Guerette v. R., [1996] 1 CTC 2780 (Informal Procedure)

Margeson J.T.C.C.: — Before commencing with the evidence counsel for the Appellant made a motion for the change of name of the Appellant from Guerette to Barnard as she had married since the filing of the Notice of Appeal.

Facts:

In completing her income tax return for the taxation year 1989 the Appellant reported her gain on the sale of Municipal Lot No. 26 in the County of Lambton, Ontario, more particularly in the Township of Clearwater, formerly the Township of Sarnia. She reported this on capital account and claimed an offset for capital gains deduction in the amount of $27,105.00.

In reassessing the Appellant for the 1989 taxation year, notice of which was mailed on December 13, 1993, the Minister deleted the capital gains deduction and included $40,657.00 in the income of the Appellant as the Appellant’s share of the gain from the sale of the property.

A Waiver was filed in respect of the normal reassessment period. The original assessment was mailed on July 12, 1990. This Waiver was allegedly filed in accordance with subparagraph 152(4)(a)(ii) of the Income Tax Act, (the “Act”). From this reassessment the Appellant filed a Notice of Appeal dated January 9, 1995.

The facts as disclosed by the evidence in Court and from a consideration of the presumptions contained in the Reply to Notice of Appeal, where they were not rebutted, disclosed that the Appellant was 16 years of age on the 27th day of November, 1987 when she signed an Agreement of Purchase and Sale for the lot in question for a purchase price of $13,500.00. Consideration for same was $1.00 down and the balance was to be paid on closing subject to adjustments. No objection was taken as to the validity of this Agreement, nor indeed of any other relevant documents. The Agreement was to be completed on the 26th day of April, 1989 at which time vacant possession was to be given to the purchaser. The lot was described as vacant land.

In 1987 the Appellant was in Grade 10. She had been involved in the labour market over the years as a janitor, real estate office receptionist and real estate agent, having started earning money around 1986. Over the years she accumulated a considerable amount of money which she put into the bank, invested in RRSPs and in Mutual Funds.

The agent for the vendor approached the Appellant in November of 1987 to see if the Appellant was interested in purchasing the lot in question for $13,500.00. The agent was a friend of the Appellant’s family and had worked in her parents real estate office. The Appellant had no prior dealings with him, nor with land. She discussed the matter with her parents as to how she could afford it and how she could take title not being of legal age. The agent said he would get back to her.

The Appellant at that time had had a boy friend for two years who was six years her senior. In 1987 they had discussed the eventuality of their marriage when she completed school in 1990, 1991 or thereabouts. He had given her a promise ring. Her parents agreed to give her an advance of any amount of the purchase price over the amount of 3,000 to $4,000.00. At that time she intended to build a matrimonial home on the property in due course. The Appellant told the agent that she wanted to go ahead and the agent said that he would write something up to solve the age problem. She was nervous. It was a big step for her. Her parents and her boy friend supported her decision however. The completion date was chosen to conform to her attaining legal age in 1989.

The Appellant went by the lot a couple of times but did nothing else to develop it, except that she considered what type of house she would put upon it. She expected to save the money that she needed by the time that the sale would be completed. In 1989 her life had changed around. Her boy friend was in jail and she decided never to see him again. She arranged financing of the sale by using $3,340.50 of her own money and by getting a mortgage of $11,000.00 from her parents, which did not require any interest to be paid and which was to be paid in full in 1993, at which time the Appellant would be finished university.

After the transfer on April 25, 1989 she went out to look at the property with her mother for about five minutes or thereabouts, but she did little else relative thereto. In the beginning of May of 1989 she was approached by Mike Kilbreath, a real estate salesman, who asked her if she was prepared to sell the lot in question. They discussed the value of the property being around $40,000 to $44,000. The Appellant indicated that she was not interested in selling the lot and that she intended to build a house upon it. A week later the agent brought in an offer of $55,000. She was surprised. She told him she had not expected to hear from him again. The real estate agent imposed a deadline of 12:00 midnight that night. The Appellant talked to her parents and discussed the fact that she was not to be married. She had no money to build the house at that time. It was a good price that she was being offered and she could always buy another lot down the road. She decided to accept the offer that was made. Subsequent to the closing she gave her parents a loan of $45,566.18 to help them buy a building. She received a mortgage back at 10% per year. Her lawyer told her it was a safe investment and she would be making more interest on the money that way than she would if she had it in the bank. In February of 1990 the parents repaid her mortgage. In March of 1990 she invested $40,000 in a company which her parents had an interest in.

