Sydney Wolofsky, Peter Wolofsky and Kenneth Wolofsky v. Minister of National Revenue, [1990] 1 CTC 2470, 90 DTC 1345

Lamarre Proulx, T.C.J.:—These appeals have been heard together. The appellants are appealing their reassessments issued by the respondent, the Minister of National Revenue, for the 1971 taxation year.

The question in issue concerns a reserve made pursuant to subparagraph 85B(1)(d)(i) of the Income Tax Act, R.S.C. 1952, c. 148. The appellants do not dispute the reasonableness of the formula to calculate the aforementioned reserve which seems to have been adopted as the current practice and which is:

The question is about one element of the formula to compute the reserve and it is as to whether, in a sale of property, the mortgages have been assumed.

At the outset of the hearing, an issue was raised by counsel for the appellants respecting the burden of proof due to the fact that the notices of assessments and the notices of confirmation did not state explicitly the assumptions of fact that appeared in the respondent's reply to notice of appeal. Counsel for the appellants referred me to an article by the Honourable Hugh F. Gibson, entitled "An Overview of Income Tax Litigation”, Report of Proceedings of the 35th Tax Conference, 1983, Canadian Tax Foundation, and to a judgment of the Cour du Québec, Chambre civile, rendered by Judge M. Desmarais, June 20, 1989, upholding the position taken by Mr. Justice Gibson in the said article. Counsel for the appellants therefore submitted that the burden of proof in the present appeals was on the Minister.

In this article former Mr. Justice Gibson puts forward the following proposition and I quote him at page 971:

. . . it is a correct statement of the law in my view that the Minister, the Crown, can rely on facts other than those on which his assessment a based or are not contained in either the notice of objection or the notice of confirmation, but the Minister, the Crown, must plead such other facts and prove them to succeed at the trial of the dispute.

In sum, therefore, the assumptions of fact which the Minister, the Crown, may assume in pleadings and in respect of which the taxpayer has the onus to demolish, that is, one or all of them, may be found in the following documents, and are set out in them and are part of the record for the Court to consider:

(1) the notice of assessment and the T7W accompanying the assessment;

(2) the notice of objection; and

(3) the notice of confirmation.

Any other facts assumed by the Minister, the Crown, that are not found in those documents and therefore are not part of the record at trial, must be pleaded and proved by the Minister, the Crown.

However he also says at page 970:

It is fair to say that no taxpayer appellant in any case to date has taken this position even though the present practice does not conform to the correct scheme of pleadings, nor does it flow from what was laid down in the Johnston case.

This position of former Mr. Justice Gibson comes from his analysis of the 1948 decision of the Supreme Court of Canada in Johnston v. M.N.R.T [1] However, after a review of the relevant case law, I have come to the conclusion that the farthest position to which judges have come in their analysis of this case is the one expressed by Mr. Justice Cattanach, (as an obiter dictum) in both of the following cases: M.N.R. v. Pillsbury Holdings Ltd. [2] and Kit-Win Holdings (1973) Ltd. v. The Queen [3] .

Here is an excerpt from the Pillsbury case, page 302 (D.T.C. 5188):

(For the word "appellant" in that quotation, may be substituted "respondent" for the purpose of this appeal.) The respondent could have met the Minister's pleading that, in assessing the respondent, he assumed the facts set out in paragraph 6 of the Notice of Appeal by:

(a) challenging the Minister's allegation that he did assume those facts,

(b) assuming the onus of showing that one or more of the assumptions was wrong, or

(c) contending that, even if the assumptions were justified, they do not of themselves support the assessment.

(The Minister could, of course, as an alternative to relying on the facts he found or assumed in assessing the respondent, have alleged by his Notice of Appeal further or other facts that would support or help in supporting the assessment. If he had allowed such further or other facts, the onus would presumably have been on him to establish them. In any event, the Minister did not choose such alternative in this case and relied on the facts that he had assumed at the time of the assessment.)

