Citation: 2005TCC283
Date: 20050531
Docket: 2003-1997(IT)G
BETWEEN:
KANDY L. MEIXNER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on March 29, 2005, at St. Catharines, Ontario.)
Paris, J.
[1] This is an appeal from reassessments of the
Appellant's 1995, 1996 and 1997 taxation years, by which the Minister of
National Revenue (the "Minister") included amounts in the Appellant's
income as unreported rental income, an unreported capital gain and unreported
business income. Penalties under subsection 163(2) of the Income Tax
Act (the "Act"), R.S.C. c.1 (5th Supp.)were imposed
on these amounts.
[2] The Appellant disputes all of these items
and argues, as well, that the years under appeal were statute-barred.
[3] All of the items that were reassessed
relate to transactions involving the Appellant's former husband, Mark DeMarco,
from whom the Appellant separated in 2000 and whom she divorced in 2002. The
separation and divorce were acrimonious and two restraining orders against Mr.
DeMarco were put into evidence.
[4] Mr. DeMarco was a businessman who, in the
course of his marriage to the Appellant, operated a number of different stores
and businesses. These included a jewelery store, pawnbroker, an antique and
second hand store and a museum. He also bought and sold cars and real estate.
[5] The Appellant and Mr. DeMarco both gave
evidence that any real estate he bought would be put in the Appellant's name.
Although it was not entirely clear why this was done, it appears that it was
originally to protect Mr. DeMarco's assets from potential creditors and, later
on, because it made it easier to get financing for the properties, because of
the Appellant's regular full-time employment and her credit record.
[6] The first item under appeal is a capital
gain of $36,000 that has been assessed to the Appellant in her 1995 taxation
year, in respect of the purchase and sale of a house located at 59 Plymouth Drive in St.
Catharines. The house was the
home of Mr. DeMarco's mother, who died in August, 1994. Under Mrs. DeMarco's
will, she left all of her property to her two children, Mark DeMarco and
his brother, Murray. Murray DeMarco was the executor of the
estate.
[7] In February of 1995, the estate transferred
59 Plymouth to the Appellant. According to the
transfer deed, consideration of $30,000 was given.
[8] In November, 1995, 59 Plymouth was sold for $66,000 to an unrelated party.
[9] Both the Appellant and Mr. DeMarco gave
evidence that the $30,000 consideration for the property was paid by Mark
DeMarco to Murray DeMarco. The transaction was carried out to pay Murray
DeMarco for his interest in the property.
[10] It appears that the value of the property,
when it was transferred to the Appellant, was approximately $60,000 and Murray
DeMarco's interest was worth $30,000. Mark DeMarco and the Appellant both said
that the property was put in the Appellant's name because this was what Mr.
DeMarco did with all his properties.
[11] It was clear that Mr. DeMarco provided the
instructions to the lawyers to prepare the transfer to the Appellant and Mr.
DeMarco said it was done on the advice of his lawyer.
[12] With respect to the subsequent sale of 59 Plymouth, the Appellant said that the proceeds went to Mr.
DeMarco, who used them to purchase another property or to put it into a GIC
until he bought another property. She said the proceeds were not deposited in
her bank account.
[13] The Appellant denies that she had a capital
gain on the sale because she says she never had beneficial ownership of the
property.
[14] The Respondent contends that since there
was no written trust declaration between Mr. DeMarco and the Appellant
regarding the acquisition and disposition of 59 Plymouth, that the Appellant must be found to have been acting on her own
account and therefore, the gain on the sale should be taxed in her hands.
[15] Although there was no express declaration
of trust here, in my view the evidence shows that the Appellant and Mr. DeMarco
both intended that the Appellant would not have beneficial ownership of 59 Plymouth and that it was being held for Mark DeMarco. As well,
all of the consideration for the purchase of the property from the estate was
provided by Mr. DeMarco. This was not contested.
[16] These circumstances are sufficient to make
out a resulting trust in respect of the property in favour of Mr. DeMarco,
while it was being held by the Appellant.
[17] A resulting trust may arise in
circumstances where the parties have a "common intention" that the
beneficial interest should not belong to the person holding legal title.
