REASONS
FOR JUDGMENT
Ouimet J.
I. introduction
[1]
This is an appeal by Barbara Gorman (the
“Appellant”) in respect of her 2000 taxation year. The Minister of National
Revenue (the “Minister”) reassessed the Appellant to include in her income the
amount of $52,880.00 pursuant to subsections 146(1), 146(8), 146(9), and
146(10) of the Income Tax Act (the “ITA”). In reassessing the Appellant for
the 2000 taxation year, the Minister determined that she was liable to a
penalty under subsection 163(2) of the ITA for not reporting the amount of
$52,880.00 in her return for that year.
[2]
The amount of $52,880.00 represents the amount
used by the Appellant’s self-directed RRSP trust to purchase shares of 629900
Saskatchewan Ltd. (“629900”) in the 2000 taxation year.
II. ISSUES
[3]
The issues in this appeal are as follows:
1. Whether
the Minister rightfully included $52,880.00 in the Appellant’s income for her 2000
taxation year;
2. Whether
the Appellant is liable to a penalty under subsection 163(2) of the ITA;
3. Whether
the Appellant is entitled to claim a capital loss under sections 38 and 39 of
the ITA.
III. THE PERTINENT LEGISLATIVE PROVISIONS
[4]
The key applicable provisions of the ITA are:
38. (b) a
taxpayer’s allowable capital loss for a taxation year from the disposition of
any property is ¾ of the taxpayer’s capital loss for the year from the
disposition of that property; and
. . .
39(1)(b) a
taxpayer’s capital loss for a taxation year from the disposition of any
property is the taxpayer’s loss for the year determined under this subdivision
(to the extent of the amount thereof that would not, if section 3 were read in
the manner described in paragraph (a) of this subsection and without
reference to the expression “or the taxpayer’s allowable business investment loss
for the year” in paragraph 3(d), be deductible in computing the
taxpayer’s income for the year or any other taxation year) from the disposition
of any property of the taxpayer other than
(i) depreciable property, or
(ii) property described in any of
subparagraphs (a)(i), (ii) to (iii) and (v); and
. . .
40(1)(b)
a taxpayer’s loss for a taxation year from the disposition of any property is,
(i) if the property was disposed of in
the year, the amount, if any, by which the total of the adjusted cost base to
the taxpayer of the property immediately before the disposition and any outlays
and expenses to the extent that they were made or incurred by the taxpayer for
the purpose of making the disposition, exceeds the taxpayer’s proceeds of
disposition of the property, and
(ii) in any other case, nil.
. . .
146(1)
Definitions — In this section,
“benefit”
includes any amount received out of or under a retirement savings plan other
than
(a) the portion thereof received
by a person other than the annuitant that can reasonably be regarded as part of
the amount included in computing the income of an annuitant by virtue of
subsections 146(8.8) and 146(8.9),
(b) an amount received by the
person with whom the annuitant has the contract or arrangement described in the
definition “retirement savings plan” in this subsection as a premium under the
plan,
(c) an amount, or part thereof,
received in respect of the income of the trust under the plan for a taxation
year for which the trust was not exempt from tax by virtue of paragraph 146(4)(c),
and
(c.1) a tax-paid amount described
in paragraph (b) of the definition “tax-paid amount” in this subsection
that relates to interest or another amount included in computing income
otherwise than because of this section
and without
restricting the generality of the foregoing includes any amount paid to an
annuitant under the plan
(d) in accordance with the terms of
the plan,
(e) resulting from an amendment to
or modification of the plan, or
(f) resulting from the termination
of the plan;
. . .
“qualified
investment” for a trust governed by a registered retirement savings
plan means
(a) an investment that would be described
by any of paragraphs (a), (b), (d) and (f) to (h)
of the definition “qualified investment” in section 204 if the references in
that definition to a trust were read as references to the trust governed by the
registered retirement savings plan,
. . .
(d) such other investments as
may be prescribed by regulations of the Governor in Council made on the
recommendation of the Minister of Finance;
. . .
146(8)
Benefits taxable — There shall be included in computing a taxpayer’s income
for a taxation year the total of all amounts received by the taxpayer in the
year as benefits out of or under registered retirement savings plans, other
than excluded withdrawals (as defined in subsection 146.01(1) or 146.02(1)) of
the taxpayer and amounts that are included under paragraph (12)(b) in
computing the taxpayer’s income.
. . .
146(9)
Where disposition of property by trust — Where in a taxation year a trust
governed by a registered retirement savings plan
(a) disposes of property for a
consideration less than the fair market value of the property at the time of
the disposition, or for no consideration, or
(b) acquires property for a
consideration greater than the fair market value of the property at the time of
the acquisition,
the
difference between the fair market value and the consideration, if any, shall
be included in computing the income for the taxation year of the annuitant
under the plan.
