Margeson T.C.J.:
By Notices of Reassessment dated August 10, 1993 and August 11, 1995, the Minister of National Revenue (the “Minister”) reassessed the Appellant for the 1986 to 1991 taxation years, inclusively, for tax and imposed penalties and interest.
Originally there were 13 different issues to be decided by the Court but before the trial commenced, the parties had resolved some of the issues, the Appellant conceding to the Minister’s position on some of the issues and the Minister conceding to the Appellant’s position on others.
In the end result, the appeals will be allowed and the assessments referred back to the Minister for reassessment and reconsideration on the basis of the concessions which will be set out at the conclusion of this trial. The other issues were contested throughout as well as the matter of costs.
The Court allowed the Appellant’s motion, made at the commencement of trial, to amend paragraph 6(a) of the Notice of Appeal to read as follows:
6. The material facts that the Appellant relies upon with respect to the 1989 taxation year are as follows:
a. 746 Southwest Marine Drive, Vancouver, B.C. was a capital asset of the Appellant, and the disposition thereof gave rise to a capital gain, and not to income. The capital gain arising on the disposition and the rental income loss arising from the rental of the property were incorrectly reported as estimated rental income of $11,000.00, and in fact ought to have been reported as follows:
| Taxable portion of capital gain on disposition (23 of | $26,715.00 |
| $40,073) | |
| Recapture | | -$ 4,868.00 |
| Rental loss | | ( 28,566.26) |
| Net taxable amount | $3,017.00 | 1,394.24 |
The Court also allowed the motion of counsel for the Respondent to extend the date for discovery to February 4, 1998.
Evidence
The Appellant, Grant Charles Norman Langdon, testified that he was a barrister and solicitor practising in the field of commercial litigation. He was called to the Bar of British Columbia in 1991. He grew up in North Vancouver and lived near the University of British Columbia when he was an under-graduate and while attending law school.
In 1981, he set up practice with a former classmate in Maple Ridge, British Columbia, which he described as being 30 miles east of Vancouver. It takes 45 to 90 minutes to go from his residence to his place of work. This residence was not owned by him.
He resided in Vancouver for three years and then moved to an apartment in Maple Ridge. He was not married until 1987.
In 1985 he acquired a vacant lot, Lot 19, Riverview Crescent, Coquitlam, B.C. and 746 Southwest Marine Drive, Vancouver, B.C. which was a small office building and warehouse.
He said that he was reassessed on August 10, 1993 and this assessment was adjusted on August 11, 1995.
He identified the Notices of Reassessment for the years in issue and said that the Minister assessed additional amounts for unreported income from his law partnership of $23,800.
He referred to the Notices of Assessment for each year in issue. He said that the Auditor with whom he dealt was a man by the name of Mr. Bolenback.
There is still an issue with respect to the sale of 1021-1025 Austin Avenue, Coquitlam, B.C. His position was that he had no direct involvement with that sale and received no income from it. The same people bought and sold it and took a building in trade which he then bought from the vendors of the Austin Avenue property. This was the Southwest Marine Drive property. He did not have many documents for the Austin Avenue property but he went through all of the accounting with the Auditor and showed him the books.
The Appellant was referred to Tab 23 of Exhibit A-l, the vesting order relating to the Austin Avenue property and the other documents between Tabs 23 and 29 in support of his position. None of these documents refer to him and he had no involvement with the purchaser company H.W. No. 78 Holding Co. Ltd. (H.W. No. 78) until after title to the property was received by H.W. No. 78. He held no shares in the company at the time of sale and he never saw the vesting order until discovery. As of May 6, 1986, he had no relationship with the company.
In any event, the Auditor, in calculating the gain on the property failed to take into account the credit given to the vendors of Southwest Marine Drive, of $600,000 and the price realized by H.W. No. 78 when the property was sold to the Appellant for $481,220. In fact, Mr. Dwight Deausy and his group made $65,000 on this sale as can be seen by examining the documents at Tab 30, page 5, which were produced for the Auditor. The Auditor also failed to take into account various transaction costs related to the acquisition and sale of the Austin Avenue property.
Currently with the closing, H.W. No. 78 held the Southwest Marine Drive property in trust for him, as bare trustee, until he paid the balance of the purchase price.
The Appellant became an officer of H.W. No. 78 on May 16, 1986 so that he could deal with the Southwest Marine Drive property. He reiterated that he did not receive any profits from the sale of the Austin Avenue property. The profits were split between Mr. Deausy and two others.
With respect to the Cedar Avenue property, this was not owned by him but by Standard Equities Ltd. in its own right and not as a trustee for him. It had its own bank accounts and is still in good standing.
Initially, the Cedar Avenue property was part of a group of transactions. Standard Equities Ltd. was to acquire it as part of a group of transactions to build a portfolio of real estate. This property was not held on his own account as Southwest Marine Drive had been. Boundary Park Mall, Cedar Avenue and the U.S.A. property (MV Lovit) were all owned by Standard Equities Ltd. and were all part of a group of transactions.
The documentation relating to all of these properties showed that Standard Equities Ltd. only was the owner of the properties and no matter how many interim transactions took place or how many different entities were involved, they only acted as a conduit so that in the end the title would be transferred to Standard Equities Ltd.
As a result of the sale to Mr. and Mrs. Valiquette of the Trail property, no money came to his company because the boat was taken in as part of the purchase price by way of trade-in.
The numbered company, 309309 B.C. Ltd. was used because it was on the original agreement before the Appellant’s company made the deal for the properties.
Mr. Quinnell was involved in the purchase of the three properties from Marathon Realty Company Limited. Mr. Quinnell had arranged to sell the Salmon Arm Lands to one of the tenants and to sell the Grand Forks and Trail properties. He ran into financial difficulties and approached the Appellant and his father to buy the Trail Shopping Mall. When the sale was to be completed, the Appellant was asked to take over all three properties including the sale of the Salmon Arm property. Mr. Quinnell was to be given time to sell the properties and if he did they would split the profits. That is when his company, 316936 B.C. Ltd. became involved.
Standard Equities Ltd. profited from the sale of the Salmon Arm property and not him. That is why he did not report it in his income. The company did not file returns for 1986 and 1987 because it did not make any money and no taxes were owing.
The Appellant used the company to hold a property in trust for him. This is not an issue in this case. He paid expenses for Standard Equities Ltd. but was reimbursed. He did not use the assets of Standard Equities Ltd. for his own purposes.
He identified the documents at Tab 55 of Exhibit A-l as his Personal Net Worth Statement given to his mortgage broker to enable financing to be obtained by him in order to buy a property. He referred to it as a consolidated net worth statement and the purpose was to set out what was behind the borrower. This is what the lenders expect. He did not intend for the statement to imply that he was the owner of these properties.
The U.S. property referred to was the 60’ boat MV Lovit. With respect to the boat, he referred to Tab 57. It was put up for sale before the purchase was completed. This property belonged to Standard Equities Ltd. and was taken as a trade-in. The trade-in value was $560,000 Canadian.