Authority for this proposition can be found in the decision of the Supreme
Court in Rathwell v. Rathwell [1978] 2 S.C.R. 436.
[18] Such an intent can be inferred from the conduct of
the parties, the most relevant of which, according to the Supreme Court in Pettkus
v. Becker [1980] 2 S.C.R. 834, is that pertaining to the financial
arrangements in the acquisition of the property.
[19] In addition to providing the purchase money
for 59 Plymouth, the evidence also shows that the proceeds
from its sale were used by Mr. DeMarco to make further investments in property.
[20] Counsel for the Respondent suggests that
the resulting trust argument was not raised in the pleadings and that the
Respondent was disadvantaged as a result.
[21] While I agree that the Appellant did not
specifically plead resulting or constructive trust, there is no reference to an
express declaration of trust or formal trust relationship in the Notice of
Appeal either. I believe that the Respondent was put on sufficient notice of
the Appellant's position that she did not acquire beneficial ownership of the
properties and that the specifics of that position could have been obtained
through a request for particulars or on the examination for discovery.
[22] Resondent's counsel also argued that pursuant to section
9 of the Statute of Frauds, R.S.O. 1990, C. S. 19, trusts in respect of
real property must be put in writing. Section 10 of that statute provides
however that this requirement is not applicable to trusts arising by operation
of law, such as a resulting trust.
[23] The second issue in this case involves the
transfer of another property from the estate of Mr. DeMarco's mother to the
Appellant. In this case, a house at 47 Lakeside Drive
was transferred to the Appellant on November 13th, 1997 for consideration
stated on the transfer deed of $30,000. The property was then transferred to an
unrelated party on November 14th, 1997, for $206,400.
[24] The Minister assessed the difference
between the stated consideration given by the Appellant and the subsequent sale
price as business income to her.
[25] The Appellant maintains, once again, that
she should not be taxed on this transaction because she was never the
beneficial owner of the property.
[26] 47 Lakeside was originally acquired by Mr. DeMarco in 1974 and transferred to his
mother in 1977. According to Mr. DeMarco, he sold the property to his mother
for $29,000. Mr. DeMarco lived in the house on the property from 1974 to 1996,
and the Appellant lived there with him from 1982 to 1996. While the Appellant
and Mr. DeMarco were living in the house, they made substantial improvements to
it, including putting on an addition, installing a swimming pool and renovating
the kitchen and bathrooms.
[27] The Appellant and Mr. DeMarco lived in the
house after Mrs. DeMarco's death in 1994 until they bought a house on Lyons Creek Road in 1996. After March of 1996, the house at 47
Lakeside remained vacant until it was sold in November, 1997.
[28] Although 47 Lakeside formed part of Mrs. DeMarco's estate, it was not shown in the
Application for Appointment of the Estate Trustee, made in the name of Murray
DeMarco. No explanation was given for this.
[29] It appears that the property was listed for
sale at the end of August, 1997 in the name of the Appellant, despite the fact
that the property was still registered in the name of Mrs. DeMarco. A sale was
negotiated for $206,400 with a closing date of November 14th, 1997. Immediately
prior to that sale, a transfer deed was executed, transferring the property
into the name of the Appellant. It was signed by Mr. DeMarco and his brother,
Murray, in their personal capacity and by Murray DeMarco as trustee of the
estate and, as indicated, showed consideration of $30,000.
[30] According to both the Appellant and Mr.
DeMarco, no money changed hands when the transfer to the Appellant occurred. The
Appellant said that Mr. DeMarco arranged for this transfer and Mr. DeMarco
said that he did so on the advice of his lawyer. He could not give any other
reason for doing so. He also said that his brother did not make any claim to
the property and only asked for half of the proceeds from the sale of 59 Plymouth as his share of the estate.
[31] Mr. DeMarco said that Murray accepted that
47 Lakeside was Mr. DeMarco's asset.
Unfortunately, Murray DeMarco was not called as a witness to shed any light on
this question.
