Beaubier T.C.J.:
1 These appeals pursuant to the General Procedure were heard together on common evidence by consent of the parties at Calgary, Alberta on February 25 and 26, 1998.
2 Gordon Atkins, the Appellant and operating officer of the second Appellant, Amden Investments Limited (“Amden”), testified for the Appellants. He owned 80% of the issued shares of Amden at all material times, his wife owned the other 20%. Amden's year end is October 31. Mr. Atkins began practising as an architect in Calgary in 1962. He has won a number of national architectural awards. He still works and resides in the Calgary area. He is now a real estate developer of suburban acreages. The Respondent called Daryl Sekiya, an auditor of Revenue Canada. Neither party called an expert appraiser of real estate as a witness.
3 The issues between the parties as set forth in the Replies are as follows:1. As to Mr. Atkins:
9. The issues are:a) Was the Minister proper in reassessing to the Appellant the amounts of $14,405.00 and $7,668.00, pursuant section 80.4 of the Act, as deemed interest in respect of his 1990 and 1992 taxation years, respectively.
b) Was the Minister proper in reassessing $6,216.00 to the Appellant, as shareholder's loans to him by Amden, pursuant to subsection 15(2) of the Act, in respect of the payments made by Amden to his children in his 1992 taxation year.
c) Was the Minister proper in reassessing $2,600.00 and $1,928.00 to the Appellant, pursuant to subsection 15(1) of the Act, in respect of shareholder's benefits conferred on him in his 1990 taxation year by Amden, by virtue of the benefit to him of the Rental Property occupied by his children rent free, and his personal travel expenses paid by Amden, respectively.
d) Was the Minister proper in reassessing the sum of $214,500.00 to the Appellant as undeclared income in respect of his 1989 taxation year.
e) Was the Minister proper in reassessing penalty to the Appellant, pursuant to subsection 163(2) of the Act, in his 1989 taxation year, in respect of $199,500.00 of undeclared income, (credit being given to the Appellant for $15,000.00 erroneously reported by the Appellant in his 1990 taxation year as his income for the Contract).
Issues 9(b) and (c) were settled on consent filed by the parties and these are referred to the Minister of National Revenue for reconsideration and reassessment accordingly.2. As to Amden:
14. The issues are:a) Were the amounts claimed by the Appellant as additions to the capital cost of the Rental Property, in its 1990, 1991 and 1992 taxation year, properly disallowed by the Minister.
b) Was the Minister proper in disallowing the travel and entertainment expenses claimed by the Appellant for its 1990 taxation year.
c) Was the Minister proper in reassessing the Appellant in the sum of $90,000.00 as the unreported income of the Appellant for its 1990 taxation year.
d) Was the Minister proper in reassessing penalty under paragraph 163(2)(a) in respect of the sum of $55,000.00 in regard to the 1990 taxation year of the Appellant.
Issues 14(a) and (b) were settled on consent filed by the parties and these are referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
4 The chronology respecting the issues of Gordon Atkins which remain in dispute is as follows:(1) 15 June, 1987 (R-1, Tab 12) Amden signs a service agreement to oppose down-zoning land with E.F. Wood, the owner. Amden's fee will be two lots.
(2) date unknown (R-1, Tab 31 provides a reference and is dated 5 April, 1989) Amden transfers its interest in the R-1, Tab 12 agreement to Mr. Atkins, according to Mr. Atkins' testimony; no document of this is in evidence.
(3) 12 May, 1988 (A-1, Tab 2) Wood's subdivision, named Rosewood, is approved by the Alberta Planning Board.
(4) 26 April, 1989 (R-1, Tab 31) Wood transfers the land to Rosewood Hill Properties Corporation.
(5) 22 November, 1989 (R-1, Tab 19) Municipal District of Rocky View (the local government in which Rosewood exists, hereinafter called Rocky View) signs the development agreement with the attached plan. Rocky View is adjacent to Calgary. Note that pages 3 to 24 inclusive of R-1, Tab 19 are missing from this exhibit.
