J a Tardif Estate, Gérard Tardif v. Minister of National Revenue, [1979] CTC 2962, 79 DTC 758

Delmer E Taylor [TRANSLATION]:—The appeals of Gérard Tardif and of the Estate of the late J Alzire Tardif (father of Gérard Tardif) were heard on common evidence in the City of Montreal, Quebec on February 9 and 19. 1979.

Issue

Gérard Tardif filed an appeal against tax reassessments for 1970, 1971, 1972 and 1973 and against an assessment for 1974. In these assessments the Minister increased the appellant’s reported income as follows:

The Estate of the late J Alzire Tardif appealed from a tax assessment for 1971 in which the Minister increased the reported income by $106,861.69 in “net business income”.

In the case of Gérard Tardif the respondent relied, inter alia, on sections 3, 5, 13, 20, 23, subsections 46(4), (5) and (6) and subsection 56(2) of the Income Tax Act, RSC 1952, c 148, and on sections 3, 9, 13, 20, paragraph 20(1 )(n), subsections 56(4), 152(3), (4), (5), (7) and subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and on ITAR 42.

In the case of the Estate of the late J Alzire Tardif, the respondent relied, inter alia, on sections 3, 4, subsections 44(1), 55(1) and paragraph 139(1 )(e) of the Income Tax Act, RSC 1952, c 148.

Facts

Gérard Tardif is a notary who has practised his profession in Pointe- Claire, Quebec for over twenty years. His father was also a notary, practising in Quebec City until he retired in 1952 at the age of 68. In 1952 the appellant and his father each purchased half a large property referred to as lot 32 near Pointe-Claire. Several small sales took place after that year, but the principal sale of the portion belonging to the late J Alzire Tardif took place in 1971, and that of the portion belonging to Gérard Tardif in 1973 and 1974.

Submissions

Although all questions concerning the assessments were considered during the hearing, the essential issue was the sale of “lot 32” and certain particular references to this subject have been taken from the notice of appeal (the appellant’s position) and the replies thereto (the respondent’s position):

Position of the appellant (Gérard Tardif)

I was not 70 years old but my health and the activity at my office were such that I could not invest my savings except in the same way as my father, whose ideas on this subject have profoundly influenced my life.

Another reason why I adopted his method and views was that although I was not his age my health has always been a cause for concern. I was therefore also trying to make safe investments, such as purchasing property.

It must be realized, finally, that in my profession there are no pensions, as there are for company employees from executives right down to office boys, and for civic employees. Once again, therefore, every dollar one manages to save must be invested safely; and once again I followed my father’s method and even made the same investment in land with him.

The intention was the same from the time of the purchase.

The circumstances were the same and when he sold in 1971 I had to follow suit a few months later since the development of the part of the land he had kept for 20 years and then sold had increased the taxes on the remainder so considerably and induced the city to do so much work that I had to dispose of my part. The profits made were consequently capital gains and not income.

Position of the respondent

The appellant has been dealing extensively in land and loans for over twenty years;

in these transactions the appellant conducts himself like a dealer in such matters;

the appellant claimed as deductible expenses the taxes payable on his properties for each of his 1967, 1968, 1969, 1970 and 1971 taxation years;

a first plan for subdividing lot 32 was filed on August 2, 1960, a second subdivision plan was filed on January 30, 1964 and a final subdivision plan was filed on October 12, 1968;

the appellant and his father severed the parts of lot 32 that had not yet been sold in a deed registered as number 2290 in the minutes of the notary Laurent Tardif, dated January 11, 1969;

Exhibits and Arguments

Gérard Tardif presented certain documents and gave oral testimony in support of the positions taken in his notices of appeal. The essential points were dealt with by both counsel when they presented their arguments, a few specific passages from which can be cited to illustrate the issues in dispute:

For the Appellants:

In J H Wood v MNR, [1967] 1 Ex C 209; [1967] CTC 66; 67 DTC 5045, Gibson, J Stated the following:

“The origin of substantially all capital gains are not, however, the subject of diversified opinions.