[32] When the property was sold to the third
party on November 14th, 1997, the proceeds were used in part to pay off a
mortgage on the house on Lyons Creek Road and to pay off a loan to the
Appellant and Mr. DeMarco from the Appellant's mother, that had been used in
the purchase of the Lyons
Creek Road house.
[33] No express declaration of trust was shown
to have existed in respect of the transfer of 47 Lakeside to the Appellant. The
Appellant's counsel again contends that Mr. DeMarco was the beneficial owner of
the property through a resulting or constructive trust.
[34] In my view, the circumstances surrounding
this transfer are somewhat different than those relating to 59 Plymouth. I accept that no cash consideration was paid for the
property, given that this was both the Appellant's and Mr. DeMarco's
recollection. If any had been provided, it would only have come from Mr. DeMarco
and such a payment would have bolstered the Appellant's position regarding the
existence of a trust.
[35] I would also note that by virtue of the
operation of section 9 of the Estates Administration Act, R.S.O. 1990,
the property had vested in Mr. DeMarco and his brother, Murray, in August,
1997, being three years after the death of Mrs. DeMarco, there having been
no sale or transfer of the property by the trustee within those three years.
This would explain why they both signed the transfer deed to the Appellant in
their personal capacity. Reference to Section 9 of the Estates
Administration Act is made on page 2 of the Deed. This means, then, that
the transfer of 47 Lakeside to the Appellant was, in effect, made from
Mr. DeMarco and Murray DeMarco personally for no consideration.
[36] With respect to Mr. DeMarco's half interest
that was transferred, both he and the Appellant indicated that their intention
was to put the property in her name for the purpose of the sale to the third
party. There was no intention for her to have beneficial ownership. The fact
that Mr. DeMarco did not receive any consideration for his half interest would
support their evidence in this respect.
[37] Finally, Mr. DeMarco also used much of the
proceeds to invest in other properties. This is indicative of an intention to
have a continuing interest in the property after it was transferred to the
Appellant and an intention to share in the proceeds from the sale to the third
party.
[38] I find, for the same reasons as given for
59 Plymouth, that the transfer of Mr. DeMarco's half interest in 47 Lakeside to the Appellant, gave rise to a resulting trust, and
that Mr. DeMarco thereby retained beneficial ownership of that half interest.
[39] However, I am unable to find that the
Appellant held the remainder of the property in trust for Mr. DeMarco. The same
factors of intention and conduct are not applicable in the case of the half
interest which was vested in Murray DeMarco prior to the transfer to the
Appellant. There is no direct or convincing evidence of why Murray transferred his interest to the Appellant for no
consideration, or that he intended the Appellant to hold it in trust for Mr.
DeMarco.
[40] In order for a resulting trust to arise in
respect of half of the 47 Lakeside property that was vested in Murray DeMarco,
there would need to be evidence of a common intention between Murray and the
Appellant that she was to hold it in trust. This evidence was lacking in the
case. Furthermore, the Appellant benefited from at least part of the proceeds
from the sale of 47 Lakeside through repayment of a loan that she had received
from her mother, and repayment of a mortgage on the family residence.
[41] In all the circumstances, I find that the
Appellant acquired a beneficial ownership of one half of the Lakeside property and thereby became entitled to one half of
the proceeds on sale.
[42] The next issue is whether the gain realized
by her on that disposition is on capital or income account. The Minister has
re-assessed the Appellant on the basis that this transaction (the acquisition and
sale of 47 Lakeside) was an adventure in the nature of trade.
[43] The Respondent's counsel argues that,
according to the normal tests that are applied to determine whether a
transaction constitutes an adventure in the nature of trade or not, as set out
in the case Happy Valley Farms v. The Queen, 86 DTC 6421, the Minister's determination was
correct. He refers specifically to the short period of ownership here and the
certainty the Appellant had of making a profit on the subsequent sale. Counsel
also asks me to impute Mr. DeMarco's motive in the transaction to the Appellant
because he appeared to be the party who arranged the sale.
[44] I am not convinced that the ordinary tests
for determining whether a transaction was a trading venture apply in the unusual
circumstances here.
