Jean Lachance v. Minister of National Revenue, [1992] 1 CTC 2617, 92 DTC 1632

Tremblay, T.C.C.J.:—

1. The point at issue

The point at issue is whether each of the appellants is correct in the computation of his or her income with respect to the 1986 taxation year:

— first, not to include the sum of $2,092 in interest. This interest was received on the sum of $37,000 borrowed in order to purchase a lot for purposes of earning a profit;

— second, not to pay penalties in respect of the non-reporting of interest income of $3,780;

— third, not to pay interest on the tax payable on the $3,780 in interest income.

2. The burden of proof

2.01 The burden of proof is on the appellants to show that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the facts assumed by the respondent in support of the assessments or reassessments are also presumed to be true until there's evidence to the contrary. In the case at bar, the facts assumed by the respondent are described in subparagraphs (a) to (1) of paragraph of the respondent's amended reply to the notice of appeal.

[Translation]

5. In assessing the appellants for the 1986 taxation year, the respondent assumed the following facts, inter alia:

(a) on September 27, 1985, the appellant, Jean Lachance, sold a property situated at 873 Mgr Grandin, in Ste. Foy, which he held as co-owner with his wife, Marcelle Lachance;

(b) during the 1986 taxation year, the appellant, Jean Lachance, earned interest income totalling $3,780, on the mortgaged balance owing as a result of the sale of the Ste. Foy property referred to in paragraph (a);

(c) in 1985, the appellant, Jean Lachance and his partners, Jacques Thibault and Harcelle Lachance, made an offer to purchase a property in Stoneham, on which a house and a sugar cabin had been built, for $75,000;

(d) the owner of the Stoneham property accepted the offer to purchase by the appellant, Jean Lachance and his partners;

(e) before the offer to purchase [sic] by the appellant, Jean Lachance and his partners was registered, the owner of the Stoneham property accepted another offer to purchase under private writing;

(f) the appellant, Jean Lachance, and his partners brought proceedings against the owner of the Stoneham property;

(g) before the court would allow the proceedings to be brought, it required

that $75,000 be placed in trust to secure the purchase price in the offer;

(h) the appellant, Jean Lachance, and his partners borrowed the $75,000 to make the payment into trust as required by the court;

(i) during the 1986 taxation year, the appellant, Jean Lachance, claimed, as a rental loss, expenses relating to the Stoneham property, that is to say: $768.30 in legal fees and $2,077.26 in interest;

(j) during the 1986 taxation year, the appellant, Jean Lachance, was never the owner or co-owner of the Stoneham property;

(k) the legal fees and interest claimed by the appellant, Jean Lachance, as a rental loss were not incurred in order to earn income from a property or business;

(l) the appellant, Jean Lachance, knowingly or in circumstances amounting to gross negligence, failed to declare interest income of $3,780 received during the 1986 taxation year.

3. The facts

3.01 With respect to the interest claimed on the tax owing:

3.01.1 The appellant, Jean Lachance, submits that, in August 1989, he admitted to an official of the respondent, that the interest in the amount of $3,780 was taxable. He then asked that the amount of the tax owing on that sum be sent to him so he could pay it.

3.01.2 The respondents officials had to continue their investigation on other points, and the reassessment in respect of the entire case was issued on November 23, 1989. The appellant, Jean Lachance, refused to pay, considering that the delay had been too long.

3.02 With respect to the penalty on the $3,780 interest:

3.02.1 The facts assumed, as set out above (2.02.5(c), (d), (e) and (f)) forced the partners to borrow $74,000: $37,000 by Jacques Thibault and $37,000 by the appellants. The appellants had given as security the mortgage claim referred to above (2.02.5(b)) and so payments on that claim were made directly by the debtor to the financial institution from which the appellants had borrowed the $37,000. Thus, throughout 1986, the appellants did not become aware of the legal receipt of this money. In preparing his and his wife's tax return in April 1987, Mr. Lachance did not think of the payments received by the banking institution, let alone of the interest included therein.

3.02.2 It emerged from the evidence, however, that, in 1985, interest on two payments received by the appellants personally and relating to the same mortgage claim were included in income reported on the 1985 tax return.

3.02.3 Under the provisions of subsection 163(2) of the Act, the respondent imposed a penalty of $83.43 on the appellant, Jean Lachance, and a penalty of $244.08 on the appellant, Marcelle Lachance, considering that the circumstances explained above amounted to gross negligence.

