Can-Am Realty Ltd. v. The Queen, 94 DTC 6293, [1994] 1 CTC 336 (FCTD)

Rouleau, J.:—The plaintiffs Can-Am Realty Ltd. and Edward Podavin appeal from reassessments by the Minister of National Revenue with respect to their 1980, 1981, 1982 and 1983 taxation years. The Minister claims the plaintiff Can- Am Realty failed to report income from the proceeds of sale of certain joint venture properties and the plaintiff Edward Podavin failed to report income in accordance with the provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Both plaintiffs commenced their appeals from the Minister’s reassessments in this Court by way of a statement of claim dated December 21, 1990. Amended statements of claim in each of the actions were filed on April 12, 1991.

The plaintiff Can-Am Realty Ltd. (Can-Am), is a Canadian controlled private corporation incorporated under the laws of British Columbia. The company is engaged in the business of real estate broker and land developer. The plaintiff Edward Podavin is the General Manager and principal shareholder of Can-Am Realty, owning 99 per cent of the voting shares of the company. Both plaintiffs engaged the services of a chartered accountant, Mr. John Chant, to prepare audited financial statements and to complete their tax returns for the taxation years in question.

On July 5, 1988, Can-Am was reassessed by the Minister of National Revenue with respect to its 1981, 1982, 1983 and 1984 taxation years on the basis the company was involved in real estate development by way of joint ventures and had failed to report substantial income realized from the ventures. Can-Am filed notices of objection to the reassessments on July 5, 1988, and later commenced actions T-3406-90, T-3407-90, T-3408-90 and T-3409-80 in this Court by way of statements of claim dated December 21, 1990. Subsequently, the Minister issued new reassessments which adjusted the amounts claimed as unreported income as follows:

Can-Am then filed amended statements of claim for each of the above-noted actions on April 12, 1991. Each claim seeks a declaration that the Minister erred in including these amounts as income in the respective taxation years and an order setting aside and vacating the various notices of reassessment.

The plaintiff Edward Podavin was originally reassessed by the Minister of National Revenue on June 15, 1988, with respect to his 1980, 1981, 1982 and 1983 taxation years on the basis he failed to report income earned in those years. The Minister also imposed a penalty against the plaintiff under subsection 163(2) of the Act. Mr. Podavin filed notices of objection on June 15, 1988, and subsequently commenced actions T-3410-90, T-3411-90, T-3412-90 and T-3413-90 in this Court by way of statements of claim dated December 21, 1990. A later reassessment issued by the Minister of National Revenue confirmed the original reassessments and deleted all but one penalty. The income alleged to have been unreported by Mr. Podavin is as follows:

On April 12, 1991, the plaintiff filed amended statements of claim in each of the above-noted actions. He seeks a declaration that the Minister erred in including these amounts as income in the various taxation years, a declaration that the Minister erred in imposing a penalty under subsection 163(2) of the Income Tax Act and an order setting aside and vacating the respective notices of reassessment.

Facts

It is necessary to examine the facts surrounding each of the transactions which gave rise to the alleged unreported income. With respect to the plaintiff Edward Podavin there are seven such incidents during the course of the 1980, 1981, 1982 and 1983 taxation years.

1. 1980 — Appropriation of Can-Am's consideration for Lot 224

In September 1978, Can-Am Realty Ltd. sold a piece of property to Yorkshire Trust Co. The terms of the sale, as set out in a letter dated June 24, 1980, from an agent for Yorkshire Trust Co. to Can-Am's solicitor, specified that Can-Am was entitled to receive a sum of $66,000 representing payment in full. In the same letter, reference was made to an agreed arrangement whereby Yorkshire Trust Co. would convey to Edward Podavin, in full satisfaction of the above-mentioned $66,000 owing to Can-Am, Lot 224 of the S.E. quarter and S.W. quarter of Section 13, Township 4, Plan 59248. The declared value of Lot 224 was to be $66,000.

The transfer of Lot 224 from Yorkshire Trust Co. to Edward Podavin was registered on August 8, 1980. It was carried out in accordance with Can-Am's instructions to its solicitor, as signed by Edward Podavin.

The Minister argues the amount of $66,000 was a benefit conferred upon Mr. Podavin and as such should have been included in his income for the 1980 taxation year. The plaintiff alleges the transaction occurred in 1979 and should be included as income for that year. Mr. Podavin also submits he had no appreciation of the tax consequences of the transaction and all documentation was provided to Can-Am's bookkeepers and was available to the accountant Mr. Chant.

2. 1980 — Appropriation of Funds from Forest Hill Joint Venture Account $49,000

3. 1980 — Unreported Gain from Sale of Carol in Mine Shares $11,331.95

During the taxation years in question, the plaintiff Can-Am Realty Ltd. was involved in certain joint ventures. In 1980, as part of one of these ventures between Can-Am and Co-ordinated Realty Projects Ltd., Can-Am sold a number of subdivided lots in property owned by the co-venturers and known as the Forest Hill property. The proceeds from the lots sold were deposited in the bank account of the joint venture. Can-Am did not report the net profit from the sale of the lots in 1980.

