed gross negligence penalties pursuant to subsection 163(2) of the Income Tax Act, on the basis that for the period under appeal, the Appellant understated his income by the amount of $151,474.
Background
[2] The evidence adduced on behalf of the Appellant with respect to the sequence of events was somewhat inconsistent and at times difficult to follow. Accordingly, a brief summary of the undisputed facts is appropriate.
[3] The property in issue was described as a long strip of land beside Tea Hill Park, running from Tea Hill Road down to the beach. It was owned by Irene McRae, who listed it for sale with a real estate broker, Jane Brewster (Brewster) on June 28, 2000 for $185,000. A For Sale sign was placed on the property shortly thereafter and Brewster immediately received "a lot of phone calls on it, a lot of inquiries on the property". In the early part of July 2000, the Appellant's son Jason was in Stratford visiting his family. On Sunday, July 2, he noticed the For Sale sign, brought it to his father's attention, and returned with him to look at the property. The listing agent's telephone number and name was noted and upon their return home, Brewster was called and an arrangement was made to meet her at the site. On July 4, 2000, following further discussion with Brewster, the Appellant signed an Offer to Purchase the property for $173,000,[1] with closing to be on August 16, 2000. The vendor's counter-offer for $175,000[2] was accepted by the Appellant on July 5, 2000.
[4] The Appellant testified it was expected that he, his wife, Sheila Bacon (Bacon) and his son Jason, would be involved in the purchase. However, Bacon initially demurred and Jason had returned to his residence in the Northwest Territories on July 3rd. When contacted two or three days after the Offer had been made, Jason advised his father that he was no longer interested. The Appellant then approached his brother David, a Moncton businessman, who agreed to lend him $75,000 towards the purchase price. The balance of the monies required to complete the purchase was obtained by the Appellant by way of a personal line of credit from the Bank of Montreal. At all relevant times, he was solely responsible for the repayment of the amounts borrowed.
[5] The Appellant's Offer to Purchase specified that "this sale conditional on changing the zoning suitable to purchaser" and "conditional upon the purchaser obtaining acceptable financing within 10 banking days of the acceptance of the Offer". He did arrange for the necessary financing within the prescribed period of time. However, when he accepted the vendor's counter-offer, he was aware that the property was "zoned agriculture" and that in order to have it changed, he would have to comply with the zoning regulations of the Town of Stratford and that would be a difficult process, which was "going to take a long time". Notwithstanding those facts, on July 20, 2000, the Appellant waived the two conditions and they were deleted. Shortly thereafter, the purchase price was reduced to $161,000. Apparently, the vendor was at that time, involved in an unrelated development with the Town of Stratford, and in order to close the transaction was required to take "the 10% off all along the side of the property abutting Tea Hill Park". The Appellant accepted the price reduction for the loss of that portion of the property. The Transfer of Land was executed on August 25, 2000, and was registered on September 8, 2000.[3]
[6] Brewster testified there continued to be a very substantial interest in the property throughout July and August. More specifically, she was receiving calls from three potential purchasers up to the closing date, each one indicating that if the sale did not go through, they were interested and would be prepared to buy it. Following closing, Brewster did not receive any further contact from anybody interested in the property. These facts were known to the Appellant. As well, he was aware from another source that his neighbour, Joyce Matheson, had expressed substantial interest and that other people were also interested in the property.
[7] Several days prior to September 19th, Brewster heard that "they had tried to get subdivision approval and they couldn't get it" and "I did call them when I heard that" and asked "if they would be interested in selling". Bacon indicated she would speak to the Appellant and get back to Brewster. They did and as a result, they met on September 19th, and a listing agreement in the amount of $385,000 was signed.[4] She contacted the three known interested parties and on September 24th, received an initial Offer from Elwood Lawton, the landowner of the adjoining property, for $234,000. This Offer was taken to the Appellant, who counter-offered on the same day at $378,000,[5] and it was accepted by Lawton on September 25th. It was Brewster's testimony that she did not believe that there had been any undue influence on the Appellant to sell the property, nor did she believe that there was any pressure to dispose of it.
[8] The gain on the sale was $197,740. When filing his income tax return for the 2000 taxation year, the Appellant did not report any proceeds of disposition from the sale of the property in his return. However, he did claim and receive a rebate of GST in the amount of $11,270 paid on his acquisition of the property. When filing her income tax return for the 2000 taxation year, Bacon reported a capital gain of $115,799 from the sale, against which she deducted a capital loss in the amount of $46,400, arising from the sale of her principal residence in 1992.[6] Bacon's net gain of $69,399 was reported at an inclusion rate of 66.67%, for a taxable gain in the amount of $46,266.[7] Thus, 58.56% of the gain on the sale of the property was reported by Bacon on capital account. The remaining 41.44% of the gain was not reported by anyone. Both of these returns were prepared by the Appellant. In due course, the Minister reassessed Bacon for the 2000 taxation year to delete the capital gain claimed by her and reassessed the Appellant to include business income in the amount previously stated and imposed penalties pursuant to the provisions of subsection 163(2) of the Act.
First Issue - who purchased the property?
[9] The Appellant says that Bacon was intended to be an equal one-third partner with him and his brother David. Thus, the Respondent's denial of any involvement by her is wrong since she "is on the deed", she contributed money, and both of them consistently told the auditor that she was an active and equal participant. Counsel submitted that it only was as a result of unexpected problems with her credit line that, at one stage, she accepted a one-sixth financial responsibility as among the three. However, since David's involvement was no longer in issue, his one-third share should be proportionately allocated between Sheila and the Appellant and, he submitted:
As Fred paid for 75% of the combined interest of Fred and Sheila, then Sheila should be entitled to a quarter of David's third, to be added to her one-sixth interest. One-sixth and one-twelfth equals three-twelfths, equals one-quarter. Therefore, 25% of the total gain, at the least, should be allocated to Sheila.
