Nesbitt v. The Queen, 96 DTC 6045, [1996] 1 CTC 282 (FCTD), aff'd 96 DTC 6588 (FCA)

Heald D.J.: — The Plaintiff herein filed a Statement of Claim in which he appealed Notice of Reassessment No. 1911903, dated July 13, 1989 (the “Second Reassessment”) in respect of his 1981 taxation year. This Second Reassessment had been confirmed by the Minister of National Revenue (the “Minister”) by a Notice of Confirmation dated June 6, 1990. The First Reassessment was dated May 4, 1987. The Plaintiff seeks an order vacating the First and Second Reassessments on the basis that they were made after the expiry of the four-year limitation period prescribed by the Income Tax Act, R.S.C. 1952, c. 148 as amended (the “Act”) and were therefore statute-barred.

Facts

In 1968, the Plaintiff purchased a 50 per cent interest in a 100 acre farm on the outskirts of Orangeville, Ontario. On July 1, 1977, this property was transferred to a partnership known as the Orangeville Mall. Subsequently a shopping centre (the “Mall”) was built on the property. On March 1, 1981 the Plaintiff transferred 65 per cent of his interest in the Orangeville Mall partnership to White Birch Lands Limited (“White Birch”) pursuant to the provisions of section 85 of the Income Tax Act. White Birch had substantial non-capital losses which could be employed to offset any taxable capital gain realized on the sale of the Mall. In May of 1981, the Mall was sold and a capital gain of $4,065,111 resulted. The Plaintiff’s share thereof amounted to $711,394.25 (that figure represents 17.5 per cent of the total capital gain, and represents the portion of the interest in the Mall still held personally by the Plaintiff).

Unfortunately, however, the Plaintiff’s 1981 tax return contained an error. Although the amount of the gain was correctly shown as $4,065,111, the calculation of the Plaintiffs share of that gain was reported on his return as $71,139.42 [1] whereas it should have been reported as $711,394.25.

On October 4, 1982, Revenue Canada sent the Plaintiff an initial Notice of Assessment in respect of his 1981 taxation year. In August of 1986, Revenue Canada approached the Plaintiff requesting a waiver in respect of the four-year statutory limitation period for reassessment since that period was soon to expire insofar as the 1981 taxation year was concerned. The Plaintiff declined to provide a waiver. Following this, Revenue Canada contacted the Plaintiff’s accountants requesting a waiver, who then prepared a form of waiver. The waiver was signed in the name of the Plaintiff on August 20, 1986, by a Mr. Stubbs who was a part-time bookkeeper for the Plaintiff.

The Plaintiff’s position is that the waiver was not signed by him or by a person authorized by him. His evidence was that he was informed of the waiver upon his return from a lengthy trip to the Northwest Territories. Because he did not acquiesce in the signing or filing of the waiver, he filed a Notice of Revocation of Waiver in Form T562 with Revenue Canada, dated November 4, 1986. The Defendant takes the position that the waiver was obtained as part of ongoing negotiations with the Plaintiff’s accountants. It is their position that the waiver was signed with the Plaintiff’s actual or ostensible authority.

On May 4, 1987, by Notice of Reassessment No. 1624781 (the “First Reassessment”) the Minister reassessed the Plaintiff on the basis that the Plaintiff’s share of the gain on the sale of the Mall was reclassified as income rather than as a capital gain.

The Plaintiff filed a Notice of Objection to the First Reassessment. The Minister then reassessed the Plaintiff again by Notice of Assessment No. 1911903, dated July 13, 1989 (the “Second Reassessment”). The Second Reassessment was on the basis that the Plaintiff had a capital gain on the disposition of the Mall and that the Plaintiffs share was 17.5 per cent of the capital gain ($711,394.25). This Second Reassessment was objected to by the Plaintiff by Notice of Objection dated October 5, 1989. However, it was confirmed by the Minister on June 6, 1990. The Plaintiff then filed the Statement of Claim herein.

Issues

1. Are the reassessments valid, pursuant to paragraph 152(4)(a)(i) of the Income Tax Act [2] on the basis that the Plaintiff made a misrepresentation that is attributable to neglect, carelessness or wilful default?

2. If not, then are the reassessments valid pursuant to paragraph 152(4)(a)(ii) of the Income Tax Act” [3] on the basis of the waiver?

Analysis

ISSUE 1: Are the reassessments valid, pursuant to paragraph 152(4)(a)(i) of the Income Tax Act on the basis that the Plaintiff made a misrepresentation that is attributable to neglect, carelessness or wilful default?