146(10) Where acquisition of non-qualified investment by trust — Where at any time in a taxation year a trust governed by a
registered retirement saving plan
(a) acquires a
non-qualified investment, or
(b) uses or
permits to be used any property of the trust as security for a loan,
the fair market value of
(c) the
non-qualified investment at the time it was acquired by the trust, or
(d) the property
used as security at the time it commenced to be so used,
as the case may be, shall be included in computing the income for
the year of the taxpayer who is the annuitant under the plan at that time.
. . .
146(12) Change in plan after registration — Where, on any day after a retirement
savings plan has been accepted by the Minister for registration for the
purposes of this Act, the plan is revised or amended or a new plan is
substituted for it, and the plan as revised or amended or the new plan, as the
case may be (in this subsection referred to as the “amended plan”), does not
comply with the requirements of this section for its acceptance by the Minister
for registration for the purposes of this Act, subject to subsection 146(13.1),
the following rules apply:
. . .
(b) the taxpayer who
was the annuitant under the plan before it became an amended plan shall, in
computing the taxpayer’s income for the taxation year that includes that day,
include as income received at that time an amount equal to the fair market
value of all the property of the plan immediately before that time.
. . .
163(2)
False statements or omissions — 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 or omission in a
return, form, certificate, statement or answer (in this section referred to as
a "return") filed or made in respect of a taxation year for the
purposes of this Act, is liable to a penalty of the greater of $100 and 50% of
the total of . . .
. . .
163(3) Burden
of proof in respect of penalties — Where, in an appeal
under this Act, a penalty assessed by the Minister under this section or
section 163.2 is in issue, the burden of establishing the facts justifying the
assessment of the penalty is on the Minister.
. . .
204 Definitions
— In this Part,
“qualified
investment” for a trust governed by a deferred profit sharing plan or
revoked plan means,
(a) money that is legal tender in
Canada, other than money the fair market value of which exceeds its stated
value as legal tender, and deposits (within the meaning assigned by the Canada
Deposit Insurance Corporation Act or with a branch in Canada of a bank) of
such money standing to the credit of the trust,
. . .
(d) share listed on a
prescribed stock exchange in Canada,
. . .
(f) guaranteed investment
certificates issued by a trust company incorporated under the laws of Canada or
of a province,
(g)
investment contracts described in subparagraph (b)(ii) of the definition
“retirement savings plan” in subsection 146(1) and issued by a corporation
approved by the Governor in Council for the purposes of that subparagraph.
[5]
The key applicable provisions of the Income
Tax Regulations (“Regulations”) are:
4900(6) For the purposes of
subparagraphs 146(1)(g)(iv) and 146.3(1)(d)(iii) of the Act,
except as provided in subsections (8) and (9), a property is a qualified
investment for a trust governed by a registered retirement savings plan . . .
at any time if at that time the property is
(a) a share of
the capital stock of an eligible corporation (within the meaning assigned by
subsection 5100(1)) . . .
(b) an interest
of a limited partner in a small business investment limited partnership; or
(c) an interest
in a small business investment trust.
5100(1) In this Part,
“eligible corporation”, at any time,
means
(a) a particular
corporation that is a taxable Canadian corporation all or substantially all of
the property of which is at that time
(i) used in a qualifying
active business carried on by the particular corporation or by a corporation
controlled by it,
(ii) shares of the
capital stock of one or more eligible corporations that are related to the
particular corporation, or debt obligations issued by those eligible
corporations, or
(iii) any combination of
the properties described in subparagraphs (i) and (ii).
“qualifying active business”, at any
time, means any business carried on primarily in Canada by a corporation, but
does not include
(a) a business
(other than a business of leasing property other than real property) the
principal purpose of which is to derive income from property (including
interest, dividends, rent and royalties), or
(b) a business of
deriving gains from the disposition of property (other than property in the
inventory of the business),
and, for the purposes of
this definition, a business carried on primarily in Canada by a corporation, at
any time, includes a business carried on by the corporation if, at that time,
(c) at least 50
per cent of the full time employees of the corporation and all corporations
related thereto employed in respect of the business are employed in Canada, or
(d) at least 50
per cent of the salaries and wages paid to employees of the corporation and all
corporations related thereto employed in respect of the business are reasonably
attributable to services rendered in Canada.
IV. WITNESSEs AT TRIAL
[6]
The Appellant testified at trial. The Respondent
did not present any witnesses.
V. THE RELEVANT FACTS
[7]
The Appellant obtained a degree in chemistry
from the University of Western Ontario in 1979 and a certificate in public health
from the University of Toronto around 1983. She ran a business with her husband
from 1995 to approximately 2004 and was in charge of purchasing, stocking,
cleaning, bookkeeping, and taxes for the business. She is experienced in bookkeeping,
having purchased a bookkeeping program and a Quicken program in 1995 for use in
the business. She taught herself how to use both. The Appellant also rendered
bookkeeping services to third parties during that time. Later, in 2000, she
worked for Primerica selling Registered Education Savings Plans under which
people could invest money for their children and receive tax deductions in much
the same way as with an RRSP. In the same year, the Appellant took an insurance
licensing course with Primerica, at which she learned about life and term
insurance, different ways to invest through such insurance, the tax consequences,
and income tax reporting. The Appellant has been investing in her RRSP since
the 1980s.