However, on February 20, 1980, two cheques were issued and signed by Mr. Podavin and Mr. William Sullivan, the sole shareholder of Co-ordinated Realty Projects Ltd., from the joint venture bank account. The cheques were in the amounts of $65,000 and $33,000 respectively. Both cheques were payable to Mr. Sullivan as reimbursement for the $98,000 payment he had made to purchase Carolin Mine shares on his and Mr. Podavin’s behalf, the latter owning one half of the shares so acquired. Mr. Podavin did not report the $49,000 benefit in his 1980 tax return.

On October 1, 1980, Mr. Podavin sold the Carolin Mine shares for $100,165.79. The money was deposited into Can-Am's bank account and the bookkeeper made a credit entry in Mr. Podavin’s shareholder account, thereby reducing the outstanding debt he had with the company at the time. The capital gain from the sale of the shares of $11,331.95 was not reported by Mr. Podavin.

The plaintiff agrees the proceeds from the Forest Hill joint venture were used to acquire shares in Carolin Mines and that capital gains were realized on their sale. He takes the position however, that nothing was hidden from his bookkeeping staff or his accountant and all transactions went through the appropriate ban accounts. The plaintiff has no knowledge of why the amount of $49,000 was not charged to his loan account or why the taxable capital gain was not included in his income for the 1980 taxation year.

4. 1981 — Wade Property Proceeds Benefit for Credit to Podavin's Shareholder Loan

In March of 1980, Can-Am and Co-ordinated Realty Projects Ltd., as part of another joint venture, purchased the Wade Property from Malcolm Carmichael for approximately $300,000. Can-Am and Co-ordinated were equal co-venturers in the project until August 25, 1980, at which time Co-ordinated sold its 50 per cent interest in the Wade Property to Bargen Bros. Construction Ltd., who was acting on behalf of Bargen Builders Ltd. On January 8, 1981, Can-Am submitted an application to subdivide the Wade Property. However, prior to any subdivision development, Can-Am sold its 50 per cent interest in the Wade Property to Bargen Builders Ltd.

Bargen Builders Ltd. paid $172,065.20 each to Can-Am and Co-ordinated Realty Projects Ltd. The cheque payable to Can-Am, and dated March 19, 1981, was deposited in Can-Am's bank account and represented payment for the following:

In August 1981, Bargen Builders paid Can-Am a further $10,687.31 in completion of the transfer of the Wade Property. This amount represented payment for the following:

All the receipts were recorded in Can-Am's general ledger and Mr. Chant made the following year-end adjusting journal entries:

Accordingly, Mr. Podavin’s outstanding indebtedness to Can-Am was reduced by the credit entry of $167,126. The Minister's position is that Mr. Podavin provided no consideration to Can-Am in exchange for this credit to his shareholder loan account. The amount therefore represents a benefit conferred on him as a shareholder and should have been reported in his 1981 tax return pursuant to subsection 15(1) of the Income Tax Act.

Mr. Podavin maintains that when asked by his accountant about the receipt on the Wade Property he stated it was "his equity in the property", but was at all times referring to Can-Am's equity. He argues he often failed to make the distinction between his own personal dealings and those of the company's, being its sole shareholder and the manager of its day to day affairs. The statement to Mr. Chant was not made for the purpose of deliberately misleading him or with any fraudulent intent. It was merely an innocent statement which led to a misunderstanding. Accordingly, Mr. Chant did not include the amount in Can-Am's income but rather credited Mr. Podavin's loan account. The plaintiff argues he did everything a prudent businessman would have done. All aspects of the transaction went through the company's bank account and all related documentation was on file at the company's offices.

5. 1982 — Appropriation of Funds from 50 Acres Property $22,500

In November 1980, Can-Am and Co-ordinated Realty Projects Ltd. entered into a joint venture and purchased the 50 Acres property. In the summer of 1982, the property was expropriated by Her Majesty the Queen, Ministry of Transportation and Highways for the Annacis Island bridge connection. Compensation for the land was paid in two equal instalments; $241,250 payable upon execution of the agreement and $241,250 payable upon transfer of title.

The first payment was immediately used to pay off the bank loan obtained in order to buy the 50 Acres property. The second payment went into the joint venture's bank account. The balance of the account was subsequently disbursed, although full details as to how the moneys were disbursed is not available. However, it is apparent Mr. Podavin and Mr. Sullivan signed three cheques dated August 30, 1982, in the following amounts: $50,000 to Can-Am; $50,000 to Coordinated Realty; $45,000 to Walter Davidson which represented payment for the purchase of 25,000 shares of Greentree Energy Ltd. by Mr. Podavin and Mr. Sullivan. The $50,000 to Can-Am was recorded as a credit to the “Bank Loan"ac- count.