There are no allegations of fraud in this case. Accordingly, for subparagraph 152(4)(a)(i) to apply, it must be shown, firstly, that the Plaintiff made a misrepresentation in his return, and secondly, that this misrepresentation was attributable to neglect, carelessness or wilful default. The onus is on the Minister to establish these requirements. [4] Counsel for the Defendant agreed that the Defendant carries the initial onus. [5]

A proper consideration of this issue necessarily involves a discussion of several sub-issues:

(I) The Evidentiary Issue in Relation to Exhibits D-l and D-2

At the trial counsel for the parties did not agree which document or documents constituted the Plaintiff’s tax return for the 1981 taxation year. I reserved my decision on this matter and indicated that I would deal with it in my reasons for judgment. [6] Exhibit D-1 contains the Plaintiff’s standard T1 General Form tax return for 1981, tendered to Revenue Canada on April 30, 1982. Exhibit D-2 contains supplemental material and is also prepared on a standard T1 General Form. On the top of page one of the “supplemental materials” appears the following handwritten notation:

REVENUE CANADA PLEASE ATTACH THE Enclosed material to my T-l-81 return which I filed on Apr 30-1981

Mr. Westel, who was the Plaintiff’s accountant, testified that the above handwritten notation was written by him on the “supplemental materials” prior to being sent to Revenue Canada. It appears these materials were sent to Revenue Canada by facsimile rather than by mail.

Counsel for the Plaintiff submitted that Exhibits D-1 and D-2« together constitute the Plaintiff’s 1981 tax return. Counsel for the Defendant submitted that it was apparent from the handwritten notation on the top of page one of the “supplemental materials” that Exhibit D-2 was filed subsequent in time to the filing of Exhibit D-l. On this basis he objected to the two exhibits being entered as a single document.

A review of Exhibits D-1 and D-2 persuades me that all of the material set out in Exhibit D-2 does indeed form a part of the Plaintiffs 1981 tax return. In my view, nothing turns upon the factual circumstance that the two segments of the 1981 tax return were received on separate forms and on different dates. Exhibit D-2 contains Schedule 2, Schedule 3 and Schedule 4 together with a financial statement for the Orangeville Mall partnership. All of this material is required to be filed with the T1 General Form. The working papers which contain handwritten calculations by Mr. Westel are, in essence, attached statements which are expressly contemplated by the headers on Schedules 2 and 4. Accordingly, I find that Exhibits D-1 and D-2 in their entirety comprise the Plaintiff’s 1981 tax return.

(II) Was there a misrepresentation by the Plaintiff?

Line 17 of Exhibit D-1 is the space provided for indicating the amount of the Plaintiff’s capital gain. The Plaintiff’s tax return (Exhibit D-1) shows this sum as being $181,938.71. The parties agree that this amount is incorrect. They also agree that the correct amount is far in excess of this figure. There is some dispute between the parties as to whether the correct amount is $495,000 or $500,000.

However, the parties agree that the Plaintiffs share of the capital gain realized through the sale of the Orangeville Mall was $711,394.25 and one-half of that amount should have been included as a taxable capital gain. The Plaintiffs accountant, Mr. Westel, made an error in calculating the Plaintiffs share of the capital gain. A perusal of page 8 of Exhibit D-2 clearly shows the error made. In calculating the taxpayer’s share of the capital gain, the figure arrived at was $71,139.42. The proper figure was $711,394.25 [7] had the calculation been correct.

As noted earlier herein, for subparagraph 152(4)(a)(i) to apply, the Plaintiff must have made a misrepresentation and that misrepresentation must have been attributable to neglect, carelessness, or wilful default. Counsel for the Defendant submitted that the incorrect amounts on the tax return established misrepresentation and thus the only remaining issue was whether those errors were attributable to neglect, carelessness, or wilful default. On the other hand, counsel for the Plaintiff, while agreeing that a calculation error such as this is due to carelessness, submitted that the critical issue here was whether an incorrect amount on a tax return based on an error in calculation is a “misrepresentation” per se as that term is employed in subparagraph 152(4)(a)(i).

The argument of Plaintiffs counsel was an ingenious one. His first submission was that a “representation” is a statement of fact? [8] Counsel then relied on the definition of “fact” as set out in Black’s Law Dictionary, 6th ed.? [9] as well as in The Shorter Oxford English Dictionary^ [10] for his assertion that the product of a mathematical calculation is not a “fact”. Accordingly, in his view, since that figure is not a statement of fact, it cannot be a representation or, if incorrect, a misrepresentation. Put another way, a misrepresentation is a misstatement of fact but since a taxable capital gain is a statement of a conclusion, even when misstated, it cannot be said to be a misstatement of fact and, accordingly, is not a misrepresentation per se.

The Plaintiffs argument is based on the view that a number arrived at through a mathematical calculation is not a fact. I do not agree.

To interpret subparagraph 152(4)(a)(i) in such a manner would produce a result which Parliament could not possibly have intended. If the Plaintiff is correct a misstatement of a figure on a tax return could avoid the consequences of a “misrepresentation” merely because that figure was produced through an arithmetical calculation.

On the other hand, the submission by counsel for the Defendant that the erroneous amounts set out in the Plaintiff’s tax return constitute a “misrepresentation” within the meaning of paragraph 152(4)(a)(i), is supported by the relevant jurisprudence. In the case of Minister of National Revenue v. Foot,\! [11] the Exchequer Court dealt with subsection 42(4)(a) of the 1948 Income Tax Act, a predecessor to paragraph 152(4)(a)(i), the relevant paragraph in this case. The Court addressed the issue of what constituted a “misrepresentation” within the meaning of the applicable section at that time. It was held that the phrase “any misrepresentation” was synonymous with the expression “incorrect”. It was the submission of counsel for the Defendant that any incorrect statement amounts to a “misrepresentation” as that term is used in paragraph 152(4)(a)(i), supra. I agree with that view of the matter.