However, when counsel for the Respondent suggested that if the Court were to find that Bacon did have an interest in the property, it should be limited to 25%, counsel rejected that and responded:
However, that is merely what her financial contribution was. That financial percentage should not constitute a ceiling on what is her rightful ownership share. Vis-à-vis Fred, each of the two of them rightly holds 50%. The evidence well-showed their commitment to each other as life partners. Spouses customarily hold major assets in equal shares, not in accordance with percentage monetary contributions. That is certainly the way Fred and Sheila viewed it, demonstrated by their rationale (albeit mistaken) for reporting entirely through her return - that is, because they were full and equal partners.
[10] The Respondent's position is that it was the Appellant who arranged for all of the financing of the property by way of loans from his Bank and his brother David. Furthermore, counsel contends that the testimony adduced regarding Bacon's participation in the transaction was not credible, and that it was the Appellant alone who bought and sold the property.
[11] Conclusion Both the Appellant and Bacon testified that their relationship was a partnership and that they were "doing this together". However, the evidence falls far short of establishing the existence of a legal and binding partnership. The original Offer was made by the Appellant alone as Bacon refused to become involved until Jason had indicated that he was no longer interested. When that occurred, Bacon applied for a loan at the Metro Credit Union which was denied. In order to complete the transaction, the Appellant borrowed $75,000 from his brother David, a further $75,000 was obtained through a mortgage line of credit at his bank and the remainder came from his own "other sources". The Appellant alleged that had it not been for Bacon's Credit Union problem, she would have been a partner and that to rectify the situation an alternative arrangement was made by them that the payment of the amount borrowed on his line of credit would be split half and half.
[12] In the course of his testimony, the Appellant rejected counsel's suggestion that Bacon "didn't put a dime into this property, did she?", responding that "she paid 50% of the loan payments on the line of credit". However, this statement was not quite accurate since the payments of $291.98 and $476.39 were made by the Appellant and reflected interest only. Furthermore, these payments, the Appellant conceded, came out of his bank account and not a joint account. No payments whatsoever were made on the principal amount. As to the manner in which Bacon "paid me her half of the payments", the Appellant said "What we do is normally pay - - she normally pays me by cash. We have several situations where we are in joint ownership", referring to a car they bought and to the purchase of groceries and household expenses, and "she just pays me the cash and I pay the bills". If any record of such transactions was kept, it was not produced.
[13] The Appellant's testimony with respect to Bacon's alleged participation in the transaction is questionable and falls well short of establishing that it was not he alone who bought and sold the property. The responsibility for the line of credit at the Appellant's bank was solely his, he paid the amounts due and owing, and the security for that line of credit was his cottage. In fact in cross-examination, the Appellant conceded that he alone had the legal obligation to pay.
[14] With respect to the ownership issue, the Appellant's counsel also made reference to a proposed partnership involving Bacon, David and the Appellant. It is not disputed that a solicitor (Douglas Ross) was consulted by the Appellant and that a Declaration of Trust had been prepared and forwarded to him for execution at some point of time in September. This document, counsel submitted, confirmed that Bacon was indeed a partner in the transaction but, it was "never finalized". The Appellant's explanation that the failure to execute that document was nothing more than an oversight is completely at odds with the following advice provided to him by his accountant:[8]
Incorporation
In our view, incorporation and transfer of the land to a corporation is not an option at this point because:
1) The profit would remain in the corporation after corporate income tax was paid. There would still be personal tax to pay on the profit to transfer it into your personal possession.
2) Because the land title is legally transferred to the corporation there is a "sale" at fair market value for tax purposes at that time. What value is assigned to that sale would be a risk. For example, Revenue Canada may accept what you paid for the property as a fair market value sales price to the corporation, but more likely they would argue that the price you are going to sell the property for is a fair market sales price. If they took this position, all the profit would still go on your personal tax return as a sale to your corporation which would defeat the purpose of the transfer.
The Appellant's ownership was also confirmed by David Coady, who in cross-examination stated "all I was was a financial backer" and conceded that was the case because it never progressed to the point where he became a participant in the project as opposed to a lender of money.
[15] The existence of a partnership is also put into question by the Appellant's treatment of the GST paid upon his purchase of the property. At some point of time in October 2000 following the sale, the Appellant learned that a rebate of the GST paid upon his acquisition could be claimed pursuant to section 257 of the Excise Tax Act. He discussed the GST implications with his accountant and received a letter from him which states in part:
Re: GST Implications of Land Sale
There is a goods and services tax rebate available under section 257 of the Excise Tax Act when the real property is sold by a non-registrant. This rebate is only available for taxable sales of the real property. The rebate available would be the GST that you actually paid on your purchase of the land. The rebate is claimed on the "General Application for Rebate of Goods and Services Tax" (Form GST 189), which must be filed within two years of the sale.
Acting on this advice, the Appellant claimed the whole of the rebate in the amount of $11,270. This treatment of the refund is consistent with the fact that he alone acquired and subsequently sold the property, and is completely at odds with the assertion that Bacon and at one stage David, were part owners.
