Charles a Beghin v. Minister of National Revenue, [1985] 1 CTC 2034, 85 DTC 48

Cardin, TCJ:—The appeal of Charles A Beghin is from an assessment of income tax with respect to the 1974, 1975 and 1976 taxation years. The issue, as set out in the pleadings, is whether the proceeds of disposition of the appellant’s interest in certain lands was on capital or income account. However, it was agreed by counsel and accepted by the Court that the imposition of penalties, for each of the taxation years under appeal, would also be litigated even though that issue was not raised in the pleadings.

The appellant, engaged in the business of trucking since 1937, sold his business in 1963 to Ken Cook. On November 16, 1960, the appellant along with Theodore Tétreault, a train conductor and Arthur Matrick, a realtor, each acquired a one-third undivided interest in 48 acres of land, commonly referred to as the “Waverly Land”. The purchase price of the property was $9,000 (Exhibits A-l, A-2).

The appellant knew in 1960 that Matrick was a real estate dealer. Indeed, according to the appellant’s testimony, Matrick was responsible for selling the land and he, in fact, contacted the Greater Winnipeg Industrial Association and the Manitoba Ministry of Industry in 1960, with a view to finding a possible buyer for the land. The Waverly land, therefore, was for sale as early as 1960 and was advertised as such by Matrick and Tétreault.

On June 10, 1961, a parcel of 10 acres of the Waverly land was listed for sale with George Augustus Brown (Exhibit R-2). Other than the 12 acres, the land was never subdivided and the current cost of the surveyors Henderson and McKeen, in subdividing the 12 acres, was paid for by the three owners. These 12 acres of the property were sold in 1962.

In 1965, Tétreault sold his one-third interest in the remaining 36 acres to the appellant and Matrick. On the basis of the evidence, particularly Exhibits A-3, A-4, A-5 and A-6, I can accept that some effort was made to derive income from the property by leasing it for farming operations. However, the income was minimal and insufficient to meet carrying costs. Deriving income from farming or rental income were [sic] evidently not one of the motivating factors in acquiring the Waverly property.

On March 5, 1974, the Hart Realty Company made an offer to purchase the remaining 36 acres for $95,000. The appellant and Matrick signed a counteroffer and the Waverly property was sold for $108,000.

The appellant’s appeal was to have been heard on common evidence with that of Arthur Matrick. The Court, however, was advised that Matrick was withdrawing his appeal and it was dismissed accordingly. One of the issues raised by the appellant at the hearing was that at the time of acquiring his one-third undivided interest in the Waverly property, it was his intention to hold five acres of his 16 acres for his personal use. The appellant testified that, he believed that for some reason which was not clearly identified at the hearing, he might have to move his residence and his business to the five acres of his newly-acquired land.

On reviewing the appellant’s reasons given in his notice of objection for the 1974 taxation year, which are also applicable to the 1975 and 1976 taxation years, the appellant claims that “the land was acquired as capital and its disposition was in the same account”. There is no mention in the notices of objection, nor indeed in the notice of appeal, that the appellant had intended at the time of acquisition, to hold five acres for his personal use. The appellant did not, in fact, move his residence nor his business operations, which he sold in 1963, to the said five acres.

There can be no doubt that the appellant was aware that efforts were being made, even in 1960, to sell the property. The evidence also showed that the appellant was not as inactive and as silent a partner as he would have the Court believe with respect to the ultimate sale of the land. The five-acre parcel which the appellant alleges as earmarked for his own personal use, was not only never subdivided, either before or after the sale of the twelve-acre parcel in 1971 [sic], but there was no agreement nor even any evidence of a discussion at any time, with the other two owners of the land, as to the exact site of the five acres the appellant alleges were to be used by him for his residence and his business.

Even if holding the five acres could be considered as a motivating factor in the appellant’s acquisition of his one-third undivided interest in the land, a proposition which in my opinion is not supported by the facts, it would at best be a contingency plan and speculative in nature because the five acres were to be used by the appellant only if circumstances made it necessary for him to do so. No firm decision had been taken and no plans were made by the appellant to move his residence or his business on the five acres at the time of acquisition.

On the basis of the written evidence and on the appellant’s own testimony, I conclude that one of the motivating factors for the appellant’s acquisition of his entire one-third interest in the Waverly property was the possibility of its resale, at a profit, at some future time. The proceeds of disposition of the appellant’s one-half undivided interest in the land in 1974 were, therefore, on income account.

With respect to the imposition of penalties under subsection 163(2) of the Income Tax Act, RSC 1952, c 148, the respondent assumed the onus of establishing their justification. Mr Fiord Rayner, an appeals officer of the Department of National Revenue, to whom both the appellant’s and Mr Matrick’s files had been assigned, was called as witness. Mr Rayner testified that, by notice of reassessment dated December 15, 1978, the Minister had assessed the appellant principally for unreported income from the sale of the Waverly Property and unreported mortgage interest income for the 1974, 1975 and 1976 taxation years.

As a result of the appellant’s notices of objection, the Minister reassessed on January 20, 1981. By these reassessments, from which the appellant is appealing, the Minister allowed a reserve on the outstanding mortgage on the property and adjusted the appellant’s business income downward for the 1974 and 1975 taxation years. For 1976, unreported sales of hay and unidentified bank deposits were corrected and business income was further reduced. However, a considerable amount of income unreported by the appellant remained in 1976. The mortgage reserve for 1976 was also adjusted (Exhibit R-6).

