Beatrice M Guest v. Minister of National Revenue, [1979] CTC 2473, 79 DTC 412

J B Goetz:—The appeal of Beatrice M Guest was heard at Toronto, Ontario, on March 21, 1979 and is from a reassessment in respect of her 1974 taxation year. The reassessment is based upon the fact that a bonus of $4,500 on a mortgage loan made by the appellant in 1970 should have been included as income in her 1974 tax return. The appeal also relates to the interest income on the loan in the sum of $1,621.47. A penalty has been assessed in the sum of $198.44 for failing to report such amount. The respondent relied, inter alia, upon sections 2, 3, 9 and subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63 and amendments thereto.

The appellant is a widow and a retired school teacher. Her husband passed away in 1970, leaving her proceeds from various insurance policies. The appellant’s son was a practising barrister and solicitor and both he and the appellant were concerned with proper investments of the proceeds of insurance resulting from the appellant’s husband’s death. The son introduced her to one of his clients for the purpose of her advancing to that client the sum of $20,000. It was agreed that this was a safe investment and mortgage was taken on certain lake property which was unseen by the appellant, but its value was assured to her by her son. Relying on her son’s advice and not having sought out the borrower, she did, in March 1970, advance the sum of $20,000 to this client on the security of a mortgage in face value of $24,500 based on the borrower’s lake front property and which mortgage bore interest at the rate of 8% with a maturity date in 1974.

After 1972 she made certain small loans to members of her family and in 1973 an $8,000 loan to a person unrelated as well as another loan of some $4,000 to another person not related. These loans as far as the evidence goes are all the mortgage transactions ever engaged in by the appellant.

The initial loan in the sum of $20,000 was paid off in 1974 by the mortgagee. The bonus of $4,500 paid to her in 1974 was not included in her income tax return. The Minister of National Revenue included it in his assessment of her 1974 tax return as being income. Hence this appeal.

The issue to be determined in this matter is whether or not the sum of $4,500 was a capital accretion or whether it was income. In other words, was the transaction an investment or a trading transaction? The Minister’s assessment with respect to the bonus of $4,500 can only stand if indeed the transaction was a trading transaction. In deciding this it is incumbent upon the Board to determine whether it is such, depending on the facts and surrounding circumstances.

I have carefully considered the decision of Cameron, J in A Cohen v MNR, [1957] CTC 251; 57 DTC 1183, and that of Thorson, P in MNR v L W Spencer, [1961] CTC 109; 61 DTC 1079. These cases are not on all fours with the case before this Board. But, in the Cohen case, the appellant purchased a number of mortgages at a discount and the discount was consistent with the apparent element of risk involved. No attempt was made to sell the mortgages and all were held until maturity. The Court held that the profit realized by the appellant from these various mortgage transactions was a mere enhancement in value at maturity and therefore a capital receipt. It was further stated that the taxpayer was not engaged in the business of money lending.

In the Spencer case the Exchequer Court differentiated the facts in that case from those in the Cohen case by holding that the lawyer who had purchased a large number of second mortgages at a discount was not making ordinary investments but that he was primarily interested in the speculative nature of the transaction.

In that instant case the appellant did not seek out the borrower, she was husbanding the proceeds of her husband’s insurance policies by making what she was advised by her son as being a worthwhile investment, as it proved to be. Under the surrounding circumstances it had none of the earmarks of a speculative venture. There was little risk involved. Although the appellant did, in subsequent years, make loans to members of her family, I hold no significance to such transactions. Further, small loans made in 1973 and 1974, in my view, do not, in any way, colour the transaction she made in March 1970 as being any more than a worthwhile and safe investment.

On the facts, I find that the appellant was not engaged in an adventure or concern in the nature of trade and that the profits realized were made on an ordinary investment by an enhancement in its value at maturity and therefore was a Capital accretion.

The appeal is therefore allowed and the matter referred back to the respondent for reconsideration and reassessment.

This brings me to another matter, namely, the amount of $1,621.47 as interest income on the loan which was not declared on the 1974 return of the appellant. A penalty of $198.44 was levied.

The appellant’s 1974 return was prepared by her son, which I can readily appreciate she would simply sign, having regard to the complexity of the income tax return form. It is only natural, under the circumstances, to assume that the appellant in no way came under the provisions of subsection 163(2) of the Income Tax Act which reads as follows:

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 statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a panalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

Having regard to the manner in which the appellant gave evidence and her obviously total reliance upon the judgment and expertise of her son, I cannot in any way assume that she knowingly or under any circumstances was grossly negligent in not including the interest income in the sum of $1,621.47 when signing the return. Mr Christopher Guest, her son, in preparing the appellant’s objection, admitted that the omission of this sum in her tax return was an error on his part. That brings us to the point as to whether a penalty should be levied with respect to the failure to disclose the said interest income. In that regard I refer to a statement of my brother Member of the Board, Mr M Bonner in H Brouwer v MNR, [1979] CTC 2219 at 2223; 79 DTC 235, at p 238.

Under subsection 163(3) the burden with respect to penalties is on the respondent. All I have before me is a case of simple failure, in unexplained circumstances, to report amount of income, the nature of which is not disclosed by the evidence. That failure, without more, is not a sufficient factor on which to uphold the penalty.

In the present case the omission was not a serious one and I therefore rule that no penalty should by levied with respect to the non-disclosure of the loan interest.

I therefore order that the matter be referred back to the Minister in order to delete the penalty levied on the undeclared amount of $1,621.47 received by the appellant as loan interest during the 1974 taxation year and to reassess accordingly.

Appeal allowed.