Danny Elias v. Her Majesty the Queen, [1994] 1 CTC 2101, 94 DTC 1053

Christie, A.C.J.T.C.C.:—The year under review is 1987 and there are two issues to be determined. First, whether the profit of $11,000 and $10,900 received in that year by the appellant on the disposition of his interest in units numbered 607 and 1007, 515 Riverside Drive West, Windsor, Ontario, ("the units”) was a capital gain. Second, whether a penalty was correctly assessed against the appellant under subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in respect of that $21,900 profit.

The appellant was born in Leamington, Ontario, on December 28, 1963. He left school while in grade 12 and went to work at 16 or 17 years of age in the family's food and produce business in Windsor. Other members of the family including two brothers and sisters also worked there.

Through a friend he met Mr. Neil Jones, a Windsor realtor, who was engaged in the sale of condominiums to be constructed facing the Detroit River in Waterford Park. The units were in that development. As a result of numerous discussions with Mr. Jones the appellant decided to purchase them. On July 25, 1987, he signed an offer to purchase suite 607 for $124,000. The offer was accepted by the vendor, Waterford Park Developments (Windsor) Inc. ("Waterford"), on August 7, 1987. A deposit of $5,000 by certified cheque was made. There was a postdated cheque to the vendor dated October 4, 1987. The offer also provided for another postdated cheque to the vendor dated 90 days after the acceptance of the offer as further deposit pending completion or other termination of the agreement. It further provided for the giving by the purchaser to the vendor on closing of a vendor take-back mortgage for the principal sum of $93,000. The balance of the purchase price was payable on closing.

The dates of the offer and acceptance regarding unit 1007 are the same. So are the other terms except that the purchase price was $128,000 and the take- back mortgage $96,000.

There is a Schedule "A" to each offer. Clause 22 of that schedule reads:

Non-transferable

22. The purchaser covenants and agrees not to sell, transfer or assign this agreement or part with occupancy of the unit without the consent of the vendor, which consent may be arbitrarily withheld. The purchaser hereby covenants that the purchaser is not purchasing the unit for trading purposes, that the purchaser is not in the business of trading in real estate and the purchaser acknowledges that the vendor is relying upon this covenant.

Both are struck out and initialled. In this regard this exchange took place between the appellant and his counsel: "Q. Can you tell me what led up to the striking out of that particular clause? A. Mr. Jones advised me that, you know, for my own protection just in case I decided to do something else that I scratch that out. If in the event in a few years you want to sell the option is there for you.”

At the time the documents pertaining to the purchase and sale of the units were executed construction of the condominium development was not under way. Only a parking lot was then in existence.

The appellant said that the decision to acquire the units was driven by pressure from his Lebanese born father, who emigrated to Canada in 1952, "to invest in real estate or something that will be worth something in a few years, perhaps when you get married, something down the line that you have something there that you can show for it, rather than buying a car or something." In purchasing both units 607 and 1007 the appellant's stated intention was to live in one and rent the other. He expected occupancy would be available in about two years.

The day after the documents were executed the appellant informed his father of what he had done. In this regard the appellant was asked this question and gave this answer:

Q. What next happened after your father was upset with the purchase?

A. He wanted me to get out. He was extremely upset. He just said whatever it is get the heck out of it, whatever it takes, whatever it costs, get out. He said, we will go buy something, an apartment or a duplex or something but he was extremely, extremely upset.

The upshot was that two days later the appellant had a further discussion with Jones who agreed to endeavour to sell the units. He was successful and by assignment dated September 27, 1987, the appellant assigned his interest in unit 1007 to David & Virginia Howe. On October 1, 1987, the agreement between the appellant and Waterford regarding the purchase and sale of this unit was amended to substitute David and Virginia Howe for the appellant as purchaser. On October 2, 1987, the appellant deposited his $10,900 profit on the assignment to his account with the National Bank of Canada.

By assignment dated October 17,1987, the appellant assigned his interest in unit 607 to Eugene & Khe-Ching Yuh. On October 21, 1987, the agreement between the appellant and Waterford regarding the purchase and sale of this unit was amended to substitute Eugene & Khe-Ching Yuh for the appellant as purchaser. On October 22, 1987, the appellant deposited his $11,000 profit on the assignment to his account with the National Bank of Canada.

When the units were sold, development of the site of the Waterford complex was not yet under way. The project was, however, subsequently completed in about three years.

Mr. Arthur Belanger, C.A., was the company and family accountant. He prepared the appellant's return of income for 1987. He prepared other returns for him for taxation years prior and subsequent to 1987. Belanger was not informed about the profit on the disposition of the appellant's interest in the units. In the return of income for 1987 the total income reported is $53,272 without reference to that interest. The appellant was asked this question by his counsel and he gave this answer:

Q. Tell me how you felt in your own mind you would have to deal with this profit you made from the sale of these two units?

A. For one I remember Mr. Jones telling me and my father, you know, if you buy a house or buy some type of apartments or something and you hang on to it if you made money it would be tax-free and called capital gains. I didn't have full understanding of it, you know, but I understood there is some type of thing if you are able to sell your home and make a profit you are able to keep that tax- free. At the end of the year I wasn't too proud of what I did, you know, I didn't want to hear from my father and all of a sudden get him upset and riled up. I tried not to make it a big issue and when tax time came my brother took care of all the taxes and being it was capital gains I just didn't think I had to do anything.