[45] Firstly, the property was not purchased in
an arm's length transaction. The overall context of the operation was the sale
of a property that had been acquired as a result of the death of a family
member. It does not bear the hallmarks of a speculative venture by the
Appellant. The asset was a capital asset in the hands of Mrs. DeMarco and then
in the hands of Mr. DeMarco and his brother. A sale of the property was
arranged prior to the Appellant acquiring her interest in it and, while it was
still capital property to the two beneficiaries. In the case of Racine
Demers & Nolin v. M.N.R. 1965 DTC 5098, Mr. Justice Noel of the Exchequer Court said at page 5105:
"The inference of an intention to make a profit by a rapid
resale can also flow from the fact that the purchaser did, in fact, resell
almost immediately at a profit, but only if there exists no satisfactory
explanation for this rapid resale...."
[46] The evidence here shows another reason for
the rapid resale - the transaction was arranged prior to the Appellant taking
title. The sale was part of an overall plan to dispose of capital property of
the estate, rather than as part of a venture by the Appellant to earn a quick
profit.
[47] This is similar, in my respects, to the
disposition of partnership units in the case of Continental Bank of Canada v. The Queen, 94 DTC 1858, which Bowman, J., as he then was, found
to be on capital account, despite the units having been held for only three
days and having been acquired with the knowledge that they would be resold in
that three day period for a profit. I do not find that 47 Lakeside lost its
character as capital property in the transfer to the Appellant. Therefore, her
gain on that sale is on capital account.
[48] The Appellant raised the possibility that
she would be entitled to a principal residence exemption for this gain, but it
is clear that she did not inhabit, let alone ordinarily inhabit, the property
during the brief period she had beneficial ownership of part of it. As well, no
designation of the property as principal residence was filed with her return of
income as required by the Income Tax Act.
[49] The third issue in the appeal relates to
rental income that the Minister alleges the Appellant was entitled to receive
from Mr. DeMarco in 1995, 1996 and 1997 on three properties she owned in Niagara Falls, Ontario. Mr. DeMarco used the properties in his
various businesses and deducted a rent expense of $12,360 in the calculation of
his business income for 1995. He said that he paid the mortgage, property taxes
and maintenance on the properties in lieu of rent for all the years. He
admitted that he did not claim a rent expense for the properties in 1996 or
1997, but said that he claimed the property tax and maintenance expenses
directly in the calculation of his business income.
[50] Mr. DeMarco based his claim for the rent
deduction taken in 1995 on a document which was signed by him and the Appellant
entitled "Rental Application" dated March 28th, 1993. This document
was also the basis on which the Minister assessed the Appellant for rental
income totalling $12,360 in 1995, $12,360 in 1996 and $15,960 in 1997.
[51] According to the Appellant, she never
entered into an agreement with Mr. DeMarco to rent him the three properties
in Niagara Falls. She said she did not receive any rent
from him and did not recall signing the rental application form. It was her
evidence that Mr. DeMarco paid all of the expenses and dealt with all of the
financial arrangements.
[52] There was a mortgage on one of the three
properties that was in the Appellant's name and the Appellant said that Mr.
DeMarco would give her $450 per month in cash to make the mortgage
payment.
[53] Mr. DeMarco's evidence relating to the
rental application agreement was somewhat convoluted. He admitted, however,
that he did not pay any rent to the Appellant according to the terms in the
rental application; instead, he said he made the mortgage payments and made
repairs to the property.
[54] He also said that the rental application
form was drawn up as a result of a discussion he had with a lawyer, Mr.
Nicoletti, shortly after one of the Niagara Falls properties
(4593 Victoria Avenue) was purchased. Mr. Nicoletti was an
acquaintance of Mr. DeMarco's and was not providing professional services
to him at the time.
[55] Mr. DeMarco indicated to Mr. Nicoletti that
he might think of putting 4593 Victoria up for rent
in certain circumstances rather than using it himself. Mr. Nicoletti was
aware of the fact that Mr. DeMarco was not paying rent to the Appellant, and
that he was paying the mortgage and repairs and suggested that Mr. DeMarco
set up a rental agreement with the Appellant in order to make it appear that
she was receiving a certain level of rent from the property. Mr. Nicoletti
thought that this would make it easier to charge that amount of rent to a third
party. Mr. DeMarco also said he believed that the Appellant was present for
these discussions and signed the "Rental Application" form. The
Appellant denies having any knowledge of the form or the discussions as related
by Mr. DeMarco.