3.03 With respect to the disallowed deduction in respect of the interest of $2.092 paid:

3.03.1 $2,092 in interest was paid by each of the appellants on the loan for $37,000 taken out in respect of the case of the Stoneham lot. They claim this interest deduction as current expenses incurred for the purpose of earning income, which the respondent denies.

3.03.2 The following detailed facts emerged from the evidence concerning the Stoneham lot:

On November 11, 1985, after the appellants had visited the lot, which neighboured on the Centre de Ski de Stoneham and was about 1,490,000 square feet in size, including a house and a sugar cabin, they made to the owner, Guy Bougie, an offer to purchase for the price of $75,000, with $1,000 in cash and $74,000 when the notarized contract was signed in about 30 days. The offer was accepted that same day (Exhibit A-1).

3.03.3 On November 21, 1985, after borrowing $37,000 from the Caisse Populaire Notre-Dame-du-Chemin, the appellants signed the contract of sale before Benolt Groleau, Notary. The parties (the appellants and Mr. Thibault) gave $74,000 to the notary.

3.03.4 The next day, November 22, Mr. Bougie informed the appellants and Mr. Thibault that he had decided not to sell to them, but that he would sell to other purchasers. In fact, that same day, a private contract was registered at the registry office as No. 1168316. It had been signed the day before, November 21, 1985 (Exhibit A-2); Mr. Bougie transferring the lot in dispute to another group of purchasers.

3.03.5 On December 11, 1985, proceedings to set aside the sale were brought against Mr. Bougie and his purchasers. That same day, the $74,000 already with the notary was deposited in trust with the minister de la Justice. This decision was made by thd appellants and Mr. Thibault. No Court order was made to that effect, as the respondent suggests (2.02.5(g)).

3.03.6 As a result of the proceedings brought, an agreement was reached on May 1, 1987 (Exhibit A-3). Pursuant to this agreement, the lot was transferred to the appellants and Mr. Thibault for $10,000, the vendors being the purchasers who appeared on the contract registered on November 21,1985 (Exhibit A-2 (3.03.4)). Moreover, the new purchasers retained their right to the $74,000 deposited in trust.

4. Law—Cases at Law—Analysis

4.01 Law

The subsections and paragraphs of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") involved in these appeals are 12(1) (c) 18(1) (a), 20(1) (c) 161(1), 163(2) and 248(1). They will be quoted in the analysis if necessary.

4.02 Cases at law

The Court took note of the following cases at law:

1. R.I. Emerson v. The Queen, [1985] 1 C.T.C. 324, 85 D.T.C. 5235; [1986] C.T.C. 422, 86 D.T.C. 6184 (F.C.A.);

2. Neonex International Ltd. v. The Queen, [1978] C.T.C. 485, 78 D.T.C. 6339 (F.C.A.);

3. C.D. Irvine v. M.N.R. (1961), 28 Tax A.B.C. 151, 61 D.T.C. 706;

4. Bronfman Trust Ltd. v. The Queen, [1987] 1 S.C.R., [1987] 1 C.T.C. 117, 87 D.T.C. 5059;

5. Auld (C.A.) v. M.N.R., 28 Tax A.B.C. 236, 62 D.T.C. 27 (T.A.B.);

6. Gagné (H.) v. M.N.R., [1981] C.T.C. 2503, 81 D.T.C. 431;

7. Matheson (J.A.) v. The Queen, [1974] C.T.C. 186, 74 D.T.C. 6176;

8. Eyamie v. M.N.R., [1983] C.T.C. 2708; 83 D.T.C. 649;

9. Birtwistle Trust v. M.N.R., [1938-39] C.T.C. 356,1 D.T.C. 419;

10. Cloutier (Y.) v. M.N.R., [1978] C.T.C. 702; 78 D.T.C. 6485;

11. Lachance (J.) v. Le sous-ministre du Revenu du Quebec, [1990] Court of Quebec No. 200-32-004972-880.

4.03 Analysis

4.03.1 Is interest properly payable on the tax?

The facts are clear (3.01). The interest was established on the basis of the tax determined to be owing. The case law has long held (C.D. Irvine v. M.N.R. (4.02(3)) Eyamie v. M.N.R. (4.02(8)), Birtwistle Trust v. M.N.R. (4.02(9)), and so on) that the legislator is entitled to decide that interest shall be calculated on tax owing by a taxpayer if such tax is not paid for the year in question, starting on the day when the taxpayer was supposed to file his or her tax return. Moreover, once the assessment is issued, the Court has no authority to relieve the taxpayer of liability for payment of interest on the income tax owing.