Capital gains in the main arise from capital assets. . .. Capital gains from increases in land values, from investments in the stock market and from the creation and expansion of industrial empires are the most well known sources of such capital gains.

The unexpected nature of a capital gain is the main thing that most economists stress in expressing the conceptual difference between capital gains and ordinary income. In other words, they say that the expected rise in value is a capital gain.

Therefore, in this view, pure capital gains are windfall additions to one’s assets or, as put by Seltzer, “Unforeseen increases in the real value of a man’s existing property not directly attributable to his efforts, intelligence, capital or risk-taking.”

Here Gibson, J cited a few words including Seltzer’s “The Nature and Tax Treatment of Capital Gains and Losses” and Pigou on Windfalls in “A Study in Public Finance”.

The taxpayer J A Tardif once again falls within the limits of these definitions and comments, since his gain was the result of his capital investment. It resulted from an unexpected increase in the value of the land he had purchased in 1952 and sold (sic) in 1971. We established earlier that he could not realy expect, given the circumstances in 1952, that things would be so different in 1971.

Therefore, as Kearney, J said in Valclair, J A Tardif’s transaction did not bear the mark of a commercial transaction since a commercial transaction is always aimed at making a profit as quickly as possible.

Moreover, the taxpayer purchased this property in order to diversify his investments, and had always considered property to be the safest security (Va/c/air, p 469, line 7).

In MNR v Freud, H J, [1969] SCR 82; [1968] CTC 438; 68 DTC 5279, a case which involved a capital gain on a mortgage investment, Pigeon, J stated: “A loan made by a person who is not in the business of lending money is to be considered as an investment”. Thus a purchase of property by an elderly, retired and ill person cannot be regarded as speculative, since this person is purchasing property for investment purposes. This is not a speculative or commercial operation.

If, on the other hand, J A Tardif had incurred a loss in 1971 instead of realizing a gain, the Minister would not have allowed his loss as a deduction from his income for the year. It should be noted that in Freud, cited above, the Minister tried to reverse the situation to his advantage and turn a loss incurred in a true ‘adventure in the nature of trade’ into a capital loss so that the loss incurred would not be deductible from the taxpayer’s income. Pigeon, J stated that the Minister could not have it both ways and treat all capital gains as income while making all losses non-deductible. The taxpayer won his case before the Supreme Court. To quote the judgment, taxpayers must not be “subjected to discriminatory fiscal treatment by being taxed if successful, but denied a deduction if unsuccessful.” (p 79, line 12).

The poor man had to realize his capital at some point. Can he be criticized for having done so when he needed it for himself and for his wife? Can he be reproached or taxed when he withdraws his capital after investing it for twenty years? Can one attempt to prove in the circumstances that he had bought the land for speculative purposes? In order to make a quick and easy profit?

Moreover, even if it were possible to discover that during his long career as a notary, always at his post, always behind his desk, where his clients were waiting for him, he carried out certain transactions, always for the purpose of investing his savings, and not as a speculator, and even if in the past he had bought a few properties, or houses, for speculation purposes, it is nonetheless still possible that in purchasing the land in Beaconsfield he acted solely in order to make a capital investment, as we have established throughout this memorandum.

For it is possible even for a dealer in such matters, even for a speculator, in fact to invest his savings on certain occasions; it is possible for him to carry out a transaction that is genuinely aimed at making an investment that can later produce a capital gain.

(a) Reasons for sale: J Alzire Tardif is 87 years old, he is seriously ill and his incme is insufficient to cover his constantly increasing expenes resulting from the medical care he must receive; the taxes payable on the properties are increasing at a great rate.

For J Alzire Tardif this is therefore a capital gain none of which was taxable under the pre-1972 tax legislation.