[8]
In 1999, the Appellant wanted to get a better
return in her RRSP. In November 1999, she attended in a London, Ontario hotel a
one-day seminar on how to obtain better returns in her RRSP. The seminar
presenter, Doug Henderson, talked about making RRSP investments in humanitarian
projects and directed her to Trevor Chilton, 629900’s president, and gave her Mr. Chilton’s
phone number. The Appellant called Mr. Chilton and they had a short
conversation, after which she decided to invest with him.
[9]
In November or December of 1999, the Appellant
drove to Toronto to meet Mr. Chilton. They met in a hotel lobby and had a
discussion, during which she signed documents to effect her investment. The
documents originally signed involved an Alberta limited company, but it was
later changed to 629900.
[10]
It is not clear from the evidence when this
actually happened, but the Appellant discussed the investment with Trevor
Chilton and Rick Cahill, 629900’s vice-president and its director in charge of
international funds. During the discussion or discussions, the Appellant was
told that she could expect a 50% to 100% return on her investment within one to
two years. Mr. Chilton did not tell the Appellant the nature of the investment and
its location other than to say that it involved, in part, projects outside Canada
and, in part, traders. The Appellant did not ask Mr. Chilton and Mr. Cahill
any questions about how they could achieve 50% to 100% returns, and she did not
have any knowledge of their respective qualifications and work experience.
[11]
Mr. Chilton and Mr. Cahill did not
give the Appellant any further information or relevant financial documents regarding
her investment. The Appellant did not receive any business plan, prospectus or
information with respect to the nature of the investment, including information
on where the funds would be invested. It is not clear from the evidence when,
but she later heard that some investments were in humanitarian projects.
[12]
Sometime after meeting Mr. Chilton and Mr.
Cahill, the Appellant met with Gary Price. Mr. Price was the Appellant’s
financial advisor at that time and he had been managing the Appellant’s RRSP since
the 1980s. The Appellant needed Mr. Price in order to transfer the funds from
her RRSP because he was the one managing it. The Appellant informed Mr. Price
of the investment she was going to make with Mr. Chilton. Mr. Price told her that
he was nervous about the investment and that she should not undertake it. While
the Appellant testified that she was aware that there was a foreign content
limit for RRSP investments, she did not ask Mr. Price whether the
investment would qualify for RRSP purposes, nor did she ask him for advice on
that subject. The Appellant did not obtain any other advice from any
independent third party regarding the investment.
[13]
On November 23, 1999, the Appellant opened a
self-directed RRSP trust account with Canadian Western Trust (“CWT”) because
Mr. Chilton had told her to do so in order for her to make the investment. Mr.
Chilton had also told her that she needed to open this type of account,
transfer money into it from her RRSP and then direct the RRSP to invest in
629900.
[14]
On the application form that the Appellant signed
in order to open the account at CWT, she acknowledged that it was her
responsibility to determine the eligibility of each investment under the
provisions of the applicable tax legislation and that she was aware of the
adverse tax consequences of including in the account investments which did not qualify
for an RRSP under such tax legislation.
[15]
Between November 23, 1999 and December 6, 1999,
the Appellant sold part of her personal RRSP holdings, consisting of an
investment in AGF Funds Inc., for an amount of $52,880.00. On December 6, 1999,
the Appellant authorized the transfer of $52,880.00 from her RRSP to her self-directed
RRSP trust at CWT.
[16]
On December 24, 1999, the Appellant signed a
letter addressed to Mr. Chilton to which was attached a document entitled
Freedom Foundations Inc. (“FFI”) Humanitarian Project Funding Agreement that
she also signed. In the agreement, the Appellant acknowledged that she had been
advised by FFI to consult and retain her own experts and representatives to
advise her concerning the legal and tax effects of any transaction made. Under
this agreement, the Appellant agreed to place an amount of $52,880.00 in the
care of FFI for the purpose of deriving profits from humanitarian projects. The
investment did not bear interest; the funds remained at all times in FFI's bank
account, under its full control, and subject to its signing authority. The
profits were to be deposited into FFI's offshore account at the end of each 15
to 45-day cycle and would be distributed every 30 days from the date of
entry into the agreement and within 10 days of their being received in
FFI's account. Profits from the investment would be distributed to the Appellant
and not to her RRSP trust.
[17]
On January 21, 2000, the Appellant signed a
letter of indemnity for CWT directing CWT to invest an amount of $52,880 in 5,288
shares of 629900. In this letter, she also confirmed and certified that this
investment was a “qualified investment” as defined in the ITA and acknowledged
that it was her responsibility to evaluate the investment and that she had sought
and obtained independent financial, investment, legal, and tax advice to the
extent she deemed necessary.