[Emphasis added. I]

And here is an excerpt from the Kit-Win case, page 55 (D.T.C. 5038):

This opinion has been interpreted and relied upon as authority for the proposition that a taxpayer has the onus of proof with respect only to the findings or assumptions made by the Minister or his assessors on his behalf at the time that the assessment was made.

As I understand it, Mr. Justice Cattanach expresses the view that there may be a shift in the burden of proof between the facts known to the Minister at the time of the assessment and those known to him after the time of the assessment albeit they are described in the Minister's reply. It is a view that seems to have been accepted by the courts as it has often been cited though I am not sure that it was the ratio decidendi of these cases.

If I revert to Mr. Justice Gibson's views expressed in the previously mentioned article, I would suggest that the wording of subsection 165(3) of the Income Tax Act (the Act), respecting notices of confirmation, does not seem either to sustain his views. This subsection reads as follows:

165(3) Upon receipt of a notice of objection under this section, the Minister shall,

(a) with all due dispatch reconsider the assessment and vacate, confirm or vary the assessment or reassess, or

(b) where the taxpayer indicates in the notice of objection that the taxpayer wishes to appeal immediately to the Tax Court of Canada and that the taxpayer waives reconsideration of the assessment and the Minister consents, file a copy of the notice of objection with the Registrar of that Court,

and he shall thereupon notify the taxpayer of his action by registered mail.

Neither section 152 of the Act relating to assessments, nor subsection 165(3) of the Act have the same statutory requirements as to the setting out of facts and reasons as those stipulated in subsection 165(1) of the Act relating to the content of a notice of objection. Subsection 165(1) of the Act reads as follows:

165 (1)

A taxpayer who objects to an assessment under this Part may, within 90 days from the day of mailing of the notice of assessment, serve on the Minister a notice of objection in duplicate in prescribed form setting out the reasons for the objection and all relevant facts.

[Emphasis added.]

Therefore I do not agree that just comparing written statements determines the burden of proof. It is not sufficient to say that the facts described in the respondent's reply do not appear in the Form T7W-C, in the notice of assessment or in the notice of confirmation.

With respect to the position expressed by Mr. Justice Cattanach, to take advantage of it, the appellants must show that the assumptions of facts as described in the respondent's reply to notice of appeal were not those made by the respondent's assessors at the time the assessment was made. This evidence was not adduced and therefore the submission as to the burden of proof fails.

The debate in the Johnston case, as I see it, was whether when pleadings were delivered, the burden of proof changed. In those times, as related by Mr. Justice Rand, the Court could ask that pleadings be filed. They were not required to be filed with the Court as they are in the present day. I refer to page 488 (C.T.C. 201-202) of his judgment:

Section 63(1) requires the Minister within two months from the making of the reply to cause to be transmitted to the Exchequer Court (a) the income tax return, (b) the Notice of Assessment, (c) the Notice of Appeal, (d) the decision of the Minister, (e) the Notice of Dissatisfaction, (f) the reply of the Minister, and (g) all other documents and papers relative to the assessment under appeal. Subsection

(2) declares "the matter shall thereupon be deemed to be an action in the said

Court ready for trial or hearing: Provided, however, that should it be deemed advisable by the Court or a Judge thereof that pleadings be filed, an order may issue directing the parties to file pleadings.”

Mr. Justice Locke who was dissenting in this case had said at page 496 (C.T.C. 209): "the burden of proof ‘lies’ on the party who substantially asserts the affirmative of the issue. The best tests for ascertaining on whom the burden of proof lies are to consider first which party would succeed if no evidence were given on either side”. About this, Mr. Justice Rand says [at C.T.C. 203]:

I am consequently unable to accede to the view that the proceeding takes on a basic change where pleadings are directed. The allegations necessary to the appeal depend upon the construction of the statute and its application to the facts and the pleadings are to facilitate the determination of the issues. It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of facts and rulings of law which have given rise to the controversy. But unless the Crown is to be placed in the position of a plaintiff or appellant, I cannot see how pleadings shift the burden from what it would be without them. Since the taxpayer in this case must establish something, it seems to me that something is the existence of facts or law showing an error in relation to the taxation imposed on him.