The Minister’s position is that Mr. Podavin’s share of the $45,000 used to purchase 25,000 shares of Greentree Energy Ltd., that is $22,500, was taken from the joint venture's bank account and used for his personal gain. Accordingly, it was a benefit which should have been reported on his tax return for the 1982 taxation year. Although the transaction did show up on the joint venture's bank account statement, Mr. Chant, unless he was advised of the details of the transaction, would not be aware Mr. Podavin had taken the money to buy shares.

Mr. Podavin contends he knows nothing about the financial and accounting circumstances relating to this transaction. He maintains all transactions went through the bank accounts of the joint venture and of Can-Am and all documents were made available to Mr. Chant.

6. 1983 — Unreported Income from Sale of Lot 224 $58,945

In 1980, Lot 224, which had been transferred to Can-Am by Yorkshire Trust in 1978 as consideration for Lot B, was conveyed to Mr. Podavin in accordance with his directions. In 1983 he sold the lot to Elite Builders Ltd. for $124,945.

The plaintiff contends the lot was part of his principal residence and was simply an extension of his backyard since it was adjoined to the property on which his principal residence was located (by approximately 50 feet) and was used as a play area for his children. Accordingly, he was not required to report any capital gain from its sale. Furthermore, the plaintiff argues that even if he was incorrect in classifying the lot as part of his principal residence, this represents an improper interpretation of the provisions of the Income Tax Act but does not constitute a misrepresentation under subsection 152(4).

The Minister maintains Mr. Podavin sold his principal residence to his wife in 1978. When he sold Lot 224 to Elite Builders Ltd. in 1983, he did not own the residence he ordinarily inhabited in the year. Therefore Lot 224 did not fall within the definition of principal residence in paragraph 54(g) of the Income Tax Act at the time of its sale. Accordingly, the profit of $58,945 (net proceeds of sale of lot 224 at $124,945 less its cost of $66,000) represents business income which should have been reported in Mr. Podavin's tax return for the 1983 taxation year. The Minister alleges this error was a misrepresentation resulting from the plaintiff's negligence or carelessness in failing to inform his accountant of the transfer of the principal residence to Mr. Podavin's wife in 1978.

7. 1983 — Appropriation of Funds from 50 Acres Joint Venture Bank Account $2,500

Finally, on February 10, 1983, a cheque payable to Mr. Podavin in the amount of $2,500 was issued from the 50 Acres joint venture bank account of Can-Am and Co-ordinated Realty Ltd. This money, which represented the final distribution of funds from the joint venture account, was deposited into Mr. Podavin’s personal bank account.

The Minister submits this is a benefit conferred on Mr. Podavin in his capacity as a shareholder of Can-Am. The amount cannot be related to the normal operations of the business itself and therefore should have been included as income under subsection 15(1) of the Income Tax Act for his 1983 taxation year.

The plaintiff denies having appropriated the funds from the joint venture account and contends all records were available to Mr. Chant in the preparation of his tax return for the year.

With respect to the plaintiff Can-Am Realty Ltd., there are four alleged incidents of under-reporting.

1. 1981 — Wade Property $100,000

In March of 1980, Can-Am and Co-ordinated Realty Projects Ltd. purchased the Wade property as joint venturers for approximately $300,000. On August 25, 1980, Co-ordinated sold its 50 per cent interest in the property to Bargen Bros. Construction Ltd. (who were acting on behalf of Bargen Builders Ltd.). On February 25, 1981, Can-Am also sold its 50 per cent interest in the property to Bargen Builders Ltd.

Can-Am reported no income from the sale of the property in its 1981 tax return. The original reassessment from the Minister in July of 1988 included income of $167,126 from the disposition. However, in its objection the plaintiff argued there was no additional unreported income and in the alternative, submitted a calculation showing Can-Am's share of profit from the sale of the Wade property at $100,000. Revenue Canada accepted this calculation but included the amount in the company's 1981 tax return.

The Minister maintains both Mr. Podavin and his accountant Mr. Chant had knowledge of the sale. Indeed Mr. Podavin instigated the entire transaction. He knew Co-ordinated Realty had sold its 50 per cent interest to Bargen Builders Ltd. in 1980 and he was responsible for the sale of Can-Am's 50 per cent interest in the property to Bargen Builders Ltd. in 1981. It is argued both the plaintiff and his accountant were negligent in the preparation of Can-Am's 1981 tax return and their negligence has resulted in misrepresentation by underreporting $100,000 of income for the company during the year.

The plaintiff admits the $100,000 was not reported in its 1981 taxation year. It is submitted however, that Mr. Chant had asked Mr. Podavin concerning the receipt on the Wade property andwas told it was Mr. Podavin's equity in the property. Accordingly, Mr. Chant did not include the amount in Can-Am's income and instead credited Mr. Podavin’s shareholder's loan account with the amount of $167,126. The failure to report the amount in question therefore was nothing more than an oversight caused by poor communication between the plaintiff and Mr. Chant. As such, it does not constitute a misrepresentation due to carelessness, negligence or fraud as contemplated by subsection 154(2) of the Income Tax Act.

