F. Maurice Edgar v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2178

Bonner, T.C.C.J.:—This is an appeal from an assessment under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the 1987 taxation year. In 1987 the appellant bought three parcels of real estate which he resold after an average holding period of three months. During the year he realized profits from the three transactions in the total amount of $20,674.

In making the assessment now under appeal the Minister of National Revenue acted on the basis that:

1. the appellant's return of income for the 1987 taxation year did not disclose the transactions or the gains realized thereon;

2. the gains were income;

3. a penalty was exigible under subsection 163(2) of the Act in respect of the failure to report income in the amount of $20,674.

The appellant's position in this appeal is that he retained a chartered accountant, Ms. Cheryl Coholan, to prepare and file his return and that, on her advice, he believed that the $20,674 was composed of gains on capital account which were exempt from tax by virtue of subsection 110.6(3) of the Act. He asserted that the transactions were so reported in his return of income for the year and that the penalty was therefore wrongly imposed. The issue raised by the appeal is whether the transactions were in fact disclosed by the appellant in his return. It was not the position of the appellant at the time of hearing that the gains were not income. Rather he asserted that, having reported the transactions in good faith as transactions on capital account, he was not liable to a penalty. Counsel for the respondent did not suggest that a penalty would be exigible if the transactions had in point of fact been disclosed in the manner alleged by the appellant. Rather he asserted that the appellant had not done so.

Subsection 163(3) of the Act provides:

Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

The question which must now be addressed is therefore whether the respondent has established on the balance of probabilities that the appellant’s return of income for the 1987 taxation year did not disclose the three transactions.

The respondent called one witness, Nicola Siena, the assessor whose investigation culminated in the issuance of the assessment under appeal. Mr. Siena produced Exhibit R-3, a document which he identified as a copy of the Original filed tax return for the appellant's 1987 taxation year. That document, in common with most completed income tax returns, contained lines in which no entry was made. However, the lines left blank in the appellant’s return included:

1. line 127''Taxable Capital Gains—complete and attach Schedule 3”; and

2. line 254" Capital Gains Deduction (from form 1657)”.

Exhibit R-3, the photocopy of the tax return produced by Mr. Siena did not include either Schedule 3 or form T657.

Schedule 3 is the form provided for reporting the details of dispositions of capital property. It requires the taxpayer to furnish the address or legal description of the property, the year of acquisition, the proceeds of disposition, the adjusted cost, outlays and expenses, and gain or loss. Form T657 may be used for calculation of the cumulative gains limit. Subsections 110.6(3) and (4) imposed limits on the total amount deductible by individuals under the sections.

Both Ms. Coholan and the appellant testified at the hearing. Ms. Coholan stated that in April of 1988 she completed the appellant’s return save for lines 127 and 254, that she intended to complete Schedule 3 and the T657 form on the basis that the gains were on capital account but exempt under section 110.6 and complete lines 127 and 254, that she did prepare Schedule 3 and form T657 and that she recalled tucking them in the envelope and mailing them with the return on or just before the April 30, 1988 deadline. She was not concerned about lines 127 and 254 because the gains, if exempt, would not increase the taxable income reported.

The appellant testified that he reviewed his 1987 return and discussed it with Ms. Coholan before it was filed. He conceded that the review was not detailed but stated that he would not have understood it if the matter had been discussed in detail. He asserted that he relied on his accountant.

On the critical question whether the return as filed disclosed the transactions at all the evidence led by the respondent was unpersuasive. The respondent did not attempt to utilize subsection 244(7) of the Act. It was not suggested that the envelope containing the return was not opened before it reached Mr. Siena's hands. It is quite unlikely that in an organization such as the Department of National Revenue an official such as Mr. Siena, who at the time was an office examination assessor, would have been charged with the duty of opening envelopes containing tax returns. Mr. Siena could not have had any personal knowledge whatever as to what in fact was enclosed with the return. There was no evidence at all from which I can infer that the return which reached Mr. Siena was the entire return filed by the appellant.

There was further evidence on which the respondent relied in support of a submission that Ms. Coholan did not have details of the three 1987 transactions as late as April 1989 and therefore could not have prepared a 1657 in April of 1988. In that month she filed the appellant’s 1988 tax return containing a T657. In that document, her entry for "net taxable capital gains reported after 1984 and before 1988” was a figure which plainly excluded the 1987 gains. However, her explanation that she used the wrong figure because of simple error and not because she was not then aware of the 1987 transactions is not improbable. On the other hand, Ms. Coholan's testimony that she recalled tucking Schedule 3 and the T657 in the envelope containing the appellant's 1987 return struck me as highly improbable. The end of April is, after all, an extremely busy season for chartered accountants and I find it difficult to accept that an accountant in public practice can have any clear recollection in June of 1993 as to what she put in an envelope on April 30, 1988 (absent some kind of written record).

The evidence as a whole is, in my view, inadequate to establish on the balance of probabilities whether the 1987 return of income did or did not include the information in question. The appeal will therefore be allowed, with costs, and the assessment will be referred back to the Minister of National Revenue for reassessment to delete the penalty.

Appeal allowed.