As a result of the January 20, 1981 reassessment, penalties in excess of $2,000 were levied for the three years under appeal. For 1975, the penalty imposed was in respect of a relatively small amount of unreported interest income. However, for the 1974 and 1976 taxation years, the unreported income greatly surpassed the income reported by the appellant.

In 1974, the appellant reported income of some $12,000, yet the Waverly Street property was sold in that year for $108,000, representing a net profit of $92,000 on the sale, of which $46,000 was the appellant’s share of the proceeds. Unlike Mr Matrick who, in 1975, reported a capital gain of some $15,000 as his share of the proceeds from the disposition of the Waverly property (Exhibit R-7), the appellant failed to report the proceeds either as capital gain or income in any of the taxation years under appeal.

In 1976, even after downward adjustments had been made in the January 20, 1981 reassessment, there remained $38,000 of sales and unidentified deposits, the accuracy of which was not disputed by the appellant at the hearing or in his pleadings. In his 1976 return, the appellant reported income of $12,600, some $25,400 less than his true income.

It is the appellant’s contention that the respondent, in attempting to justify the imposition of the penalties, failed to satisfy the onus of establishing that the appellant, either knowingly or under circumstances amounting to gross negligence, participated in, assented to or acquiesced in making an erroneous statement or an omission in his tax returns within the meaning of subsection 163(2) of the Act.

The appellant in support of his position relied on a decision of the Exchequer Court of Canada in Cyrus C Udell v MNR, [1970] CTC 704; 70 DTC 6019. In that decision, Mr Justice Cattanach established the principle that subsection 56(2) [now 163(2) ] did not contemplate that gross negligence on the part of the appellant’s professional agent, an accountant, could be attributed to the taxpayer.

Counsel for the appellant cited the last paragraph of Mr Justice Cattanach’s reasons. At 714 [6026], the learned Justice states:

I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.

This paragraph, of course, was not the main thrust of Mr Justice Cattanach’s ratio decidendi. Nor do the facts of the case at bar present any fair or reasonable doubt that would justify giving the appellant the benefit of the doubt. In reviewing the appellant’s argument in Udell, supra, with respect to the language of subsection 56(2), Mr Justice Cattanach states at 712 [6024] the following:

He says that the section applies only to the acts of the appellant himself and cannot possibly apply on the facts of the present case where the appellant was completely innocent of any negligence but that the errors and omissions were committed by his accountant and had not been authorized by him, nor subsequently ratified by him because he was not aware of them, nor did he have reason to suspect them.

In arriving at his decision and establishing his principle, Mr Justice Cattanach, based himself on the following considerations:

In considering the question so posed, I do so on the acceptance of three premises:

(1) that the relationship between the appellant and his accountant was that of principal and agent;

(2) that the omission and errors of the accountant in preparing the appellant’s tax

returns constituted gross negligence on the part of the accountant; and

(3) that the appellant did not know of these omissions and errors on the part of the accountant.

There is nothing in the decision or the principle enunciated in Udell, supra, that can be interpreted as diminishing in any way a taxpayer’s primary and statutory obligation of filing, or of having filed tax returns reflecting his true income. Before errors and omissions in tax returns can be attributed solely to the taxpayer’s accountant, it must first be clearly established, as indeed it was in Udell, supra, that the accountant had been given all pertinent information with respect to the taxpayer’s income.

In applying Mr Justice Cattanach’s three conditions to the facts of the case at bar, I find the following:

1. Although there was little if any evidence with respect to the appellant’s agent, I assume that his relationship with the appellant was that of principal and agent;

2. Unlike the circumstances in Udell, supra, where the accountant admitted having made accounting errors, in the case at bar there is no evidence that it was the accountant who made the omissions or the errors in the appellant’s tax return and there is no proof that the accountant was in any way guilty of negligence;

3. It is, in my view, utterly inconceivable that the appellant, who signed the tax returns for each of the years under appeal, who knew that his share of the proceeds on the disposition of the Waverly Street property in 1974 netted him some $46,000, was unaware or had no reason to suspect that the gain so realized was not in any manner included in any of his tax returns for 1974, 1975 and 1976. Nor do I accept that the appellant did not know, when he signed his 1976 tax return, that he had earned $25,000 more income than the $12,000 he reported.

In Donald Eugene Morgan, Maitland Almost, Carlyle A. Bodkin and Frank E Cassin v MNR, [1973] CTC 2192; 73 DTC 146, (which case was also cited by the appellant) Chairman Keith Flanigan, then Chairman of the Tax Review Board, is reported as stating the following at 2196 [149]:

I can only assume that when Parliament chose to insert the words “gross negligence’’ in Section 56(2), the expression was intended to mean something more than ordinary inadvertence on the part of a taxpayer. It means, to my mind, very great negligence .. . .

In this instance, failing to report income of over $71,000 in three consecutive years is more than ordinary inadvertence. The respondent has satisfied the onus that the appellant, knowingly or under circumstances amounting to gross negligence, has participated in, assented to or acquiesced in making a false return or omission in his tax returns for 1974, 1975 and 1976.

I find that the proceeds of disposition of the appellant’s one-half undivided interest in 36 acres of the Waverly land in 1974, were on income account. The appeals for the 1974, 1975 and 1976 taxation years are dismissed and the penalties levied for each of the said taxation years are maintained.

Appeals dismissed.