It appears to me that the Johnston case decided that pleadings did not change the burden of proof at a time when filing pleadings was the exception rule. Now that filing pleadings is the rule, it follows, it seems to me, that the burden of proof rests on the taxpayer to question the facts assumed by the Minister as described in the Minister's reply to notice of appeal. In this manner the parameters of the judicial debate would remain set by the pleadings and the documents that are forwarded to the Court pursuant to subsection 170(2) of the Act, having an informative value.

As I had taken Counsel for the appellants' submission on the burden of proof under reserve, he proceeded with his presentation of the facts and his argumentation. As previously mentioned, no witnesses appeared on either side.

Facts

In 1960, the appellants had acquired 13 lots. During the year 1962, the appellants built 11 residential buildings totalling 315 rental units. In doing so, the appellants had mortgaged the property to various mortgagees in the total amount of $1,459,438.39.

On August 1, 1962, the appellants sold the property to Sutton Development Corp. ("Sutton") and Charlton Development Ltd. ("Charlton") and on that same day they sold it to Cytro Real Estate Corp. ("Cytro"). In the first deed of sale, Sutton and Charlton did not assume the mortgages. They undertook to pay the vendors at the same time and rate as the appellants were obligated towards the mortgagees. In the second deed, though there was no apparent intervention of the appellants, Cytro assumed the mortgages. From this, the argument that in so far as the appellants are concerned the mortgages were not assumed and should not be included in the computation of the reserve.

The first sale was for an amount of $2,219,719.20 as follows: $330,280.81 cash and $1,889,438.39 to be payable in monthly instalments. Clause 4 of the "Vendor's declarations” which may be found at page 25 of the deed of sale says the following: "The property hereby sold is free and clear of all hypothecs and encumbrances whatsoever, with the exception of the following and which the Purchasers, their successors and assigns agree to tolerate." And then follows the description of all the hypothecs. At page 30 of the deed of sale, the clause respecting the price is as follows:

PRICE:

THE PRESENT SALE IS THUS MADE for and in consideration of the price or sum of TWO MILLION TWO HUNDRED NINETEEN THOUSAND SEVEN HUNDRED AND NINETEEN DOLLARS AND TWENTY CENTS ($2,219,719.20) on account and in deduction whereof the Vendors acknowledged to have received at the execution hereof the sum of THREE HUNDRED AND THIRTY THOUSAND TWO HUNDRED AND EIGHTY DOLLARS AND EIGHTY-ONE CENTS ($330,280.81) whereof quit for so much.

AS TO THE BALANCE or remaining sum of ONE MILLION EIGHT HUNDRED AND EIGHTY-NINE THOUSAND FOUR HUNDRED AND THIRTY-EIGHT DOLLARS AND THIRTY-NINE CENTS (1,889,438.39) the Purchasers bind and oblige itself to pay the same to the Vendors as follows:

a) THE sum of ONE MILLION FOUR HUNDRED AND FIFTY-NINE THOUSAND FOUR HUNDRED AND THIRTY EIGHT DOLLARS AND THIRTY-NINE CENTS ($1,459,438.39) representing an amount equivalent to the aggregate of sums outstanding under the terms of the deeds of loan hereinabove declared as affecting part or parts of the property hereby sold shall be paid as follows:

i) The sum of One hundred Thirty Seven Thousand Four Hundred Ninety- four Dollars and Seventy-one cents ($137,494.71) shall be payable to the Vendors with interest at the rate of Seven per cent (7%) per annum, calculated half-yearly and not in advance and shall be payable partly by consecutive monthly instalments of ONE THOUSAND AND SEVENTY-SEVEN DOLLARS AND THREE CENTS ($1,077.03) each (to cover payment of principal and interest) commencing on the tenth day of August, Nineteen hundred and sixty-two, and thus to continue monthly on the tenth day of each month to and including the tenth day of October, Nineteen hundred and eighty-one, and the balance, if any, of the said principal sum and interest thereon as aforesaid on the date last mentioned.

