Robert E. Angus v. Her Majesty the Queen, [1996] 3 CTC 2618, 96 DTC 1823

Lamarre Proulx J.T.C.C.: - These appeals are from reassessments made by the Minister of National Revenue (the “Minister”) for the years 1986, 1987 and 1988. The reassessments were made beyond the normal reassessment period and concern the acquisition and sale of shares in circumstances that were considered by the Minister to be indicative of trade.

The first question at issue is whether the Appellant when filing his income tax returns for the years in question made a misrepresentation attributable to neglect, carelessness or wilful default within the meaning of subsection 152(4) of the Income Tax Act (the “Act”).

The second question at issue is whether the gains realized by the Appellant from the acquisition and sale of shares were on capital account or On income account.

The third question is whether the Appellant is liable to a penalty under subsection 163(2) of the Act for having knowingly or under circumstances amounting to gross negligence participated in the making of a false statement in his income tax returns for the years in question.

In reassessing the Appellant on January 3, 1992, for his 1986, 1987 and 1988 taxation years, the Respondent made the assumptions of fact described in paragraph 7 of the Reply to the Notice of Appeal as follows:

(a) For several years prior to 1987 and until April of that year the Appellant was employed by National Trust Company (hereinafter “National Trust”) at its head office in Toronto, Ontario. He had completed two years towards a university degree in Commerce, had successfully passed the necessary courses to qualify him as a stock broker and by 1986 was working as an account executive and business development officer with National Trust which enabled him to have association with daily stock market events;

(b) At all relevant times National Trust was the stock transfer agent for Punters Graphics Inc. (hereinafter “Punters”) and the Appellant was responsible for administering Punters account;

(c) The Appellant became involved with the principals of Punters, purchased shares in the corporation, assisted in issuing press releases, introduced potential investors to Punters and attended directors’ meetings;

(d) The Appellant acquired and disposed of shares in Punters as detailed in schedule “A” attached hereto and his gains were in the following amounts:

1986: $129,573

1987: $46,731

1988: $ 17,125

(e) The shares acquired by the Appellant in January and March 1986 were acquired on the open market, the purchase price having been paid in cash;

(f) The 100,000 shares acquired by the Appellant in June of 1986 were received from Robert Freeland for no cost as they represented a payment for services rendered (Robert Freeland was a venture capitalist and an important source of capital for Punters);

(g) At all relevant times the Appellant’s intention was to profit from trading in Punters shares and at no time did he acquire or hold shares in Punters as an investment on account of capital.

The facts upon which the Appellant relies are stated in paragraphs 4 to 8 of the Notice of Appeal and are the following:

4. During the relevant period, the Appellant was employed as an officer of the corporate trusts division of two trust companies.

5. At no time was the Appellant a trader or dealer in securities nor was he employed by a corporation acting as such.

6. During the period between January 15, 1986 and May 31, 1988, the Appellant purchased and sold shares of Punters Graphics Inc. on several occasions, as more fully appears from Schedule D filed herewith.

7. Schedule D is a summary prepared by Revenue Canada detailing the dispositions by the Appellant, which summary the Appellant acknowledges to be accurate, subject to the following corrections:

(a) four entries (each being indicated with an asterisk) involve transfers of shares from one broker to another and are thus instances where shares were not in fact disposed of; and

(b) as indicated by the Appellant in his tax return in respect of his 1986 taxation year, the price for the 100,000 shares purchased on June 12, 1986 was 10 per share. The agreement to purchase such shares at such price was concluded in early February of 1986 and the Appellant acknowledges that the price has not been paid.

8. When the Appellant filed his tax returns for the relevant years, he sought and obtained advice from Mr. Peter Ears of Price Waterhouse who assisted him in preparing his tax returns and counselled him in respect of the reporting of the gains on disposition as capital gains.

As the reassessments were made beyond the normal reassessment period, the Respondent presented his evidence first.

Mr. Karan Talwar, an investigator with Revenue Canada, Taxation, in the Halifax district office, was called as a witness. Although the matter having given rise to the assessments had taken place in Kitchener, Ontario, the file had been sent to Mr. Talwar in January 1991 because the Appellant had moved to Halifax in 1991. The file was the result of an investigation carried out by a departmental special enforcement unit working with the Royal Canadian Mounted Police, (the “RCMP”). Following the investigation by the RCMP, several charges were laid against persons involved in illegal dealings regarding Punters shares. Sometime in 1992, the Appellant was found guilty of having received a secret commission and was sentenced to three months in jail.