2. 1982 — 82nd Avenue Property $60,000

On February 13, 1981, Can-Am and Co-ordinated Realty Projects Ltd. purchased the 82nd Avenue property as co-venturers. On March 22, 1982, Bargen Builders purchased the interest in the property from Can-Am and Co-ordinated Realty Projects Ltd. The purchase of Can-Am's interest was with the understanding that Can-Am would receive the right to one residential lot in the property upon the registration of the appropriate subdivision plan. Can-Am would also receive a payment from Bargen Builders on March 22, 1982 in the amount of $29,500. Apparently, this payment represented Can-Am's net equity in the property at the time of sale. Title remained in the name of Can-Am because Bargen Builders Ltd. did not have the financial strength to assume the bank loan on the property.

On February 8, 1983, the property was sold to W. Kreykenbolm Corporation Ltd. at a market value of $700,000. On the same date, in accordance with the agreement between the parties, lot 580 was transferred to Can-Am from Kreykenbolm at a fair market value equal to $60,000. A subdivision plan was registered on February 15, 1983.

In his original reassessment, the Minister included the $60,000 in Can-Am's 1983 taxation year on the basis the company had sold its 50 per cent interest in the 82nd Avenue Property and had received Lot 580 as part consideration for its interest. The amount was included in the plaintiff’s 1983 taxation year since Lot 580 was transferred from Kreykenbolm Corporation Ltd. to Can-Am in that year. However, that was later revised and the amount was included as income in the company's 1982 tax return.

The plaintiff maintains the Minister's initial reassessment including the $60,000 in the company's 1983 tax return was simply an error. Under the circumstances, particulary the number of transactions the company was involved in and their complex nature, the mistake was understandable. However, it is argued the plaintiff, who has no experience in matters of this nature, should not be held accountable for a similar error, thereby imposing a higher standard of care on the taxpayer than on Revenue Canada itself.

3. 1982 — 50 Acres Property $81,892.44

The details of the sale of this property are outlined above. Can-Am's share of the net profit from the sale was determined by Revenue Canada to be $81,892.44 and should have been included in the company's tax return for its 1982 taxation year.

The plaintiff agrees the property was expropriated in 1982 and the profit realized from the transaction was not reported. However, it is argued all transactions went through the bank accounts and all documents were available to Mr. Chant in preparing the financial statements and tax return for the year in question. Furthermore, the plaintiff takes issue with the amount of $81,892.44, arguing that due to loan interest and certain bank charges, the correct amount was approximately $61,000.

4. 1983 — Barnes and Raith Property $18,156.20

Can-Am Realty Ltd. and Co-ordinated Realty Projects Ltd. entered into another joint venture in November of 1980, whereby they acquired land legally described as the North half of Lot 3 of SE quarter Section 13, Township 4, Plan 245 NWD, hereinafter referred to as the Raith property. In January of 1981, the co-venturers purchased the south half of the same lot, referred to as the Barnes property. Total purchase price for the Barnes and Raith property was $672,352.

The joint venture then subdivided the property and on January 27, 1983, sold a little over one quarter of the property to the municipality of Delta for $296,257.93. The sale was not recorded in Can-Am's books nor was any profit from the disposition reported in the company's 1983 or 1984 tax return.

Originally, the Minister included the profit from the sale, $18,156.20, in the company's 1984 taxation year. However, that was later revised and the amount was included in Can-Am's 1983 tax return. The plaintiffs maintain the failure to report the income was not a misrepresentation due to carelessness or negligence. Rather, it was the result of discussions Mr. Podavin had with Mr. Chant and Mr. Steve Lake, the accountant for Co-ordinated Realty Projects Ltd., which led the plaintiff to believe the profit from this particular sale could be used to reduce the cost base of the remaining property in inventory. It is submitted that Revenue Canada's assessing policy, as reflected in Interpretation Bulletin IT-153R2, specifically allows for such a reduction in these circumstances.

Analysis

The issue now before the Court is whether the plaintiffs are taxpayers who fall within the definition of paragraph 152(4)(a)(i) of the Income Tax Act, thereby allowing the Minister to reassess them beyond the normal time period prescribed by the legislation. That paragraph, as it read at the material time, provides as follows:

152(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within four years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require, except that a reassessment, an additional assessment or assessment may be made under paragraph (b) after four years from the day referred to in subparagraph (a)(ii) only to the extent that it may reasonably be regarded as relating to the assessment or reassessment referred to in that paragraph.

The plaintiffs’ primary contention is that they relied on the expertise of their chartered accountant, Mr. Chant, for the preparation of their financial statements and tax returns for the years in question. Although there may have been some accounting errors and their bookkeeping system might be considered less than perfect, the plaintiffs deny they were guilty of neglect, carelessness, wilful default or fraud in filing their returns or supplying information to their accountant. Indeed, Mr. Podavin testified he has little knowledge of taxation matters and simply provided whatever information Mr. Chant requested. Furthermore, the plaintiffs maintain that during the taxation years in question, they were involved in hundreds of real estate transactions and the small number of incidents of unreported income in question do not justify an inference of misrepresentation. Accordingly, it is argued the Minister should not be permitted to reassess them pursuant to subparagraph 152(4)(a)(i).