In the sale agreement between Sutton and Charlton and Cytro clause 6 of the "Vendor's declaration” that may be found at page 29 of the deed of sale says "that the said property is free and clear of all hypothecs and encumbrances whatsoever, save as hereinafter mentioned and assumed by the Purchaser." The clause respecting the price is found at page 30 which for the first parts reads as follows:

The present sale is thus made for and in consideration of the price or sum of TWO MILLION THREE HUNDRED AND FORTY-FOUR THOUSAND, SEVEN HUNDRED AND NINETEEN DOLLARS AND TWENTY CENTS ($2,344,719.20) on account and in deduction whereof the Vendor acknowledges to have received from the Purchaser partly previous to and partly at the execution hereof the sum of FOUR HUNDRED AND FIFTY-FIVE THOUSAND, TWO HUNDRED AND EIGHTY DOLLARS AND EIGHTY-ONE CENTS ($455,250.81) and whereof quit for so much.

AND as to the balance or remaining sum of ONE MILLION EIGHT HUNDRED AND EIGHTY-NINE THOUSAND FOUR HUNDRED AND THIRTY-EIGHT DOLLARS AND THIRTY-NINE CENTS ($1,889,438.39) the Purchaser binds and obliges itself to pay the same as follows:

a) The sum of ONE HUNDRED AND THIRTY-SEVEN THOUSAND FOUR HUNDRED AND NINETY-FOUR DOLLARS AND SEVENTY-ONE CENTS ($137,494.71) to the entire exoneration of the Vendor to the CROWN LIFE INSURANCE COMPANY, the said sum of ONE HUNDRED AND THIRTY-SEVEN THOUSAND FOUR HUNDRED AND NINETY-FOUR DOLLARS AND SEVENTY-ONE CENTS ($137,494.71) being the present amount of the existing hypothec affecting the property hereinabove Firstly described and being the balance remaining unpaid of a larger sum of ONE HUNDRED AND FORTY THOUSAND DOLLARS ($140,000.00) due to the said Creditor in virtue of deed of loan by the said Creditor to Peter Wolofsky et al, passed before Erigene Godin, Notary, on the tenth day of August, Nineteen hundred and sixty-one, and duly registered at the Montreal Registry Office under the No. 1550576, and referred to in the Vendor's deed of acquisition hereinabove mentioned under the heading of "TITLE".

The said sum of ONE HUNDRED AND THIRTY-SEVEN THOUSAND FOUR HUNDRED AND NINETY-FOUR DOLLARS AND SEVENTY-ONE CENTS ($137,494.71) is repayable to the Creditor with interest at the rate of Seven per cent (7%) per annum, calculated half-yearly and not in advance and shall be payable partly by consecutive monthly instalments of ONE THOUSAND AND SEVENTY-SEVEN DOLLARS AND THREE CENTS ($1,077.03) each (to cover payment of principal and interest) commencing on the tenth day of August, Nineteen hundred and sixty-two, and thus to continue monthly on the tenth day of each month to and including the tenth day of October, Nineteen hundred and eighty-one, and the balance, if any, of the said principal sum and interest thereon as aforesaid on the date last mentioned.

All the instalment payments that were payable by Sutton and Charlton are described as being payable to the mortgagees in the same manner as the one shown in paragraph (a) of the price clause. Of this amount of $1,889,438.39 there were two amounts, one of $230,000 and the other of $200,000 that were payable directly to the appellants. Those amounts were payable in five years. The hypothecs assumed were thus in the amount of $1,459,438.39. Cytro, as purchaser, made the following acknowledgement on page 44 of the deed of sale:

The Purchaser acknowledges to have taken communication of all of the above deeds of loan and binds and obliges itself to fulfil all the terms and conditions herein contained to the complete exoneration of the Vendor and without restricting the generality of the foregoing, the Purchaser binds and obliges itself to make deposits for taxes to such mortgage Creditors as may require it in virtue of the said Deeds of loan.