He added that he had no intention to deceive with reference to the profit he made.

A few years later the appellant purchased a house and a six-unit apartment building. They were rented until sold to purchase a matrimonial home. He married in the fall of 1992.

In the course of cross-examination the appellant twice reiterated his father's objection to purchasing "something that you can't see.” The father was also angry because he was not consulted prior to contracts being made to acquire the units. The appellant agreed that when he entered into those contracts he had at least $25,000 to his credit in his bank account. Regarding his failure to report the $21,900 gain, this exchange took place between counsel for the respondent and the appellant:

Q. You knew there was a capital gains exception?

A. Yes, I understand now.

Q. So at that time you just thought all capital gains were free. Did you ever ask anybody if this was the case? Did you ever try to verify whether or not you had . . . did you even ask your accountant?

A. No, I didn't.

Q. You just assumed you didn't have to report it?

A. Yes.

The appellant's father testified in support of the appeal. His evidence is brief. At the time of the trial he was 59 years of age. As previously noted, he was born in Lebanon and came to Canada in 1952. Over the years he purchased revenue-producing properties 10 or 12 times. He was asked this question by counsel for the appellant and gave this reply:

Q. Did you know of a development in Windsor on the water called Waterford Park? Did you know about the condominium development on the river?

A. One time, it is a while back, I can't tell you exactly when begun, Danny he come to me and he said Dad, I did something good". I said, "What is it?” He said,"I did bought some property". I said,"What is it?" He said “I will show you". He took me somewhere right by the river, an empty parking lot with nothing. I said, “Danny. .. ." He said, "We are going to build here". I said, “Danny, how you could put your money for something you can't see. See if you can sell it and lose a few dollars and buy yourself a house. At least you can see something, right, what you are going to show me an empty parking lot”. And I was kind of upset about it. So at that time I said, “if you can sell it and lose a few dollars on it, no problem”. So we have a little talk and I coming back home. I was not too happy about it. Danny, I guess he listened to me and he come one day later and he said,” Dad, I did what you told me, I sold it". I don't have the nerve to ask him if he lost money or if he make money. I don't care which way because, you know, didn't make no difference I was happy he sold it.

In cross-examination the witness was asked if, when he learned of the profit made on the assignment of the appellant's interest in the units, he had advised the latter about investing it. He replied:

What they do with the profit I don’t know, because they grow hard way and they know how they spend it, their money. Actually I don't have to tell them anything because I know they work hard, they work seven days a week. They watch their money carefully, whatever they do. That is why I don't have to say anything or remind them about their money. Because I know he doesn't drink, doesn't horses or anything, I am relaxed for them working.

Mr. Charles T. Kettlewell, an accountant with Revenue Canada, testified on behalf of the respondent. In the course of investigating all of the purchases and sales of units in the Waterford development done prior to construction he discovered the transactions that gave rise to this litigation. Those involved, including the appellant, all knew Jones personally. When Kettlewell contacted the appellant by telephone he was simply referred to the appellant's accountant.

In Hall v. The Queen, [1986] 1 C.T.C. 399, 86 D.T.C. 6208 (F.C.T.D.), Mr. Justice Collier said at page 408 (D.T.C. 6213):

But all these cases involving capital gain versus income, or adventure in the nature of trade, must depend on their own particular facts. This was pointed out by Judson, J. in Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902, [1960] C.T.C. 384, 60 D.T.C. 1270 at page 907 (C.T.C. 390). I refer also to the comment of Kerwin, C.J. in McIntosh v. M.N.R., [1958] S.C.R. 119, [1958] C.T.C. 18, 58 D.T.C. 1021 at page 121 (C.T.C. 20):

It is impossible to lay down a test that will meet the multifarious circumstances that may arise in all fields of human endeavour . . . it is a question of fact in each case. . . .

With reference to liability to tax the onus is on the appellant to establish on a balance of probability that the Minister of National Revenue erred in adding the $21,900 to his income for 1987.

This onus has not been discharged. At trial the appellant endeavoured to portray himself as a young and perhaps naive person entirely under the sway of his father in respect of business matters, including his personal business. The impression created was not that. It was of a self-confident individual who was quite capable of making his own decisions about investing his money. He had been successfully working in the family business since he was 16 or 17 years old. He consulted with Jones at length before agreeing to acquire the units and it strikes me as incongruous that he would do an about-face regarding this decision for the reason given, especially having regard to the fact that the father's objection was not, with respect, based on any sound business reasoning.

The evidence points to the transactions regarding the units being an adventure in the nature of trade. Consequently the profit arising therefrom was properly treated as ordinary business income.

With respect to the penalty, subsection 163(2) provides that every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return is liable to a penalty. The method of calculating the penalty follows. Subsection 163(3) provides that where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister. This burden has been discharged.

Receipt of $21,900 in 1987 was a significant matter to the appellant. It was equal to 41 per cent of the total income reported by him in that year. In my opinion he was grossly negligent in not at least disclosing the profit to the chartered accountant who prepared his return of income. If that had been done, I expect the accountant would have quickly advised the appellant of the correct course of action to be taken.

The appeal is dismissed. The respondent is entitled to party-and-party costs.

Appeal dismissed.