Georges Sigouin v. Minister of National Revenue, [1993] 2 CTC 2760, 93 DTC 210

P.R. Dussault, T.C.C.J.:—This is an appeal from an assessment by the Minister of National Revenue (the"Minister") in respect of the appellant's 1986 taxation year. In assessing the appellant, the Minister relied, inter alia, on the facts stated in subparagraphs (a) to (i) of paragraph 6 of the reply to the notice of appeal, which read as follows:

(a) the appellant declared total income of $48,816 in his income tax return for the year 1986;

(b) in his calculation of income for the year 1986, the appellant failed to declare income totalling $13,655.12, which is itemized as follows:

Undeclared interest income	$ 1,710.73
Undeclared rental income	$	466.39
Undeclared taxable capital gains	$11,478.00
	$13,655.12

(c) with three other persons, the appellant owned an equal share (25 per cent) of a building located at 2019-2021-2023 Marlowe Street, in Montreal;

(d) in 1986, the appellant failed to declare the amount of $466.39, his share of the income from the rental of the building located on Marlowe Street;

(e) the building located on Marlowe Street was sold on June 2, 1986 for the price of $562,000. That sum included a balance of the sale proceeds owed to the appellant and the other co-owners of $126,643.83, bearing interest at the rate of eight per cent per annum, payable in equal and consecutive instalments of $966.58, including principal and interest;

(f) in 1986, the appellant failed to declare his share of the taxable capital gain of $11,478 from the sale of the building located on Marlowe Street;

(g) the appellant also failed to declare his share of interest income in the amount of $1,710.75 from the balance of the sale proceeds and from term deposits which he held with three other persons;

(h) the appellant having knowingly or under circumstances amounting to gross negligence made false statements in his income tax return for his 1986 taxation year by not declaring income of $13,655.12, a penalty of $1,004.66 was assessed under subsection 163(2) of the Income Tax Act;

(i) the appellant either knowingly or under circumstances amounting to gross negligence failed to declare a capital gain of $22,956. . . .

[Translation.]

The appellant did not dispute the inclusion of rental and interest income in his income. Nor did he contest the inclusion of the taxable capital gain, but he objected to the disallowance of the capital gains deduction provided under section 110.6 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), as well as the penalty assessed under subsection 163(2) of the Act.

According to Mrs. Louise Brisebois, auditor with Revenue Canada, the capital gains deduction was disallowed and the penalty assessed because, according to her, the appellant wilfully did not declare the rental and interest income and the capital gain resulting from the sale of the building located on Marlowe Street (on the occasion designated as the "Marlowe project"). It was in fact with the aid of the income tax return and financial statements submitted by Mr. Martin Dale Wilson, one of the appellant's associates in the Marlowe project, that Mrs. Brisebois traced these items not declared by the appellant in his income tax return for 1986. The rental income from the Marlowe project and the interest on term deposits had also not been declared for 1985; nor had the interest income or the capital gain for 1987 and 1988 been declared. Concerning these last two years, it was only following the audit conducted for the previous years that the appellant applied for adjustment in order that these items might be added to his income. According to Mrs. Brisebois, the appellant must have known that he had to declare the capital gain resulting from the sale of the building in 1986 in order to be granted the deduction under section 110.6 of the Act, since the appellant had declared a taxable capital gain for the previous year in respect of a sale of shares and had claimed that deduction for an equivalent amount.

According to Mrs. Brisebois, at a meeting held on June 15, 1989 for the purpose of informing him of the planned reassessment, the appellant had allegedly explained that the rental and interest income did not amount to large sums."It's not in the millions,” he allegedly said. The appellant allegedly said that he was not aware of the obligation to declare the capital gain since, in his view, he was entitled to a capital gains deduction of at least $50,000. The appellant also allegedly told Mrs. Brisebois that he had never received the financial statements prepared by Mr. Wilson for the four associates in the Marlowe project so that he could complete his income tax returns. In fact, the appellant said that he had seen those financial statements only 15 days before the meeting with Mrs. Brisebois, when he demanded them from Mr. John Wall, one of the other associates in the Marlowe project, immediately after being informed in a telephone conversation with Mrs. Brisebois of the audit under way and of the planned assessment.