The defendant on the other hand, submits the plaintiffs cannot escape liability for errors made in their tax returns by merely relying on the fact they employed the services of a chartered accountant to prepare audited financial statements and their tax returns. Nor can Mr. Podavin avoid responsibility for the correctness of the returns by pleading he had little knowledge of such matters and simply provided whatever information was requested by his accountant. It is argued that taxpayers retain the ultimate responsibility for ensuring their tax returns contain correct information and have an obligation to review prepared returns for that purpose.

The arguments made by the parties in the present action are similar to those made in Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D). In that case, the Minister reassessed the taxpayer in respect of a number of taxation years and as a result included additional amounts in the taxpayer's income and imposed penalties. Mr. Venne, although not well educated, was a successful businessman and in addition to his business income, had earned interest from mortgage investments. In filing his income tax returns for the years in question, he relied entirely on his booKkeeper and signed the returns without reading them. He appealed from the reassessment on the grounds the Minister had not reassessed within the normal time period prescribed by the Income Tax Act and there was no basis on which to find he had made misrepresentations caused by neglect or carelessness.

The argument advanced by the taxpayer in the Venne case is summarized by Strayer, J. at page 228 (D.T.C. 6251):

Central to Mr. Venne's position now is the proposition that he was not personally responsible for the many errors committed by Mr. Barnes in the completion of these income tax returns. Mr. Venne testified that he found it almost impossible to understand income tax returns, that successive bookkeepers tried to explain these matters to him but he found them almost entirely incomprehensible. He insisted that he signed the forms without verifying the information in them or indeed without understanding its purport.

In concluding the taxpayer had made misrepresentations attributable to neglect or carelessness, thereby allowing the Minister to reassess under subparagraph 152(4)(a)(i), Mr. Justice Strayer made the following comments at pages 228-29 (D.T.C. 6251-52):

I am satisfied that it is sufficient for the Minister, in order to invoke the power under subparagraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. . . .

The plaintiff devoted a good deal of effort during the trial to demonstrating that his bookkeeper during these years, Mr. Barnes, was grossly negligent or incompetent or both. To be sure, there is ample evidence to suggest that Mr. Barnes did not do an adequate job of preparing the plaintiff's tax returns. In some cases this worked against the interests of the taxpayer and cannot be assumed to have reflected his true wishes. Further, I am satisfied from the evidence that many of the subtleties of income tax law and of accounting were beyond the understanding of the taxpayer.

Nevertheless, there are two salient forms of evidence which have convinced me that the taxpayer did not exercise reasonable care in the completion and filing of his income tax returns and that this negligence resulted in misrepresentations being made in the returns.

First, there is ample evidence that the taxpayer did not read his returns before signing them. He admitted this on several occasions:. . . While one cannot expect a person wit the plaintiff's limited education and limited experience with accounting matters to understand fully the details of a tax return, in my view he cannot absolve himself from all responsibility by hiring what he now says to be a patently inadequate bookkeeper and leaving matters entirely in the latter’s hands. Secondly, 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 investor, should have noticed.

[Emphasis added.]

Accordingly, in order for the Minister to rely on subparagraph 154(2)(a)(i) of the Act, he must show, not only that the taxpayer committed an error in completing his tax return, but as well, the mistake was the result of negligence, carelessness or wilful default on the taxpayer's part. In other words, it must be proven the taxpayer did not exercise reasonable care in the completion and filing of his return which caused misrepresentations to be made.

Furthermore, as pointed out in the Venne decision, it is the taxpayer himself who carries the ultimate responsibility for ensuring his tax returns contain accurate data. That obligation is not altered by the fact the taxpayer has engaged the professional services of an accountant or other agent to prepare and complete his returns. In Howell v. M.N.R., [1981] C.T.C. 2241, 81 D.T.C. 230, the Tax Review Board made the following observations concerning this principle at page 2245 (D.T.C. 233-34):

There are certainly income tax situations in which only a comprehensive review and specific explanations by professional help would make the income tax return intelligible to even a knowledgeable and interested taxpayer. Those situations are the exception, not the rule, when a personal income tax return is at issue.

I am in agreement with counsel for the respondent — there is a bottom limit to the responsibility which must be accepted by even the most inexperienced or trusting taxpayer. The bottom limit is not simply to read the last relevant line of the return (a balance owing or a refund). It must demonstrate a reasonable effort on his part in the circumstances and within his own framework of comprehension and competence to understand the component elements of that final result. The fact that the amount in question was omitted from the tax preparation in itself is "negligence" on Mr. Howell's part. A review of his income tax return. . . would have been adequate for him to discover the omission before filing the return since, in my view, this was within his comprehension and competence.

[Emphasis added.]