Counsel for the appellants submitted that the Court should not look at the subsequent transactions and that the only transaction that should be examined, for the purpose of the appeal, should be the deed of sale between the appellants and Sutton and Charlton. In this agreement, there was no assumption of hypothecs by the purchaser, as mentioned at the beginning. Counsel for the appellants does not question the formula to compute a reasonable reserve under paragraph 85B(1)(d) of the former Income Tax Act. That formula is to the effect that when mortgages given by the vendor to a third party are assumed by the purchaser, they should be deducted from the gross selling price as well as from the amount receivable. The question here is whether I should look at the subsequent deeds of sale and take into account the fact that the hypothecs were assumed by the subsequent purchasers. It is a fact that the appellants have never exercised their rights for payments described in the first deed of sale against the purchasers.

I believe that the appeals must fail for the following reasons:

No portion of profit receivable

Paragraph 85B(1)(d) of the Act is to the effect that where an amount has been included in computing the taxpayer's income from the business for the year, or for a previous year, in respect of property sold in the course of the business and that amount or part thereof is not receivable (until a day that is more than two years after the day on which the property was sold and after the end of the taxation year) there may be deducted a reasonable amount as a reserve in respect of that part of the amount so included in computing the income that can reasonably be regarded as portion of the profits from the sale.

What paragraph 85B(1)(d) of the Act says is that when a profit has been included in a taxpayer's income and a portion of that profit is payable but has not been yet paid, that part that has not been paid may be deducted as a reserve. The circumstances of this case bring me to believe that there was no money owed in the year under appeal to the taxpayers on account of the profit from the sale of the property. It may be true that the appellants would have been obligated to pay, if the subsequent purchasers had defaulted on their payments and the value of the property could not have covered the balance of the loans still owed. However, no evidence was brought forward to the effect that the value of the unpaid balance of the mortgages was higher than the value of the property mortgaged. All subsequent purchasers have validly and personally assumed all of the appellants’ obligations towards the hypothecary creditors. In this respect it is pertinent to read a clause of the original hypothecary loans:

Should the borrower fail to make any payment to which he is bound under any provision of this deed within thirty days after it shall have become exigible, or should he fail in any respect in the opinion of the Lender to fulfil any covenant to which he is bound under Section 7 or under Section 9, or should the Borrower be in default for thirty days to execute any other obligation to which he is bound under this deed, or should the property or any part thereof be acquired by any person who shall not have validly and personally assumed all the Borrower's obligations towards the Lender, or should the property or any part thereof be acquired jointly by more than one person, each of whom shall not have validly and personally assumed jointly and severally all the Borrower's obligations towards the Lender then in such event the Lender shall have the right without any demand or notice to exact payment of the aggregate of all sums then outstanding under this deed in principal, interest and accessories and shall not be obliged to make any further advance.

Mortgages assumed

There is no explanation as to why the appellants never claimed the instalment payments that would have been owed to them by Sutton and Charlton. This is not a case of a non-arm's length transaction. Therefore, the only plausible and possible explanation is, in the absence of any oral evidence, that the appellants were aware and had agreed that in the subsequent transactions, the purchasers had and would assume personally the payment of the hypothecs. Moreover, the purchasers were required to do so by virtue of the appellants' own contracts of hypothecs. In view of the evidence before me, I do not agree with the proposition of counsel for the appellants that I should not look at the subsequent deeds of sale.

I therefore conclude first, that there was no portion of the profit that remained to be received by the appellants and second, that the hypothecary loans of which the appellants were the debtors had been and had to be personally assumed by the subsequent purchasers, and this with the agreement of the appellants. Therefore the gross selling price of the formula to calculate the reserve becomes nil and the receivable amount becomes nil as well, which results in a nil reserve.

The appeals are dismissed.

Appeals dismissed.