The assessment was finally issued on February 12, 1990 and confirmed on September 27, 1990, according to the testimony of Mrs. Germaine St-Pierre, to whom the file had been assigned in response to the objection of the appellant. The latter was unable to provide a valid explanation of his omission, although he was certainly aware of the obligation to declare and, in light of his return for the year 1985, must have been familiar with the capital gains deduction mechanism.

Mr. Wilson, who was also summoned to testify, explained that he himself had prepared the financial statements with respect to the Marlowe project for each of the associates. Those financial statements, submitted in evidence, clearly indicate the rental income, the interest income from the term deposits and from the balance of the sale proceeds, as well as the capital gain from the sale of the building located on Marlowe Street for the relevant years. He said that he remitted the copies intended for the other associates to Mr. John Wall, who in turn was to give them to the two other associates, including the appellant. Mr. Wilson said that he had declared all his rental and interest income, as well as the capital gain. Mr. Wilson added that the term deposits had been made pursuant to a decision taken by all the associates at a meeting which he termed "informal".

In his testimony, the appellant substantially repeated the explanations previously provided to Revenue Canada representatives, in particular with regard to the fact that he had not been given the financial statements so that he could complete his income tax returns correctly, including that for the 1986 taxation year which is the subject of the present issue. In an attempt to explain why he had not declared the capital gain resulting from the sale of the building located on Marlowe Street in 1986, whereas he had declared a capital gain on shares in 1985 and had then claimed the capital gains deduction, the appellant stated that his 1985 return had been prepared by a colleague and that he himself had only recopied it "in final form". He also added that, in 1985, he had been in possession of an information slip issued by his securities broker for tax purposes, whereas, in 1986, he had in his possession no document stating the rental and interest income or even the capital gain realized from the sale of the building on Marlowe Street. As for the interest on the term deposits, he stated that he had not been aware of that investment.

While saying that he knew that the building had been rented in 1985 and 1986, the appellant stated he had never been interested in or concerned by the rental income, since, in his view, it was perfectly clear that the building had been acquired solely for the purpose of reselling it quickly at a profit.

This spontaneous admission by the appellant, repeated on a number of occasions, and the tax consequences of which he clearly was unaware of at the time, cannot be passed over in silence since it is of a kind to deprive the appellant entirely of the entitlement to the capital gains deduction under section 110.6 of the Act. In fact, the result of such a full legal admission is that the sale of the building located on Marlowe Street should nave been treated as resulting in income from an “adventure or concern" or "in the nature of trade", thus a business income, not a capital gain. While it is acknowledged that the Court cannot deliver a judgment whose effect would be to increase the tax already assessed by the Minister by considering what has already been treated as a capital gain a business income, it may certainly deny the appellant, on the basis of his own admission, any entitlement to the capital gains deduction under section 110.6 of the Act with respect to the profit from the sale of the building on Marlowe Street, even if it does so on another ground than that on which the Minister disallowed that deduction.

Despite this finding, it is important to determine whether the appellant's failure to declare the 'alleged" capital gain was done "knowingly or under circumstances amounting to gross negligence" within the meaning of subsection 110.6(6) of the Act, since these were factors also stated by the Minister in support of the penalty assessed under subsection 163(2) of the Act, although, in assessing that penalty, he also took into account rental and interest income not declared by the appellant. Concerning the burden of proof imposed on the Minister in such circumstances, Judge Taylor of this Court noted in his judgment in Dymond v. M.N.R., [1990] 2 C.T.C. 2509, 90 D.T.C. 1920, at page 2512 (D.T.C. 1926), “that substantiating the penalty under subsection 163(3) of the Act, should also serve to fulfil the Minister's responsibility under subsection 110.6(6) of the Act, supra".