[18]
The Appellant also indicated in the letter of
indemnity that attached thereto was a letter from 629900’s officers/accountants/solicitors
or other qualified professional advisor declaring the investment in 629900 to
be a “qualified investment” and stating that the current fair market value of a
share of 629900 was $10.00. In cross‑examination, the Appellant admitted
that no such letter was attached to the letter of indemnity and that she had not
seen such a letter before signing the letter of indemnity. The Appellant said
that she believed the value of a share to be $10.00 although she did nothing to
determine the fair market value of the shares. On the basis of that belief, she
later instructed her RRSP trust to purchase the shares of 629900 at $10.00 a
share. It is unclear from the evidence given by the Appellant when and from
whom the Appellant got a copy of the letter from Blaine Cisna of Cisna Accounting
dated May 27, 2000, indicating that, in his opinion, the fair market value of
the shares was $10.00 per share and that 629900 was an eligible corporation
under the ITA. What is clear from the testimony of the Appellant is that Mr. Cisna
was not retained by her and that she did not have any contact with him.
[19]
On February 9, 2000, the Appellant’s RRSP trust
at CWT purchased the 5,288 shares of 629900 for an amount of $52,880.00.
[20]
Between February 9, 2000 and April 10, 2002,
when the Appellant signed her 2000 income tax return, she received e-mails from
Mr. Chilton. In one e‑mail, dated February 7, 2000, matters such as
mortgage fraud, credit card fraud, fictitious loan fraud and a project enabling
people to purchase $1,000 worth of gold for $1 were mentioned. On February 23,
2000, Mr. Chilton noted in another e-mail that the retrieval of investment
funds was moving along slowly because a third party named Louis Grenier was
stalling. In an e-mail dated January 2, 2001, Mr. Chilton stated that Mr.
Cahill’s phone lines were under surveillance, that he could not speak to anyone
without jeopardizing security and confidentiality, and that they were looking
at quarterly distributions of the profits starting in March 2001. In this
e-mail, Mr. Chilton also described a number of investment projects (“IP”) outside
Canada, these being the following:
Project # 1
As much as I would like to forget about this one, none the less we
have to deal with what lies on the table today. Dec. 13th Donald and
myself met with Sam & Larry to go over the various projects and issues at
hand with them. First of all they are looking after the retrieval of the funds
placed with Louis Grenier and Steve McKim out of California. Some of the
participants in this ill fated venture have talked to Louis only to get more
fairy tales, post ponements and ridiculous excuses. The simple fact is that
these fools lost all control over these funds and are just feeding back to us
the garbage that is fed them. Through our efforts in the U.K. the great news is
that they have traced the path of these funds and found them and much more.
This effort has been advanced particularly since September when the U.K. really
went to work on our file.
These less than scrupulous individuals that made the contract with
these two fools have indeed succerred others as well. The approach now is to
issue a friendly advisory to those at the top so that they will want to return
the funds prior to an official investigation being launched against them. I am
sure that they are well aware that they do not really want an official
investigation as that would most likely lead to someone seeing jail time over
their less than scrupulous business activities. This has hardly been a pleasant
experience but highly educational as to what happens when you release control
of funds to those that you do not know. Unfortunately this has been a costly
learning experience for all concern however it is the only way to learn the
rules of the game. In the long run our education will be highly rewarding once we
get over this bump in the road. This is how we have come to know what the red
flags are and this is what I now introduce people to at our seminars. These
lessons certainly govern how and with who concerning some house cleaning
matters with the participants in this venture early in the new year, I shall
advise you of a date. I do believe we will be successful in this retrieval in
the new year and can put this one behind us forever.
Project # 2
March 4th, 2000 $249,000 usd
Placed in a custodial account under our signature in Europe. These
are currently earning interest at a very high bank rate as compared to here.
This is not a banking program but a business venture involving the high tech
area of diamond cutting using lazers. This is a very long term play that would
pay us off for many years once the business is developed. That is what they
have been doing this year setting up the company that is going to do this and
getting the contracts for distribution particularly in the orient and the
supplies or the raw product in South Africa and Russia. Like most businesses
this is much more time consuming than a simple bank instrument trading program.
I believe many do not have the entire concept down here and what reasonable
expectations will ensue. We are assured by our partners that it will indeed be
very lucrative after all why are DeBeers in the business. This is not a short
term hit but a very long term pay back that will have us smiling for years. The
beginning of the dividends should not be to far way now.