[56] I accept the Appellant's evidence that she
never intended to enter into a lease of the properties. In any event, it is also
clear that the alleged rental agreement is not a binding agreement of the kind
suggested by the Respondent. It is simply a preliminary application to rent the
premises and according to its terms, it required acceptance by the landlord and
the execution of a tenancy agreement "in the landlord's usual form"
subsequent to the acceptance of the application. No subsequent tenancy
agreement was ever drawn up.
[57] Respondent's counsel suggests that the
amounts of expenses paid by Mr. DeMarco on the properties should be
considered the payment of rent, and that these amounts can support the
assessment against the Appellant.
[58] It is clear, though, that the Appellant did
not receive any amounts, either in money or money's worth from Mr. DeMarco in
excess of the expenses of maintaining the properties and, therefore, there is
no basis for including any net rental income in her income for those years.
[59] As a result of the preceding reasons, the
only item of those reassessed which has been upheld is the inclusion of a
capital gain from the sale of 47
Lakeside Drive in 1997.
[60] Therefore, I must determine whether the
Appellant's failure to include this gain on her 1997 tax return amounted to a
misrepresentation which is attributable to her neglect, carelessness or wilful
default such that the Minister may reassess beyond the normal reassessment
period of 3 years referred to in paragraph 152(3.1)(a) of the Income
Tax Act.
[61] I must also determine whether the penalties
on this amount under subsection 163(2) of the Act are warranted.
[62] The onus is on the Respondent to prove the
requisite degree of fault under both subparagraph 152(4)(a)(ii) and subsection
163(2) of the Income Tax Act.
[63] As pointed out by counsel for the
Appellant, the degree of fault under the two sections is different, with
subsection 163(2) of the Act requiring proof of gross negligence.
[64] According to the Federal Court in Venne
v. The Queen, 84 DTC 6247, gross negligence involves a high degree of
negligence tantamount to intentional acting or indifference as to whether the
law is complied with or not.
[65] Here, the Appellant is an intelligent
individual with a Grade 12 education. She has been successful in her career and
works in a managerial capacity in a large company. She appreciated that she was
involved in many property transactions with her former husband, but claims that
she was unaware that those transactions had tax implications. Although she had
access to professional assistance in those transactions and in preparing her
tax returns, she did not discuss the tax implications of her business dealings
with those advisors or even with her husband.
[66] I do not accept the
Appellant's testimony that she did not know that her participation in these
dealings with her husband could have income tax consequences. I agree with Respondent's counsel that a
person with the Appellant's level of education and experience would have had at
least a basic idea that property transactions could have such consequences. I
also believe that the Appellant must have been aware that her former husband's
practice of putting properties in her name was out of the ordinary. She herself
said that she was worried because he had put so many properties in her name,
but she did not make any effort to get advice on the tax implications of those
transactions.
[67] On the whole of the evidence, it is my view
that she was wilfully blind to her obligations under the Income Tax Act
in failing to advise her accountant, when he was preparing her returns, of the
property transactions she had been involved in, including the one dealing with
47 Lakeside. She said that she relied entirely on her former husband to take
care of these matters, but did not apparently ever raise the matter with him.
[68] I do not accept that the Appellant was
prevented from fulfilling her obligations under the Income Tax Act by
her former husband. The evidence simply does not support this contention. She
may have chosen not to deal with these matters to avoid arguments with her
former husband, but this does not excuse her from carrying out her legal duty.
[69] I find that the Appellant's failure to
report the disposition of 47 Lakeside on her 1997 tax return amounted to gross
negligence, justifying the imposition of a penalty under subsection 163(2) of
the Income Tax Act.
[70] By extension, the failure to report the
transaction amounted to negligence sufficient to allow the Minister to reassess
beyond the normal three-year period.
[71] The appeal is therefore allowed in part
with costs.
Signed at Ottawa, Ontario,
this 31st day of May 2005.
"B. Paris"
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