In a case such as this, where the Department assesses numerous years after the death of a taxpayer and where the issue is whether there was a capital gain or income, it is very difficult for the legal representatives of this deceased taxpayer to defend their interests adequately. In such a case the evidence should be based on the testimony of the person most directly concerned, in this case J Alzire Tardif. It is on the basis of this statement and his testimony in general that the circumstances surrounding the purchase and sale of the asset in question should be considered. J Alzire Tardif would have been able to show everyone by his testimony that the purchase of land was an investment for him, but unfortunately this is obviously impossible, although we have nevertheless tried to establish, sometimes with difficulty, what the testimony of J Alzire Tardif would have proved with much greater certainty, namely an intention to invest, a genuine investment, the disposition of an investment, the realization of a capital gain.”

For the Respondent

1. Real estate transactions on lot 32 in Beaconfield

We wish to uphold the validity of the addition of the sum of $106,861.69 in computing the J Alzire Tardif estate’s income for the 1971 taxation year, of the sum of $10,912.57 in computing Gérard Tardif’s income for the 1973 taxation year and, finally, of the sum of $29,124.76 in computing Gérard Tardif’s income for the 1974 taxation year. These three amounts represent profits realized on the sale of land located on lot 32 that was purchased by the appellants in 1952. At the hearing the parties agreed to proceed on common evidence respecting these transactions. This is why we intend to present joint pleadings on the issue.

The Board will no doubt have remarked in this regard that our colleague has made a great deal of the alleged intention of Mr J Alzire Tardif as opposed to that of Mr Gérard Tardif. He is trying to establish that an old man, who has retired, would not become involved in a commercial undertaking for the purpose of making a business profit. This argument could certainly have some merit if it were not for the principal and dominant participation of Mr Gérard Tardif in this undertaking. Mr J Alzire Tardif would certainly not have considered purchasing property for the first time in his life at his age in an area with which he was not at all familiar had it not been for Gérard Tardif’s influence. It was entirely normal for a father to have absolute confidence in his son. Especially since the first investments, made before 1952, were beginning to bear fruit. Gérard Tardif recognizes himself that he had such an influence on his father that the interest Alzire Tardif took in real estate came not so much from his past experiences as from the new interest Gerard was taking in such transactions. If the conclusion should not be drawn that there was an actual partnership between the parties, as our colleague maintains, we are of the view that there are grounds at least for associating the intentions of the parties.

Gérard Tardif had special and new reasons for being interested in real estate and was able, for these same reasons, to convince his father to take an interest as well. We do not see why a person who had reached retirement age would choose for the first time in his life to invest in vacant lots. It sems to us that the time for making long-term investments is entirely past by retirement age since the taxpayer is instead now seeking an annual return on his capital. My colleague will no doubt argue that neither is retirement a time when one decides to become involved in a commercial undertaking. We are not at all convinced that this is so where the undertaking does not require a great deal of activity. Becoming involved in a commercial undertaking does not pose any particular problems where the management can be entrusted to one’s son, who will take care of finding purchasers.

As for Mr Gérard Tardif, we must recognize that real estate is not entirely foreign to the professional practice of a notary. He was himself indirectly involved in a real estate agency business and was familiar with the needs of the different builders and contractors in the area.

With the exception of the long period during which the properties were held by the appellants, we are of the view that this case cannot be distinguished from S Grossman v MNR, [1979] CTC 2132; 79 DTC 141, where the Tax Review Board gave an interesting analysis of the case law on this issue.

Consequently we submit that the nature of the assets purchased by the taxpayer, the personality of Mr Gérard Tardif, who was also involved in a real estate agency business, and the general conduct of the taxpayers over the years from 1950 to 1974 lead us to conclude that they were involved in an adventure in the nature of trade if not in a business undertaking.

In this regard we submit that there is no need to assign a separate status to Mr J Alzire Tardif, since the latter was associated with his son’s speculative venture and even participated actively in it. On this point we would refer in particular to the different transactions carried out between 1955 and 1961 by Mr Alzire Tardif, who had purchased the property from Gérard Tardif’s nominee, Charles Paradis, as appears from Exhibit 1-18. If the parties’ intention was thwarted, it was not so much their intention to keep and realize an investment they had never intended to realize, but rather their intention to resell at a profit as quickly as possible, since the market had proved to be slower than they had anticipated at the time of purchase. Phases 1, 2 and 3 revealed that they had carried out their intention in the shorter term. If the parties genuinely wished to acquire a long-term investment, we have trouble seeing why they were in such a hurry to dispose of these properties so quickly in phases 1, 2 and 3.