Tab 58 was completed to show that Standard Equities Ltd. was the real seller of the Cedar Avenue property.
The Appellant was contacted by Mr. Bolenback and was told that he was to be reassessed. He received the letter dated May 11, 1993 Tab 22 from Revenue Canada Taxation. It was not discussed with Mr. Bolenback because the Appellant put no trust in him.
Mr. Bolenback had presumed that the amount referred to in his net worth statement at Tab 55 was from the sale of assets in the United States, ($473,000 and not net of $254,000).
The Appellant was reassessed for the Boundary Park Mall property and the boat, but Standard Equities Ltd. was the owner of these properties.
The Minister’s valuations for the profits on these properties were also flawed. He did not accept the expenses and fees that related to these properties. The Minister was correct with respect to the cost base and the gross gain only. The Minister incorrectly disallowed the items in dispute for legal fees, appraisal fees, commitment fees and commissions to Dwight Deausy.
The Appellant said that the commissions were paid to Mr. Deausy for his involvement. He attempted to have the commitment fee refunded from Standard Trust but they refused. Other funding was necessary. The inspection fee was paid to The Toronto Dominion Bank.
Originally The Toronto Dominion Bank named the Appellant as mortgagor but that was amended. The other disputed expenses were ultimately paid by Standard Equities Ltd.
All of these expenses were documented and shown in the exhibits produced before the Court.
The legal fees claimed with respect to the boat, MV Lovit, were paid by Standard Equities Ltd. When document 27 said: “I am instructing you to act on my behalf,” I was really acting as agent for Standard Equities Ltd. and not on my own behalf in those instructions.
The Appellant said that he made no personal use of the boat. The mooring fees claimed were paid as well as the insurance expenses.
After all these expenses were taken into account for all three properties, the net profit was $5,548.57.
With respect to the Riverview Crescent Lot, the Appellant testified that he did not make a profit after all expenses were deducted. He explained the documents found at Tabs 63 to 67 which were relative to this property. The property was taken in his name. It was sold for $55,000. The $3,650 added on to income by the Minister was not valid. He incurred costs after it was purchased. He had to cut down trees and remove debris. He paid taxes. He had costs of about $6,000 and sold it for $55,500. There was no profit.
He recorded all of his income and expenses with respect of 148 East 2nd Avenue, North Vancouver and the condo in Cranbrook, in his 1988 income tax return.
The Appellant did not really buy them, “he flipped them”. He provided all the information and back-up material to the Revenue Canada Auditor about these transactions. These transactions were all explained to the Auditor, who had in fact double counted the income. The profit went to him and not to his company. He was shocked when he was reassessed and assessed a penalty. He wrote back to Revenue Canada and told them that they were all included in his return.
Regarding the property at Southwest Marine Drive he said that the difference between his assessment and the Minister’s assessment was only $698. This amount represented fees paid for registration of documents relative to this building. He referred to Tab 79 to support this. This was a disbursement paid by his law firm on this account.
The Appellant prepared a complete set of accounts for this property from the beginning to the end and gave it to the Auditor. These included the income, expenses and a balance sheet. Those were given to the Auditor the first time that he came into his office.
He admitted that when he was accounting for the gain on his income tax return he made a rough estimate and came up with a figure of $11,000 and added that to income on line 126 of his return. This was because he ran out of time for filing his return. He explained to the Auditor how it had been arrived at. He knew that it related only to the Southwest Marine Drive property. The Auditor did not take into account the rental loss claimed on the property. The net gain was $3,017 and that is on the Amended Notice of Appeal. He admitted that he did not report a disposition and the Auditor assessed it as an income item and not as a capital item.
Before purchasing the property, the Appellant checked it out. He intended to keep it as an investment. He considered the annual rental, costs of insurance, interest and upkeep. He expected to make between $10,000 and $12,000 per year from it, but due to financing costs and lease costs that were higher than he had expected, there was a loss but after these one time costs were met there was a profit. The money left over was used for his own purposes.
On May 15, 1988, the lease with the major tenant expired. It was not rented in spite of the hiring of a rental agent and the incurring of expenses thereto. He even changed the rental agent. He was not interested in selling it for most of 1988. He wanted a tenant. He later gave a listing agreement to the Sutton Group because the upper portion of the building had become difficult to lease, parking was a problem and after six months of vacancy, it was losing money. He decided to sell it and in January or February of 1989 he sold it.
The Appellant filed an income tax return for 1988 showing no net income for it. He referred to the documents at Tab 79 in this regard. In 1989, due to the reduced rental period, he had a loss of $28,566.26 as shown by the above document.
His position was that if the Court should find that the whole $40,073 was to be included in his income, then the profit would be $11,507. He already reported $11,000 and therefore the adjustment should be $507.
With respect to the property at Panorama Drive, the Minister assessed him for unreported business income of $138,000 and penalties. This property was his personal residence, was exempt and so he did not report it. His position was that it was never rented because he lived in it.
This was a smaller, older house, located on the water and was located five miles from where he grew up. He always wanted a waterfront lot. He moved his practice to Vancouver and moved to North Vancouver to this house. They made improvements and he owned it for 31/2 years.
He could not afford to keep it because by 1990 when he sold he was losing money. He could not afford to pay the mortgage payments of $2,000 per month and the taxes. The house was put up as security for loans of Standard Equities Ltd. who paid the second mortgage, although the Appellant was putting up the money. The Appellant had no choice but to sell. It was listed for sale in the Fall and sold in November. It sold for $448,000 and he took a condo in trade, valued at $220,000. The taxes were in arrears although the mortgage payments were close to current.
He continued to list the condo for sale and it sold for $202,000. There were $18,000 of costs relative to it. The property at Panorama Drive was listed in the company’s name, 325467 B.C. Ltd., but the Appellant said that he was the real owner. Shares of 325467 B.C. Ltd. were sold for $400 and not for $400,000 as the Minister had concluded.
The residential property was held by his company under a declaration of trust for him. This was because it contained a dock which was held under a lease. This lease was not transferable. The dock affected the value of the property. In the event of sale, the old lease would be cancelled and a new lease would have to be obtained. His position was that the authority had a habit of changing the conditions in the lease, so that he decided to put the property in the company’s name. Further, upon transfer, there might be ad- ditional expenses involved in removing certain improvements, such as wharves.
The Appellant explained the documents found in Exhibit A-l to support his position that the property was held in trust for him and that this continued until the time of sale. He also referred to the new return for 325467 B.C. Ltd. and correspondence with The Toronto Dominion Bank to show the status of the company and that it held the property in trust for him.
At Tab 89, the name of the company was struck out as vendor and the Appellant’s name was inserted but he did that to show that he was the beneficial owner.
The Appellant was referred to other documents in Exhibit A-l to enforce his position that he sold the shares in the company for $400. He prepared the back-up documentation at Tab 93 and explained how the ultimate transfer was accomplished to Mr. Mallender and how he calculated the net loss after taking into account the expenditures on the property from the time of purchase to sale including the cost of liquidating the trade-in property. He calculated that the net loss on the Panorama sale was about $21,000 being the difference between the gross gain and the gross expenses.