The information that Mr. Talwar received from Kitchener was that the Appellant was involved in a scheme designed to manipulate Punters’ stock with a view to enhancing the price of the shares. Mr. Talwar understood the Appellant’s role to be that of promoting Punters shares in the following fashion: he attended board meetings, solicited potential investors to sit on the board of directors and issued news releases. For this role the Appellant received 100,000 shares of Punters that he disposed of at a considerable profit.

The Appellant was employed by National Trust from 1983 to April 11 1987. In the years in question he worked in the stock transfer department of National Trust.

At the end of the year 1985, the principal shareholders of Punters, the Soper brothers, had asked the Appellant to be their account officer and to advise them in share issue matters. National Trust then became transfer agent for Punters and the Appellant became Punters’ stock transfer account officer.

The Appellant befriended the Sopers and when visiting them one Saturday morning, (they were 45 minutes from his home) he met a Mr. Freeland for the first time. Mr. B. Freeland was a venture capitalist who lent money to the Sopers. The Appellant said that he told Mr. Freeland, on this occasion while he was alone with him, that he would like to acquire more shares of Punters.

Exhibit R-4 is a letter in the form of a final draft, dated April 6, 1987, addressed to the Appellant from a Mr. Kalvik, vice- president of National Trust. There was an objection on the ground of hearsay made by counsel for the Appellant regarding the production of this letter as an exhibit. In the R. v. O’Brien, [1978] 1 S.C.R. 591, 76 D.L.R. (3d) 513, at page 515 (D.L.R. 593), Dickson J. stated the following:

It is settled law that evidence of a statement made to a witness by a person who is not himself called as a witness is hearsay and inadmissible when the object of the evidence is to establish the truth of what is contained in the statement; it is not hearsay and is admissible when it is proposed to establish by the evidence, not the truth of the statement but the fact that it was made.

The draft letter is therefore admitted as evidence on the basis that its object is to establish that it had been shown to the Appellant.

Mr. Tai war found this letter in the file that had been referred to him from Kitchener. Apparently, it had never been mailed to the Appellant but the Appellant saw it at a meeting to which he was summoned by his employer to discuss a matter of conflict of interest. This letter made reference to 100,000 shares received from Punters as a gift or as remuneration for services.

Mr. Talwar specifically asked the Appellant whether he paid for those shares. The Appellant answered that he was supposed to pay Mr. Freeland $10,000 but in fact he never paid for them or offered to pay for them.

Schedule “A” to the Reply to the Notice of Appeal was prepared by Mr. Talwar after having met the Appellant and obtained from him his trading statements for the years 1986 to 1988 regarding the Punters shares.

In Schedule “A”, the 100,000 shares appear in the “bought” column at the date of June 12, 1986, with no price mentionned. That date is the date on which the Punters shares were transferred to the Appellant’s personal account from a trust account of his in which they had been held for someone else. The shares had been first placed in the trust account on June 2nd, 1986.

Toward the end of May 1986, Punters issued a treasury direction which, according to the Appellant, authorized the transfer agent to issue a set number of shares as stipulated in the treasury direction. It directed that 1.375 million shares be issued to Mr. B. Freeland. The Appellant received a phone call from Mr. Freeland who requested that these shares be delivered halfway between Kitchener and Toronto, in the parking lot of a motel. This is where Mr. Freeland gave the Appellant the 100,000 Punters shares.

In March of 1987, there was formed a group of dissident shareholders that was not satisfied with the Appellant’s role. That group had been made aware that the Appellant had received 100,000 Punters shares and it informed National Trust which in turn confronted the Appellant. This gave rise to the letter filed as Exhibit R-4 (mentioned above) and to a letter of acceptance of termination of employment by the Appellant dated April 10, 1987, filed as Exhibit R-9.

Exhibit R-1 is the Appellant’s income tax return for the year 1986. It shows that he had employment income of $39,212.50 and a taxable capital gain of $59,457.85. Mr. Talwar said that the Appellant’s capital gain would have been twice that amount. For the year 1987, the appellant reported employment income of $42,520.36 and a taxable capital gain of $21,059.88. For that year, this figure represented 66 2/3 per cent of the actual capital gain (Exhibit R-2). Exhibit R-3 is the income tax return for the year 1988, it shows employment income of $46,430.50 and taxable capital gains of $28,976.00, which for that year, represented 75 per cent of the actual capital gain.

