Date:
20021129
Docket:
2000-3798-IT-G
BETWEEN:
IAN
MORRISON,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Bell,
J.T.C.C.
ISSUES:
[1]
The issues with respect to the Appellant's 1995 taxation year
are:
1.
What is the adjusted cost base ("ACB") for purposes of
determining the capital gain subject to tax in respect of the
disposition of a house and land initially regarded by the
Appellant as a principal residence not subject to tax on
disposition? The Appellant, at the hearing, acknowledged that
only three-fifths of the gain on the sale was attributable to his
principal residence.
2.
Is the Appellant subject to a penalty assessed by the Minister of
National Revenue ("Minister") pursuant to the
provisions of subsection 163(1) of the Income Tax Act
("Act")?
FACTS:
[2]
The Appellant, in 1991, purchased 155 acres of undeveloped
mountain side property. It was located in an area that was zoned
with minimum lot sizes of 74.1 acres.
[3]
In 1993 he built a residence on the property. His application for
subdivision into two parcels to take advantage of the minimum lot
size was denied.
[4]
In 1995 the Appellant sold the entire land and house for
$1,009,600. He failed to declare the gain made upon that sale.
Although the Minister, at the time of reassessment, took the
position that the cost of land allocable to the principal
residence was $68,007.07, the Respondent, at the hearing, agreed
that the full cost of the land, namely $142,420.20 was the
adjusted cost base of that land, the Minister having accepted
that the entire lot was part of the principal
residence.
[5]
The reassessment of the Appellant's 1995 taxation year
included the figure of $483,760 as the cost of improvements to
the land. The Appellant's position, at the hearing, was that
this sum should be increased by the amount of $57,744.76 which
are described by him as:
Expenses
not reported to Accountant.
These expenses
are itemized as follows:
|
survey: before construction
|
1177
|
|
custom book case
|
4139.77
|
|
fireplaces - rock facings
|
8392
|
|
well
litigation; release
|
10844
|
|
legal
fees re well
|
150
|
|
excavation in access tunnel
|
1584.67
|
|
chicken coop
|
4007.32
|
|
trench hydro and water too coop; labour
|
950
|
|
exercise equip
|
4500
|
|
pool
table
|
10000
|
|
septic system
|
2500
|
|
generator; Onan diesel
|
3500
|
|
trucking - to level building site
|
6000
|
|
|
|
|
total
|
57,744.76
|
The
Appellant's position is, therefore, that the total adjusted
cost base of the property is $683,924.96 made up as
follows:
|
Land
|
142,420
|
|
Improvements
|
483,760
|
|
Other
allowable expense
|
57,744.76
|
|
|
|
|
Total
|
683,924.76
|
[6]
The issue respecting the adjusted cost base of the property can
now be restated as to whether the sum of $57,744.76 should be
included in the adjusted cost base in the principal residence
computation.
[7]
The Appellant gave detailed evidence respecting services and
materials obtained for each sum totalling $57,744.76. He was
cross-examined on that evidence in great detail by
Respondent's counsel. Counsel, in such cross-examination,
referred to a letter sent by Reginald J. LaBonte, C.A.
("LaBonte"), on January 25, 1999 to Revenue Canada
Taxation. In this letter LaBonte set forth that the total cost of
the property had been determined as $646,046 detailed as
follows:
|
Land
|
$
142,420
|
|
Construction cost - see attached schedule
|
456,760
|
|
Capitalized interest
|
17,620
|
|
Property taxes (1992 & 1993)
|
2,426
|
|
Miscellaneous costs (all < $1,000)
|
27,000
|
|
|
|
|
|
$
646,046
|
[8]
LaBonte testified that as of 2002 he had been the Appellant's
Accountant for a period of 15 years. He said that he discussed
the principal residence question with the Appellant when
preparing the Appellant's income tax return. He advised the
Appellant that he did not think any tax was payable. He then
stated that his advice was incorrect. He said that the Appellant
had given him all the information respecting his principal
residence and that it was an oversight on his firm's part not
to have reported the transaction. He explained the oversight in
that his firm should have used a formula which, when ultimately
employed, revealed that three-fifths of the gain was not subject
to tax. LaBonte said that he would have included the appropriate
amount had he done that computation and not simply assumed that
the full amount was exempt from tax as a principal residence
exemption. He said that it was not the Appellant's place to
second guess him respecting his opinion.
