REASONS
FOR JUDGMENT
Graham J
[1]
Cynthia DaCosta is the paternal grandmother of
Denise DaCosta.
In 2006, the Appellants each signed a contract of purchase and sale to acquire
a condo in a building that was being constructed in Toronto. Denise’s contract
was for Unit 5 and Cynthia’s contract was for Unit 6. Both purchases closed in
June 2010. Unit 5 was sold that same month. Unit 6 was sold one month later.
[2]
Neither Appellant reported any income relating
to the condos on her 2010 tax return. The Minister of National Revenue
reassessed Denise’s 2010 tax year on the basis that Denise had failed to report
business income of $106,025 on the sale of Unit 5. The Minister reassessed
Cynthia’s 2010 tax year on the basis that Cynthia had failed to report business
income of $103,206 on the sale of Unit 6. The Minister assessed gross
negligence penalties against both Appellants. The Appellants have appealed the
reassessments.
[3]
There are three issues:
a)
Should the profits on the sales be taxed on
income account or on capital account?
b)
Should those profits be reduced to account for
costs of disposition or other expenses that were not allowed by the Minister?
c)
Were the Appellants grossly negligent in failing
to report the profits from the sale of the condos?
Income vs. Capital
[4]
The Appellants take the position that they
should be taxed on capital account. I disagree.
[5]
The Appellants testified that the condos were
next to Seneca College and that the plan was that Denise, who planned to attend
Seneca College after graduating from high school, would live in her condo and
Cynthia would rent hers to third parties. I do not believe that these were the
Appellants’ intentions. I reach this conclusion for two reasons.
[6]
The first reason that I do not believe the
Appellants intended to hold the condos on a long-term basis is that I did not
find Cynthia to be a credible witness and thus do not believe her statement as
to the Appellants’ intentions. She gave vague and often contradictory testimony.
Twice she made statements that were inconsistent with answers she had
previously provided. When I asked her specific questions to try to understand
what appeared to me to be contradictory positions, she gave responses that
bordered on evasive. I found Denise to generally be a credible witness.
However, it was apparent to me that Denise knew nothing about the transactions
other than what Cynthia had told her. Thus, while I think Denise told the truth
when describing her understanding of the transactions, I cannot rely on her understanding.
[7]
The second reason that I do not believe the
Appellants intended to hold the condos on a long-term basis is that it is clear
that doing so would never have been an option for them. This is not a situation
where a taxpayer planned to hold a property on a long-term basis and some
unexpected event intervened to frustrate that intention. When the Appellants
entered into contracts of purchase and sale to acquire the condos neither of
them had the financial resources to actually complete the purchases. Denise was
only seventeen at the time. Her only hope to be able to complete the purchase
was if Cynthia gave her the money to do so. Cynthia had significant mortgage,
line of credit and credit card debts and had had those debts for some time. She
was not in a position to expect to be able to complete her own purchase let
alone finance the completion of Denise’s purchase. Cynthia is a real estate
agent. When she signed the contract of purchase and sale, she had been a real
estate agent for approximately 18 years. As such, she would have been well
aware of the need for financing and the requirements for obtaining that
financing in order to close.
[8]
Sure enough, when the time came to close the
purchases, neither Appellant had the money to do so. Cynthia’s credit rating
was too poor for any conventional lender. Denise was earning less than $7,000
per year so, even if she had hoped to contribute financially, she was in no
position to do so. Cynthia had to borrow money from friends on short-term loans
just to bridge the time between the closing of the purchases and the subsequent
sales. She used the proceeds from the sale of Unit 5 to help close the purchase
of Unit 6.
[9]
Unit 6 was listed for sale before Cynthia even
took ownership of it. Denise signed an agreement of purchase and sale for Unit
5 almost two months before she even took ownership of it. Cynthia and her son (Denise’s
father) were the listing agents on both sales. The condos were sold at a significant
profit.
[10]
Based on all of the foregoing, I conclude that
Cynthia’s primary intention was always to try to sell the condos at a profit. I
find that Denise’s intention was simply to do whatever Cynthia wanted and thus
that she indirectly had a primary intention to sell her condo at a profit. As a
result, I find that the Appellants held the condos on income account.
Amount of Profits
[11]
The Appellants submit that their profits from
the sale of the condos should be reduced to account for costs of disposition
and other expenses that were not allowed by the Minister. They have not proven
their case on this point.
[12]
The Minister had already accounted for certain
costs of disposition in calculating the Appellants’ profits. Cynthia spoke
generally about the types of closing costs that were incurred but did not
identify which costs she believed had not been allowed. Similarly, the
Appellants produced no documentary evidence to support any such costs. In the
circumstances, I cannot allow any additional costs of disposition.
[13]
Cynthia testified that she received occupancy of
Unit 6 in January 2010 and had had to pay occupancy fees between then and the
time she took title in June. She stated that she had rented the property during
that period to try to offset those costs but had still ended up losing money.
She submitted that those losses should reduce her income on the disposition.
Cynthia did not introduce any documentary evidence supporting her position.
Given my findings concerning her credibility, I am not prepared to allow her to
claim these losses in the absence of documentary evidence.