Second Issue - Capital or Income Transaction
Appellant's submission
[16] The Appellant contends that at no time was resale ever considered and maintains that the gain on the sale of the property was on capital account. He said that the primary motives for acquiring the property were to use it as the site for family cottages, creating in essence, a "Kennedy compound", and to afford him with the opportunity of developing a cottage construction and rental business on the balance of the property to provide him with employment income in his retirement years. As well, consideration was given to resurrecting and developing the "Christmas tree farm" which existed on a substantial portion of the property.
[17] It was further submitted that the evidence does not point to resale of the property as having been an operating motivation. Rather, it points to a continued use, or a combination of uses, as the sole reason for the acquisition. In this context, counsel argued that certain actions by the Appellant are particularly germane, and support his position. First, (a) the rezoning condition that would have the property converted from agricultural usage was waived at the time the Appellant committed to acquiring the property; (b) no application for rezoning was ever made because the Appellant was in no rush to develop a cottage rental operation which he intended as his post-retirement occupation in "two years or so"; (c) the Appellant's brother invited him to consider subdividing the property for sale of lots, but the Appellant rejected the idea; and (d) no steps were taken to initiate resale since it was the real estate agent who persisted. These facts, counsel argued, suggest that the property was acquired on capital account and do not indicate any realistic anticipation of a sale. On the basis of the foregoing, the Appellant submitted that the gain realized on the sale of the property was on capital and not income account.
[18] In support, counsel cited Racine vs. M.N.R.[9] where Noel J. stated:
... To give to a transaction which involves the acquisition of capital, the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising, he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.
Reference was also made to Crystal Glass Canada Ltd. vs. Her Majesty the Queen,[10] and the conclusion of Mahoney J.A. that:
Secondary intention requires not only the thought of sale at a profit, but that the prospect of such a sale be an operating motivation in the acquisition of capital property.
[19] Counsel for the Appellant submitted that the short-term ownership did not reflect an intention to sell, but rather was the result of an unexpected Offer to Purchase that no reasonable person could refuse. He further argued that the Appellant took no steps to initiate a resale. It occurred as the result of prompting from Brewster, both shortly following the purchase which, he alleges was rejected, and on a second occasion in September, as a result of which the Appellant chose to set a "ridiculously high price" in the belief "that might stop Mrs. Brewster from raising the matter of resale yet again". Thus, counsel argued, it was solely as a result of the contact initiated by Brewster that the Appellant accepted the Offer to Purchase the property for $378,000. Citing Cook v. Her Majesty the Queen[11] and Iula et al v. Her Majesty the Queen,[12] counsel submitted that an Offer too good to refuse is a well-accepted rationale for recognizing an early sale of a property as nevertheless having been on capital account.
Respondent's submission
[20] Counsel for the Respondent agrees that the factors identified by the Appellant's representative as relevant in determining whether a gain is of an income or capital nature are well known. These include items such as the nature of the property sold; the length of period of ownership; frequency or number of other similar transactions by the taxpayer; work expended on or in connection with the property realized; circumstances that were responsible for the sale of the property; and motive.
[21] He submitted that in the present appeal, the most relevant factors are the nature of the property, i.e. raw land, in the form of beach-front property, in an area where the interest in such property is strong, and the extremely short holding period, both of which point strongly to the disposition of the property being on income account. Counsel further observed that the fact that the Appellant has never before or since engaged in a similar transaction is the "classic recipe for this transaction being found to be a venture in the nature of trade". The work expended factor is irrelevant in this case where the extremely short holding period is such that there was no time for any work to be expended.
[22] Furthermore in this particular case, the Appellant waived the zoning condition even though the real estate agent assured him that she was not aware of any reason why the vendor would be unwilling to give whatever time was needed to work out the zoning. Counsel submitted that the Appellant's action was more consistent with someone who intends to sell the property rather than someone who intends to subdivide it.
[23] Counsel further argued that as a circumstance responsible for the sale, the Appellant testified that he received an unsolicited Offer that was too good to refuse. This, counsel contends, was certainly not the case since it was the Appellant who decided to list the property at $395,000, and made the counter-offer of $378,000. Counsel further submitted that if the Appellant was being truthful regarding his desire for the property to be his retirement project, all he needed do was to say "no" to Brewster rather than choose to list the property for sale with her. Thus, any suggestion by the Appellant that he was hounded into setting a ridiculously high price in order to "fight off the crowds who were after his property" is not tenable. This is so particularly because Brewster did not believe the Appellant was in any way being pressured to sell the property. Accordingly, the Respondent submits that the disposition of the property was an income transaction.
Conclusion
[24] The basic issue in this appeal relates to the Appellant's intention at the time he acquired the property. The testimony of an individual who has an overriding interest in the outcome of an appeal regarding the intention behind a transaction, is not necessarily determinative of the existence of the stated intention. While an Appellant's testimony is of some assistance it is the entire course of his conduct, the relevant circumstances and inferences flowing therefrom, and the steps he took to carry out his plans that provide a better indication of what his intention actually was. Furthermore, it is also accepted that a secondary intention to trade may exist and this requires not only the thought of a sale at a profit, but that the prospects of such a sale be an operating motivation in the acquisition of the property.[13] In these cases, credibility is of substantial import, and is always a factor to be considered. It is highly unlikely that an Appellant would admit the existence of a secondary intention and thus, to make that determination it is necessary to review the totality of the evidence and more particularly, the Appellant's conduct and the circumstances surrounding the transaction.
