Robert Girard v. Minister of National Revenue, [1989] 1 CTC 2138, 89 DTC 63

Couture, C.J.T.C. [Translation]:—The appellant is appealing from an assessment dated July 19, 1982 by which the respondent added the sum of $46,460 to his income as profit from the operation of a business made on the sale of real property. The notice of appeal refers to notices of reassessment for the taxation years 1974 to 1978 inclusive. At the hearing, counsel for the appellant and counsel for the respondent agreed that the only point at issue before the Court was the profit made by the appellant in selling two properties in 1976, and the amount of the penalty deducted under the assessment if the Court allows the appeal.

During the taxation year at issue the appellant was a real estate broker working for himself. He had previously worked for the Fiducie du Québec for seven years as a real estate agent.

He explained in his testimony that in 1975, together with his brother, he bought a motel known as the Motel Hong Kong located in Ste-Foy near the Quebec bridge, and in the same year he purchased a hotel known as the Château Laurier ("the Château") also located in Quebec. In 1978, he purchased another establishment known as the Manoir Lafayette.

Before these purchases he had also bought six apartment buildings, but none of these buildings contained more than eight apartments.

The witness mentioned that as a real estate broker for the Fiducie du Québec he had specialized in the sale of motels. He said that he had probably sold about 40 of these motels while he was with the Fiducie, and that through these deals he had acquired considerable experience in the way to finance such purchases and sales for the buyer, while still allowing the seller to negotiate a profitable deal.

The reasons why he left the Fiducie du Québec and went into business for himself as a real estate broker have nothing to do with the purposes of the case, except to add that the appellant said that in 1975 he formed the idea of creating a capital fund to ensure the future financial security of himself, his wife and their six children.

Based on his experience with the Fiducie du Québec, and in order to proceed with his capital formation project in 1975, he purchased the motel Hong Kong with his brother on September 10,1975. According to the witness he knew this motel well and knew that it was operating at a loss, and based on his expertise he had decided that for such an operation to be profitable it had to have about 40 more units. The appellant pointed out that he approached the municipal authorities at the time to ensure that he could get a building permit and to be certain that he could lease adjacent land owned by the municipality. He had a draughtsman prepare a sketch of his project, which he submitted to the authorities. He also obtained a bid from a contractor in Ste-Marie-de-Beauce for construction of the additional motel units.

When he was considering the purchase of this motel he was already looking into the possibility of buying the Château. This hotel was owned by a company in which the shares belonged to an estate and at the time negotiations were difficult, which is essentially what prompted him to buy the Motel Hong Kong. The appellant admitted that he acted as a real estate broker in buying the Chateau, but with a prior agreement with his brother that if the latter was able to purchase it the appellant would become coowner with him.

The appellant testified that after buying the Château in December 1975 he realized that its parking lot was too small for its needs and, together with his brother, they bought two adjoining properties so as to enlarge it. The appellant further said that he was faced with an expenditure of some $500,000 for renovations at the Château. To finance the purchase and the renovations, they had to get rid of the Motel Hong Kong.

In 1976 the doctors found that his brother was suffering from brain cancer, and this acted as a warning to the appellant, since he was co-owner with his brother of a substantial investment and if the latter could no longer look after his business the situation would be much more difficult for him, not only as regards managing the business but also as to division of the property in the event of his brother's death. The appellant said he consulted his auditor and the latter recommended the transfer of the assets in question, which at that time consisted of the Château, to a corporation on the ground that it is easier to deal with company shares for purposes such as the settlement of an estate than to deal with assets such as a hotel that is jointly owned.

For this reason, the appellant said, the Château was sold to a company known as Cogires Inc., in which the appellant and his brother held equal shares, in 1976 for $406,000 according to the deed of sale, a copy of which was submitted.

In the years following purchase of the Château the appellant also personally bought three other properties located on rue Grande Allée in Quebec, while Cogires Inc. bought two. The list of real estate deals arranged by the appellant on his own behalf was indicated by the evidence as the purchase before 1975 of six apartment buildings, the purchase and sale of half of the Motel Hong Kong, the purchase and sale of half of the Château and the purchase of three apartment buildings in the years after 1975. According to his testimony at the date of the hearing, he still owned nearly all these apartment buildings except for two that were bought in 1974 and sold in 1976. The Château is still owned by Congires Inc.

In view of the evidence on the appellant's activities in the real estate field, and bearing in mind the circumstances which led him to engage in these deals, I do not think that a speculative intent can be attributed to him in respect of the purchase and sale of the Motel Hong Kong and the Château.

I accept his version of the reasons for purchasing the two properties in question and later disposing of them, namely that of carrying out what appears to me to be a very legitimate project of creating a capital fund as security for himself and his family. At the date of the hearing this capital fund was substantial. Not only was his testimony credible but his actions in the real estate field in the years following the year on appeal were also consistent with the intent he mentioned, which he said prompted him to engage in these deals.

The evidence further disclosed that the profits made by the appellant when he sold the Motel Hong Kong and the Chateau were not reported by him in his tax return for the taxation year 1976, which led the respondent to deduct a penalty under subsection 163(2) of the Act in the amount of $4,953.08. The appellant’s excuses were that he instructed his auditor at the time to prepare his tax return and that the latter died suddenly without completing the work, which after several months had elapsed was transferred to another auditor who died accidentally also without completing the work, and that the necessary financial statements were only finally prepared by a third auditor.

The evidence further disclosed that the appellant filed two returns for the taxation year 1976. The first, duly signed by him, appears to have been filed before May 1, 1977, while an amended return also signed by him was filed on October 11, 1978. The appellant did not report the profit made by him in the sales of the Motel Hong Kong and the Château in either the first or the second return. He tried to explain this omission by alleging he had been confused, as he suffered losses in the year in question from other activities and these losses led him to think that they would offset the profit in question.

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.

I cannot agree that in the situation under consideration the appellant did not “knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act . . . [make] a false statement or omission in a return", as required by the subsection, in failing to report income of $46,460 for the taxation year 1976 resulting from disposing of the Motel Hong Kong and the Château.

His original return showed his net income for the year as $20,000. This fact alone should have told him that the return might not be complete. The appellant gave me the impression of being an experienced businessman and as such should easily have realized that in view of the two major transactions carried out during the year the amount of $20,000 income for the taxation year 1976 was unrealistic. If he had looked carefully at his return, he would have seen that Schedule C, titled "Summary of disposition of real property", was not included. He would also have realized that there was no mention in his return of the sale of the motel and the Château. I cannot help concluding that he demonstrated a lack of care sufficient to justify a finding of gross negligence on his part.

For all these reasons the appeals are dismissed for the taxation years 1974, 1975, 1977 and 1978. The appeal is allowed for 1976 and the assessment referred back to the respondent for him to issue a reassessment on the basis that the $46,460 added to the appellant's income for the said taxation year is a capital gain. The penalty which was applied under the provisions of the Act will nevertheless have to be reduced to allow for tax on the capital gain.

Appeal allowed in part.