[9]
The Minister of National Revenue ("Minister") assessed
a penalty pursuant to subsection 163(1) of the Act as a
result of the Appellant's failure to report income for one of
the three taxation years preceding the 1995 taxation year under
appeal and for 1995. Appellant's counsel acknowledged that
there had been such reporting failure.
[10]
Respondent's counsel acknowledged, based upon the decision in
Consolidated Canadian Contractors Inc. v. Canada,
[1998] G.S.T.C. 91 that the defence of due diligence respecting
the Appellant's income reporting failure for the 1995
taxation year was available to the Appellant.
[11]
Respondent's counsel cross-examined the Appellant in detail
respecting the miscellaneous costs set out in LaBonte's
letter to Revenue Canada, each of which was described as being
under $1,000, totalling the estimated $27,000. The Appellant was
clear in his statements that no part of the said sum of $27,000
was included in the amount of $57,744.76 aforesaid.
Respondent's counsel also asked Appellant whether he had
referred to the principal residence provisions in the Act.
Appellant responded in the negative.
APPELLANT'S SUBMISSIONS:
[12] In summary,
Appellant's counsel stated that the Appellant's evidence
respecting the $57,744.76 was satisfactory and that he was
adequately cross-examined without that evidence being
compromised. He stated that some items of which the Appellant was
not certain could have been higher or lower.
[13] Regarding
the penalty, counsel submitted that the Appellant had exercised
reasonable care in providing all documents and all financial
information about the house to LaBonte respecting his 1995
return. Counsel referred to LaBonte's evidence to the effect
that he had all he needed and that he made the error respecting
the principal residence exemption and voluntarily acknowledged
that he had done so. He said he had, in making such error, failed
to provide the proportionate formula rule which, if applied,
would have resulted in three fifths of the gain constituting a
principal residence exemption. He stated further that if LaBonte
had applied that rule, the return would have been filed correctly
in this regard and that this gives a due diligence defence to the
Appellant. He submitted that the evidence demonstrated a
satisfactory level of communication between the Appellant and his
accountant, LaBonte. He said that LaBonte was not kept in the
dark and that he prepared the return on the basis of his
own mistake. He referred to LaBonte's evidence that he
discussed the income tax return with the Appellant and that the
Appellant had signed the return. He also stated that not only did
the Respondent not seriously challenge that fact but provided no
evidence to the contrary. He then submitted that the Appellant,
in providing all information respecting his house sale to his
chartered accountant, a professional, had exercised all
reasonable care to ensure errors not be made and, accordingly,
had exhibited due diligence and should not be subject to the
subsection 163(1) penalty.
[14] Counsel
then submitted that the ACB of the house and land was $683,924.76
for the purpose of determining the capital gains and that there
should be no subsection 163(1) penalty.
RESPONDENT'S SUBMISSIONS:
[15]
Respondent's counsel submitted that the sum of $57,744.76
claimed by the Appellant as an addition to the $483,760 of
improvements was already included in the latter sum. He then said
that if the Court was favourably disposed to accept the
$57,744.76 it should reduce that sum by the amount of $27,000
referred to in LaBonte's aforesaid January 29, 1999 letter to
Revenue Canada and, in such case, only the balance of $30,744.76
should be added. That would fix the ACB of the property at
$656,924.76.
[16] Regarding
penalty, Respondent's counsel submitted that the Appellant
had not taken all reasonable care with respect to his 1995 income
tax return and that engaging the services of an accountant was
not enough to meet the due diligence test. He referred to
Roberts (K.) v. Canada, [1997] G.S.T.C. 58 in which
Bowman, J., as he then was, ruled that reliance on one's
bookkeepers cannot constitute due diligence.
He then
referred to SDC Sterling Development Corp. v. Canada,
[1997] G.S.T.C. 103 in which Christie, J.T.C.C., relying on
Roberts, said that if "a well known national
accounting firm" gave insufficient or erroneous advice to
the Appellant, that does not go to establishing due diligence.
Counsel then submitted that the actions of one's agents are
the actions of that person.