(6) 20 December, 1989 (R-1, Tab 21) Rocky View executes a caveat against Rosewood's title to the as yet unregistered subdivision land. No exact date of registration of this caveat or of the subdivision plan in the Land Titles Office is in evidence. When the subdivision plan is registered, its first two digits are “90”, indicating registration in 1990 (See R-1, Tab 22)
(7) 28 December, 1989 Mr. Atkins chooses Lot 11 and receives Lot 16 by draw as his fee for Rosewood. (See assumption (x); this sentence.)
(8) 11 January, 1990 (R-1, Tab 22) Lot 11 is transferred from Rosewood to Mr. Atkins. Mr. Atkins swears the affidavit of value of Lot 11 to be $124,500.
(9) 11 January, 1990 (R-1, Tab 22) Lot 16 is transferred from Rosewood to Mr. Atkins. Mr. Atkins swears the affidavit of value of Lot 16 to be $35,000.
(10) 23 February, 1990 (R-1, Tab 26) Mr. Atkins transfers Lot 11 to Owens for $124,500.
(11) “Effective 5 April, 1990” (R-1, Tab 31) Paragraph 2 contains a proviso which allows Atkins to postpone his duty to build on Lot 16 if he sells Lot 16 to a third party.
(12) 1994 Mr. Atkins transfers Lot 16 to a transferee for $96,000 less certain reserve sums, for a net amount of $90,000.
5 With respect to the issues still in dispute, the assumptions of the Respondent as to Gordon Atkins which were either confirmed or not refuted by the evidence are the following subparagraphs of paragraph 8 of the Reply:
b) At all times material to this appeal, Amden was a corporation duly incorporated according to the laws for the time being in force in Alberta.
c) The year end of Amden was October 31.
d) At all times material to this appeal, the Appellant and his wife, C. Joan Atkins, were shareholders of Amden; each holding 80% and 20% respectively of the share capital of the company.
g) At all times material to this appeal, the Appellant was a director of Amden and was responsible for the day to day running of Amden. The decisions of Amden were made by the Appellant and he was its controlling mind.
p) At all times material to this appeal, more particularly from 1989 to 1992, the Appellant carried on the profession of an architect under the name, style and firm, Gordon Atkins & Associates.
q) The Appellant had, in the course of years, acquired skill and expertise with regard to processing applications for the subdivision of land and also of supervising the construction of facilities such as road ways, water, power, landscaping etc.
r) The Appellant participated in many subdivisions in respect of different lands at times previous to 1989.
s) On June 15, 1987, Amden entered into an agreement with Wood (the “Contract”) for the benefit of the Appellant in respect of a parcel of land owned by Wood in extent about 87.5 acres and legally described as the South-east quarter of Section 24, Township 24, Range 3, West of the Fifth Meridian (the “Land). The benefit of the Contract was later assigned to the Appellant with the consent of Wood.
t) In or about June of 1987, Wood anticipated that the Municipal District of Rocky View intended to down-zone the Land, and, by the aforesaid Contract, Wood employed the services of the Appellant in order to oppose the down-zoning of the Land, and, if successful, thereafter to take all such steps as may be necessary to obtain approval to subdivide the Land into 30 lots.
u) The obligations of the Appellant were to:
ii) to make representations to regulatory authorities as required in connection with design control relating to the Land;
iii) to assist in co-ordinating road, water, gas, power, landscaping and act as casual supervisor of construction, and to assist in subdividing the Land into 30 lots;
iv) to supply his services to assist the owner with an application to subdivide the Land into the Owner's Acreage and as many two acre parcels as may be permitted.
v) In the event the Appellant was successful in opposing the down-zoning of the Land and the Land was subdivided, the consideration or fee payable to the Appellant was the grant to him of 2 two acres lots to be selected by him, at the time registration of such lots was possible.
w) The Appellant was successful in opposing the down-zoning of the Land by September 13, 1988. Wood continued to engage the services of the Appellant with regard to the sub-division of the Land.
y) The fully serviced lots 11 and 16 were transferred to the Appellant on January 11, 1990.
z) As part of the work done in regard to getting approval for the development agreement, the Appellant did a feasibility study of the whole project which indicated the value of each lot.
bb) The Appellant sold lot 11 on February 23, 1990 for the sum of $124,500.00, and the Affidavit of the Transferee on the Transfer of Land of the above transaction stated the fair market value of the land as $124,500.00.