Floyd Quinnell was living in the house until the Appellant moved in and that is why he was added to the insurance policy.
With respect to the costs of renovations, he said that these amounts were either paid for by himself or by Quinnell. If Quinnell paid them, then the Appellant reimbursed him. These expenses were not claimed in the Appellant’s 1990 income tax return or by any other entity because he considered it to be his principal residence and it did not matter.
Likewise, the expenses on the trade-in property were not claimed because there was no reasonable expectation of profit or else it was part of the Panorama property transaction, his principal residence and therefore, not deductible.
With respect to the McKenzie Pub and Bowling Lanes the Appellant said that he had incurred the bad debts of $39,521 in 1988 and $132,146 in 1991 as a result of the monies owed to him with respect to his rental operation of a property located at 101 Stewart Drive, McKenzie, B.C. and the Minister was wrong in not allowing these deductions.
He testified that himself and Peter Shields took over the agreement to buy the property which was the subject matter of a foreclosure action with Federal Business Development Bank, (F.B.D.B.). It also included a deal with one Higgs (the manager) who was to lease the property back and he expected that Mr. Higgs would buy the property back.
Several problems developed including the failure to have the lease signed and financing problems that caused the closing to be delayed. Later Higgs did not make the rental payments and was evicted.
The Appellant was satisfied that the likelihood of recovering any rental arrears from Higgs was nil and even though he contemplated legal action he finally concluded that it would be useless due to the unsigned lease and also due to the Appellant’s conclusion that Higgs was not worthwhile pursuing.
He had expenses relative to his trip to McKenzie to evict Higgs and to install one Enns to run the business. He referred to various documents to show the rental losses he suffered as a result of attempting to have the business operated on his behalf as a going concern. He accounted for all income and was entitled to claim the expenses that he did.
He was personally liable on the mortgage with F.B.D.B. Finally he treated the property as inventory and did not claim any further expenses.
He finally arranged a sale to Mr. Walter Andereggen pursuant to a written agreement as shown at Tab 98. This purchaser only made some interest payments in 1991, did not make a large balloon payment as required under the agreement, made only sporadic payments in 1991, failed to pay the taxes and the Appellant was advised that Mr. Andereggen was having extreme financial difficulties. The Appellant concluded that the extent of his interest in the property, as reported in his income tax return of 1991, was the sale value of the property.
He paid $615,000 for it and it was worth less than that. It was only worth what income it could produce. He calculated that it could generate about $150,000 of income per year but the property had a bad performance history. The Appellant concluded that a buyer would not pay what was owed to him.
He calculated that a buyer could only produce about $90,000 net income per year. There was $660,000 owing. He concluded that this property was worth $400,000.
He decided that the replacement value was more but he could not say what calculations he used to come up with the “paper value” that he assigned to the property of $520,000 and added the $132,000 figure that he had claimed in 1991. He did not try to sell the debt. Finally F.B.D.B. fore- closed on the property and it sold for $360,000. The Appellant paid $40,000 under the guarantee to F.B.D.B.
He appealed the 1992 property assessment of $555,000 and it was dropped to $240,000. He did not report the sale to Andereggen (December 12, 1989). The downpayment was cleared up in clearing title so that the sale price was less than his inventory cost. He believed that it was inventory and later when he made money on it he would report it.
He was cross-examined about the documents at Tabs 101 to 106 and explained that these were expenses that had to be paid out such as arrears of taxes, liquor licence fees, balance of commission, liquor tax, insurance premiums and $78,000 in operating expenses until Mr. Andereggen came along (Tab 114).
In cross-examination he said that he had no cancelled cheques for the items that were shown at Tabs 102 and 106 as expenses but the law firm records showed the same thing at Tab 116. These expenses were incurred with respect to the McKenzie property.
He was familiar with shareholders’ rights and that shareholders are not entitled to use company assets for their own purposes. He also knew that companies have to keep proper records.
When the Auditor came to his office he provided file folders for the properties in issue. There was a general ledger file for Southwest Marine Drive, the Langley property, for Surrey and he was not sure about the Shaugnessy property but there is none for the McKenzie property. These files were similar to the computer print-out that he had introduced with respect to the Cedar Avenue property.
316936 B.C. Ltd. had become Standard Equities Ltd. around September 1989. He admitted that no return had been filed for the company until the week before this trial had commenced. He was the sole shareholder and director and knew that an annual return should be filed.
He was questioned about 309309 B.C. Ltd. and said that it was incorporated on May 16, 1986. It became Third Avenue Properties Ltd. in August of 1989. Since August 31, 1989 he was the director but did not know if he was the director before that. It was probably him or Standard Equities Ltd. 309309 B.C. Ltd. was used only by Floyd Quinnell. He was a personal friend. He was involved in real estate transactions as well as Dwight Deausy. Mr. Becker had no interest in the Cedar Avenue or Boundary Park Mall properties.
Again the Cranbrook condo and 148 East Second Street were reported in his 1988 income tax returns.
He identified the income and expense pages, relative thereto (R-1, Vol. 1, Tab 3) but said that there was no separate general ledger for them. There was a summary sheet for the five properties. The $49,724.69 figure was a summary for all properties in that year that were dealt with. The summary sheets were produced at the time of the transaction.
He admitted that no financial analysis was done regarding potential income for the McKenzie property although some kind of projections were provided directly or indirectly by Mr. Bremner and they did a rough estimate as to what it would make.
The Appellant had no accounting or appraisal training. He had personally guaranteed the $400,000 loan to F.B.D.B. He had not verified the signing of the lease by Mr. Higgs before signing the guarantee.
He admitted that the McKenzie financial documents did not exist in 1987. He identified the document, Exhibit R-2, as a transfer document from 332100 B.C. Ltd. to 373639 B.C. Ltd. (as his trustee for $725,000).
The net loss was shown as $100,000 and was prepared the last day of April 1992. There was no general ledger in existence in 1992 nor today. The only statement was the one in the 1989 and 1991 returns.
He referred to the loss of $101,302.46 as shown in Exhibit A-2 at page 3 and said that he was not claiming this loss. Standard Equities Ltd. was claiming one half of the loss but it had not filed a return at the time of the statement. This was not his transaction personally but if it were, the net profit was $5,548.57.
Standard Equities Ltd. had records for the expenses and revenues respecting the Cedar Avenue and Trail properties. The financial statements were prepared by the accountants but he did not have them in Court. He reiterated that the boat was bought and sold the same day and there was a loss of about $100,000.
He explained again, the letter at Exhibit A-2, Document 27 that he wrote to the lawyer regarding the incorporation of 309309 with him as sole shareholder and referred to the lawyer acting on his behalf and what he meant by that. He was sure that the broker had an idea of what the boat would be sold for.