In conclusion, we submit that the profits made on the disposal of parts of lot 32 in 1971,1973 and 1974 must be regarded as income for Mr Alzire Tardif and Gérard Tardif respectively.

Conclusion

The following four points must be taken into consideration:

(a) the nature of transactions “151(2)” (Parish of Ste-Genevieve) and “lot 32”Parish of Pointe-Claire), as reflected in the assessments for the 1971, 1973 and 1974 taxation years—is this income or capital?

(b) the other items in connection with the 1971, 1972 and 1973 taxation years;

(c) the penalties for 1971, 1972, 1973 and 1974;

(d) the limitation period in the case of the assessment for 1970.

Should the Board decide in favour of the Minister with respect to 1970, that year will be dealt with under items (b) and (c) above.

The Board will deal with these points in reverse order.

Limitation period

In my view the evidence adduced by the respondent does not support a finding that the appellant “made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud . . lt seems to me that the Minister based his claim to be able to assess the 1970 taxation year on the amount of $322.80 (representing the interest the appellant received from a certain Mr Andrews) since a penalty was added to the tax in respect of this amount. Another sum of $1,710 was also taxed but no penalty was added in this regard. This second amount had been deducted by the appellant as interest he himself had paid. The essential argument, as I understand it from the reasoning of counsel for the respondent and referring to subsections 152(4)and 152(5)of the Act, is that once the Minister has established (as is admitted in this case) that a sum of $322.80 was omitted for whatever reason, the onus then shifts to the appellant to prove that this omission was not “attributable to neglect, carelessness or wilful default”. My view differs from that of the Minister on this point. The question of negligence has been dealt with fairly specifically in Jet Metal Products Ltd v MNR, [1979] CTC 2738; 79 DTC 624. I agree with the reasoning of counsel for the appellants, who stated:

_.. for the Minister to be able to assess in this manner after the expiration of the four-year time limit he must prove this neglect, carelessness, wilful default or fraud on the part of Gérard Tardif when the latter was filling out his return for 1970. Unfortunately for him the Department had not discharged the onus it had of proving these essential elements that allowed him to assess outside the time limits. The 1970 year is thus time-barred for the Department of Revenue and the assessment must therefore be vacated.

The appeal of Gérard Tardif with respect to 1970 will therefore be allowed and the assessment vacated.

Penalties

It is obvious that Gérard Tardif is a well-educated man with a considerable amount of experience in business matters. Even if his affairs were very complex and varied, there is no doubt that if he had been a little more careful in preparing his tax returns, he could have filed correct returns. However, the analysis of the requirements of the Income Tax Act on the question of gross negligence in Michael S Mark v MNR, [1978] CTC 2262; 78 DTC 1205, is also applicable to the appeals of Gérard Tardif. The parts of the assessments (for 1971, 1972, 1973 and 1974) dealing with the penalties will not be upheld.

Other items

With regard to the interest received from Mr Andrews ($756.88 for 1971) and from Mr Penchèvre ($875 for 1971, $1,000 for 1972 and $1,000 for 1973), the appellant (Gérard Tardif) explained that this was a mere oversight. This explanation is not sufficient even if there was no gross negligence. The Minister’s assessments with respect to these amounts will consequently be upheld.

As for the interest received from Mr McCowan ($700 for each of the 1971, 1972 and 1973 taxation years), the justification of the appellant (Gérard Tar- dif) to the effect that this interest was “a form of replacement” cannot be accepted. I cannot understand how a taxpayer could have “thus received interest with one hand and put it out with the other”, as counsel for the appellant was suggesting.

The sum of $2,508.50 in connection with McWhiter and Paule Delorme for 1971 is of course taxable, but the Minister taxed it twice over in his assessment and I cannot follow his reasoning in so doing. As a result the assessment for 1971 will be reduced by $2,508.50.