cc) The fair market value of lots 11 and 16 on November 7, 1989 was $124,500.00 and $90,000, respectively.
dd) The return of income of the Appellant for his 1989 taxation year was signed by him on April 29, 1990, and the Appellant failed to report the aforesaid sum of $214,500.00 as the consideration paid to him by Wood in 1989, pursuant to the Contract. The Appellant had thereby understated his income for his 1989 taxation year by $214,500.00.
ff) The Appellant, however, erroneously, reported the sum of $15,000.00 as the income earned by him in 1990 pursuant to the Contract.
gg) In a hand written document dated February 6, 1990, the Appellant estimated the fair market value of lot 11 as $125,500.00 and of lot 16 as $105,000.00 and further that he expected to get title to the lots within a week and to sell them also within a week.
6 With respect to Amden:(1) As of 12 February, 1989 (A-1, Tab 6) Amden and Hodgson enter into an oral agreement for Amden to arrange to subdivide Hodgson's land in Rocky View. Amden's fee is described in a portion of a written draft which appears to be printed by Mr. Atkins (page 2) as a “2 two acre parcel of his choice. The transfer shall occur at the time any parcel may be registered and given separate title.” This formed the basis for discussions between Amden and Mr. Hodgson.
(2) 5 September, 1989 (A-1, Tab 7) The approval of Hodgson's subdivision plan called “Alandale” is received from the Alberta Planning Board. Mr. Atkins testified that he chose Amden's fee lot between then and September 30, 1989.
(3) 22 November, 1989 (A-1, Tabs 56 and 57) Hodgson withdraws an appeal to the Alberta Planning Board of a reserve dispute with Rocky View about the subdivision plan proposed for Alandale.
7 The assumptions of the Respondent as to Amden which were either confirmed or not refuted by the evidence are the following subparagraphs of paragraph 13 of the Reply:
b) At all times relevant to the appeal, the Appellant was a corporation duly incorporated according to the laws for the time being in force in Alberta.
c) The year end of the Appellant was October 31.
d) At all times material to this appeal, the Appellant owned the Rental Property and was in the business of a consultant assisting land owners in processing applications for subdivision of lands and co-ordinating the construction work in relation to the establishment of facilities such as roadways, water, power, landscaping etc.
h) At all times material to the appeal, Atkins and his wife, Joan Atkins, owned 80% and 20%, respectively, of the shares of the stock of the Appellant company.
n) The Appellant entered into the Contract aforesaid to assist Allan Hodgson in obtaining the necessary permission for subdividing land owned by him bearing legal description as follows:
North-east quarter of section 24, Township 24, Range 3, West of the Fifth Meridian, containing in extent 113 acres more or less together with an improvement thereon (the “Land”).
o) In accordance with the aforesaid Contract the Appellant undertook to:
i) Immediately and urgently pursue and take whatever steps as may be necessary to initiate the reclassification of the Land and to, thereafter, subdivide it into 30 lots.
ii) To act as the casual supervisor of construction, co-ordinating building facilities such roads, water, power and landscaping on the Land.
p) In accordance with the aforesaid Contract, Allan Hodgson agreed to transfer to the Appellant a two acre lot to be chosen by the Appellant from the Land in consideration for the aforementioned services rendered by the Appellant.
q) The Appellant completed performance of the obligations under the Contract and pursuant thereto, on October 3, 1990, Allan Hodgson transferred title of a parcel of the Land to the Appellant containing an extent of 2 acres and legally described as follows:
Plan 9010945, Lot 4, excepting thereout all mines and minerals, (the “Lot”)
r) The Affidavit of Execution in relation to the aforesaid transfer stated the fair market value of the Lot on October 3, 1990 as $100,000.00.
s) The fair market value of the Lot during 1990 as estimated by Atkins was $110,000.00.
t) At all times material to this appeal, Atkins was aware that other lots in the same Springbank area containing in extent 2 acres had been sold in 1990 by Allan Hodgson for prices ranging from $85,000.00 to $230,000.00 per lot depending on the location of the particular lot.
u) The fair market value of the Lot, at any time during the period November 22, 1989 to October 3, 1990, was not less than $90,000.00 and Atkins of the Appellant was aware of same or ought to reasonably been aware of same.