Project # 3
April 4th & 10th, 2000
$280,000 usd
June 20th, 2000 $275,000 usd
Place into funding the establishment of a Humanitarian housing
project in Mexico of absolutely huge proportions. This is also a very long term
project in that we could well be involved with our partners in this area for
easily 5-10 years. The minimum position was for us to double our money but many
other opportunities abound in this area that would cause us to well exceed
that. We expected the first trading of instruments to start this fall but with
the election in Mexico and the first change of political parties in over 60
years has indeed slowed the progress with the Mexican officials. All is back on
track, their cabinet was sworn in Dec. 1st. Sam and Larry just got
back from working down there on the project in early December. 2001 will
definitely see this first stage of projects getting off the ground with many to
follow.
Project # 4
August 1st, 2000 $200,000 usd
September 1st, 2000 $252,000 usd
Both placed into an ongoing program that pays out 50% & 40%
respectively a month while trading. This was due to pay out at the end of
November but has been rescheduled to pay out in three portion in each of Jan.,
Feb., and March. This slow down was caused by a cease trading order issued as a
result of an ill founded investigation that has since been settled.
Project # 5
December 6th, 2000 $425,000 usd
Placed into a
Letter of Credit program that is also up and running on an ongoing basis. Bank
to Bank arrangement guarantee with banks in Costa Rica and Bahamas. This will
provide a long term, at least 5 years steady income stream on at least a
quarterly basis. Through the leveraging of these LOC’s we will be able to
magnify this no risk investment into at least 50% per year.
Project # 6
December 29h, 2000 $1,048,000 usd
Placed into a
very short term (less than 1 month) US Treasury Bill trading program. Profits
as yet are not determined other than exceptional. The contract will be provided
to us early in the new year. We maintain full signature control of our funds at
all times and can back out at any times. Absolutely zero risk on the
instruments plus we are dealing with established contacts that are well know to
us.
[21]
On February 12, 2001, the Appellant e-mailed Mr.
Cahill over concerns she had with the investment. Mr. Cahill responded to
the e-mail and stated that, among other things, Mr. Chilton had taken in excess
of US$2million and had been removed as president and a director of FFI and
629900 by the other directors.
[22]
On March 8, 2001, Donald Neuls, a director of
629900, sent an e-mail to the Appellant stating that Mr. Chilton could not
participate in the diamond industry investment because of his criminal record
and present fraudulent dealings, that 100% profits were expected from the Mexican
investment, and that they had achieved very good results in Mexico and hoped to
see, within the month, profits at much more than the expected doubling. Two
private placement programs were to yield respectively 50% and 40% per month net
returns, which would be paid around March 15, 2001 and March 22, 2001.
[23]
On July 4, 2001, the Appellant received another
e-mail from Mr. Neuls in which he spoke of a letter from Mr. Chilton
containing misrepresentations. Mr. Neuls wrote that the shares in 629900 held
in trust at CWT needed to be returned and that establishing a price would be a
problem because Mr. Chilton had refused to turn over the records. Mr. Neuls
asked the shareholders for their cooperation in producing proof of the funds
transferred to CWT for shares in 629900.
[24]
On April 10, 2002, the Appellant signed her 2000
income tax return and in doing so certified that the information given was
correct, complete and fully disclosed all of her income.
[25]
On December 31, 2002, 629900 was struck from the
corporate registry on the basis that it was inactive.
VI. ANALYSIS
A. Did the Minister rightfully
include in the Appellant’s income for the 2000 taxation year the amount of
$52,880.00?
[26]
In answering this question, I will conduct an
analysis to determine whether the shares of 629900 acquired by the Appellant’s
self-directed RRSP trust are a “qualified investment” in an “eligible
corporation” pursuant to subsections 146(1) and (10) of the ITA and subsections
4900(6) and 5100(1) of the Regulations.
[27]
If necessary, I will determine whether the
629900 shares acquired by the Appellant’s self-direct RRSP trust were acquired
for a consideration greater than their fair market value pursuant to subsection
146(9) of the ITA and whether the Appellant received out of or under an RRSP a
benefit in the amount of $52,880.00 pursuant to subsection 146(8) of the ITA.
(1) Were the shares of 629900
acquired by the Appellant’s RRSP a qualified investment in an eligible corporation
under the ITA and the Regulations?
[28]
A qualified investment for a trust governed by an
RRSP includes investments prescribed by regulation. According to the applicable
regulation, a property is a qualified investment for a trust governed by an
RRSP if at the relevant time the property is a share of the capital stock of an
eligible corporation within the meaning assigned by subsection 5100(1) of the
Regulations, unless the annuitant under the plan is a designated shareholder of
the corporation.
[29]
An eligible corporation is defined by regulation
as being a taxable Canadian corporation of which all or substantially all of
the property is used at the relevant time in a qualifying active business
carried on by the particular corporation or by a corporation controlled by it.
[30]
“Qualifying active business” means any business
carried on primarily in Canada by a corporation.
[31]
On the basis of these definitions, the 629900
shares acquired by the Appellant’s self-directed RRSP trust will be a qualified
investment under the ITA if, at the time of the acquisition of the shares,
629900 was a taxable Canadian corporation that used all or substantially all of
its property in an active business carried on primarily in Canada.