The essence of the plaintiff’s position in the present case is that the Minister is precluded from reopening the statute-barred taxation years to reassessment because he has failed to satisfy the burden of proof placed on him by subsection 152(4) of the Income Tax Act. It is submitted Mr. Podavin did what any prudent businessman in his circumstances would have done for the taxation years in question. Having no accounting qualifications himself, it was reasonable for him to assume all accounting matters were being accurately maintained by his bookkeeping personnel and Mr. Chant. He had no cause to believe anything was remiss. Furthermore, neither Can-Am nor Mr. Podavin should be held accountable for the errors made by Mr. Chant, unless Mr. Podavin was privy to negligence or carelessness resulting in misrepresentations being made in the tax returns. On the contrary, plaintiffs’ counsel argues the accountant was furnished with all documents and records pertaining to each transaction in which Mr. Podavin was involved either personally or through Can-Am Realty Ltd.

Based on the evidence, I am unable to agree. Clearly Mr. Podavin is a knowledgeable businessman. He was the sole shareholder of Can-Am Realty Ltd. and managed the day to day affairs of the company. It was he who negotiated the real estate transactions, including the joint ventures, in which Can-Am was involved, as evidenced by his signature on all related documents.

However, the manner in which he handled the joint venture financial data rendered it virtually impossible for his accountant to avoid omissions and errors in many instances. Mr. Podavin simply did not inform Mr. Chant of the pertinent details of the joint ventures nor did he ensure that his bookkeeping staff was adequately apprised. There is no evidence the plaintiff Can-Am Realty Ltd. maintained books on each joint venture nor did the joint venture bank statements contain any reference to sales which had been made. In addition, unless they were brought to his attention, it would only be by coincidence Mr. Chant would encounter land transfer documents. Accordingly, he would have been unaware of any disposition of a joint venture interest unless Mr. Podavin reported it to him. Even if the accountant was aware of the disposition of property, as the evidence seems to suggest he was with respect to the Wade property in 1981, he was not provided with sufficient detail to allow for accurate preparation of tax returns. Mr. Podavin’s silence with respect to the amounts earned by Can-Am in the joint ventures was either careless or negligent or both. In any event it resulted in misrepresentations being made in Can-Am's tax returns for the years in question.

Indeed, Mr. Podavin's entire course of conduct with respect to Can-Am's dealings in the joint ventures was not that of a reasonably careful and prudent businessman. He certainly did not lack the experience and knowledge necessary to form a preliminary estimation of how much profit Can-Am realized through the joint ventures. The amounts themselves, $100,000 for the sale of the Wade property in 1981, $60,000 for the sale of the 82nd Avenue property in 1982, and $81,892.44 for the sale of the 50 Acre property in 1982, are substantial. A careful review of the tax returns prepared by Mr. Chant would have rendered their omission obvious to Mr. Podavin.

Therefore, although it is clear he did not conceal receipt of the proceeds from the disposition of Can-Am's interest in the joint ventures, it is equally apparent Mr. Podavin did not assume responsibility for ensuring his accountant was apprised of the germane details of the transactions so they could be accurately reported in the company's tax returns. It may be true Mr. Chant did not carry out his functions with due care and diligence. That does not however, absolve Mr. Podavin of the ultimate obligation as the taxpayer to review Can-Am's tax returns in a circumspect manner. Had he done so, the errors in the company's 1981 and 1982 tax returns with respect to the income from the joint ventures would have been apparent.

In my opinion, Can-Am Realty Ltd. has made misrepresentations in reporting its income for the 1981 and 1982 taxation years. The misrepresentations, being attributable to either negligence or carelessness or both, on the part of Mr. Podavin, permits the Minister to invoke subparagraph 152(4)(a)(i) of the Income Tax Act and reassess for those years.

However, I am not satisfied the Minister has succeeded in establishing that Can-Am's failure to report income from the disposition of the Barnes and Raith Property in its 1983 tax return constitutes a misrepresentation. That money was not included because the plaintiffs believed the company was entitled to use the profit from the disposition to reduce the cost base of the remaining property in inventory pursuant to subsections 18(2) and (3) of the Income Tax Act. Indeed, there was some debate on that point at the trial of this matter, the Minister taking the position the legislation only permits such a reduction where the property has been "transferred" by the developer, but not when it is sold for a profit. After reading the relevant provisions of tne Act and Interpretation Bulletin IT-153R2 I am inclined to agree with that argument. Nevertheless, there is insufficient evidence to indicate the plaintiffs were negligent or careless in omitting the income from the company's tax return. The failure to report the income was based, in my view, on an honest, albeit possibly erroneous, belief. As such, the error does not constitute a misrepresentation brought about by carelessness, negligence or wilful default which would entitle the Minister to reopen the year for reassessment.