Regards Penalty
v) In the return of income submitted by the Appellant in respect of its 1992 taxation year, it reported $35,000.00 as the value of the consideration paid to it by Allan Hodgson in regard to the services rendered by the Appellant to him pursuant to the provisions of the Contract.
w) In its return of income for its 1990 taxation year the Appellant did not declare any income from the Contract, and thereby the Appellant by its servants and agents knowingly or under circumstances amounting to gross negligence made or participated, assented to and acquiesced in making the false statement that its income arising out of the aforesaid Contract during its 1990 taxation year was nil and thereby understated its income by $90,000.00. But for the purposes of assessing penalty, credit was given by the Minister, for the sum of $35,000.00 erroneously reported by the Appellant as income for the 1992 taxation year from the Contract, and the unreported income for the 1990 taxation year was assumed as $55,000.00.
x) And as a result of the aforesaid understatement, the tax that would have been payable by the Appellant for the 1990 taxation year, if computed according to subparagraph 163(2)(a)(i) exceeds the tax that would have been payable, if computed under subparagraph 163(2)(a)(ii) of the Income Tax Act in the amount of $15,033.39.
8 In his examination-in-chief Mr. Atkins stated that in his subdivision activities he would “exchange my services ... for a right to own a piece of the land we're subdividing”. He then went on to say with respect to the owner that “Once it can be registered, he has an obligation to transfer that title.” As he and Amden's services were used, he “... felt secure that my land bank was growing.” He also stated that he did not feel it necessary to report a lot as income until he got title to the lot.
9 Thus, both Appellants received the lots in question as fees. Their values are those which were assumed by the Minister of National Revenue. No appraiser or expert evidence on the value of the lots was called. As a result the Minister's assumed lot values were not disproved by the evidence heard in Court as the only contrary figures were suggested by Mr. Atkins in his testimony. The questions that remain are of timing:(a) When was the fee payable? and,
(b) When did each Appellant have a registrable interest in the land respecting each lot?
Atkins' Appeal
10 In Mr. Atkins' case, his agreement with Wood (Exhibit A-1, Tab 12) states in paragraphs 8 to 11 inclusive:
8. The Owner shall be entitled to terminate this agreement by notice to the Consultant in writing in the following circumstances:(a) in any event that the Consultant defaults in the performance of any of the provisions of this agreement;
(b) in the event that the Consultant is unsuccessful in a subdivision application to create the Owner's Acreage and not less than 15 two-acre parcels on or before December 31st. 1988.
Upon receipt by the Consultant of a notice of termination this agreement shall terminate and the Owner shall have no further obligation to the Consultant thereafter.
9. The Consultant shall at any time be entitled to terminate this agreement by 30 days' written notice to the Owner of its intention to do so.
10. If the Lands are subdivided into the Owner's Acreage and not less than 15 two-acre parcels then the Consultant shall be entitled to the Consultant's Fee as referred to in paragraph 11 hereof. If the Consultant is successful in opposing the application to “down zone” the Lands and the Owner does not proceed expeditiously to apply for or proceed with the subdivision of the Lands, the Consultant shall be entitled to a fee of $10,000.00.
11. The fee (the “Consultant's Fee”) payable to the Consultant for services rendered by the Consultant hereunder shall be the transfer to the Consultant of 2 two-acre parcels chosen in the following manner:(a) the Consultant shall be entitled to the first choice of any two-acre parcel resulting from subdivision of the Lands. The second two-acre parcel which shall form part of the Consultant's Fee shall be determined by “lot”;
(b) on the tenth business day following the date upon which the right to subdivide the parcel into the Owner's acreage and not less than 15 two-acre parcels has been granted by the relevant regulatory authority. The parties hereto shall meet at the Lands, or such other place as may be agreed upon between the parties, at the hour of 10:00 a.m. (Calgary time). At the time of such meeting the Consultant shall signify its second choice of a two-acre parcel. At such meeting, subsequent to the Consultant making its second choice, the Owner shall place the description of three unchosen two-acre parcels into a suitable receptacle and the parcel so chosen shall be the second lot forming part of the Consultant's Fee unless the parties hereto otherwise agree.
