Blair Down v. Minister of National Revenue, [1993] 2 CTC 2027, 93 DTC 591

Bell, T.C.C.J. (orally):—There are two issues in this appeal.

1. whether the appellant can deduct the sum of $122,818, as a non-capital loss arising in his 1983 taxation year, from his income for that year and from his income for other taxation years in accordance with the provisions of paragraph 111(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act");

2. whether the appellant is subject to a penalty levied under and by virtue of the provisions of subsection 163(2) of the Act in respect of a commission received in his 1981 taxation year.

First issue

The loss of $122,818 arose by virtue of expenditures on and the sale of a house and lot municipally described as 6070 Granville Street, Vancouver, B.C. (“Granville Street"). The appellant, for a number of years prior to 1983, resided on a five-acre lot in the Langley, B.C. area and carried on business both as a licensed real estate agent and as a principal in the purchase and sale of real property having bought, in that capacity, either personally or in a wholly owned corporation, between 80 and 100 properties. A number of those properties were residences which were renovated and subsequently sold. The real estate company with which he was associated had its office in Langley and he carried on his business in that general area.

He testified that in February 1982 he purchased Granville Street on a one hundred per cent financed basis for the purpose of renovating and selling same. His evidence was that his investigation into renovations required in order to bring the house up to the standard of the neighbourhood showed that they would be more extensive and more expensive than he had anticipated. He was becoming apprehensive about the health of the economy and he decided to move to that house for the purpose of supervising and expediting the renovations so he could sell the house as soon as possible.

He testified further that he intended to return to his Langley home when Granville Street was sold and to that end stored most of his furniture and effects in a garage on the Langley property, rented that house on a month to month basis and moved minimal and lower quality effects into Granville Street. The appellant, who was divorced at that time, had some years earlier built a house on the Langley property, same having been his matrimonial home. He acquired it for his own purposes upon having obtained his divorce.

An invoice for the total cost of renovations of Granville Street was introduced in evidence. It, bearing the date March 29, 1982, listed all required alterations for a total cost of $39,636.36. The appellant testified that the contractor had submitted this cost invoice to him in order to obtain an advance of funds for the purpose of financing the necessary work. He further testified that the renovations took much longer than anticipated and were not completed until the end of December 1982 and that he occupied the premises together with a lady whom he married late in that year and with her two children.

During part of that period he had a"for sale by owner" sign on the Granville Street lawn. The appellant gave evidence as to how the economy turned sour and how he lost all of his real estate holdings resulting in the loss described above. He testified also that he and his brother had acted as agents for the sale by G.S.K. Industries Ltd. of a property to a John Tiberio, which sale was to be completed on or before October 15,1981 and in respect of which each of them was to receive $100,000 as commission. He negotiated with a Mr. Baldwin, the principal of G.S.K. Industries Ltd., to sell his right to the commission for $75,000. He arranged a similar sale of his brother's right to commission for $75,000 and applied that amount to a debt owing to him by his brother. He then stated that the purchaser failed to make his October payment and that Mr. Baldwin said that he would sue the appellant for the return of $150,000 if the sale was not completed.

The appellant testified that, as was his practise, he advised his accountant that had he received these amounts and told him the surrounding facts and that his accountant felt he should leave it and see what happened respecting the transaction. In response to his own counsel's suggestion as to why it was not reported in the subsequent year he said that he guessed his accountant didn't think it was reportable and that he didn't know why it wasn't included but that he had reported it to his accountant.

On cross-examination the appellant spoke of the confusion about how his brother's $75,000 should be treated from a tax viewpoint and also about the deal looking like it was in trouble. In response to the direct query from respondent's counsel as to whether he had told his accountant about this, he said that he told his accountant about all his income. He had testified earlier that he gave all information to his accountant and when an income tax return was presented to him he did not study it but simply asked where he should sign.

Second issue

The respondent's counsel produced a James Wilson as a witness. He is, and was at all relevant times, an official of the Department of National Revenue. He testified that he had telephoned the appellant about the aforesaid commission and that the appellant had agreed it wasn't reported and explained that he had forgot. He testified further that the next day he telephoned the appellant to let him know that the next step would be a 163(2) penalty. Obviously he was referring to subsection 163(2) of the Income Tax Act.

Upon consulting notes which Mr. Wilson said were made immediately after such telephone conversation, he stated that the appellant had spoken of his neglect and had concurred with the penalty. He testified, in response to respondent's counsel's question as to whether he had explained the nature of the penalty, that that would be standard procedure.

