A E Greer v. Minister of National Revenue, [1977] CTC 2522, 77 DTC 368

Delmer E Taylor:—This is an appeal from income tax reassessments for the years 1971, 1972, 1973 and 1974, in which the Minister of National Revenue changed the taxable income of the appellant by the following:

1971— addition of mortgage interest of $1,520:

1972— addition of mortgage interest of $1,520, and also the addition

of $6,711.93 on account of a reserve previously taken by the appellant;

1973— allowance of only $63.75 of a total of $1,563.75 claimed for

legal fees;

1974— allowance of the full business loss of $1,232 rather than

just 50% ($616) originally claimed, and the disallowance of $300 claimed for municipal expense allowance.

Facts

The appellant during the times material operated a business or businesses in the vicinity of Tiverton, Ontario and purchased and sold a parcel of land in the same general area. Mrs Greer, his wife, assisted him in his business venture.

Contentions

It was claimed by the appellant that his wife was a full 50% partner in the business, and that the financial results of the business ventures should be taxed accordingly, not as though the income all belonged to him. Further, that the mortgage interest for 1971 and 1972 actually should be regarded as the income of his wife.

Evidence

The taxpayer had been assessed on an arbitrary basis up to and including the year 1968. Difficulties with accountants and records after that year still provided some areas of difference with Revenue Canada, and the taxpayer’s son, now a chartered accountant, who acted as agent at the hearing, was attempting to bring up to date the various matters still in dispute. The Board was provided with very little in the way of factual evidence but both the appellant and Mrs Greer gave oral testimony.

Argument

At the hearing some points had been agreed between the parties and only three points remained to be determined by the Board. The decision on these would allow any outstanding matter in the matters in the appeal to be finalized. These points were:

(1) whether or not the appellant and his wife operated the business as partners;

(2) whether or not the mortgage from which the mortgage interest had been received was the property of Mrs Greer;

(3) whether or not the Minister had erred in including in the taxpayer’s 1972 income the amount of $6,711.93 on account of a reserve previously taken by the appellant.

Counsel for the Minister pointed out that although the available information supported the view that the appellant had worked closely with his wife in any business endeavour and that such arrangement may have been regarded by the public as a form of partnership, there was no such partnership in law. He further stated that the acquisition and sale of the real estate involved had been conducted solely by, and with the credit of, the appellant. On the point of bringing back into income the reserve amount of $6,711.93, counsel urged upon the Board that the appellant had not appealed the 1968 arbitrary assessment, nor any of those subsequent and up to the year 1971, and therefore he could not now hold that the mere technicality of not showing the reserve as an “in” and “out” item on these assessments negated the Minister’s right to tax in any way.

Findings

Disposing of these points, the Board simply notes that the evidence does not support a conclusion that, for purposes of the Income Tax Act, the appellant’s business activities were conducted in partnership with his wife. Further, there is no evidence to support the conclusion that the taxable income and mortgage interest arising from the purchase and sale of the property should be taxable in the hands of the appellant’s wife rather than in his own. Turning to the final point at issue, the Board wishes to briefly review the facts at least as they appear from the appellant’s tax returns, notices of assessment and reassessment, the notices of objection and appeal and the replies to notice of appeal for the taxation years involved. A statement from the Minister’s reply to the notice of appeal for the year 1972 is helpful, and reads as follows:

3. In assessing tax as aforesaid, he acted upon the following findings or assumptions of fact:

(b) In his 1968 taxation year, the Appellant disposed of property which he owned in the Township of Kincardine at a net profit of $13,777.12, and took back a mortgage on the said property in the amount of $19,000.00;

(c) The Minister included the profit on the said sale in the income of the Appellant for his 1968 taxation year and allowed the Appellant to deduct a reserve of $6,711.92 [sic] pursuant to Paragraph 85B(1)(d) of the Income Tax Act as it was then in force;

(d) In his 1972 taxation year, the Appellant received interest on the said mortgage in the amount of $1,520.00;

(e) Said mortgage was paid in full in the Appellant’s 1972 taxation year.

The position of the agent for the appellant was stated as follows in a letter dated June 15, 1977 from the appellant’s agent to the Department of Justice:

5. Paragraph 85(b)(1)(d) reserve arbitrarily allowed as a deduction in 1968 —$6711.92 [sic]. I would like to point out that the taxpayer did not request this deduction. The deduction was prepared by Revenue Canada, Taxation when they arbitrarily assessed the taxpayer for the 1968 taxation year.

6. Net amount included in the taxpayer’s 1968 taxable income re Ponderosa transaction—$7,065.20. I would like to point out that Revenue Canada, Taxation arbitrarily assessed the 1968 taxation year and that the taxpayer does not believe that the amount of any gain on the sale of the Ponderosa property is his income.

I would like to take this opportunity to again point out that subsection 12(1)(e)(ii) of the 1972 Income Tax Act only requires the inclusion in income of any amount deducted under paragraph 20(1)(n) in computing the taxpayer’s income from a business for the immediately preceding year.

Whether or not the taxpayer requested the reserve appears to me immaterial with regard to the validity of the 1968 assessment. Earlier decisions, notably that of / Weinstein v MNR, [1968] CTC 357; 68 DTC 5232, established that the Minister could make such a determination. As indicated this determination was made in the year 1968 and, taken in its simplest format, it appears to me that the position of the agent for the appellant is that since the reserve was not taken in the 1971 taxation year by the appellant, it could not be included on payment of the mortgage in the taxable income of the appellant in the year 1972. I have reviewed paragraph 85B(1)(d) of the Income Tax Act, RSC 1952, c 148, as amended, under which the reserve was established by the Minister and I have done the same with its successor, paragraph 12(1)(e) of the Income Tax Act, SC 1970-71-72, c 63, as amended, under which it was taxed. Further, a careful examination has been made of the appellant’s income tax return filed for the year 1971 and of the assessments and reassessments which are available and which resulted therefrom.

The explanation the Board understood from counsel for the respondent was that it would have been only a technicality to show the reserve both “in” and “out” in the years following 1968 until payment of the mortgage in 1971, and such a technicality which would not have affected in any way the appellant’s tax position should not give support to the claim now being pressed by the agent for the appellant.

However, I have concluded that once the Minister had determined to allow to the appellant the reserve under paragraph 85B(1)(d), apparently without the appellant’s request that he do so, the onus for maintaining that reserve in a “recallable” posture shifted to the Minister and, unless some particular action by the appellant altered that responsibility, it would there remain. The opportunity existed for the Minister to show the reserve, “in” and “out”, in the assessments or reassessments for 1969, 1970 and 1971, but not having done so, it is my view that the appellant’s position is sound—the reserve to be included in the appellant’s taxable income for the year 1972 should have appeared as a deduction and/or credit to him in the year 1971.

Decision

The appeal is allowed in part in order that the appellant’s taxable income for the year 1972 be reduced by the amount of $6,711.93. in all other respects the appeal is dismissed.

Appeal allowed in part.