[32]
In Harquail v The Queen, the Federal Court of Appeal
(“FCA”) provided guidance on the meaning to be given to the term “active business”.
The Court held:
It is not easy to
delimit the content of the concept of carrying on business. One can see two
outside parameters where the carrying on of business does not occur: on the one
hand, when a company, which has been incorporated, has not actually commenced
operation and, on the other hand, when a company has become dormant and is only
holding annual meetings and filing its returns so as to avoid the forfeiture of
its charter. There are, in between, some activities, however, which are signs
that a company is operating and which should fall within the spectrum of the
concept of carrying on business, even though, for example, the activities are
carried on for the purpose of reaching an agreement which eventually is not
reached or even though they do not result in the earning of income.
[33]
In order to determine whether 629900 was
carrying on an active business in Canada at the time its shares were purchased
by the Appellant’s RRSP trust, I have to answer the three following
questions:
1.
What was the business carried on by 629900?
2.
Did 629900 carry on that business in Canada?
3. Did 629900 carry on that business actively?
[34]
According to the assumptions of fact made by the
Minister, at the time the Appellant’s self-directed RRSP trust purchased the
shares of 629900, the corporation had not filed any income tax returns, had not
produced a prospectus for the distribution of shares, and had not provided a
business plan, a budget, or any financial statements to support the share
transactions. Furthermore, the Minister assumed that 629900 held no property,
had no employees and no bank accounts, and conducted no business activity.
[35]
In making assessments and reassessments, the
Minister proceeds on the basis of assumptions. The initial onus is on the
taxpayer to "demolish" the Minister's exact assumptions and nothing
more. This initial onus of "demolishing" the Minister's exact
assumptions is met when an appellant makes out a prima facie case.
[36]
In Amiante Spec Inc v Canada, the FCA defined what
constitutes a prima facie case as follows:
A prima facie
case is one "supported by evidence which raises such a degree of
probability in its favour that it must be accepted if believed by the Court
unless it is rebutted or the contrary is proved. It may be contrasted with conclusive
evidence which excludes the possibility of the truth of any other conclusion
than the one established by that evidence" (Stewart v. Canada,
[2000] T.C.J. No. 53, paragraph 23).
[37]
The Appellant failed to adduce evidence to
demolish any of the assumptions of fact mentioned in paragraph 34 above. I was
not presented with any evidence that would allow me to determine the business in
which 629900 was involved. No evidence was presented to me that demonstrated that
629900 was an operating company or that it conducted any activities other than
selling its shares. The simple fact that shares of the corporation were being
sold does not prove that the corporation was operating and was an active
business.
[38]
Since the Appellant has failed to meet the onus
of demolishing the assumptions of fact made by the Minister, I must accept those
assumptions. I must accept that 629900 had not filed any income tax
returns, had not produced a prospectus for the distribution of shares, and had
not provided a business plan, a budget or any financial statements to support
the share transactions, and that it held no property, had no employees and no
bank accounts, and most importantly, did not conduct any business activity.
[39]
On the evidence before me, I conclude that
629900 was not an active business; it was not carrying on a business. Therefore,
629900 was not a qualifying active business within the meaning of the
Regulations and thus the purchase of its shares by the Appellant’s self-direct
RRSP trust was a non‑qualified investment. Given that conclusion, the
application of subsection 146(10) is automatically triggered and the fair
market value (“FMV”) of the shares at the time of their acquisition must be
included in the Appellant’s income.
(2) Were 629900’s shares acquired
by the Appellant’s self-directed RRSP trust for a consideration greater than
their fair market value?
[40]
In Nash v Canada, the FCA endorsed the
following definition of FMV:
[8] . . .
The statute does not define the
expression "fair market value", but the expression has been defined
in many different ways depending generally on the subject matter which the
person seeking to define it had in mind. I do not think it necessary to attempt
an exact definition of the expression as used in the statute other than to say
that the words must be construed in accordance with the common understanding of
them. That common understanding I take to mean the highest price an asset might
reasonably be expected to bring if sold by the owner in the normal method
applicable to the asset in question in the ordinary course of business in a
market not exposed to any undue stresses and composed of willing buyers and
sellers dealing at arm's length and under no compulsion to buy or sell. I would
add that the foregoing understanding as I have expressed it in a general way
includes what I conceive to be the essential element which is an open and
unrestricted market in which the price is hammered out between willing and
informed buyers and sellers on the anvil of supply and demand.
[41]
The Minister assumed that the value of a share
was $1.00. The Appellant had to submit prima facie evidence to demonstrate the
fair market value of the shares. The Appellant did not adduce evidence to
demolish this assumption of the Minister and did not establish the FMV of the
shares. The only evidence adduced by the Appellant on that point was her
testimony that she believed that the value of a share was $10.00 even though
she did not do anything to determine the fair market value of the shares. On
the basis of that belief, she instructed her RRSP trust to purchase the shares
of 629900 at $10.00 a share.