He was confident that anyone looking at financing the transactions would rely upon the net worth statement at Tab 17 of Exhibit R-1.
He was questioned about the Southwest Marine Drive property and explained the documents pertaining to it and that H.W. No. 78 held it as his trustee, pending payment of the balance of the purchase price. Mr. Deausy was the sole shareholder of H.W. No. 78. The Appellant was not a shareholder from May to November of 1986 even though he was a guarantor. The company was the registered owner of the property.
Again he admitted that the gain was indicated at $11,000 and that that amount was incorrect, that return was incorrect and no amended return was filed. It was reported as income incorrectly.
He was referred to various documents relating to the Boundary Park Mall, Cedar Avenue and Salmon Arm properties. He said that he dealt with all of these properties in the same way. They were part of an agreement with Marathon, his own deal with Quinnell to purchase all three properties through Standard Equities Ltd. and to sell the Salmon Arm property immediately. There was a gain of $40,000 on the Salmon Arm property in 1986. This was never reported to Revenue Canada until 1988.
The Boundary Park Mall property was disposed of in March of 1987.
He described the various processes by which the properties were ob- tained and then sold. Sometimes properties went directly from one owner to a third without actually being registered into the name of the second purchaser. This obviously caused confusion and suspicion on behalf of the Minister.
He referred to Exhibit R-l, Vol.l, Tabs 3, 4 and 5 and identified them as all of his income in 1988, 1989 and 1990 except for the non-taxable portion of the capital gain.
Likewise, the way that the mortgage statement was directed to the numbered company and not to the Appellant raised a question in the Respondent’s mind about what was going on since the Appellant said that he was paying the mortgage (Exhibit A-3, Document 14). Similarly the insurance statement sent to 325467 B.C. Ltd. was c/o Grant Langdon.
Document 25 of Exhibit A-3 was directed to Floyd Quinnell who was living in the Panorama Drive property. It was referred to as a rented dwelling. According to the Appellant this was incorrect. It was cancelled and a new policy was taken out. Likewise, Document 25 in Exhibit A-3 listed Floyd Quinnell as an insured for 325467 B.C. Ltd. Other invoices were also directed to Floyd Quinnell. See Exhibit A-3, Documents 26 to 30.
In re-direct the Appellant said that the computer print-out, Exhibit A-l at Tab 114 was inputted in 1994. There was a print-out for 746 Southwest Marine Drive, for 2565-2575 Shaugnessy Street, Port Coquitlam and for 97th Avenue, Surrey.
With respect to the Panorama Drive property, the sale did not go through directly to him then to the buyer in order to save transfer fees and registration fees. There was no need for a trustee to be identified as such in the transfer documents and this was not a practice to do so.
Kenneth Boyer was the president of Pro-Mor Investment Services Ltd. This company is a licenced mortgage broker. It is involved in commercial income property financing for clients. The company has been in business since 1964 and in mortgage brokering since 1977. He knew the Appellant since 1985.
He reviewed statements similar to that at Exhibit A-l, Tab 55 for Mr. Langdon. This was part of the documents that he reviewed to support a financing request. The statement indicated to him that the Appellant had an estimated net worth of $742,000. Some of the assets mentioned were owned by him and some were owned by companies in which he had an interest. There is no particular way to list an interest in assets held by a corporation. He sees such statements in the same form frequently.
From reading the heading, contingent liabilities, he concluded that some of the assets listed were in the name of corporations in which the Appellant had an interest.
[ cross-examination he said that he viewed the exhibit the day of Court and the Sunday before.
There was no doubt in his mind that the term “Contingent liabilities” indicated that guarantees were signed by the Appellant for the companies in which he had an interest. The Appellant had listed the interest as a contingent liability and not as an asset.
Argument of the Appellant
The Appellant’s position was that the matters that are now in dispute relate to the following properties: (a) Austin Avenue Property; (b) Boundary Park Mall, Grand Forks, British Columbia; Cedar Avenue, Trail, British Columbia; and the U.S.A, property (the “MV Lovit”); (c) Riverview Lot, Coquitlam, British Columbia; (d) Cranbrook Condominiums; (e) East Second Avenue, North Vancouver British Columbia; (f) Southwest Marine Drive, Vancouver, British Columbia; (g) Panorama Drive, North Vancouver, British Columbia; (h) McKenzie Pub and Bowling Lanes.
(a) Austin Avenue Property
Counsel for the Appellant submitted that with respect to the Austin Avenue property the issue is whether or not, the Appellant, either directly or indirectly, participated in the gain realized on the purchase and sale of this property.
He argued that the Appellant testified that he had no economic interest in this transaction whatsoever nor was there any basis on the facts nor in law to conclude that the Appellant received any benefit of any kind whatsoever from the purchase and sale of the Austin Avenue property.
Further, the Appellant himself testified that, from his review of the documents provided to him by the former owners of H.W. 78, the gain determined by the Auditor of $250,000 was incorrect since it had failed to take into account, among other things, differences between the credit given to the vendors of Southwest Marine Drive, that is $600,000 and the price realized by H.W. 78 when the property was sold to the Appellant for $481,220.
Detailed back-up with respect to the profit made by Deausy and Group was provided to the Auditor.
The Auditor failed to take into account the various transaction costs associated with the purchase and sale of H.W. 78 which were incurred in the course of the acquisition and disposition of the Austin Avenue property.
(b) Boundary Park Mall, Cedar Avenue and U.S.A. property
Counsel argued that there were two issues in this matter, (a) Who was the owner of these properties? Was it Standard Equities Ltd. or the Appellant? (b) If it was the Appellant, what was the gain realized from these transactions?
His position was that Standard Equities Ltd. was the owner of these properties, not the Appellant. This company had its own bank accounts and dealt with the property directly. Standard Equities Ltd. held itself out to the public as beneficial owner of the properties; no declaration of trust existed between Standard Equities Ltd. and the Appellant and there was no declaration of trust inconsistent with Standard Equities Ltd. being the beneficial owner of the properties.
He cited a number of legal authorities in support of his position that the corporate veil should not be lifted in this case and that the normal rule of a corporation being a separate and distinct legal entity from its shareholders should apply in this case because there were no compelling circumstances to displace the normal rule.
However, if the Court should find that this is a proper case for lifting the corporate veil, the Respondent has another problem and that is in calculating the profit.
Counsel submitted that all of these properties should be accounted for as one business deal which was completed in parts. The MV Lovit cannot be separated from the sale of the Trail property. When determining the amount of the profit realized in the sale of the Cedar Avenue property and the Boundary Park Mall property, Standard Equities Ltd., before paying its share of the profits to Mr. Quesnel, realized a profit of $60,777 for the Grand Forks property, less a loss of $49,679 for the Trail property, resulting in an overall profit of $11,098, the Standard Equities Ltd. share being $5,548.