I turn now to unreported income in Mr. Podavin's personal tax returns for 1980, 1981, 1982 and 1983. With respect to the 1980 taxation year and the unreported amount of $66,000 resulting from the appropriation of Can-Am's consideration for Lot B, I again conclude, based on the evidence, that Mr. Podavin failed to supply details of the transaction to Mr. Chant. The transfer of the property from Can-Am Realty Ltd. to Mr. Podavin was in accordance with his written instructions as Can- Am's manager to the company's solicitor. However, the transfer was not recorded in Can-Am's books. In fact the only trace of the transfer appears in the correspondence between Can-Am and its lawyers. Unless Mr. Chant was specifically advised of the transfer, a review of the company's books would not serve to render him cognizant of it. Once again, Mr. Podavin failed to supply complete and accurate information to his agent and his silence, whether it be careless or negligent, resulted in a misrepresentation in his tax return for the year.

The Minister also alleges misrepresentation in the 1980 taxation year in relation to the appropriation of funds from the Forest Hill joint venture account of $49,000 and the unreported gain from the sale of the Carolin Mines Shares of $11,331.95. However, I am not satisfied the evidence supports the Minister's position that Mr. Podavin was careless or negligent with respect to these transaction. There is no dispute the plaintiff used the proceeds from the Forest Hill joint venture to acquire shares in Carolin Mines, that capital gains were realized on the disposition of the shares and that the transactions went through the appropriate bank accounts. It is simply not clear why the amount of $49,000 was not charged to Mr. Podavin’s loan account or why the taxable capital gain was not included in his income for the 1980 taxation year, although all indicators point to an error or omission in bookkeeping.

The fact the Minister has succeeded in establishing a misrepresentation, thereby opening the statute-barred year to reassessment, does not mean he is entitled to reassess every incorrect item in the return. It is true the Minister may allege a number of misrepresentations in any given year but is only required to prove one of them in order to have the year reopened. However, having done so the Minister is not free to reassess other errors in the tax return unless he can establish they too constitute a misrepresentation due to carelessness, negligence or wilful default on the part of the taxpayer.

This was the principle established in Jet Metal Products Ltd. v. M.N.R., [1979] C.T.C. 2738, 79 D.T.C. 624, where the Tax Review Board stated at page 2755 (D.T.C. 637):

The Minister simply cannot bring into the reassessment for a statute-barred year items which are based upon any thing other than the misrepresentation or fraud outlined in subsection 152(4) of the Act — but he only is required to prove one such item. In summary, therefore, as I see the relative responsibilities outlined in subsections 152(4) and (5), they necessitate that the Minister first reassess the statute-barred year, and by so doing he demonstrates that he is prepared to prove at least misrepresentation. If chal- lenged by the taxpayer, the Minister must prove at a minimum that any (one) error has been made by the taxpayer, and while it may have been made in good faith, that it was nevertheless not one which a normally wise and cautious taxpayer could have made.

Accordingly, although the Minister is entitled to reopen Mr. Podavin’s 1980 taxation year and reassess the $66,000, the amounts of $49,000 and $11,331.95, not being items which constitute misrepresentation, are not open to reassessment.

I turn now to his 1981 tax return wherein Mr. Podavin failed to report income of $167,126 representing proceeds from the sale of the Wade property credited to his shareholder's account. I find it difficult to give much credence to the plaintiff's contention this error was due to his inclination to treat himself and Can-Am Realty Ltd. as a single entity and resulted in mistakenly advising his accountant the money was "his" equity in the property when in fact, it was Can-Am's. Mr. Podavin is not an accountant but he is an astute and successful businessman.

In any event, even if I could accept this explanation, a proper review of his tax returns and his shareholder's loan account would have rendered an error of that magnitude obviously apparent. It is inconceivable the amount of $167,126 could have been credited to Mr. Podavin’s shareholder account without his becoming aware of the fact at some point in time. Had he reviewed the yearly financial statements prepared by Mr. Chant with even a reasonable measure of diligence, he would have noted his shareholder's loan account was in a debit balance and that a large credit had been made to the account thereby reducing his indebtedness to the company by $167,126.

I am satisfied the error was a misrepresentation caused by carelessness and neglect on Mr. Podavin's part and the Minister is accordingly entitled to reassess pursuant to subparagraph 152(4)(a)(i) of the Act.

Mr. Podavin's 1982 tax year should also be reopened. In that year he failed to report the appropriation of $22,500 from the 50 Acres joint venture bank account to purchase shares of Greentree Energy Ltd. The money was taken and used by Mr. Podavin for his own personal gain and had no connection with the operation of the business. Although the transaction did appear on the joint venture's bank statement, unless Mr. Chant was advised of the details of this transaction, he would have no way of knowing Mr. Podavin had taken the money to buy shares, since the cheque releasing the funds was payable to Mr. Walter Davidson and not to Mr. Podavin himself. The plaintiff has a responsibility to make full and accurate information available to his accountant. As previously stated, Can-Am did not keep a synoptic for each joint venture and the entries on the joint venture bank statements did not make any reference to sources of deposit or reasons for withdrawals. As a result, the records could hardly be considered adequate such as would allow Mr. Chant to separate, on his own, personal expenses from business ones.