[25] The purchase: The Appellant asserted that the Christmas tree project, cottage construction for rental purposes, and the "Kennedy compound concept" and nothing else constituted the rationale for the acquisition of the property at the time of the Offer to Purchase. The evidence before the Court does not support that assertion. The property was listed by Brewster on June 28th, and a For Sale sign was posted on the site. There was, according to Brewster, much more than usual interest and she had actually shown the property to others prior to meeting with the Coadys. It is likely those facts were made known to the Appellant on July 3rd when he, Jason, and their wives met Brewster at the site, and were a factor in his decision to immediately make the Offer to Purchase. When the Appellant arranged to meet Brewster the next day, July 4th, for that purpose, the following facts must be considered in the course of determining his intentions. First, Jason was on his way home to Fort MacMurray, his interest in the purchase was at best tentative, and the Appellant knew that it was necessary for Jason to discuss matters with his wife before making a decision.[14] Second, the Appellant had not arranged any financing and knew that it would be necessary to borrow a substantial portion of the funds required, whether or not Jason remained in the picture. Furthermore, the Appellant's testimony indicates an awareness that it would be difficult to obtain financing on agricultural land and that the local banks and financial institutions were not prepared to lend money for that purpose readily. As well, Bacon testified that she did not consider herself to be a partner at this stage, and the Appellant was aware of this. Notwithstanding the foregoing, the Offer was made. In order to evaluate the Appellant's intentions, it is necessary to look at the circumstances of the transaction and to consider all, and I might add, often conflicting, facts.
[26] Christmas tree project - credibility: The testimony of both the Appellant and Bacon indicated a degree of concern as to whether a Christmas tree farm was viable. That it was questionable at best was subsequently confirmed by Bacon's brother, Scott Jay (Jay), a forestry technician who described the trees as neglected and requiring a substantial amount of work. The Appellant conceded "that was early in the proceedings", and the tree farm was dismissed "as soon as Scott had said the trees were too big".
[27] At some point of time in September, the Appellant discussed a number of tax implications of the sale with his accountant, Terry Soloman, on several occasions, and received a letter from him dated October 3rd, in which he wrote:
Recently, you bought about 20 acres of land in Stratford, P.E.I., for approximately $178,000. The land presently has cultivated Christmas trees with a fair value of approximately $40 - $50,000.00. It was your intention to harvest these trees commercially over the next few years as they matured. Other potential future uses of the land was not decided at the present time. These uses could have included construction of a personal residence for yourself or other family members or subdivision of the land or other development.
(Emphasis added)
and
In your case, it appears that your intention was not a short term turn over of the property but rather you had intended to use it as a Christmas tree farm. Secondary intentions are also very important. For example, if you bought the land to harvest trees, ... looking to sell it at the same time this would put capital gains treatment at risk.
I note that the Appellant's testimony did not even remotely suggest that the trees were seedlings or immature. However, when asked by counsel for the Respondent to explain the inclusion of the Christmas tree farm as a viable project in the information he provided to the accountant when he knew, as a result of the advice he received from Jay, that "the Christmas tree operation was history", the Appellant hedged in his response, saying:
... that I'd have to know when Mr. Jay was there to be able to say that I had that point of view. If Mr. Jay had talked to me before - - or had talked to Sheila before and said it wasn't possible, then I would say yes, but if Mr. Jay was later or whenever - - before I talked to Mr. Soloman, that is, not necessarily October 3rd, before I talked to Soloman, then I would agree with you.
and then, in the course of further cross-examination, offered another explanation:
... the cutting the tops off the trees for Christmas trees and that wasn't something I was going to do, but the idea of moving the trees around the lot and that was still in my mind. There was still a use for those trees.
When reminded that the discussion with Jay took place well before his discussions with the accountant, the Appellant finally conceded that
... I knew the Christmas tree operation wasn't going to go and I knew it because of Mr. Jay.
No reference was made by the Appellant to the fair market value of the "Christmas trees" in the course of his testimony in-chief, and furthermore, with respect to the "fair market value" provided to the accountant, he stated:
That would be just an estimate and I don't know where I received that estimate.
and
... I don't know where the forty or fifty came from. I probably said it. I don't imagine Terry[15] would go out and look at the land, so I probably said it. Where I got it is probably from someone else and saying, you know, "There's forty - - or forty or fifty thousand dollars ($40,000 or $50,000) worth of trees on there and they were Christmas trees at one time, they're not very good Christmas trees now but there's trees on there that if you sold them, you know, or used them on the lot, whatever, like they did already with them" - - they sold them to the golf course - - "there is a potential for those trees" and that's what I was probably saying to him there. I mean, I can't remember the details of my conversation with him.
[28] With respect to that exchange, counsel for the Appellant suggested that the conversation with the accountant related to his intention at the time the decision was taken to acquire the property, and not to what he may have been thinking in October 2000. That submission is questionable since the Appellant was in no position at the time of the purchase to have made an assumption regarding the value, if any, of the trees nor is there any evidence that he sought such advice at that time.
[29] Construction of Personal Residence The Appellant maintained that the purchase of the property was primarily related to family cottage building and this at all times included the construction of one for Jason and one for himself. Counsel for the Respondent observed that although the focus of the accountant's letter was on the Christmas tree operation he also made reference to the Appellant's "construction of a personal residence for himself, or other family members or subdivision of the land, or other development". When asked why no decisions had been made, the Appellant stated it probably was because of the zoning problems and that the cottage concept "wasn't developed because we didn't do anything on it". As well, with respect to building his own cottage on that site (a position he repeated more than once), he was contradicted by Bacon who said that their current residence was:
... one lot away from the waterfront. ... And the rest of the land is - - it belongs to all of us, so it can never be sold or developed, so we have complete water view and water access where we are.[16]
and
... till July 15th or so, we were very much enamoured of the property and we were going to build. Then we kind of had a reflective moment when we thought about, "Whoa, wait a minute, we made the decision not to build. We made the decision to live here ...". [17]
The Appellant's references to constructing his own cottage after the decision had been made to abandon that idea can only be construed as an effort to establish that resale was not a prime factor in the purchase.