On cross-examination Mr. Wilson stated that his memory was restricted to what was in his notes and that apart from what was in his memorandum he could not tell the Court what procedure was followed. He was then referred to Exhibit R-3, his notes respecting the telephone conversations, and in particular to his words:

I contacted Mr. Down and explained that it appeared he did not report his commission income from the Walnut Grove joint venture. He quickly agreed and explained that he simply forgot due to various lengthy reasons.

When appellant's counsel stated that he hadn't recorded any of the reasons and that anything more than what was in the report would be pure speculation Mr. Wilson agreed. Counsel also pointed out to Mr. Wilson that his letter of November 28, 1983 to the appellant contained no statement about the appellant having understood and concurred with the penalty but that it simply stated that a penalty would be applied. Mr. Wilson's response was that it was a standard letter.

With respect to the first issue, I accept the uncontroverted evidence of the appellant regarding his extensive activities in real estate in the years prior to his purchase of Granville Street. I also accept his evidence to the effect that his purpose in acquiring that property was to renovate and sell same as soon as possible. On this basis I have no difficulty concluding that the Granville Street transaction was part of the appellant's business of dealing in real estate. Therefore, such property cannot, as was urged by respondent's counsel, be personal use property as defined in section 54 of the Act, that definition being expressed specifically to have application only for the purposes of paragraph

(c) which deals with capital gains and capital losses. Accordingly, such loss of $122,818 is a "non-capital loss” within the meaning of that term as defined in section 111 of the Act and is deductible under and in accordance with the terms of that section.

With respect to the second issue, in order for the appellant to be subject to a penalty under subsection 163(2) of the Act, he must have knowingly or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under the Act, have made or participated in, assented to or acquiesced in the making of a false statement or omission in a return filed in respect of his 1981 taxation year.

Subsection 163(3) provides that the burden of establishing the facts justifying the assessment of the penalty is on the Minister. respondent's counsel made no argument with respect to the word "knowingly" and therefore I have no need to consider that word. He did submit that on the basis of the cases of Holden v. M.N.R., [1981] C.T.C. 2016, 81 D.T.C. 27 (T.R.B.) and Holley v. M.N.R., [1989] 2 C.T.C. 2152, 89 D.T.C. 366 (T.C.C.) the appellant had been grossly negligent. He also sought to attach importance to the fact that the appellant had not responded to the letter from Mr. Wilson advising him that a penalty would be levied and that he had not raised this matter in his notice of objection. I find neither of those two facts to be of assistance to the respondent.

The facts in the cited cases were not similar to those under consideration here. In the Holden case the appellant kept inadequate and incomplete financial records and was the subject of a net worth assessment by the Minister of National Revenue. In the Holley case the appellant failed to include in income a capital gain of $565,575. It was not a matter of him having furnished information respecting the transaction giving rise to that gain to the accountant who prepared his tax return.

I accept the appellant's evidence that he had given all financial information concerning his business transactions to his accountant. I accept his evidence concerning the confusion that existed about the commission amount that he had received from the unsuccessful vendor of the property in a transaction which had provided for the payment of such commission but which was not completed.

The term“ gross negligence" has often been described by the courts of this land as meaning "very great negligence”. In the case of Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D), Mr. Justice Strayer stated, at page 234 (D.T.C. 6256), that:

"Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.

The learned justice continued with these words at page 234 (D.T.C. 6256):

To be sure, the plaintiff did not exercise the care of a reasonable man and, as I have noted earlier, should have at least reviewed his tax returns before signing them. A reasonable man in doing so, having regard to other information available to him, would have been led to believe that something was amiss and would have pursued the matter further with his bookkeeper.

I find nothing in Mr. Wilson's evidence which will be of assistance to the respondent in meeting the burden imposed by statute. Any explanation to the appellant and the receipt of any concurrence from the appellant in the circumstances described is irrelevant to the determination of this issue.

Undoubtedly, the appellant should have studied his income tax return and sought explanations in respect of any matter he did not understand including the omission of a sum as substantial as his commission. In my opinion not having done so constitutes negligence. However, also in my opinion, the respondent has not met the burden of establishing facts justifying the assessment of a penalty herein on the basis of gross negligence. Accordingly, the penalty assessed herein should not be applied.

Finally, the appellant is awarded costs.

Appeal allowed.