This witness was able to trace all her transactions. There were documents presented to Court showing the course of her activities throughout the years in question. In 1994 she bought another lot and started building upon it. The Deed for this lot was to herself and to her husband. The husband had not come into her life until August 1992 and they were married in August of 1993. The costs of her house were paid for by using her own money, and by taking a mortgage on the property. She had saved that amount up to August 1994. She admitted that she had shares in MADD-Guer Developments Incorporated, a land development company located in Sarnia, but she only became aware of that in 1993. She had no other interest in real estate apart from these transactions.

With respect to the Waiver that the Respondent relied upon, she said that she had a meeting with the agent for Revenue Canada, David Jex in her accountant’s office on April 7, 1993, in Sarnia. It lasted for about an hour to an hour and a half. After the meeting she was confident that there were no problems. Then she received a letter and Waiver from Revenue Canada by the end of May 1993. These documents were placed in evidence. She was surprised. She did not expect it. She went down to see her accountant and she was told that Revenue Canada had a certain amount of time to reassess unless the Waiver was signed. She did not want to upset Revenue Canada so she signed it and sent it back.

In cross-examination counsel for the Respondent brought out that the jobs that the Appellant had over the years were not very high paying. They were basically part-time and she questioned how the Appellant could afford to save the money that she did and invest in RRSPs and Mutual Funds. She indicated that she did not have to use her own money, that is the Appellant, for personal expenses as her parents looked after her. The Appellant also indicated that she was initially approached by the real estate agent. She did not ask who owned the land. She assumed it was zoned residential. She knew that one could build a house upon it. She knew it was a field. She had no knowledge who Rickscott Holdings was. She received the lot. She was not interested in who was the legal owner.

In 1993 she found out that her father had put money into the development of the land. She drove by later on and saw that a road had been put in and she had expected that this would be done. She did not think it strange when the transfer took place that there was a road already in there. She could not say if all lots in the subdivision were listed for sale with Magic Realty Limited. Her lot was not listed for sale in 1989. She confirmed that her parents were involved in the company referred to in the Reply. She knows that now but was not aware that her parents were involved in the development company when she signed the agreement for the lot. She confirmed that the Offer to Purchase her lot came without real estate commission but she did not know why.

In re-direct she said that she did not sign a listing agreement for her lot. She did not know if other lots around there were listed but she was aware that buildings were going up on the lots around her lot.

Mike Kilbreath was the real estate agent who arranged the sale of the lot in question for the Appellant to the Patels. His evidence made it clear that the sale was as a result of an unsolicited offer by the Patels to him to the Appellant. He obviously had good and sufficient financial reasons to ensure that the sale went through and was prepared to forego his sales commission because he hoped to gain a bigger commission when the Patels built their house using the building company that he represented. Likewise he corroborated the position of the Appellant that she was not initially interested in selling the lot. He basically talked her into it. He confirmed that there was no listing with Magic Realty Limited for this lot and, further, in re-direct that there was no listing agreement at all for this lot. Services did run by the lot. In cross-examination he said that he was unaware of any agreement between Heritage, Magic and Danbury.

David Jex was an auditor with Revenue Canada and indicated that he was assigned the file in question. He arranged the meeting referred to by the Appellant with her accountant. They discussed the matter in issue and Ms. Coupland agreed to send him the documents. He received them on April 16th. At the meeting they discussed the limitation period. He discussed the Waiver with Ms. Coupland. He told her it was approaching the Statute barred period although it was not really close. If it was going to drag on they would need a Waiver. She provided him material that allowed him to work on the file in the meantime. By May 20, 1993 he had concluded that he could reassess and would reassess. He sent a letter to the Appellant herself on May 20, setting out his position and the reasons for it. Some of these conclusions were legal opinions and certainly did not necessarily reflect the legal consequences that he stated. Suffice it to say that he made it clear that he was in a position to reassess and he intended to reassess. He pointed out that these adjustments would be made without delay as they could not be done after July 12, 1993. He stated that if the Appellant or her representative should want to provide any further information for him to consider they should sign and return the Waiver Form T2029 enclosed with the letter that he was sending her. He received back the signed Waiver and other documents.