11 Mr. Atkins testified that the Wood agreement was not drafted by him. However, paragraph 14 contains a portion struck out and initialled by someone with the final initial “W”. The typed portion struck out is entirely in favour of Mr. Atkins. Paragraph 14 reads:
14. The Consultant hereby agrees to act as a “casual” supervisor of construction (i.e. road, water, power, gas, etc.) in connection with any construction required in order to achieve subdivision of the Lands, “.. W”
The struck out portion indicates that, at the very least, Mr. Atkins had some input into the typed document itself before it was signed.12 A subdivision plan can only be registered in an Alberta Land Titles Office if it has been approved by a subdivision approving authority. Subsection 86(1) of the Alberta Planning Act, R.S.A. 1980, Chap. P-9 reads:
86(1) Except as provided in subsection (2), a Registrar shall not accept for registration an instrument that has the effect or that may have the effect of subdividing a parcel unless the subdivision has been approved by the subdivision approving authority.
Subsection (2) does not apply to plans like those in issue. Section 87 describes a subdivision approving authority as a municipality such as Rocky View. Section 110 specifically states:110(1) When on appeal the Board approves an application for subdivision approval, the applicant shall submit the plan of subdivision or other instrument to the subdivision approving authority from whom the appeal was made for endorsement by it.
(2) If a subdivision approving authority fails or refuses to endorse a plan of subdivision or other instrument submitted to it pursuant to subsection (1), the chairman of the Board may do so.
On the basis of these provisions, the court finds that Mr. Atkins became entitled to his fee when Rocky View endorsed the subdivision plan. Even if Rocky View refused to endorse the plan, it was necessary that the plan then be returned to the Board chairman for endorsement before it became a registrable subdivision plan which subdivided the parcel of land into lots. It was only at that point that there was a registrable subdivision plan which subdivided the parcel of land into lots. Under paragraph 10 of the Wood agreement, Mr. Atkins was entitled to his fee “if the lands are subdivided.” That occurred when Rocky View signed the plan on December 20, 1989 (Exhibit R-1, Tab 19).13 Within 10 days, on December 28, 1989, Mr. Atkins chose his lots and so ascertained that his lots were lot 11 and lot 16. He then had an interest in those lots which was registrable by means of a caveat. This Court finds that on December 28, 1989 Mr. Atkins received his fee which consisted of two lots of a value of $214,500. He did not declare that as income in his 1989 taxation year.
14 Issue 9(e) described in the Reply to Mr. Atkins' Notice of Appeal is whether there was a proper assessment of a penalty in respect of $199,500 of undeclared income by Mr. Atkins for his 1989 year.
15 The quotations taken from Mr. Atkins' testimony are clear. He took the lots as fees. Due to a lack of expert testimony from an appraiser, the Court accepts the assumptions to arrive at the value of the lots. However, the timing of sales of the Wood lots and the prices for which they were sold verify the values assumed.
16 Mr. Atkins was a sophisticated, experienced and very intelligent architect- developer who took the lots as fees, knew that they were income and knew their value.
17 It is clear from the entire evidence that he knew they were taxable as income. His protests that he reviewed these transactions with his accountant and relied on his accountant are not credible. His accountant was not called to testify. Moreover, in any event, Mr. Atkins knew what he was doing in 1989 and knew what constituted fees and that fees were taxable as income. Mr. Atkins compiled his statement of income at the year end for his accountant. He had few clients and these amounts were gigantic in relation to his normal income. He did not report anything at all in 1989 respecting these lots. In the Court's view, he knew they were income in 1989. By then he had been in his own private practice for over 20 years and was fully knowledgeable of what constitutes business income. He is an intelligent, clever businessman who seized an opportunity, realized on it in a fashion that need not show up in income and who did not report it. Mr. Atkins' failure to report the income was deliberate, knowing and intentional.
18 His appeal of the penalty is dismissed.
19 Paragraph 14(a) of Mr. Atkins' Notice of Appeal appeals the following assessment:
Assumptions 8(1) and (o) read:(1) In the 1990 taxation year of the Appellant, from time to time, Amden loaned and advanced to the Appellant diverse sums of money. The deemed interest benefit to the Appellant during his 1990 taxation year in respect of his shareholder's loan account, was $14,405.00
(o) The shareholders loans account of the Appellant in Amden and the deemed interest liability of the Appellant pursuant to section 80.4 of the Act in respect of his shareholder's loans balances for his 1992 taxation year, is as set out in the First and Second Schedules hereto respectively.