Subsection 161(1) is clear:

161(1) Where at any time after the day on or before which a return of a taxpayer's income was required under this Part to be filed for a taxation year,

(a) the amount of his tax payable for the year under this Part

exceeds

(b) the aggregate of all amounts each of which is an amount paid at or before that time on account of his tax payable and applied as at that time by the Minister against the taxpayer's liability for an amount payable under this Part for the year,

the person liable to pay the tax shall pay to the Receiver General interest at the prescribed rate on the excess computed for the period during which that excess is outstanding.

The reason for the delay on which the appellant, Jean Lachance, relies is not serious. Moreover, there was nothing to prevent him from sending a payment on account. The appeal on this point is dismissed.

4.03.2 Is the penalty properly payable on the unreported $3,780 interest?

Do the circumstances explained above in paragraph 3.02 amount to gross negligence as provided in subsection 163(2)?

Gross negligence, as defined by Marceau J. in Cloutier v. M.N.R. (4.02(10)) is [Official English Translation] "a relatively serious act of negligence, which is difficult to explain and socially inadmissible”.

Simple negligence is easy to commit and to explain. It is not always easy for the person who must decide where to establish accurate parameters. Again, as stated by Marceau J. in Cloutier (4.02(10)), following the passage quoted above:

[Official English Translation]

The question before the Court is whether the circumstances in which the omission occurred are such that gross negligence may be attributed to the taxpayer: "gross negligence” being taken to mean a relatively serious act of negligence, which is difficult to explain and socially inadmissible. The factual circumstances in themselves do not present a problem, they are all established; it is the way in which they should be regarded which is at issue, namely, what can be deduced from them concerning the acts of plaintiff which are at issue. This is not a question of fact in the sense of a question regarding an earlier factual circumstance or an event which took place at an earlier point in time, but a question of legal appraisal and judgment on the actions, which is not subject to proof but depends on the personal conviction of the individual making the decision.

In my view of the facts, the fact that the principal and interest payments on the mortgage were made directly to the banking institution, without the appellants receiving any documents in that respect, was the cause of the error. It was easy to forget, even though a year before, two months interest had been included.

Accordingly, the appeal is allowed on this point.

4.03.3 Is the interest paid of $2,092 deductible?

4.03.3(1) The facts described in paragraph 3.03 speak for themselves. The respondent does not dispute that, originally, the appellants had purchased the lot at issue in order to earn income, but argues that in 1986 the appellants were no longer co-owners of the lot, and so dia not have any possible source from which income could have been derived, under 20(1)(c).

That provision reads as follows:

20. (1) Notwithstanding paragraphs 18(1) (a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may oe deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(c) an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income), pursuant to a legal obligation to pay interest on

(i) borrowed money used for the purpose of earning income from a business or property. ....

In this case, the owner of the lot, Mr. Bougie, had sold the lot at issue to a second group of purchasers and those purchasers had duly registered the contract (3.03.4), and the appellants [sic] group, according to the respondent, thereby lost its right to the property. Accordingly, it lost its source of income, even if it recovered it in 1987 (3.03.6).

4.03.3(2) The Court is of the view that the appellants group was the owner of the lot at issue in 1986. Article 1472 of the Civil Code of Quebec [sic] provides that a sale" is perfected by the consent alone of the parties, although the thing sold be not then delivered”.

The offer accepted by Mr. Bougie on November 11, 1985 (Exhibit A-1, 3.03.2) perfected the sale and also made the appellants group the owner of the lot at issue.

The registration on November 22, 1985 of the contract signed by the second group of purchasers the day before gave priority to that second group of purchasers with regard to third parties, but did not ipso facto deprive the first group of purchasers of its right of ownership. Registration is merely a procedure for the protection of third parties. The evidence is clear that pursuant to the appropriate judicial action being instituted and the agreement which resulted, the appellants" group was officially acknowledged to be entitled to the lot. Moreover, instead of $75,000 being paid for the lot, it cost the appellants and Mr. Thibault only $10,000. All of this indeed confirms their original right to the said lot which was purchased for the purpose of earning income, that right continuing to exist throughout 1986.

4.04.3(3) The appellants are entitled to deduct the interest paid in 1986 on the loan contracted to purchase the lot.

5. Conclusion

The appeals are allowed in part, with costs.

Appeals allowed in part.