In cross-examination he said that Revenue Canada has a policy about obtaining waivers. One should not ask for one until you are in a position to reassess. One should allow the taxpayer time to provide further information to support his or her position. He said that he told her that they had enough information to reassess but she could provide further information if she wanted to and it might be of assistance to her. He believed that the Waiver included the essence of what was going to be changed. It referred to the specific matter of taxable income. His position was that the Waiver was completely unrestricted in scope. He did not feel it was his duty to tell her that it was a serious matter, or for her to obtain legal advice. He did not care if he received the Waiver since he was already in a position to reassess and fully intended to do so.

Argument of the Appellant:

In argument the Appellant took the position that the Waiver was invalid because the reassessment did not reasonably relate to a matter specified in the Waiver under paragraph 152(5)(c) of the Act. He contended that no “matter” was described in the Waiver.

He argued further that if the taxpayer was not fully informed about its nature and effect then it was invalid. There was misrepresentation he said by the Minister and the Minister should have told her that it was a serious matter requiring some advice.

Counsel took the position that the scope of the Waiver is not elastic. It has a limit. There must be some specificity to it. A “matter” must mean something other than being merely the subject matter of taxable income, he said. That was the term referred to in the Waiver signed here. His position was that any ambiguity should be interpreted against the Respondent. It is the duty of the Respondent to show that the Appellant signed a Waiver that relates to the matter resulting in the tax payable. Counsel argued that you cannot consider information outside the box in the form until you are satisfied that the form includes the “matters”. You would not go to extraneous information or other evidence. The Waiver is invalid and that means that the assessment should be vacated.

On the second issue of the nature of the transaction, be it on account of capital or income, counsel reiterated the facts disclosed by the Appellant and Mr. Kilbreath and said that these facts had not been challenged. There had been a paper trail of all the transactions which took place. There was nothing out of the ordinary about any transaction, each one was documented.

To a large extent the presumptions contained in the Reply are irrelevant, he claimed. There was no listing of the property. There was an explanation for the lack of commission on the sale. The Appellant was not aware of many of the interrelations between the various companies and the relationship of her parents to those companies, certainly not until after the relevant date here. The presumptions that were unrebutted do not corroborate a primary or a secondary intention to sell to the extent as required by the law. The appeal should be allowed.

Argument of the Respondent:

On the Waiver issue counsel for the Respondent said that taxable income is a thing. She believed that there might be some benefit to the taxpayer if the Waiver was general in nature. She could have addressed other issues that would have been advantageous to her as a taxpayer. The taxpayer could have changed the Waiver or sent back a more specific one. Taxable income is a matter, she claimed. If there was any ambiguity she said it was resolved by the other evidence as to the circumstances surrounding the execution of the Waiver. The facts showed what matter was involved. The Minister made it clear what parts of the assessment were in issue. This was merely a technical deficiency. The Waiver refers to Part I and 1.1 of the Statute.

With respect to the matter of informed consent, she said that the first paragraph of the Waiver sets out the repercussions of signing a Waiver. The Minister has no need to advise the taxpayer of more than that. On the issue of the nature of the transaction, counsel argued that the relevant date was the date of the signing of the Agreement of Purchase and Sale in November, 1987. This is a relevant date to consider secondary intention as well as primary intention. The Court, she said, should look at all of the factual situations disclosed here. It is only a matter of what weight you give to the later transactions, considered important to the Respondent’s position, that there were a series of transactions relative to the subject property. The Appellant had training. She had knowledge and experience in real estate. She probably had the advice of her parents who were deeply involved in developing and buying and selling real estate. She argued that paragraphs 8(b), (c), (d), (e), (o), (p) and (q) of the Reply were indeed relevant contrary to the position that the counsel for the Appellant took. Her position was that those paragraphs showed the whole series of interrelated companies that may be tied to the Appellant and certainly to some extent to the property in issue. She asked the Court to consider also the nature of the property. A vacant lot which had no services when bought has complete services when it is sold.

Her position was that there must have been some expectation that the Appellant might not be able to realize her primary intention and therefore it would have to be used as part of the subdivision and sold. The Court should consider the length of time of the ownership, consider the financing arrangements, consider that no interest was payable, no commission was paid. The Court can conclude that there was an alter ego at work, at least in the secondary intention to sell if the opportunity arose. That alter ego she said was that of her parents and that could be transferred to the Appellant. The appeal should be dismissed as far as she was concerned.