With reference to the sum of $5,000 added to Gérard Tardif’s income for 1973 as “recapture of capital cost allowance”, the explanation given by the appellant seems to indicate that he was not satisfied with the reasons given by the Minister:

Since it was not to your advantage to apply section 42 of the ITARs, the amount of capital cost allowance recaptured was calculated according to the tax rates in section 117.

In my view this explanation given by the Minister is correct and definitive and this part of the assessment should be upheld.

Lots 151(20) and “32”

We come, finally, to the parts of the assessments concerning the disposition of this property (re Gérard Tardif—$10,912.57 for 1973 and $2,605.33 and $29,124.76 for 1974; re the late J Alzire Tardif—$106,861.69 for 19771). Gerard Tardif not only disputed the validity of these assessments (which are based on the principle that the profit comes from a business undertaking) but also stated that he did not receive the total value and consequently suffered a loss. The principle he is putting forward is an intriguing one (the properties sold to the municipality in 1973 and 1974 had on December 31, 1971 a value at least equivalent to the amounts he received and even, according to him, higher than these). He did not provide any professional assessment in support of his claims. It is obvious that the appellant knows a great deal about real estate matters, but the Board cannot accept his opinions on this subject without any supporting evidence. All that remains to be determined, therefore, is whether the profits realized should be regarded as Capital or income.

In conclusion, the evidence strongly indicates that Gérard Tardif had been involved in real estate transactions (purchases, sales, mortgages, construction, and so on) for some time. All the profits from these transactions (sometimes reported, sometimes added in reassessments) were in the end included in his taxable amounts for the years we are concerned with. In my view there is no doubt that the sum of $2,605.33 in connection with lot 151(20) is taxable. I shall thus move directly on to the transactions concerning “lot 32” ($106,861.69 for 1971, $10,912.57 for 1973 and $29,124.76 for 1974).

As mentioned earlier, there were also during these twenty years a number of minor real estate sales in connection with “lot 32”. In my view the fact that these sales were in themselves taxable as income or as capital gains should not necessarily mean that the principal sales that are the subject of this dispute should be treated in the same manner. These lesser sales cannot be ignored completely, however. The Board also notes that despite the fact that the late J Alzire Tardif had not seriously contemplated a future Sale when he bought the property (“lot 32”), there is nothing to prove that he had intended to make good use of the property. Because of his retirement, his poor health and the fact that the other half of the property was owned by his only son, Gérard Tardif, who was well informed and took an active interest in local real estate dealings, it is reasonable to assume that the late J Alzire Tardif attached a great deal of importance to his son’s intentions.

Gérard Tardif stated that this property was a safe investment consistent with his policy of keeping about a third of his investment portfolio in land. According to him this investment policy leads to the conclusion that the profit made should be regarded as capital and not income. This is a proposition I cannot support. I would like to refer to two recent decisions on this point, Sam Grossman v MNR, [1979] CTC 2132; 79 DTC 141, and Regin Properties Limited v MNR, [1979] CTC 2149; 79 DTC 156. In the present case I do not accept that there was really any public or outside action, such as expropriation, which could have altered the result and made it more advantageous to the taxpayer. In my view the intention to purchase the property (“lot 32’’) was that of Gérard Tardif (for himself and for his father) and he has not proved that this intention was to make a capital investment. It is certain that he did not pursue such a course (capital) with the property. At best he established that he had no intention of using the land but merely of keeping it. This lack of any purpose does not give him the benefit of a capital gain. On the contrary, the present circumstances support a conclusion that the profit should be categorized as income.

Decision

The appeal of the Estate of the late J Alzire Tardif with respect to the 1971 taxation year is dismissed.

The appeals of Gérard Tardif are allowed in part as follows: the reassessment with respect to the 1970 taxation year is vacated; the penalties imposed with respect to the 1971, 1972, 1973 and 1974 taxation years are quashed; and the assessment with respect to 1971 is reduced by $2,508.50. The matter is referred back to the Minister for reassessment in accordance with the above reasons for judgment. In all other respects the appeals are dismissed.

Appeals allowed in part.