[42]
In my opinion, this transaction does not
constitute evidence of the FMV of a share of 629900. For a transaction to be evidence
of the FMV of a share according to the definition endorsed by the FCA in Nash,
it must represent the highest price that a share might reasonably have been
expected to sell for if it had been sold, using the normal method applicable to
shares, in the ordinary course of business in an open and unrestricted market in
which an informed buyer and an informed seller were dealing at arm's length,
were not exposed to any undue stresses, and were not under any compulsion to
buy or sell.
[43]
I was not presented with such evidence. The
transaction entered into by the Appellant does not meet the criteria of the
definition in Nash. Therefore, I cannot consider the price paid for a
share of 629900 by the Appellant’s self‑directed trust as evidence of the
FMV of the shares. The Appellant failed to provide evidence to demolish the
assumption of fact made by the Minister. I must accordingly accept the Minister’s
assumption of fact and conclude that the fair market value of a share of 629900
was $1.00 as assumed by the Minister. Having come to that conclusion, I must
also conclude, pursuant to subsection 146(9) of the ITA, that the shares of
629900 were acquired by the Appellant’s self-directed RRSP trust for a
consideration greater than their fair market value.
[44]
Having determined that the shares of 629900
acquired by the Appellant’s self-directed RRSP trust are not a “qualified
investment” in an “eligible corporation” and that these shares were acquired
for a consideration greater than their fair market value, it is not necessary
for me to determine whether the Appellant received out of or under an RRSP a
benefit, pursuant to subsection 146(8) of the ITA, to dispose of this appeal.
(3) Conclusion
[45]
The amount of $5,288.00, representing the FMV of
the 5,288 shares of 629900 purchased by the Appellant’s RRSP trust in the 2000
taxation year must be included in the Appellant’s income pursuant to subsection
146(10) of the ITA. Pursuant to subsection 146(9) of the ITA, the difference
between the consideration given to acquire the shares ($52,880.00) and the FMV
of the shares ($5,288.00) must also be included in the Appellant’s income for
that year. Therefore, an additional amount of $47,592 should be included in the
Appellant’s income.
B. Is the Appellant liable to
penalties under subsection 163(2) of the ITA?
[46]
Under subsection 163(2) of the ITA, where a
taxpayer knowingly, or under circumstances amounting to gross negligence, has
made or participated in, assented to or acquiesced in the making of, a false
statement or omission in an income tax return filed in respect of a taxation
year, he or she is liable to a penalty.
[47]
In Laplante v The Queen, this Court summarized as
follows the interpretation given by the courts to the words gross negligence:
[11] The
concept of "gross negligence" accepted in the case law is that
defined by Mr. Justice Strayer in Venne v. Canada (Minister of
National Revenue – MNR) . . .
. . . "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.
[12] In
Da Costa v. Canada . . . the Honourable Chief Justice Bowman . . . made
the following remarks:
[9] . . . The
question in every case is . . .
(a) was
the taxpayer negligent in making a misstatement or omission in the return? and
(b) was
the negligence so great as to justify the use of the somewhat pejorative
epithet ‘gross’?
. . .
11 In drawing the
line between ordinary negligence or neglect and gross negligence a number of
factors have to be considered. One of course is the magnitude of the omission
in relation to the income declared. Another is the opportunity the taxpayer had
to detect the error. Another is the taxpayer’s education and apparent
intelligence. No single factor predominates. Each must be assigned its proper
weight in the context of the overall picture that emerges from the evidence.
. . .
[13] Further,
in Villeneuve v. Canada . . . the Federal Court of Appeal made it clear
that gross negligence could include wilful blindness in addition to an intentional
act and wrongful intent.
[48]
Gross negligence includes the situation where a
taxpayer is wilfully blind to relevant facts, where the taxpayer becomes aware
of the need for some inquiry but declines to make the inquiry because the
taxpayer does not want to know the truth.
[49]
The concept of wilful blindness was discussed at
length by this Court in Torres v The Queen, a decision in which the
following summary of the principles that emerge from the jurisprudence dealing
with this concept is to be found at paragraph 65:
[65] .
. .
a) Knowledge of a
false statement can be imputed by wilful blindness.
b) The concept of
wilful blindness can be applied to gross negligence penalties pursuant to
subsection 163(2) of the Act . . .
c) In determining
wilful blindness, consideration must be given to the education and experience
of the taxpayer.
d) To find wilful
blindness there must be a need or a suspicion for an inquiry.
e) Circumstances that
would indicate a need for an inquiry prior to filing, or flashing red lights as
I called it in the Bhatti decision, include the following:
i) the
magnitude of the advantage or omission;
ii) the
blatantness of the false statement and how readily detectable it is;
iii) the
lack of acknowledgment by the tax preparer who prepared the return in the
return itself;
iv)
unusual requests made by the tax preparer;
v) the
tax preparer being previously unknown to the taxpayer;
vi)
incomprehensible explanations by the tax preparer;
vii)
whether others engaged the tax preparer or warned against doing so, or the
taxpayer himself or herself expresses concern about telling others.
f) The final
requirement for wilful blindness is that the taxpayer makes no inquiry of the
tax preparer to understand the return, nor makes any inquiry of a third party,
nor the CRA itself.
