John G Campbell v. Minister of National Revenue, [1985] 1 CTC 2070, 85 DTC 65

Taylor, TCJ:—This is an appeal heard in Ottawa, Ontario, on September 27, 1984 against income tax assessments for the years 1978 and 1979 in which the Minister of National Revenue treated certain losses in a manner different than that asserted by the appellant, and imposed penalties, as indicated below from the notice of appeal:

The net capital losses of $18,539 in the years 1972 to 1977 inclusive and the capital gains of $23,012 in 1978 and 1979 are detailed in Appendix A. I was not aware that I had reached a net gain position of $4,473 by the end of 1979 until recently documenting all transactions back to 1972.

As I understand it, the method used by the appeals assessment officer, in dealing with the capital losses in prior years, has deemed the provisions for deduction of net capital losses (including the carry-back and carry-forward features) to have been applied during the years prior to 1978 without reassessing the returns for those same years.

Thus the net capital losses for 1972 to 1977 amounting to $18,539 were thus reduced by $11,761 to $6,778 (see April 8, 1963 notice of reassessment)* — without creating any commensurate tax credits. I consider that, in this case, this method results in an unreasonable penalty. Not taking into account any interest rates, but including the 25% penalty provision, the added tax assessment for 1978 and 1979 now amounts to $4,597.57. This added tax does not appear reasonable when compared to the overall net capital gain of $4,473 (as shown on Appendix A)* for the years 1972 to 1979.*

For the respondent the situation was detailed:

In reassessing the Appellant for his 1978 and 1979 taxation years, the Minister of National Revenue assumed inter alia, the following facts:

— During his 1978 and 1979 taxation years, the Appellant disposed of gold and silver;

— In his 1978 taxation year, the Appellant realized a capital gain in the amount of $14,881.50 from the disposition of gold and silver;

— In his 1979 taxation year, the Appellant realized a capital gain in the amount of $8,143.42 from the disposition of gold and silver;

— In computing his income for his 1978 and 1979 taxation years, the Appellant did not bring into the computation of his income the said amounts of $14,881.50 and $8,143.42;

— In computing his income for his 1978 taxation year, the Appellant was entitled to reduce his capital gain for that year by an amount of $6,778.00 representing capital losses of prior years;

— The income of the Appellant during his 1978 and 1979 taxation years was understated by $4,052.00 in 1978 and by $4,071.71 in 1979.

The respondent relied, inter alia, upon the provisions of sections 3, 38, 39, 40, 111 (l)(b), 111(3) and 163(2) of the Income Tax Act, RSC 1952, c 148 as amended by s I of c 63, SC 1970-71-72 as amended thereafter for the 1978 and 1979 taxation years.

There was one case presented to the Court by the respondent Alexis Nihon Company Limited v MNR, [1969] CTC 39; 69 DTC 53, in support of the assessment practice of the Minister in this matter. The critical phase in Nihon (supra) relied upon by the Tax Appeal Board in dismissing that appeal was to be found in subparagraph 27(l)(e)(ii) of the Income Tax Act as it then was:

no amount is deductible in respect of the loss of any year until the deductible losses of previous years have been deducted

In addition I would stress another aspect of the current version of the legislation. It would seem to me that subsection 111(3) of the Act makes perfectly clear the only basis upon which the Minister can act on this matter:

an amount in respect of — net capital loss, — for a taxation year is only deductible to the extent that it exceeds the aggregate of

(i) amounts previously deductible in respect of that loss — [Emphasis mine]

The critical word is “deductible”, it is not “deducted”. This taxpayer has indeed foregone his right to deductibility of that portion of the losses which he was entitled to deduct in previous years.

With regard to the penalty imposed, the only explanation provided by the taxpayer was that he believed he did not need to report the losses — or in fact report anything regarding the transactions — until he began to show a net gain. That argument might have more weight, if he had reported the gain realized in 1978, when preparing his 1978 income tax return, rather than waiting for the subject reassessments for both 1978 and 1979 to arrive after examination by the Minister of his filed returns and other information. The frequency and duration of the transactions involved in the losses and gains over the period 1972 to 1979 could have led the Minister to conclude that the operation involved was trading rather than related to capital, but that issue was not stressed before the Court. I am satisfied that at the minimum the appellant’s conduct can be described as indicating gross negligence.

The appeal is dismissed.

Appeal dismissed.