Counsel argued that this is the proper treatment for determination of the profit and loss realized in the transaction respecting the Cedar Avenue, Boundary Park Mall and U.S.A, properties.
c) Riverview Lot
With respect to the Riverview Lot, counsel argued that the real issue was whether or not the Appellant made a profit in the sale of the lot. His conclusion was that the evidence showed that after deducting transaction costs involved with the sale of the property, including the payment of real estate commission and payment of property taxes, the Appellant in fact incurred a loss. This result is substantiated by the evidence of the Appellant and the documentation produced.
d)&e) Cranbrook Condominiums and East Second Avenue
With respect to the Cranbrook Condominiums and the East Second Avenue property, counsel took the position that there were two issues. (1) Did the Appellant properly report the gains realized in these transactions when he filed his 1988 taxation return? (2) Did the Appellant knowingly or under circumstances amounting to gross negligence, make or participate in, assent to or acquiesce in the making of a false statement or omission in his returns in respect of the reporting of the profits made from these transactions?
Counsel submitted that the Appellant properly included these amounts in the statement of income and expenses in his 1988 taxation return. He further submitted that the Auditor double counted these amounts by reassessing them as income a second time.
With respect to the assessment of penalties, counsel submitted that the Minister had improperly levied penalties pursuant to section 163(1) of the Act. It is the Respondent’s duty to establish that he properly assessed the penalties.
Counsel referred to various cases in this regard and said that subsection 163(3) required evidence of intent or gross negligence on behalf of the Appellant. This evidence should be given in a clear and convincing manner and this did not take place in the case at bar.
f) Southwest Marine Drive
With respect to the Southwest Marine Drive property counsel for the Appellant took the position that the issue was whether or not in the Appellant’s 1989 taxation year, disposition of this property gave rise to an income gain and what was the proper amount of the gain.
The Appellant’s submission was that the inclusion of a further $507 in the income of the Appellant for the year in question was the proper adjustment.
g) Panorama Drive
With respect to the Panorama Drive property counsel put forward the proposition that there were three issues: (1) Did the personal residence of the Appellant qualify as his principal residence? (2) Did the costs incurred as a result of the acquisition, ownership and disposition, including the trade- in of the West 8th condominium result in realization of a loss of $129,660?
(3) Should penalties have been imposed under the circumstances in this case?
Counsel’s conclusion was that the property in question was not a property used in trading as the Minister alleged. This was the principal residence of the Appellant, an exemption should be granted and capital gains taxed under the rules in paragraph 40(2)(b) of the Act. The Appellant qualified for the exemption as he and his spouse lived in this property from the fall of 1989 until the sale, approximately one year later.
However, if the property in question was not the principal residence of the Appellant, so as to qualify him for the above referred to exemption, the Respondent improperly calculated the gross gain that the Appellant realized on the disposition of the property, because the Respondent did not take into account the costs for property taxes, improvements and the costs of liquidating the trade-in. It was counsel’s position that the Auditor treated this matter as a sale of shares but this was completely rebutted by the evidence. The Auditor has not testified in the matter and none of the Appellant’s evidence has been rebutted.
If the property involved was by way of trading, then the property was inventory and the Appellant should be entitled to costs related to this property although the Respondent has not allowed these costs.
Counsel argued that as a result of the transactions the Appellant actually suffered a loss of $21,000, being the difference between the gain on the sale of the residence and the total cost.
h) McKenzie Pub and Bowling Lanes
Regarding the McKenzie Pub and Bowling Lanes properties, counsel said that there are two issues: (1) Did the Appellant have debts in the amount of $39,521 in 1988 in respect of his rental operation of the property which had become bad? (2) Was the Appellant entitled to claim as a reserve for a doubtful debt the amount of $132,146 in 1991 in respect of the receivable which was owing to him as a result of the sale of the McKenzie property?
Counsel took the position that the Appellant was properly entitled to claim the bad debt expense in respect of the amounts which were owed to him by Higgs in his 1988 taxation year. The Respondent had assumed that the debt was not established to have been owed in 1988 or that the debt became bad. However, this was shown to be incorrect according to the evidence.
Counsel further argued that the Respondent had accepted the income reported by the Appellant in respect of the accrued rent and inventory, which was owed to him by Higgs, in the amount of $39,521 but refused to permit him a deduction for a similar amount even though he had never received payment in respect of these items.
In the year 1991, with respect to the reserve for bad debt, the Appellant argued that the debt was a trade receivable from the sale of inventory in the course of his business of buying and selling businesses. The bad trade receivable is now at least $132,146 or less, taking into account the poor performance of Andereggen’s business and the resulting decline in the value of the property. The actual loss was borne out by the sale of the property by foreclosure in these periods.
Counsel referred to a number of legal authorities on the question of allowing the reserve for doubtful debts under paragraph 20(1 )(/) of the Act. His position was that it is not a requirement of deductibility that a taxpayer attempt to collect the receivable before being entitled to the benefit of this paragraph, provided the conclusion regarding the lack of worth of the debt can be substantiated.
Counsel took the position that the cross-examination of the Appellant did not deal with the issue of the value of the receivable or if it had any value. However, by 1995 the Appellant had lost it and he had to pay $40,000 to F.B.D.B.
In the end result counsel argued that the presumptions contained in the Reply had been rebutted. The appeal should be allowed, with costs to the Appellant.
Argument of the Respondent
Counsel for the Respondent said that one can be sympathetic to the plight of the Appellant, but the Court must decide the case on the facts. The Appellant must prove his case on the balance of probabilities. The Income Tax Act imposes duties on taxpayers. The taxpayer must pay his taxes in each year.
Section 150(1) requires a taxpayer corporation to file a return for every taxation year. Here, there were none filed by Standard Equities Ltd. for 11 years.
The Appellant filed his own return near the end of the taxation year, the last day and had to estimate his income. He did not provide sufficient information to the Minister. He did not meet his obligation. Section 230 of the Act requires the taxpayer to keep proper records of his business to enable the correct taxes to be identified. Here, he has not met that obligation. Subsection 231(1) of the Act entitles an authorized person to audit and inspect the taxpayers’ records. There is no duty on the Respondent to call the Auditor. Credibility is an issue here. There must be positive evidence of the facts and there should be corroboration of those facts as stated by the Appellant.
With respect to H.W. No. 78, there was no evidence that the Appellant became a shareholder. He did not complete the shareholders’ register.
With respect to 309309 B.C. Ltd., Mr. Quinnell was using that company for his business, but there was no evidence that any shares were transferred to him.
Panorama Drive
With respect to the property at Panorama Drive, the Appellant’s partner incorporated 325467 B.C. Ltd., and there was insufficient evidence to show that the property was held in trust for the Appellant. The registration documents showed that the Appellant treated all of the properties the same way. Therefore, all of the properties were really his and not those of the incorporated entities. He was buying and selling these properties on his own. The company was not the owner.
Even though there may have been companies incorporated, this does not mean that the Appellant himself was not trading in these properties. See Fraser v M.N.R., 64 DTC 5224 at p. 5226.