[30] Zoning The Offer to Purchase provided, inter alia, that the sale was conditional "On zoning suitable to the purchaser". No specific date for this condition was set out in the Offer and thus, the Appellant had until the closing date to deal with the issue.[18] Bacon testified that she had "one visit to the Town office between the 4th and the 11th or 15th or whatever the date is that the conditions were sealed" and that they both attended a meeting where the Town's philosophy as far as zoning and planning was discussed and learned that:
... any zone change to make it commercial property, any requests were going to happen way down the road in the future because at that point the Town of Stratford was working on a master plan, they didn't know when it was going to be ready but they were basically on hold in any approval of any plans for anything because they - - I don't know if they used the word "moratorium" or if that's my word, but that's the sense I got, that it was just - - everything was on hold until they get a handle - - because they explained to us that they were having exponential growth and they wanted to slow things down to make good decisions for the town.
and
... they're waiting to have the ones that are already sanctioned built on, all the divisions that are in the Town of Stratford, before they allow any new. ...
[31] However, the evidence also indicates that the Appellant was aware that the owner of the adjacent property, Lawton, would be involved when they applied for a zoning change and, in fact, Bacon speculated that he would be a "factor because zoning changes are a political process and he is going to be a factor in that", since he:
... didn't want the land developed in any way, and once he realized that the land sold, he realized, "Whoops, I'm going to have something going in there that's going to ...
When asked why this was of concern to the Appellant, she said:
The only - - the vision I had because he's such a high wheeler political force and has benefited greatly from government involvement with companies and has gotten his money from that kind of enterprise, I felt that he would be an issue when we applied for zoning to go commercial, to put cottages in there. I felt that he would have influence within - - I just felt that he was going to be a thorn in our side. and that he was.
Nonetheless, both the Appellant and Bacon asserted that this state of affairs did not cause them any concern because "that gave us time to think about and to continue to explore" other ideas.
[32] This response and other similar comments by the Appellant imply that not only was he prepared to delay seeking a zoning change for an extended period, perhaps several years or more,[19] but also was prepared to risk the distinct possibility that it might not be allowed in any event. Given the highly leveraged purchase of the land, the Appellant must have been aware that this course of conduct would require the payment of interest, realty taxes, and possibly other costs, for what might be an extended period of time. I note as well that in her testimony, Brewster observed that zoning is always of paramount importance where someone is acquiring a property for the purpose of subdividing it and that a prudent potential purchaser who wanted to subdivide would not close the deal until the zoning had been appropriately changed. Brewster also indicated that she was unaware of any reason why the vendor would have been unwilling to give whatever time was needed to work out the zoning.[20] Notwithstanding these facts, the Appellant waived the zoning condition which in effect postponed the alleged cottage development project for an extended period of time without any assurance of a zoning change in the near future. It is reasonable to conclude that no effort was made to obtain a zoning change because resale at a profit was contemplated at all relevant times and the Appellant was aware that there was a substantial market for the property.
The sale of the property
[33] The Appellant maintains that the sale was the result of an unsolicited Offer presented by the real estate agent Brewster. He said Bacon, who took the call, told him that Brewster had heard "that permission for subdivision had not been obtained" and that she had been "receiving continued interest from several parties" and asked "have you ever considered putting the property back on the market?". The Appellant said he understood that Brewster called because "the person who lives beside the property wanted to buy it" and that she also spoke to Bacon regarding "an Offer she had on the property, he wanted to buy it". This, he alleges, upset him and he asked her to tell Brewster "to come on over and we'll fix this matter right away". Bacon returned the call and made an appointment. The Appellant alleges that during the meeting on September 19th Brewster told them "it's Elwood Lawton that wants to buy it" and that he "had some kind of idea about a price and exchanging lands". After some discussion, he decided to list the property for sale at $395,000.[21] This price, he said, was deliberately set to discourage buyers and make it clear that he was not interested in selling the property. Brewster returned on September 24th with what the Appellant described as "another Offer of swapping land. He had land someplace else, in Banbury. He wanted to swap ... but I knew the land referred to and was not interested".[22] At this point, he said Brewster suggested:
'well, why don't you make him another Offer of something?' and that's when we come up with the price, I think it was three seventy-eight, or something like that, and we said to her, 'That's it, we don't want to haggle anymore, we don't want any hassle, it's $378,000, don't come back unless it's accepted, $378,000.'[23]
And it was.
[34] Brewster testified that from the time of the original listing in June there was a great deal of interest in the property, and that it was "a lot more interest than you typically get when you're selling a 20-acre lot of land". She also recalled that there was a substantial degree of persistence on the part of three individuals, and two of them called on more than one occasion, and one, in particular, called "frequently, every 10 days or less, over the period until the closing of the transaction on August 25". This information had been passed on to the Appellant. Brewster also recalled that those calls stopped when the transaction closed and from that point on, there was no contact with the Appellant until the middle of September when she heard a rumour regarding his failure to obtain a change in zoning and called to confirm whether that was in fact the case. She said that in her initial conversation with Bacon, no indication "of anybody being interested" was given, albeit she believed that if the Appellant
couldn't do a subdivision and build there, they probably would be interested in selling it. And if so, I mean, up until closing, I had people that still wanted to buy it, so I would think, you know, I would try some of these people again.