[50]
The Appellant clearly acted with indifference as
to whether the law was complied with or not. Her negligence was such, in my
opinion, that it can be qualified as gross negligence. In the circumstances
surrounding this case, there were sufficient warning signs to cause the
Appellant to make, prior to filing her return for the 2000 taxation year, further
inquiries regarding the nature of the investment her self‑directed RRSP
trust was making in 629900 and regarding the tax impact of that investment. In
my opinion, the Appellant intentionally kept herself unaware of the facts by
not making such inquiries because she did not want to know the truth about her
investment in 629900.
[51]
I can summarize these circumstances as follows:
1.
The Appellant was told that she could expect a
50% to 100% return on her investment within one to two years. The Appellant did
not ask Mr. Chilton and Mr. Cahill how they could achieve such returns.
2.
The Appellant was not given any information or any
relevant financial documents concerning 629900 or its future investments.
3.
The Appellant placed complete trust in Mr.
Henderson, Mr. Chilton and Mr. Cahill after only a few meetings. The
Appellant did not know anything about Mr. Henderson, Mr. Chilton and
Mr. Cahill, including their qualifications or experience, before deciding
to trust them with her money and her investments.
4.
The Appellant’s financial advisor, Mr. Price,
told her that the investment made him nervous and he suggested that she not go
through with it.
5.
The Appellant knew that there was a foreign content
limit in RRSPs and she was aware that there were as many as six foreign
projects in the investment.
6.
Between February 9, 2000 and April 10, 2002, the
Appellant received a number of e-mails whose contents, she admitted, caused her
concern: Among them were the e-mails from Mr. Chilton. The e-mails from
Mr. Cahill and Mr. Neuls on February 12, 2001 and March 8, 2001,
respectively, confirmed that there were serious problems with the investment
and the people who were promoting it.
7.
The Appellant had other RRSP funds and received
yearly statements for those funds, but did not receive the same type of
statements for this investment.
8.
When the Appellant opened her self-directed RRSP
trust account with CWT, she acknowledged on the application form that it was
her responsibility to determine the eligibility of each investment for her plan
under the provisions of the applicable tax legislation, and she attested that
she was aware of the adverse tax consequences of including investments which
did not qualify under such legislation.
9.
In the letter of indemnity to CWT that she
signed, she confirmed and certified that this investment was a “qualified
investment” as that term is defined in the ITA, acknowledged that she had
sought and obtained independent financial, investment, legal and tax advice to
the extent she deemed necessary, and further acknowledged that it was her
responsibility to evaluate the investment.
10. In the Freedom Foundations Inc. Humanitarian Project Funding
Agreement, she acknowledged that she had been advised and was now being advised
to consult and retain her own experts and representatives to advise her on the
legal and tax effects of any transaction entered into.
[52]
Despite all these circumstances and red flags, the
Appellant did not ask Mr. Price or anybody else for formal advice on this
investment and its tax consequences prior to filing her income tax return for
the 2000 taxation year.
[53]
I conclude that the Appellant knowingly, or
under circumstances amounting to gross negligence, made a false statement or an
omission in her 2000 tax return when she failed to include in her income the
amount of $52,880.00 used by her self-directed RRSP trust to purchase the
shares of 629900. The circumstances of this case were such that the Appellant
was aware of the need for some inquiry. Yet despite her knowledge of
investments and her prior work experience, she chose to make none.
[54]
For all these reasons, I find that the Appellant
is liable to a penalty under subsection 163(2) of the ITA.
C. Is the Appellant entitled to
claim a capital loss in her 2000 taxation year?
[55]
In her oral submissions, the Appellant raised an
issue that was not raised in her Notice of Appeal. The Appellant suggested that
she might be entitled to claim a capital loss for the 2000 taxation year. Given
the fact that the Appellant was not represented by counsel, I consented to hear
her submissions on that issue. Both the Appellant and the Respondent were given
the opportunity to provide written submissions on the issue.
[56]
Pursuant to paragraph 38(b) and
subsections 39(1)(b) and 40 (1)(b), in order for a taxpayer to
claim a capital loss in a taxation year, there must first be a disposition of
property. In the present case, and in light of the evidence before me, the
Appellant’s self-directed RRSP trust did not dispose of its 629900 shares or of
any other property in the 2000 taxation year. As there was no disposition of
property, a capital loss is not allowable.
VII. conclusion
[57]
For all these reasons, the appeal is dismissed,
with costs.
Signed at Ottawa, Canada, this 22nd
day of June 2016.
“Sylvain Ouimet”
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