Before analyzing the evidence submitted, it is important to emphasize the taxpayer's responsibility with respect to his income tax return as a result of the signature of his return whereby he certifies that the information given is, in particular, "complete in every respect and fully discloses (his) income from all sources". In his judgment in Girard v. M.N.R., [1989] 1 C.T.C. 2138, 89 D.T.C. 60, Chief Justice Couture of this Court analyzed its implications for the taxpayer in the following terms at pages 2140-41 (D.T.C. 63):

For an appellant to avoid liability under the Act when he fails to report income, he cannot simply attribute the omission to circumstances apparently beyond his control and try to place the blame on third parties. When he signs his tax return for a taxation year he also signs the following certificate:

I hereby certify that the information given in this return and in any documents attached is true, correct and complete in every respect and discloses my income from all sources.

This statutory formula appears to me to be quite clear and to require no explanation. When signed by a taxpayer it creates a presumption that the return is correct, based on the fact that the taxpayer was aware of and satisfied with its contents when he signed it. The same is true for all additions that must be completed and filed with the statement without exception, if the circumstances so require.

I do not suggest that the fact that a taxpayer signed such a certificate automatically makes him liable to the penalty mentioned in subsection 163(2) if he commits any offence in the return. I admit that there are a whole range of circumstances in which he will be entirely free of liability under this subsection; but for him to succeed in persuading the Court that the offence committed by him resulted from independent circumstances beyond his control, and so avoid liability, he must show that in the circumstances he exercised reasonable attention and diligence in preparing and filing his return.

In the instant case, the appellant stated that he had not declared the rental and interest income because he had not had the relevant information and documents. He stated actually that those documents had not been remitted directly to him by Mr. Wilson or by Mr. Wall, to whom copies had been given for all the associates. The appellant admitted, however, that he had been in contact with Mr. Wall from time to time, either by telephone or at meetings. Under these circumstances, it appears unlikely that the appellant had not been given the relevant documents. However, supposing that one can accept such an explanation, the appellant nevertheless reported taking no steps to ensure he obtained the necessary information so as to complete his return correctly, since he was aware, on the one hand, that the building was rented and, on the other hand, that interest was payable on the balance of the sale price upon disposition of the building in June 1986. Thus, if the appellant did not knowingly" fail to declare the rental and interest income, the absence of any effort whatever on his part constitutes, in my view, "gross negligence” within the meaning of subsection 163(2) of the Act.

I now come, lastly, to the failure to declare the capital gain. I have explained above why this "alleged" capital gain cannot provide entitlement to the deduction under section 110.6 of the Act, regardless whether the taxpayer" knowingly or under circumstances amounting to gross negligence” did not declare it. It is obviously difficult here to dissociate the failure to declare the rental and interest income from the failure to declare the "alleged" capital gain, since all these items relate to the project whose object was the building located on Marlowe Street, except, obviously, the interest on the term deposits. The explanations provided by the taxpayer to justify his failure to declare the details of the transaction with respect to the building were insubstantial. In fact, the appellant simply claimed that he was unaware of the obligation to declare a capital gain since, he said, he was entitled to a deduction of at least $50,000. This explanation is unconvincing because one need only reflect a moment in order to realize that the competent authorities must be able to verify the entitlement to a cumulative deduction limited in dollar terms. Furthermore, the fact that the appellant had realized a capital gain the previous year, that he had declared it and that he had claimed the capital gains deduction strengthens my conviction that I cannot allow this explanation. While the appellant stated that his return for the year 1985 had been completed by a third party, he nevertheless admitted that he had recopied it himself and that he had also signed it. There are limits to the argument of ignorance of the Act. Thus, here again, while I cannot state with certainty that the appellant "knowingly" failed to mention the sale of the building on Marlowe Street, I can at least find that this omission must be considered as made "under circumstances amounting to gross negligence".

For these reasons, the appeal is dismissed.

Appeal dismissed.