Brewster also testified that she made it a practice not to divulge the names of potential buyers and made it clear that she did not name, refer to, or contact the three parties until after the property was listed for sale by the Appellant.[24]
[35] The basis for the Appellant's assertion that a land swap formed part of the offer from Lawton is not clear. His Offer to Purchase was for $235,000 and made no reference to an exchange of land. Although both Bacon and Brewster were thoroughly examined and cross-examined, a land trade proposition was not mentioned at any time by either one. This raises a question regarding the source of that "proposal", if indeed there was one, and/or whether contact in one form or another may have been made with the Appellant at an earlier point of time.
[36] I find the Appellant's testimony that it was necessary to make "an unreasonably high offer" in order to "get rid of the people that were after Jane (Brewster) for us to sell it" to be totally lacking in credibility. In the first place, since closing there had not been a single whisper from anybody indicating interest in the property. Furthermore, the initial telephone call from Brewster in late September could have been dismissed by simply advising her that she misunderstood or was misinformed about the Appellant's zoning situation. The testimony adduced on behalf of the Appellant provides no rational basis for his "belief" that it was necessary to get Brewster "off his back" by setting a price that no purchaser would be prepared to pay. His assertion that this was the reason for the price is also contradicted by the fact that he was fully aware that the owner of the neighbouring property was a very wealthy businessman; was, as Bacon testified, likely to be concerned about what might be built alongside his estate; and that he had an intense interest in acquiring the property.[25] In fact, Bacon testified that they knew that at some point of time, it would be necessary to deal with him, and when asked why, she responded:
I felt that because he wanted to buy the property, he probably wasn't happy that it was going to be developed because he lived in a beautiful sanctuary that he had - - he had a park on the other side of us, he had this land that had been farmland, he has a huge - - he set back away from the road. It's an amazing looking estate. It's a huge property. And I think he realized that he had missed an opportunity to control that piece of land and things might go in there that would affect his privacy and impact him.
Although the Appellant steadfastly maintained that the price was set to discourage potential purchasers it is much more likely that the rationale for the sale was his knowledge of Lawton's concern regarding the property and of his ability to pay the price rather than a desire to preclude a sale.
[37] Counsel for the Appellant submitted that the offer the Appellant received was unsolicited, and referred to the following comment by Noël J. in Racine et al v. M.N.R.:
The fact alone that a person buying a property with the aim of using it as capital could be induced to resell if a sufficiently high price were offered to him, is not sufficient to change the acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a "secondary intention" if one wants to utilize that term.
However, in this case, the evidence is clear that the Appellant did not receive an Offer, either written or oral, nor can it be said that he was induced to sell the property by "an offer too good to refuse". The fact is that Brewster's first call was not related to an offer, either written or oral, and her testimony was crystal clear that if the Appellant had simply said "no thanks, not interested", that would have been the end of it.
[38] While the Appellant's testimony is of some assistance in the determination of his intention, it is his conduct and the steps he took to carry out these intentions which gives a much better indication of what they actually were. For example, one of the reasons for the acquisition advanced by him was the construction of cottages for both personal use and to provide post-retirement rental income. However, at the time of the purchase, he had made no arrangement and had no plan with respect to the substantial financing which would be required to carry out his project. Furthermore, he had not made any inquiries regarding the adequacy of the land for that purpose which could have involved issues such as water and sewer lines and access roads. I am also satisfied that the Appellant's haste in making his Offer to Purchase reflected his awareness that a very substantial interest was being shown in the property. In my view, the evidence before the Court establishes, on a balance of probabilities, that at all relevant times the Appellant had in his mind the possibility of reselling the property as an operating motivation for his acquisition. Accordingly, the Minister's assessment that the Appellant's profit was income from a business or property is upheld.
Penalties - Gross Negligence
[39] The Appellant was assessed penalties pursuant to the provisions of subsection 163(2) of the Act on the basis that he knowingly, or under circumstances amounting to gross negligence made or participated in the making of a false statement or omission in his income tax return for the year under appeal. Subsection 163(3) of the Act imposes the burden of establishing the facts justifying the assessment of penalties on the Minister.
[40] At some point of time following the sale of the property, Bacon told the Appellant that she had a capital loss of approximately $44,000 which had been incurred in the course of the sale of her former principal residence in 1992. As a result of this information, he chose not to report the disposition in his return, but decided to report the gain from the sale on Bacon's return. The rationale advanced by the Appellant for taking this step was:
She had what we thought was a capital loss. She had a property that she sold a number of year back and lost money on it, so Sheila and I are both on the Deed and we felt, well, the tax had to be paid, so what difference how it has to be paid, let's just pay it, which meant that if we could take advantage of the loss that she had, a capital loss that she had, then why not put it all through on hers. So, that's how I filled out the form, I filled out her taxes, all our profit went on her tax form and paid the tax.