Counsel argued that the Appellant disposed of the Panorama Drive property as part of a “trading operation”. It was not his principal residence. Therefore, any profit received was “income”. He did not prove that the property came within the definition of “principal residence” as set out in subsection 54(g) of the Act.
The residency of the Appellant in this property was “casual” or “nonpermanent” unlike the residence of the Appellant in Thomson v. Minister of National Revenue (1946), 2 D.T.C. 812 (S.C.C.).
See also Schujahn v. Minister of National Revenue (1962), 62 D.T.C. 1225 (Can. Ex. Ct.) and Gavrilovic v. R. (1996), 97 D.T.C. 142 (T.C.C.). The Appellant here had a trading history. The test is an objective one. He did not live in it until January 1990. Mr. Quinnell was living there. The insurance documents listed Mr. Quinnell as residing there. The Appellant sold in November of 1990.
The majority of the repairs were done when Mr. Quinnell was there. The explanation for selling was not reasonable. He must have listed it on the market before November 1990. He had financial problems in 1989. His income was only $38,470, how could he afford to pay a mortgage of $2,000 per month? How could he afford to buy it if he was not intending to sell? He knew that he had financial problems. He must have intended to sell. He had purchased and sold properties for business purposes in 1987, 1988 and 1989. His course of conduct and the surrounding circumstances dictate that this was not his principal residence property.
MV Lovit
With respect to the boat, the MV Lovit, the Appellant did not provide sufficient evidence for the computation of the gain. The owner was an American company. The evidence was insufficient to show what had taken place so that the assessment has not been shown to be incorrect. The evidence was vague, uncertain and uncorroborated.
Why would you buy and dispose of it in one day and lose $100,000? The Appellant was experienced in business and sophisticated. The Appellant did not call Mr. Quinnell to corroborate his evidence.
The letters that the Appellant submitted to establish his costs were inadequate. They do not show the subject matter of the expenditure and did not show that the amounts were paid. There should have been cancelled cheques. If the gains are found to have been income the Minister has calculated them correctly. Deductions for businesses must be related to the source of income.
1200 Cedar Avenue
With respect to the 1200 Cedar Avenue property, the interest cannot be deducted in this way where the properties are held for sale. If they can be deducted some of them are objectionable i.e. the $7,500 expense to Standard Trust. If it were paid it was not reasonable. The Toronto Dominion Bank only charged $408. I
McKenzie Pub and Bowling Lanes
Counsel addressed the issue of the reserve for the bad debt and asked the question, when did the property, (giving rise to the alleged bad debt) become that of the Appellant? She also raised the issue of the credibility of the Appellant.
Counsel argued that the amount can only be claimed as a bad debt if it were included in income that year or a previous year and if it qualified as a bad debt. She referred to subparagraph 20( 1 )(p)(i) of the Act in support of her position. With respect to the alleged bad debt of $39,521, she said that this was included in income in 1988 and the real issue is whether or not it had become bad.
The Appellant did not send a demand to the debtor to be paid. He took no legal action. One has to do more than the Appellant did. The debt may have been doubtful, but it was not conclusive that it was a bad debt. The period of time over which it was owed was short, five months or thereabouts.
With respect to 1200 Cedar Avenue, the income should have been reported in his 1989 return. It was not. In 1990, no disposition was reported.
With respect to the doubtful debt reserve claimed with respect to the McKenzie property ($132,146), he should have included it as income in 1991 and did not. See Exhibit R-l, Tab 6, copy of the Appellant’s income tax return for 1991.
Further, she asked, what was the proper amount? The proper amount was never proved. What he should have done was to have claimed it as income in 1989 and then claim a reserve in 1991. Under paragraph 40(1 )(a) of the Act, he should have dealt with the debt relative to the property year after year and he did not. What does this bad debt claim relate to? The Appellant should have provided more evidence to establish the bad debt in 1991.
Penalties
With respect to the penalties, it is simple. If he did not include income in his returns with respect to the properties, that is gross negligence and penalties apply under subsection 163(2) of the Act.
In summary, counsel argued that the Appellant is asking the Court to recompute his income for the years in question. The Court cannot do that. The Appellant has not met the burden. One cannot use corporate entities for their own purposes. The evidence led by the Appellant is unclear, self-serving and uncorroborated.
The Appellant set up his affairs in such a way that it was almost impossible to determine what was going on. Costs should be dealt with after the decision is given and counsel for the Respondent wishes to speak to the matter of costs.
The appeals should be dismissed except for those matters covered in Schedules II and V.
Rebuttal
In rebuttal, counsel for the Appellant directed his attention to paragraph 40(1 )(a) of the Act in respect to the doubtful accounts. He argued that this was the improper section of the Act in respect to the bad debt claimed here.
The reserves referred to in that paragraph deal with reserves relative to capital gains and that is not what we are dealing with here. The property in issue was not capital to the Appellant by the time that he listed it for sale to Andereggen. There was a loss at the time of sale.
The property was being operated at that time as a going concern, as a business and therefore the receivable was a trade receivable.
Counsel was prepared to concede that the Appellant may have claimed the amount of $5,113 twice and therefore there would have to be an adjustment in the return of this amount.
With respect to the fee paid to Standard Trust for 1200 Cedar Avenue, counsel for the Respondent argued that the amount of $7,500 was unreasonable in relation to The Toronto Dominion Bank fee but the Minister did not even allow The Toronto Dominion Bank fee.
In any event, the mortgage document was drawn. There was a letter written indicating that the fee was not to be refunded. The Toronto Dominion Bank had the same clause except if they funded it, it would be paid back.
The argument raised by the Respondent that all the properties were adventures in the nature of trade is not relevant. The term “business” is. This definition includes an adventure or concern in the nature of trade.
The law permits these deductions to be made because the properties were sold and if they were not then they would be capitalized under sections 9 and 10 of the Act.
With respect to the $132,146.37 claimed for doubtful reserve, with respect to the McKenzie property, this was the amount that the Appellant calculated as the real value of the asset that remained. That was his evidence. That evidence should be accepted.
with respect to the MV Lovit, the Minister has failed to appreciate that this was part of another transaction. We have to go back to the Cedar Avenue property transaction and reduce the gain by the cost of that property. The boat was taken in trade. With respect to the fact that the sale price was $100,000 less, that is what it took in order to move the Cedar Avenue property.
with respect to the Panorama Avenue property, in accordance with the decision in Gavrilovic, supra, this was the Appellant’s principal residence in the year in question, the year that he disposed of it. The expenses claimed were properly included in the cost base to determine the amount of the gain.
The Appellant made improvements to change the cost base. He said that he paid these amounts. How far can you go. The Minister cannot have it both ways. The case of Fraser v. Minister of National Revenue (1964), 64 D.T.C. 5224 (S.C.C.) is not relevant. That was a case dealing with the sale price of the shares and here it is obvious that the sale price of the shares in issue was $400 only.
Analysis and Decision
The evidence in this case was voluminous, circuitous, confusing and there was some considerable difficulty in understanding it. There is no doubt that such difficulties stemmed from the manner in which the Appellant dealt with the various properties, his failure to file returns on a timely basis for Standard Equities Ltd. and his failure to properly characterize some of the items in his own returns.