[17] Counsel
also submitted that the Appellant had received erroneous advice
and that he had not looked at Revenue Canada's interpretation
bulletins. With respect to the Court's question as to what he
should have done, counsel replied that he should have read the
Income Tax Act.
ANALYSIS
AND CONCLUSION:
Subsection
163(1) of the Act reads as follows:
Every
person who
(a)
fails to report an amount required to be included in computing
the person's income in a return filed under section 150 for a
taxation year, and
(b)
had failed
to report an amount required to be so included in any return
filed under section 150 for any of the three preceding taxation
years.
is liable
to a penalty equal to 10% of the amount described in paragraph
(a), except where the person is liable to a penalty under
subsection (2) in respect of that amount.
Subsection 3
states:
Where in an
appeal under this Act, a penalty assessed by the Minster
under this section or section 163.2 is in issue, the burden of
establishing the facts justifying the assessment of the penalty
is on the Minister.
[18] Respecting
the first issue, I accept, without question, Appellant's
evidence that he expended, in addition to the agreed amount of
$483,760, the amount of $57,744.76 on improvements to the land
whose cost was $142,420.20 thereby reaching a total of
$683,924.96. I am further satisfied that the Appellant expended
the sum of $27,000, described in the Appellant's letter to
his accountant, and that it was not part of the sum of $57,744.76
and that it should not, as suggested by Respondent's counsel,
reduce the total cost. The result is that an ACB of $683,924.96
should be used in determining the taxable capital gain for the
1995 taxation year.
[19] With
respect to the penalty, the Reasons for Judgment in
Roberts read, in part:
Here it is
true the Appellant hired bookkeepers for one of the periods in
question and paid them what appears to be excessive amounts for
their incompetence and inaction. This might justify an action by
the Appellant against them, but it does not amount to due
diligence.
Although
the learned judge stated that the accountants were the
Appellant's agent and the Appellant is responsible for what
they did or failed to do, he also referred to them as
"overpaid and essentially useless bookkeepers". There
is no evidence or suggestion that LaBonte was incompetent or
useless. He appeared to be a very professional man who freely and
openly admitted his error, attributing no blame on the part of
the Appellant.
[20] In
SDC Sterling the Court stated that particulars of
what the Appellant's accounting firm did or did not do were
not spelled out in evidence at the hearing. Also, the Appellant
was delinquent in filing many of its GST returns. Those types of
circumstances do not pertain here.
[21] I do not
subscribe to the notion that a taxpayer, in circumstances such as
those of the Appellant, cannot be said to have exercised due
diligence for the purpose of avoiding a penalty under subsection
163(1) of the Act. He, in the preparation of his 1995
taxation year income tax return engaged the services of the
chartered account who had assisted him for years and to whom he
had given all relevant information, all in respect of a formula
concept contained in the Income Tax Act which is not
easily understood. The suggestion by Respondent's counsel
that he should have read the Interpretation Bulletin or read the
Income Tax Act cannot have been seriously advanced by
Respondent's counsel. The appeal will be allowed so that the
ACB of the Appellant's property is $683,924.96 and the
penalty assessed will be deleted.
Signed at
Ottawa, Canada this 29th day of November, 2002.
J.T.C.C.
COURT FILE
NO.:
2000-3798(IT)G
STYLE OF
CAUSE:
Ian Morrison v. Her Majesty the Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
September 12, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge R.D.
Bell
DATE OF
JUDGMENT:
November 29, 2002
APPEARANCES:
Counsel
for the Appellant: R. Keith Oliver
Counsel
for the
Respondent:
Eric Douglas
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3798(IT)G
BETWEEN:
IAN
MORRISON,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on September 12, 2002 at Vancouver, British Columbia,
by
the
Honourable Judge R.D. Bell
Appearances
Counsel
for the
Appellant:
R. Keith Oliver
Counsel
for the
Respondent:
Eric Douglas
JUDGMENT
The appeal from the reassessment made under the Income Tax
Act for the 1995 taxation year is allowed, so that the
adjusted cost base of the Appellant's property is $683,924.96
and the penalty assessed will be deleted, and the reassessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with the attached
Reasons for Judgment.
Costs are awarded to the Appellant.
Signed at
Ottawa, Canada this 29th day of November, 2002.
J.T.C.C.
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