Q. Had you reported it as a capital gain as opposed to an income gain? Right?
A. Yes.
[41] I note as well that in November of 2001 following the assessment, the Appellant wrote a letter to Revenue Canada[26] in which he stated that it was an honest mistake and that:
Sheila had what we thought was a capital loss and, therefore, we thought that it would be simpler to just let her take the amount, since it belongs to both of us, and what difference who pays the tax along with the taxes paid in? The accountant said I had to pay the tax and, thus, this was the simplest way to use up her credit and still pay the tax. (Emphasis added)
[42] In the course of cross-examination, the Appellant conceded that when he filed his 2000 tax return there was no indication whatsoever therein that there was a property disposition. Counsel then suggested that the Appellant did not follow his accountant's advice and the Appellant responded:
Well, that's probably how you would interpret it, but that's not the way I would interpret it. This interpretation to me is that I'm to - - that the tax has to be paid, I have to make sure it's paid, which I did. I made sure it was paid. It wasn't shown on mine but it was paid.
Q. And the reason you put it on Sheila's return as opposed to either your return or both returns is because less tax would be paid to the FISC by putting it on Sheila's return because you would offset the - - you would use her loss from 1992 to offset the gain in 2000?
A. Yes sir, that was the reason.
[43] Respondent's position Counsel submitted that there was no doubt that the Appellant made a false statement when he disposed of the property and failed to report it in his income tax return. This, counsel argued, notwithstanding that the Appellant admitted it was "crystal clear" in his mind that he was going to have to pay tax as a result of the transaction but, he did not report and he paid no tax. Furthermore, the taxpayer sought professional tax advice which he chose to both ignore and skirt around. Reference was specifically made to the accountant's direction "you must make a decision as to which way you will report the disposition on your tax return for the 2000 year", but this advice was ignored and the disposition was deliberately reported on Bacon's return because it produced a more favourable tax result.
[44] Counsel further argued that the Appellant also ignored the accountant's advice and caused the disposition to be reported on capital account rather than on income account as it should have been. He was aware that this advice was given on the premise that the property constituted a viable Christmas tree farm but also knew from the very early stages that this was not the case and failed to pass this information on to the accountant. Thus, counsel submitted, when that premise was no longer present, the only reasonable interpretation of the dealing with raw land and the short holding period is that the transaction should be reported on income account.
[45] Counsel also submitted that if the Appellant did not act knowingly, then he has clearly demonstrated that high degree of negligence tantamount to intentional acting, and an indifference as to whether the law was complied with or not, and that has been held to be gross negligence. (Venne v. The Queen, 84 DTC 6246 @ 6256, F.C.T.D.).
[46] Appellant's position: Counsel submitted that there was a credible and rational explanation for having made the mistake of reporting the gain on Bacon's return and although the Appellant conceded it was wrong and "that perhaps he was negligent in doing this", that error did not constitute gross negligence. Furthermore, the component of the penalty relating to what turned out to be a nonexistent capital loss was not the Appellant's fault. Bacon believed in good faith that she had a large capital loss and the Appellant believed her. This, counsel argued, might have been "a mistake in judgment, and possibly even negligent, but definitely was not grossly negligent being tantamount to intentional acting". The Appellant trusted that Bacon was right and in this case she was not. This was described by counsel as an understandable mistake and it was submitted that if a "penalty is justified", then it should be noted that it was Bacon who actually claimed the capital loss. Accordingly, the Appellant "should not be penalized for this given that it was based on information Sheila had given him regarding a capital loss to which she in good faith thought she was entitled". Thus, there was:
a credible and rational explanation for having made this mistake of reporting all on Sheila's return. He certainly knows now it was wrong and that perhaps he was negligent in doing this. He has no history of tax difficulties whatsoever and this is the first time he had ever had this kind of transaction. His decision to seek professional advice as to how this should be reported (which advice did not address the matter of in whose return) also shows that he took that question seriously.
[47] Counsel further argued that the accountant's comment to the Appellant "that you must ..." did not suggest that he personally would have to report the capital loss, and led him to believe that he could report his share of the gain through Bacon's return because she was his spouse. This, counsel contends, "was really an innocent mistake" and that was confirmed:
by the fact that both Fred and Sheila earned about the same income as they were both public school vice-principals, so really, there was no pronounced tax advantage to his half share being reported in her return rather than where it should have been reported - in his return. The capital loss she wrongly thought she had, would have absorbed basically only her 50% share of the portion of gain they thought they had to report anyway, leaving tax to be paid on Fred's 50% share no matter which return - his or Sheila's - it was reported in.
and
Fred, as any rational taxpayer, cannot be faulted for wanting to lawfully minimize his tax liability. He understood that this accountant had told him he had a choice of reporting the gain on either income or capital account. Assuming this Honourable Court was to find that the gain is not on capital account, no gross negligence is involved in the rational choice he accordingly made.
Conclusion
[48] The Appellant, a teacher of mathematics, was vice-principal of the Colonel Grey High School during the relevant period. He was also executive director of the Prince Edward Island Golf Association. In those capacities, in addition to his other responsibilities, he "did the books" for both, and in each case utilized the services of Soloman's firm for that purpose. Although it had been his practice to prepare and file his own tax returns, as well as those of his wife and children, in the taxation year in issue there was no doubt in his mind that because of the property transaction there were going to be tax consequences. As a result, he consulted Soloman with respect to the implications arising from the transactions in issue, provided him with the necessary information and received the advice he sought
[49] In the course of his testimony, the Appellant maintained that the steps he took to deal with the tax issues were consistent with the advice given by the accountant and, more specifically, did not address the matter of whose return was to be used to report the profit. In my view, the evidence does not support that assertion. For example, with respect to the sale, the following exchange took place between counsel for the Respondent and the Appellant:
Q. What did you tell Mr. Soloman about the transaction?
A, I don't know what the exact wordings were. I told him all about the land deal and what had happened and the monies involved and that was it. I mean I don't recall what it was. It was a phone conversation and I was over to the place with the forms for the other people and we talked then too, but I can't recall any of that stuff. I honestly can't recall it. All I know is that I wanted Mr. Soloman to tell me what would be the best way for my benefit on the taxes there. So - -
Q, Sorry, would you just repeat that please. Tell you what would be what?