Analysis and Decision:

The Court is satisfied that the Waiver as filed was not invalid. It is agreed that it was in general form, but the Court cannot consider the document in a vacuum. What transpired between the Appellant and the Respondent’s agent was not all set out in the Waiver. There was considerable discussion as to what matter was involved in the reassessment. It is abundantly clear from the evidence that the Appellant and her agent, who was an accountant, were appraised of what issue was being considered in the reassessment and the reassessment dealt with that specific item and only that item.

It is true that the Respondent might have been more specific in describing the matter involved, but there was no ambiguity on the Appellant’s part as to what aspect of the return was being reconsidered. Some of the cases referred to by the Appellant are cases where the Minister was more specific, but there is nothing in the statue or case law that sets out any guidelines as to the degree of specificity required. Each case must be considered after all the facts are ascertained, here they were. Surely it can be argued that if the Respondent files a Waiver which is very broad containing all matters relating to taxable income, as here, one cannot say that the Minister needed to have been more specific. Surely he is entitled to Open up any aspect of the assessment before obtaining a Waiver and the Appellant will be bound if she signs it, absent duress, misinformation or trickery by the Minister. In this case the Minister has chosen to draft the Waiver very broadly. When his agent discussed the reassessment with the Appellant and her agent he chose to limit the scope of his inquiry to issues involved in this case.

Although it is not germane to this case, if the Minister chose to make more restricted the Waiver that was very general, he could not later broaden this inquiry to other matters except those which were brought to the attention of the Appellant and her agent. As Lamarre Proulx, judge of the Tax Court of Canada said in Placements T.S. Inc. v. R. (sub nom. Placements T.S. Inc. v. Canada), [1994] 1 C.T.C. 2464, 94 D.T.C. 1302, at page 2470 (D.T.C. 1308):

The appropriate approach to the interpretation of the waiver is to seek to ascertain the intention of the parties as expressed in that document together with any relevant circumstances for which evidence is available.

The Court finds here that it is not possible to conclude that the reassessment in issue could not reasonably be regarded as relating to a matter as specified in the Waiver as contemplated in the relevant section, especially in light of the other evidence before the Court, other than the waiver itself.

There is no merit to the second argument that the Waiver was invalid due to misinformation by the agent of the Respondent, lack of understanding of the Appellant as to the nature of the document and its consequences if it were signed. The Appellant had an accountant’s advice on these matters and her own evidence clearly showed that she knew what she was doing and knew the effects of affixing her signature to the Waiver.

The Court concludes that the Waiver was valid under the circumstances shown here. That argument allows no relief to the Appellant.

On the issue as to the nature of the transaction, be it on account of capital or income, the cases make it clear that what is involved here is a consideration of the taxpayer’s intention when the purchase agreement becomes legally binding rather than the time when title is passed. See Warnford Court (Can.) Ltd. v. Minister of National Revenue (1964), [1964] C.T.C. 175, 64 D.T.C. 5103 (Ex. Ct.). As in that case it is abundantly clear that the taxpayer did not even have the possibility of a sale in mind when she obtained the property here. The Court has not only her evidence on that but her evidence is corroborated by the evidence of other witnesses and to a certain extent by the paper trail that she was able to establish from 1987 to 1994 and even up to the events which happened after the sale of the property to the Patels by Agreement of Purchase and Sale executed in May of 1989.

The Respondent’s arguments in that regard are valiant but not effective. The Court accepts the evidence of the Appellant herself as to her intention at the relevant time but it need not rely on that alone. The other evidence drives one irrefutably to the same conclusion. There was nothing in the evidence presented, nor in any arguments advanced by the Respondent, based upon a reasonable view of the evidence that the presence of such a secondary intention could be inferred from the history of past operations of the Appellant, from her method of financing or from the short period of time that she owned the property before it was sold after its initial purchase. See Racine v. Minister of National Revenue, (sub nom. Racine, Demers and Nolin v. Minister of National Revenue) [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex. Ct.).

Further, the Court cannot accede to the Respondent’s argument that the parents of the Appellant were her alter ego or in some way that they had the requisite intention to sell the property if it became profitable to do so. The evidence clearly indicates that the Appellant was the person who was in control of this lot.

The appeal will be allowed and the matter referred back to the Minister of National Revenue on the basis that the transaction in question was in the nature of capital, on capital account and not income account.

The Appellant has been successful in the appeal and the Appellant will have her costs to be taxed.

Appeal allowed.