The Appellant was involved in the buying and selling of shares other than the Punters ones. Only the dealings in the Punters shares were considered to be on income account because of the Appellant’s extensive and active involvement in their trading. As regards the other shares, the Appellant did not appear to be the officer responsible for them at National Trust, if indeed National Trust was transfer agent with respect to those shares, and the Minister accepted the categorization as “capital” of the gains made on their purchase and sale.

Mr. Earl was called as a witness by counsel for the Appellant. Mr. Earl is an accountant who was a partner with Price Waterhouse until June 1986. He prepared the 1986, 1987 and 1988 tax returns of the Appellant. He testified that the Appellant did not tell him that he was the National Trust account officer for Punters nor that he had obtained the 100,000 shares from Mr. Freeland, a venture capitalist who was an important investor in Punters. He stated to his accountant that he had paid 10 a share for the 100,000 Punters shares that he had acquired.

Analysis

The reassessments in question in these appeals were made beyond the normal reassessment period.

Paragraph 152(4)(a) of the Act reads as follows:

(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 3 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year,

Counsel for the Appellant argued strongly that the Appellant’s income from the gains on the disposition of the shares ought to be on capital account. He cited the decision of the Supreme Court of Canada in Irrigation Industries Ltd. v. Minister of National Revenue, [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131, referring in particular to the following passage at page 351 (C.T.C. 219; D.T.C. 1133):

In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of his regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could. I think that there must be clearer indications of “trade” than this before it can be said that there has been an adventure in the nature of trade.

In counsel’s view, if I were however to find that there was an indication of trade, an error in categorizing the gains as capital gains rather than income gains, would not be sufficient to allow the Minister to assess beyond the normal reassessment period. He submitted that the bona fide description of oneself as an investor rather than as a trader is not a misrepresentation within the meaning of subsection 152(4) of the Act.

Counsel for the Respondent referred to the decision of this Court in François Prévost Inc. v. Minister of National Revenue (sub nom. Prévost v. Minister of National Revenue), [1996] 1 C.T.C. 2701 (T.C.C.), rendered by Archambault J., on December 14, 1994, from which I quote at pages 2711-12 of the translation:

I agree with Judge Tremblay who states that a taxpayer cannot be reproached for having made a misrepresentation when that error results from a mischaracterization of the income or a misinterpretation of a provision of the Act. I hasten to add, however, that that error must be an error made in good faith. Judge Addy wrote as follows in Regina Shoppers Mall Ltd. v. The Queen:! [1]

Where a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152 [1056 Enterprises Ltd. v. R., [1989] 2 C.T.C. 1]. In Levy v. R., [1989] C.T.C. 151, 89 D.T.C. 5385, at page 176, Teitelbaum J. quotes with approval the following statement by Muldoon J. in the above case:

Subsection 152(4) protects such conduct, and perhaps only such conduct, where the taxpayer thoughtfully, deliberately and carefully assesses the situation as being one in which the law does not exact the reporting of that which the taxpayer bona fide believes does not exis.

It has also been established that the care exercised must be that of a wise and prudent person and that the report must be made in a manner that the taxpayer truly believes to be correct. [2]

Was the care exercised by the Appellant in filing his annual tax return that of a wise and prudent person? Subsection 152(4) of the Act requires that the misrepresentation be attributable to neglect, carelessness or wilful default, and thus, it becomes a matter of appreciation of the degree of negligence.

The Appellant did not inform his accountant of the circumstances of the acquisition of the Punters shares. He did not tell him that he knew the principals of Punters, had given them advice on the promotion of shares and that 100,000 shares had been given to him. There was no value really in having the Appellant’s accountant testify since he had not advised the Appellant on a matter about which he knew the facts. He did not even know that the Appellant had paid nothing for the shares. Moreover, there is no doubt that the representation of the adjusted cost base of shares as being 10 is a misrepresentation of an essential fact especially given the large number of shares acquired as a gift. This misrepresentation by the Appellant concerning the cost of acquisition of the shares by itself is sufficiently substantial to be clearly attributable to neglect, carelessness or wilful default. It can thus be concluded that the Minister had the authority to assess the Appellant beyond the normal reassessment period.