A. Best for my interests as far as taxes concerned, "how am I going to claim this, or, you know, I have to pay taxes on it, I know, but what can I do? I don't know anything about this. Tell me.
Counsel asked the Appellant to focus on Soloman's comment: "You must make a decision as to which way you will report this disposition on your return for the 2000 year" and put the following proposition to him:
Q, Now, that sentence - - not the first sentence, but the second sentence, the one you just read, that sentence is very easy to understand, isn't it? It's telling you that you have to make a decision, but whatever the decision is the way you have to report the disposition on your return for 2000.
A. Yeah.
Q. Now, you didn't do that, did you?
A. No, I didn't.
Q. Why didn't you do it?
A. Because my interpretation of that is that the money that was made was made by us as a group and we pay it.
My interpretation here was - - I'll tell you honestly how I felt. My interpretation was that, all right, this tax has to be paid, he's saying "you" simply because I'm the one who contacted him. And so the tax has to be paid. My understanding was that, okay, I'm going to pay that tax, the government is going to get its money, here is a way in which we can do it and that's best for me and Sheila, and Dave had his own so it had nothing to do with it. And that's all we did.
And, he added:
Well, it gives me and Sheila the best break on it. So, if we report it on Sheila's return because she had a capital loss that we thought, so that's the way we reported it because of her capital loss.
He went on to say that his understanding of the accountant's comments was:
That there's really nothing that you can do, you have to pay the tax, pay it, okay. So, we're going to pay it. Now, I'm filling out the tax forms and she has a capital loss, so we're partners in it, why don't I put it through on hers?
[50] I find little merit in the submission made on behalf of the Appellant that he misunderstood the accountant. In his letter of October 3, 2000, Soloman provided the Appellant with the following instruction and advice:
There are persuasive arguments both for and against capital gains treatment of this sale. You must make a decision as to which way you will report the disposition in your tax return for the 2000 year.
He then proceeded to discuss the following factors: intention and conduct of the taxpayer; number and frequency of transactions; the relationship of the transaction to the taxpayer's business; the nature of the transaction; the nature of the disposed asset, the method of disposition; and incorporation. This was followed by letters dated October 11, 2000 in respect of the GST implications of land sale and October 30, 2000, in which the accountant wrote:
As a follow-up to our recent telephone discussions, please find enclosed the following:
1) copy of letter to you regarding potential income tax issues of the sale;
2) copy of our letter to you regarding potential GST implications of the proposed sale; and
3) your copy of the GST rebate form for the purchase of the property in August 2000 (The original has been filed).
We would strongly advise that you review both enclosed letters so that you are aware of the income tax and GST uncertainties to this transaction. You may wish considering having your personal income tax return professionally prepared for the 2000 year if it is not your practice to normally do so.
(Emphasis added)
[51] It is fair to say that the advice provided by the accountant establishes that their discussions were wide in scope and detail and that three major issues were covered in the course thereof being the GST rebate, the incorporation of a company for the purpose of transferring the property to it, the sale of the property and the capital gain or business income ramifications arising therefrom. The evidence also establishes that the Appellant understood the accountant's advice and had no difficulty in personally claiming the GST rebate and that, as previously noted, he accepted the recommendation to abandon incorporation because of the tax problems inherent in that concept.[27] Notwithstanding the foregoing and the fact that he was aware that there would be personal income tax consequences as a result of the property transaction, the Appellant ignored the accountant's strongly worded advice.
[52] The provisions of subsection 163(2) of the Act authorize the Minister to impose a penalty on a taxpayer who has either "knowingly or under circumstances amounting to gross negligence" made a false statement or omission in an income tax return. This subsection requires the Minister to demonstrate not only that there has been an act of omission or misstatement by the taxpayer, but also that the taxpayer acted in a deliberate and conscious fashion. Gross negligence involves a high degree of negligence and indifference as to whether the law was obeyed or not and involves greater neglect than simply failure to use reasonable care.[28]
[53] The Appellant is a well educated, intelligent individual. He recognized the income tax implications of the transaction in issue and sought professional advice. In my view, it is significant that he chose to accept that advice when it suited him, i.e. with respect to the GST rebate, and the rejection of the partnership/corporation, and to ignore it when Bacon's "capital loss" became available. Considering the evidence as a whole, there was no rational basis upon which a reasonable person could conclude that it was appropriate for the gain to be reported in the income tax return of his wife. The Appellant's decision to proceed with the reporting of the gain in that manner reflects a gross degree of negligence and complete indifference to legal requirements. I repeat that there is no question that the Appellant was aware of the various tax ramifications arising from this transaction and that the advice he received from the accountant made it clear that the issues were complex and that the Appellant needed to consider all aspects of the transaction and consult him if in doubt. The Appellant's rejection of that advice was not mere carelessness or simple negligence, but rather in the circumstances of this case it constituted an absolute indifference tantamount to wilful blindness as to whether the law was complied with or not. It is fair to say that a reasonable man, having regard to the information which was available to the Appellant in this case, would have realized that something was amiss and would have pursued the matter further with his accountant. The fact remains he chose not to do so and in these circumstances, it is not possible to conclude other than the Appellant was grossly negligent and the penalty was properly imposed.
[54] The appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 15th day of March, 2006.
Sarchuk J.
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