These relate to the fact that Mr. Atkins simply drew money from Amden as he needed it for his personal purposes or for business purposes. There were no withholdings and Mr. Atkins did not pay quarterly instalments of income tax on any of these sums. Nor did he or Amden keep track of these during the year. The chartered accountant of Amden, and of Mr. Atkins, recorded the draws in a “shareholder's loan account” ledger that Mr. Sekiya, Revenue Canada's auditor, obtained. This is the only record of these withdrawals. As a result, interest was assessed on Mr. Atkins under section 80.4 of the Income Tax Act. Mr. Atkins appealed this.21 Mr. Sekiya accounted for his calculations, which are appended to the Reply, in detail. The only corporate records of the withdrawals are in the “shareholder's loan account”. The individual items accounted for by Mr. Sekiya were disputed by Mr. Atkins, but the chartered accountant and Mrs. Atkins did not testify. Neither Amden nor Mr. Atkins paid taxes on the withdrawals as they were made. Indeed, it appears that any reconciliations were made after the year end. Nor were there any resolutions or other corporate records or designations respecting the sums paid by Amden to Mr. Atkins. These appeals are dismissed.
22 Thus, the portions of Mr. Atkins' appeals which are not the subject of the consent agreement are dismissed in their entirety.
Amden's Appeal
23 Amden's rough draft included one typed page (page 3) which was taken out of the Wood agreement. The hand-printed fee paragraph reads:
The fee payable to the consultant for services rendered by the consultant hereunder shall be the transfer to the consultant of a two acre parcel of his choice. The transfer shall occur at the time any parcels may be registered and given separate title.
(Exhibit A-1, Tab 6)
Based upon the Wood page attached into the Amden working draft, it appears that the Amden rough draft was drafted after the Wood agreement. Thus, Amden's negotiations with Hodgson were based on the Wood experience. The draft indicates the transfer of the fee lot was to be “at the time any parcels may be registered and given separate title”.24 Mr. Woods testified that “once it can be registered, he has an obligation to transfer that title”.
25 But Amden did not have an agreement in writing from Hodgson. In order to have a legal interest in the fee lot, Amden had to have a note or memorandum in writing signed by Hodgson describing Amden's interest in the land. The only evidence of any such writing in Amden's appeal is in the Respondent's assumption (q). It states that Hodgson transferred the title for Lot 4, Plan 9010945 to Amden on October 3, 1990
26 Mr. Atkins testified in re-examination that Amden received its fee lot in 1991. This is not believed. In the face of an exact assumption such as (q), Amden should have filed a certified copy of the transfer which would show the date of the transfer to be in 1991. It did not. Therefore, assumption (q) is accepted as true.
27 On October 3, 1990 Amden received its fee which consisted of one lot with a value of $90,000. Pursuant to the assessment, the unreported income of Amden for 1990 in respect to this fee is $90,000.
28 Amden reported fees of $35,000 in 1992 respecting this transaction. Mr. Atkins' presentation of this evidence was based on $15,000 to $20,000 per lot and receiving the fee in 1991. Instead it reported $35,000 in 1992. Again, Mr. Atkins was not credible.
29 It is clear that Amden's fee was received on October 3, 1990 and, from assumptions (r) and (s), that its value was at least $90,000 at that time. Yet it did not report any fee. Its year end was October 31 and the value of the lot was great. Based upon Mr. Atkins' lack of credibility, the value of the lot and the fee nature of this transaction, the fee was not forgotten or overlooked. Once again, the failure to report was deliberate, knowing and intentional and the penalty was properly levied by the Minister of National Revenue.
30 Those portions of Amden's appeals which are not the subject of the consent agreement are dismissed in their entirety.
31 The Respondent is awarded a full set of party and party costs in respect to each appeal except that only one set of costs is awarded for the hearing itself; Mr. Atkins is ordered to pay the taxable party and party costs for the hearing.
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