I still must decide whether there were clear indications of trade in order to determine whether the gains from the disposition of shares were on income or on capital account. Counsel for the Appellant referred to the Irrigation case (supra). Counsel for the Respondent referred to the decision of this Court in Wolfin v. Minister of National Revenue, [1984] C.T.C. 2427, 84 D.T.C. 1382 (T.C.C.), a case in which the taxpayers were actively engaged in the promotion of shares. The gains from the disposition of those shares were found to be on income account. I quote from page 2434 (D.T.C. 1387) of this decision:

Mr. Wolfin was and remains an intelligent and resourceful entrepreneur, and he directed his energies and efforts in a manner designed to utilize to the maximum his peculiar and particular “insider” situation in all the matters which have come to the Court’s attention. That degree of dedication to his overall affairs one can only salute, but he clearly fashioned a business which at least for a time was very profitable. It was a business in which he, more than anyone else, was fully aware that the prospect of business returns in the form of dividends was almost negligible, but that the prospect of turning over the stock, as the demand for it rose or was encouraged, was a viable, immediate and attractive opportunity.

Counsel for the Appellant submitted that the Appellant was a far cry from a Mr. Wolfin. He submitted that the Appellant was only a stock transfer agent with no power whatsoever to influence the value of shares and participate in the direction of the corporation of which he had obtained shares as a gift. Counsel for the Appellant tried to minimize the role of the Appellant as a stock transfer agent and as an adviser to Punters concerning the trading of its shares.

I cannot but find that, whatever may have been the Appellant’s real power to influence the share market, he made Mr. Freeland believe that he had some degree of influence such that Mr. Freeland gave him a gift of more than $100,000.00. This amount of money was given for some purpose and this purpose had something to do with the sale of the shares at a good price. It is not possible to see the Appellant’s act as that of a person waiting passively for shares he had acquired to increase in value. The Appellant was actively engaged in the enhancement of the value of the shares and I conclude that the circumstances of the acquisition and resale of all Punters shares by the Appellant are clearly indicative of trade.

The Appellant was assessed a penalty under subsection 163(2) of the Act which provides:

(2) 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, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater of $100 and 50 per cent of the aggregate of

This provision requires that the Minister establish, on the balance of probabilities, that the taxpayer knowingly, or under circumstances amounting to gross negligence has made a false statement or omission in his income tax returns for the years in question.

Counsel for the Respondent referred again to the decision of this Court in Prévost v. Minister of National Revenue (supra), a case in which the taxpayer’s profit on the sale of shares was assessed as professional fees rather than as a capital gain as claimed by the taxpayer. The Court found that the proceeds of disposition of shares acquired by the taxpayer as a nominee of the purchaser and sold to the purchaser the day after their acquisition were indeed professional fees and that the penalty was warranted. In that case then, it was not a matter of having categorized the proceeds of disposition from the sale of shares as being on account of capital rather than on income account as is the case in this appeal.

Here, the appellant was not assessed on the receipt of the secret commission as a payment for services rendered. He was assessed on the gains arising from proceeds of the disposition of the shares which took place over a period of slightly more than two years. I was not referred to any case in which such a circumstance, that is the categorization of the gains as capital rather than income, was sufficient to attract the application of subsection 163(2) of the Act.

As previously mentioned, I was referred by counsel for the Respondent to the decision of this Court in Wolfin v. Minister of National Revenue (supra). In that case, whose facts are somewhat similar to those of the instant case, the matter of the imposition of penalties was not pursued by the Minister at the time of hearing.

I have no difficulty in finding that the imposition of the penalty under subsection 163(2) of the Act, is correctly imposed as regards the difference between the price of acquisition as represented by the Appellant and the real price, but I have doubts about imposing a penalty for having shown the gains resulting from the disposition as being on capital account rather than on income account. That subsection refers to a false statement or omission in a return, not to a misrepresentation. I do not believe that declaring gains from the disposition of shares to be a capital gain rather than an income gain is a false statement, at least in the present circumstances. It is no doubt a misrepresentation but it is not a false statement.

I therefore find that the Minister had the authority to reassess the Appellant beyond the normal reassessment period within the meaning of subsection 152(4) of the Act.

I also find that the Minister correctly imposed a penalty under paragraph 163(2) of the Act with regard to that part of the gains corresponding to the difference between the stated acquisition cost of the shares and their true price but not the remaining part of the gains.

The appeals are allowed, without costs, and the matter is referred back to the Minister in order that the penalties imposed be corrected on the above basis. In all other respects, the assessments stand.

Appeal allowed in part.