Penalties
[14]
The Minister assessed gross negligence
penalties, not because the Appellants failed to report their profits on income
account, but rather because they failed to report them at all.
[15]
Cynthia was fully aware of the profit that she
had made. She claimed that she was not aware that she had to report that
profit. As set out above, Cynthia is a real estate agent. When she filed her
2010 tax return, she would have been a real estate agent for approximately 23
years. I do not believe that she was unaware that profits made selling real
estate that is not one’s principal residence are taxable. I do not believe Cynthia’s
testimony that she disclosed the sale to her accountant. Even if she had, she
did not review her tax return before signing it so would not have been aware
whether the accountant had included the income from the sale or not. Cynthia
reported taxable income of approximately $20,000 on her 2010 tax return. Her
unreported income is more than five times higher than that. Based on all of the
foregoing, I find that Cynthia was grossly negligent in not reporting her profit
from selling Unit 6.
[16]
By contrast, I find that Denise was not grossly
negligent. She was only 17 years old when she signed the contract of purchase
and sale. She did so under the direction of her grandmother and father, both of
whom were real estate agents. Denise was 21 years old when the purchase closed
and the subsequent sale occurred. Her grandmother and father were the listing
agents on the sale. The sale was arranged and negotiated entirely by them.
Again, Denise simply signed the documents that her grandmother and father asked
her to sign. Denise did not receive any of the profit from the sale of Unit 5.
All of that money was used by Cynthia to close the purchase of Unit 6.
[17]
Normally I would consider a taxpayer who blindly
signed contracts for the purpose of flipping real estate and failed to inquire
whether there were any tax consequences relating to those contracts to have
been grossly negligent. However, in the circumstances, I am not prepared to do
so in Denise’s case. The profits from the sale of Unit 5 went to Cynthia, not
Denise. If tax was to be paid on that sale, the money would have had to have
come from Cynthia. I conclude that, just as Cynthia did not want to pay that
tax on the profit on her own condo, she similarly did not want to pay it on the
profit on Denise’s condo. Because of this, I am not convinced that Cynthia told
Denise that she had to report the income. It appears far more likely to me that
Cynthia kept Denise in the dark than that she conspired with her to file false
tax returns.
[18]
I think it is reasonable for a twenty-one-year-old
whose tax experience consists of reporting relatively small amounts of T4
income on her tax return each year to rely on her own father and grandmother,
both of whom are real estate agents intimately familiar with the details of a sale,
to tell her if she needed to report income on her tax return. Had Denise
received the proceeds of sale or had reason to distrust her family, I would
likely have come to a different conclusion.
Potential Issues Not Pled
[19]
During the course of the trial, a significant
amount of evidence given by the Appellants and some submissions that they made
suggested that there may be two other issues that could have been raised in the
appeals and perhaps would have been raised had the Appellants been represented
by counsel. I feel that, for completeness, I should identify those issues and
explain why I have not addressed them.
[20]
The first issue that perhaps could have been
raised is whether Cynthia was the beneficial owner of Unit 5 and Denise merely
held legal title to the property as a bare trustee. Had that issue been raised
and had I ruled in the Appellants’ favour on that issue, the result would have
been that the profit from the sale of Unit 5 would not have been taxed at all.
I would have had to allow Denise’s appeal and remove the Unit 5 profits from
her income, but I would not have been able to add those profits to Cynthia’s income
as I do not have the power to increase an appellant’s taxable income on appeal.
[21]
The second issue that perhaps could have been
raised is whether beneficial ownership of the condos was even disposed of in
2010 or whether legal title was simply transferred to close family friends in
order to fool a bank into indirectly providing financing to Cynthia. Had that
issue been raised and had I ruled in the Appellants’ favour on that issue, the
result would have been that I would have had to allow both appeals.
[22]
There is no need for me to review the evidence and
submissions that give rise to these potential issues nor is there any need for
me to determine whether that evidence was credible. Neither of these issues was
raised in the Appellants’ notices of appeal. On the contrary, the facts, issues
and reasons pled in the notices of appeal are inconsistent with these arguments.
The issues pled are the three issues that I have analyzed above. Neither of the
Appellants asked for leave to amend her notice of appeal. The purpose of
pleadings is to set out the issues in the litigation so that each party may
properly prepare. An issue not pled cannot be raised at trial. While the Court
may show some lenience in interpreting the pleadings of a self-represented
taxpayer who lacks the expertise to precisely identify the tax issue at hand,
it is not unreasonable to expect that such a taxpayer will at a bare minimum
make an attempt to identify the issue and accurately plead the facts necessary
to support it. The Appellants did neither.
Conclusion
[23]
Based on all of the foregoing, the appeal of
Cynthia DaCosta is dismissed and the appeal of Denise DaCosta is allowed and
the matter referred back to the Minister for reassessment on the basis that the
gross negligence penalty should be removed.
Costs
[24]
The Respondent is only seeking costs in respect
of Cynthia DaCosta’s appeal. Costs are awarded to the Respondent in respect of
that appeal.
Signed at
Ottawa, Canada, this 24th day of November 2017.
“David E. Graham”
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