Another decision of the Exchequer Court which supports the position of the Defendant herein is the Taylor case. [12] In that case, Cameron J. addressed the issue of what constituted “any misrepresentation” as used in a predecessor provision of paragraph 152(4)(a)(i). At page 220 (D.T.C. 1144), he stated:

I have reached the conclusion that the words “any misrepresentation”, as used in the section, must be construed to mean any representation which was false in substance and in fact at the material date, and that it includes both innocent and fraudulent misrepresentations.

A similar view was expressed by the Supreme Court of Canada in dismissing an appeal of the Foot case, supra, where Cartwright J. speaking for the Court stated, “We are all of the opinion that the meaning of the word “misrepresentation” in s. 42(4) of the Income Tax Act is not restricted to a fraudulent misrepresentation”. [13]

I agree with the above jurisprudence. In the case at bar, the mathematical miscalculations and errors which were established by the evidence are clearly encompassed by the language of paragraph 152(4)(a)(i).

(Ill) Was the misrepresentation herein attributable to the neglect, carelessness or wilful default of the Plaintiff?

As noted, supra, counsel for the Plaintiff made submissions which were tantamount to a concession that the calculation errors made herein amounted to carelessness. However, such a concession is not conclusive of the issue because it was not the Plaintiff who made the errors in calcula- tion. Rather, it was Mr. Westel, the Plaintiffs accountant, who committed these errors. The only handwriting of the Plaintiffs on Exhibit D-l is the signature on the last page of the T1 General Form. There is no signature on the attached schedules which form Exhibit D-2. It is clear from the evidence that Mr. Westel actually prepared the Plaintiffs 1981 tax return. The Plaintiff was cross-examined extensively on the issue of whether his conduct amounted to neglect, carelessness or wilful default. He agreed that he did not carefully review the return before signing it. He asked the accountant whether the return was accurate, but said that he “pretty much” relied on his accountant insofar as accuracy of the return was concerned. [14] He also said that he perused “the return in general”. [15]

In my view, the Plaintiffs actions do not establish that he exercised reasonable care in the completion of his return. [16] The Plaintiff, like all other taxpayers under the Income Tax Act, is required to sign the income tax return after certifying that the information given in this return and in any documents attached is true, correct and complete in every respect and fully discloses my income from all sources’. It is no answer for a taxpayer to blame any miscalculations or errors on the preparer of his income tax return.

In my view, this record establishes that the Plaintiff was neglectful in respect of the preparation and filing of his 1981 tax return.

The error relating to the calculation of the Plaintiffs capital gains was in the order of approximately $300,000. An error of this magnitude should have been clearly apparent to the Plaintiff had he taken reasonable care in reviewing the return. A similar situation was present in the Venne case, supra. In that case, Mr. Justice Strayer stated at page 229 (D.T.C. 6252):

The errors in the income tax returns should have been sufficiently obvious that a reasonable man of even limited education and experience, especially one who was apparently a very successful businessman and inventor, should have noticed. ... I think it is apparent from the order of magnitude of these amounts of unreported income, even (with the exception of 1974) as estimated by the taxpayer, that a reasonable taxpayer would have suspected that there was something deficient in the income tax returns which he was signing during this period.

In my view, the ratio of the Venne decision applies with equal force to the factual situation at bar. While in Venne, the taxpayer did not read his returns before signing them, the Plaintiff in this case did very little more. I am satisfied from his evidence that his “perusal” of the 1981 tax return was perfunctory indeed. Moreover, in this case as in Venne, the error in respect of the Plaintiff’s taxable capital gains was substantial. A discrepancy of such magnitude should have been discovered by the Plaintiff if he were taking reasonable care to ensure that his tax return was true, correct and complete. He admitted to his own counsel in examination-in- chief that he only looked at the tax return briefly and did not review it on a line by line basis. [17]

For all of the foregoing reasons I have concluded that the Defendant has established that the Plaintiff’s tax return contained a misrepresentation attributable to the Plaintiff’s neglect, carelessness or wilful default. On this basis the provisions of paragraph 152(4)(a)(i) of the Income Tax Act apply in the circumstances of this case. Accordingly I find the Defendant’s assessments of the Plaintiff here in issue are valid since paragraph 152(4)(a)(i), supra allows the Minister to reassess the taxpayer at any time in such circumstances.

ISSUE 2: If not, then are the reassessments valid pursuant to subparagraph 152(4)(a)(ii) of the Income Tax Act, on the basis of the waiver?

Due to my disposition of Issue 1 above, it is not necessary to deal with Issue 2.

Conclusion

For the foregoing reasons, the Plaintiffs appeal herein is dismissed with costs.

Appeal dismissed.