In some cases, properties which he supposedly held in his own name were registered in the name of other entities, transfers of properties went directly from one registered owner to the ultimate buyer, although in fact the legal interest in the properties passed through several other persons or legal entities with the intermediary owner taking advantage of agreements in place for the benefit of those who were earlier owners.
It would have been a simple matter for the Appellant to have kept a separate file and general ledger account for each property and to have reflected therein every transaction relative to that property.
It would have been much simpler if the Appellant had produced receipts or vouchers for the expenses claimed or cancelled cheques instead of relying upon the trust ledger sheets of the law firm or computer print-outs.
It would have been simpler if the Appellant had not characterized a profit on a property as income and if the registers of the various companies incorporated had been kept up-to-date so that a clear picture could be had of the relationship to the companies of all persons mentioned in the evidence here.
Apart from the Appellant here there were nine other limited companies involved to some extent and at first blush, looking at it from the point of view of the Auditor on this file, the picture must have been very blurred indeed and to some extent suspicious.
In addition to that there was apparently an unwillingness or an inability on behalf of the Appellant and the Auditor to address the outstanding issues in a more cooperative and non-confrontational way so that in the end the Auditor probably believed that the Appellant was withholding information that he needed to complete his audit. The Appellant may very well have concluded that the Auditor was unwilling to consider, in a reasonable way, the information that was provided and that he had his mind made up.
The evidence of the Appellant was that he had provided all of the information to the Auditor that was relevant. However, it was easy to see why the Auditor may very well have been so overwhelmed by the confusing nature of the documentation, that he was unable to satisfy himself that the documentation was what it purported to be or that it led to the conclusion that the Appellant was advancing.
There was obviously a degree of mistrust between the two so that in the end the Auditor probably concluded that the Appellant had not provided all of the information available as was his duty. The Appellant probably concluded that he had provided enough information for the Auditor’s needs and was not going to provide more.
Some issues were resolved before trial by counsel but other substantive issues remained. Only by a careful consideration of all of the evidence presented in Court, some of which may not have been available to the Auditor, nor counsel for the Respondent, could these outstanding issues be resolved.
The Court is not prepared to place blame for the stalemate on one side or the other and it must make its decision based upon all of the evidence presented, in light of the credibility it attaches to the witnesses and the documentary evidence after the examination-in-chief, cross-examination and the re-direct of the witnesses and in light of the arguments of counsel.
Counsel for the Respondent conceded that the recapture of $9,891.45 with respect to the disposition of a class 10 asset of the Appellant in the 1989 taxation year, should not be included in the income of the Appellant for that year.
Counsel for the Respondent conceded as follows: a) that interest expenses in the amount of $47,366 with respect to the property located at 18503 - 97th Avenue, Surrey, B.C. should be deducted by the Appellant in the 1987 taxation year; b) that the amounts of $18,600, $12,500, $1,154 and $550 were proper expenses in the year 1986 and should be deducted; c) that claimed expenses of $10,000, $830 and $277 were properly deductible in taxation year 1987, with respect to the Boundary Park Mall property; d) that the amount of $18,000 deducted by the Appellant in the 1989 taxation year in respect to the 746 Southwest Marine Drive property, should be allowed.
Therefore, the appeal will be allowed with respect to those items and the matter referred back to the Minister of National Revenue for reassessment and reconsideration based upon these agreements.
For the 1988 year the Appellant deducted the amount of $5,113 twice so that the assessment issued will be varied to add the amount of $5,113 to it.
Disputed Items
1021 - 1025 Austin Avenue, Coquitlam, B.C.
The Minister assessed a gain of $250,000 to the Appellant on this property. The evidence of the Appellant in this regard was not challenged. His knowledge of the matter was complete and his explanation as to what had occurred was credible.
The Court is satisfied that the Appellant has established, on a balance of probabilities, that at the time of the disposition of this asset the Appellant had no interest in it. This property was acquired by H.W. No. 78 and at the time of disposition of the property in question, the Appellant had no interest in the company; was not entitled to share in the proceeds of disposition and did not do so.
The appeal is allowed in this regard and the matter referred back to the Minister of National Revenue for reassessment and reconsideration based upon this finding.
1200 Cedar Avenue, Trail, B.C., Boundary Park Mall and MV Lovit.
There are two questions relative to these dispositions. (1) Was the owner Standard Equities Ltd. or the Appellant? (2) What was the gain realized from the sale of these assets, if any?
The Minister conceded that certain expenses were properly deductible in computing the gain on 1200 Cedar Avenue, leaving in issue a purported gain of $77,196 instead of the reassessed gain of $110,000, but this amount is only in issue if the Court finds that the Appellant was an owner of this property at the time of disposition.
Counsel for the Respondent conceded that certain outlays or expenses were deductible in relation to the net gain realized on the sale of the Boundary Park Mall property, thus, reducing the net gain on disposition to $61,893. This amount is only in issue if the Court should find that the Appellant was the owner of this property.
The Minister maintained that there was a gain on the disposition of the MV Lovit of $473,000. This amount is only in issue if the Court should find that the Appellant was the owner of this asset at the time of disposition,
There was considerable evidence before the Court of a documentary nature that indicated that these properties were owned by Standard Equities Ltd. and not by the Appellant. This company was a legal entity, it had bank accounts in its name, it held itself out as owner of the properties in question, it dealt with the properties directly and there was no documentary evidence that pointed to the Appellant as being the beneficial owner of these properties such as a declaration of trust.
The Appellant’s evidence in this regard was consistent with the documentary evidence and the manner in which these properties were dealt with did not indicate ownership as otherwise.
At first blush, the net worth statement might be construed as suggesting that the Appellant was the real owner, but when looked at in light of the Appellant’s testimony and the testimony of Mr. Boyer, such perception is dissipated.
It was certainly open to question why the owner of MV Lovit would sell the property at a loss the day that it was purchased, but again when viewed in light of all of the evidence and in light of the fact that the Court finds that this property transaction cannot be looked at in isolation but as part of a transaction involving the three properties, the nature of the transaction is not questionable.
There were certain pieces of documentary evidence which, when looked at in isolation and without explanation, might suggest that the Appellant was holding himself out as the owner. But again when these documents are scrutinized in light of the explanations offered by the Appellant and in light of all of the transactions involving these three properties, these apparent discrepancies do not amount to anything of significance.
The evidence of the Appellant in regards to these transactions was complete, detailed and in the main, undisputed.
The Court is satisfied that this is not a case where any evidence has been presented which would dictate that the Court should fail to recognize “the normal rule of a corporation being a separate and distinct legal entity from its shareholders” -- see R. v. Jennings (1994), 94 D.T.C. 6507 (Fed. C.A.) and Appleby v. Minister of National Revenue (1974), 74 D.T.C. 6514 (S.C.C.).