In fact, this is a recurring problem in the plaintiffs’ bookkeeping system. On many occasions, Mr. Podavin used Can-Am's bank account as his own personal account. His counsel emphasized at the trial of this matter there is nothing unlawful about that. That may be true. Nevertheless, when one conducts their business and personal affairs in this manner, it becomes virtually impossible for an accountant in Mr. Chant's position to delineate business related expenditures from personal ones, unless he undertook to question Mr. Podavin on every transaction, a highly impractical and unworkable solution. While it may not be unlawful to conduct business in this manner, it is nevertheless a careless and haphazard way to do so and has created many of the problems the plaintiffs have encountered with Revenue Canada in the past as well as in the present actions.

A portion of the unreported income in Mr. Podavin's 1983 taxation year arose from the sale of Lot 224, which the taxpayer considered to be part of his principal residence, thereby precluding the necessity of reporting any capital gain from its disposition, pursuant to paragraph 54(g) of the Income Tax Act.

The legislation provides that land upon which a principal residence stands and adjoining land which contributes to a taxpayer's use and enjoyment of his residence qualify as part of a principal residence. However, certain criteria must be satisfied before a housing unit can be considered a taxpayer's principal residence. To begin with, the housing unit must be owned solely or jointly by the taxpayer or with another person. In addition, it must be ordinarily inhabited by the taxpayer in the year and it must have been designated by him, in the prescribed form and manner to be his principal residence.

I am not satisfied based on the evidence that Lot 224 can reasonably be considered Mr. Podavin’s principal residence. He did not own the housing unit to which the lot was adjoined. Mr. Podavin bought his home, located on 6680 Knight Drive, Delta, British Columbia, in 1975. In 1978, he sold the house to his wife. She has remained the registered sole owner of their home from that date to the present. When he sold Lot 224 in 1983, he did not own the principal residence where he and his family ordinarily resided. However, when Mr. Chant prepared the plaintiff's 1983 tax return he was not aware the housing unit had been transferred to Mr. Podavin's wife in 1978, having never been informed of this very significant fact by the plaintiff.

I cannot accept the plaintiff's explanation therefore, that this error in his tax return was simply due to an incorrect interpretation of the Income Tax Act on his part. Once again, this instance demonstrates Mr. Podavin's delinquency in apprising his accountant of the details necessary to properly prepare his tax return. In my view, this fact renders the plaintiff's failure to report the $58,945 gain from the sale of lot 224 a misrepresentation, due in the very least to carelessness or neglect, if not wilful default.

I take the same view with respect to the appropriation of $2,500 from the 50 Acres joint venture bank account to buy shares of Greentree Energy Ltd., unreported in the plaintiff's 1983 tax return. That money was withdrawn from the joint venture bank account and deposited directly into Mr. Podavin's personal bank account, thereby representing a benefit conferred on him in his capacity as shareholder of Can-Am Realty Ltd. In light of his previous dealings with Revenue Canada relating to problems with his shareholder's loan account, I am not persuaded Mr. Podavin was confused concerning his tax liability under the Income Tax Act on a benefit he received from the corporation. Furthermore, there is no evidence to suggest he advised Mr. Chant of the transaction. He simply took the company's money for his own personal use and ignored the tax consequences. His whole course of conduct in this respect constitutes negligence at the very least, if not wilful default, in the reporting of his income for the 1983 taxation year. Accordingly, the Minister has succeeded in meeting the onus placed on him by subparagraph 152(4)(a)(i) of the Act and is entitled to reassess for that year.

Finally, the Minister has imposed a penalty pursuant to subsection 163(2) of the Income Tax Act with respect to the $66,000 unreported income in Mr. Podavin's 1980 taxation year. The jurisprudence has established the burden on the Minister to justify a penalty under that provision to be an onerous one. It is not sufficient to show a taxpayer has failed to comply with his obligations under the Act, nor is it enough to demonstrate he has been careless or negligent in the filing of his return. What is required is conduct which is exceptional and flagrant to the degree of gross negligence. Although Mr. Podavin was remiss in his obligation to provide Mr. Chant with complete and exact information, I am not persuaded his conduct, with respect to that particular transaction in any event, amounts to gross negligence such as is necessary for the imposition of a penalty.

For these reasons, the Minister is entitled to reopen the plaintiff Can-Am's 1981 and 1982 taxation years and reassess the three items in those years as set out above. Can-Am's 1983 taxation year cannot be reopened as the Minister has failed to prove a misrepresentation caused by negligence, carelessness or wilful default on the part of the plaintiff. The Minister is entitled to reassess Mr. Podavin's 1980, 1981, 1982 and 1983 taxation years. All of the items, with the exception of the $49,000 and $11,331.95 in Mr. Podavin's 1980 taxation year, are misrepresentations due to carelessness, neglect or wilful default, and are therefore subject to reassessment. In addition, I am prepared to accept the amounts reassessed by the Minister as being correct. The penalty imposed by the Minister under subsection 163(2) of the Act is rescinded.

Costs to the defendant.

Appeals allowed in part.