If the Court had found that the Appellant was the owner of these assets it would have found that the Minister had improperly assessed the value of the gain on these properties and the real gain that should have been assigned to Standard Equities Ltd. would have been $5,548.
The appeal in regard to these three properties is allowed and the matter referred back to the Minister of National Revenue for reassessment and reconsideration based upon the finding that the Appellant is not the owner of these properties.
Lot 19, Riverview Crescent, Coquitlam, B.C.
The Appellants’ testimony in regard to his calculation of the loss on this property was not really seriously questioned. The expenses that he incurred appeared to be reasonable and there was no evidence to indicate that they were not incurred. (See Tabs 64 and 67 at Exhibit A-l)
The appeal in regard to this property is allowed and the matter referred back to the Minister of National Revenue for reassessment and reconsideration based on this finding that there was no net gain on this property.
746 Southwest Marine Drive
The Minister determined that the gain realized on this property was $40,771. The Appellant agreed that the difference between that amount and his figure was a disallowed legal disbursement for this property by his law firm of $698. This explanation was shown at Tab 79, Exhibit A-l, its propriety was not really contested and that deduction should be allowed.
The Appellant confused the nature of this transaction by reporting income of $11,000 from this property in 1989 but his evidence indicated that it was really his estimate of the gain on disposition.
Counsel conceded that the Appellant had actually made a gain of $11,507 and had only reported income of $11,000, so that a further amount of $507 should be added to the income of the Appellant in 1989 if this amount was found to be on account of income. The Court finds that a proper adjustment to the income of the Appellant in 1989 is in the sum of $507 and this amount is to be added to his reported income for 1989.
The appeal is allowed and the matter referred back to the Minister of National Revenue for reassessment and reconsideration based upon this finding.
2534 Panorama Drive, North Vancouver, B.C.
The Court is not persuaded that the Appellant occupied this property as a principal residence. The Court accepts the argument of counsel for the Respondent that the Appellant treated this property in essentially the same manner as the other properties which he bought and sold.
The Appellant testified that he bought the property as his personal residence and intended to reside there and it was only his financial difficulties that forced him to change this intention. The Court considers all of the factors brought out in the evidence, such as his avowed intention, the length or duration of his residence in this property, his trading history and the residence of Mr. Quinnell in the property. Further, various documents referred to Mr. Quinnell as being the resident there, various repairs were carried out by Mr. Quinnell even if they were paid for by the Appellant. The property was registered in the name of the Appellant’s company. The Appellant had financial difficulties and the nature of financing on the property was suspect. The Court is satisfied that the Appellant had an intention to sell the property from the beginning and the quality of his personal residency did not have the “permanency” required and was “casual” as those terms were discussed in Thomson, supra. Consequently any gain on the disposition of this property was on account of income.
The second question raised is the extent of the “gain”, if any. Counsel for the Appellant argued that the Minister treated this transaction as a sale of shares of the company which held legal title to the property but the evidence of the Appellant was that the shares sold for $400 and that has not been rebutted.
Counsel for the Respondent at the time of trial did not call the Auditor to give any further insight into his treatment of the item and did not really contest in any serious way the evidence of the Appellant that the expenses that he incurred for taxes, improvements, insurance and renovations were properly deducted from the gross gain.
Likewise, the Appellant testified that after he took into account the cost of liquidating the trade-in on this property the end result was a loss of $21,000. This was not seriously disputed in cross-examination nor was it seriously addressed in argument.
The Minister obviously did not allow any of these costs. The Court is satisfied that these deductions were proper.
The appeal is allowed with respect to this item and the matter referred back to the Minister of National Revenue for reassessment and reconsideration based upon this finding.
Cranbrook Condominiums and 148 East 2nd Avenue
The Appellant testified that he reported the gains realized on these transactions when he filed his 1988 tax return. Further he testified that he provided the Auditor with the back-up files to support his calculations. He explained to the Auditor how he arrived at the figure for sales and gross revenue and included the expenses claimed in his statement of income and expenses attached to his income tax return.
The Respondent did not attack these calculations in any way nor was their accuracy called into question. No real issue was taken with these calculations in argument.
The appeal in respect to these properties is allowed and the matter referred back to the Minister of National Revenue for reconsideration and reassessment based upon these findings.
As a result, any penalties levied with respect to these items were improper and these penalties shall be cancelled.
McKenzie Pub and Bowling Lanes
There does not seem to be any real issue between the parties that the amount of $39,521 claimed by the Appellant for the 1988 taxation year was owing. Further it was admitted that this amount had been included in the income of the Appellant in the year 1988 and the only issue was with respect to whether the Appellant had established that the debt had become “bad”.
The Appellant testified extensively about the difficulties he encountered with respect to these properties.
The evidence made it clear that the debtor would not pay and could not pay. The Appellant made various efforts to have the debtor satisfy the claim but these efforts came to naught. It was obvious from the information provided by the debtors accountants that the debtor was in serious financial difficulty. He did not pay the taxes nor the balloon payment as required. The Appellant considered legal action but it was obvious that this would have proven fruitless.
There was no evidence to contradict the conclusion of the Appellant that this debt was uncollectible. The Court is satisfied that it had become “bad” and was not merely “doubtful” as counsel for the Respondent argued. The Court can find nothing wrong with the method that the Appellant used in claiming this amount.
The appeal with respect to the disallowance of this amount is allowed and the matter referred back to the Minister of National Revenue for reassessment and reconsideration based upon this finding.
The second claim was for a reserve for a doubtful debt in the year 1991 in the amount of $132,146.
Counsel for the Respondent took serious issue with this claim, firstly on the basis that it had not been included in the income of the Appellant in the year 1991 or any earlier year and if it were to be claimed it should have been. This argument was not seriously questioned.
Secondly it was questioned because counsel for the Respondent argued that there was no basis established with respect to its calculation.
It was clear from the evidence of the Appellant that there was no objective basis for the calculation of this amount and counsel admitted in rebuttal that this was merely the amount that the Appellant calculated as the real value of this asset that remained and that his evidence should be accepted.
The Court is satisfied that this amount cannot be claimed by the Appellant in the year 1991 and it accepts both arguments of counsel for the Respondent in that regard.
The appeal in respect to that item is dismissed and the Minister’s assessment is confirmed.
With respect to penalties, the Court accepts the argument of counsel for the Respondent that, where the Appellant did not include in his return amounts that should have been reported, there should be penalties because there was no evidence led which would explain these failures, except “gross negligence” or intention not to include them and the Appellant has violated subsection 163(2) of the Act.
The Appellant was a sophisticated businessman and a barrister who practised in, the corporate field, who completed and filed his own returns and there was no evidence to indicate that these failures to report the amounts that the Court has found that he should have reported or where he claimed deductions which the Court has found that he was not entitled to claim, were the fault of anyone but himself.
The Minister shall reassess the penalties in light of the above findings.
The Court will hear the parties as to costs by telephone conference call or in Vancouver during the week of June 8, 1998.
Appeal allowed in part.
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