Subhash Mehta v. Minister of National Revenue, [1985] 1 CTC 2211, 85 DTC 219

Cardin, TCJ:—The appeal of Subhash Mehta is from an assessment of tax with respect to the 1978 taxation year. I cannot refrain from stating at the outset of these reasons that, in my opinion, this appeal which lasted two full days is a classic example of a case going to trial prematurely.

The basic legal issue is clear enough and is whether the appellant, as tutor to his infant son through a series of real estate transactions, used his son’s exempt status under paragraph 81(l)(g. 1) of the Income Tax Act, RSC 1952, c 148, to conceal or reduce his own 1978 income and whether, in the circumstances, the imposition of a penalty by virtue of subsection 163(2) was justified.

The Minister’s net worth reassessment, which counsel for the appellant in his more moderate language described as “completely arbitrary”, is unclear. Indeed, the amount of unreported income alleged by the Minister to be taxable was still unestablished at the end of the trial.

As I see it, the Court in this appeal is being asked not only to determine whether the appellant knowingly omitted to declare income in 1978, but to act as an assessor and to make what, in effect, are administrative decisions and significant corrections to a series of figures in the Minister’s net worth assessment covering a period of some eight years (some of which are statute-barred), in order to arrive at the amount of income the appellant is alleged to have omitted in his 1978 return.

For example, the Court was asked to use its discretion in allocating income between the appellant and his wife (who had not as yet been assessed) which the Minister had wrongly assumed was on a 50/50 basis without any evidence ever having been adduced as to what agreement existed between them in that respect.

The Court was also asked to use its discretion in its consideration of an amount of $7,889 appearing in the Minister’s net worth assessment. Mr Clouette, a group head of the auditing section of the Department of National Revenue, who was ultimately responsible for the appellant’s net worth assessment, testified at the hearing that an amount of $7,889 had wrongly been deducted in the 1977 taxation year — it should have been deducted in 1978. However, having said that, he continued to say that as a result of a more recent review of this file, he had come to the conclusion that the amount of $7,889 was in fact, not deductible in any year. No satisfactory explanation for the Minister’s change of opnion was given. In argument, the Court was invited to consider either that the amount of $7,889 was deductible in 1978 since the Minister of National Revenue had already allowed the deduction in principle, or consider the amount as not being deductible.

In my opinion, no Court should be asked to determine an issue unless the Minister’s position (and the taxpayer’s) is clearly defined in the pleadings or at least established during the course of the trial. Before the Court can decide whether the Minister’s assessment is correct or not, it must be clear what amount the Minister is assessing. It also appears obvious to me that the Court cannot allocate income between the appellant and his wife without having before it conclusive evidence of the income-sharing arrangement they had agreed to prior to the trial.

Under the circumstances, I do not feel it necessary to go deeply into the facts of this appeal but in describing briefly the context in which the assessment was made, the reasons I feel the case was not ready for trial will be more easily understood. In concluding that the pleadings in this appeal are unsatisfactory, I wish to point out that I am not referring only to the Minister’s mathematical errors in his reassessment but also to the appellant’s attitude at the time of the reassessment and, subsequently, during the period of the objection stage. I cannot help but feel that if all the information presented to the Court, particularly the very numerous documents filed together as Exhibit A-l, had been made available at the time of the assessment and had been discussed thoroughly with the Department of National Revenue during the objection stage of the procedure, the case may not have gone to trial or, at the very least, the quantum as well as the issue would have been more clearly established prior to trial.

In the appeal, it is common ground that in 1972 the appellant, his wife Sunita and his infant son Sanjay, sustained serious injuries as a result of an automobile accident. On July 7, 1977, damages were awarded in amounts of $35,000 (less costs) for the appellant, $50,000 to the appellant’s wife and $40,000 to the appellant’s infant son. On January 10, 1977, the appellant was appointed tutor to his son Sanjay (Exhibit A-l, page 24). On April 25, 1977, the awards for the appellant, his wife and son were used to purchase guaranteed investment certificates.

There is no dispute that paragraph 81(l)(g. 1) applies to income arising from property acquired as a result of an award for damages sustained by the appellant’s son. Such income not being taxable in the son’s hands until he has attained the age of 21.

On March 31, 1977, after damages had been awarded to the members of the appellant’s family but before the award cheques had been cashed, the appellant purchased a property at 4260-4280 Barclay Avenue, in the city of Montréal, for $91,500 (Exhibit A-l, Tab 16, page 47).

On April 28, 1977, the appellant borrowed $70,000 from his wife in order to pay the mortgage on 4260-4280 Barclay Avenue, which was held “in trust” for his son Sanjay to the extent of $20,000 (Exhibit A-l, Tab 17, page 53).

On April 29, 1977, the appellant’s son’s guaranteed investment certificate was redeemed to pay the first mortgage ($54,188) on 4260-4280 Barclay, thereby acquiring a mortgage on a property which was held “‘in trust” for him to the extent of $20,000 (Exhibit A-1, Tab 16, page 47).

On February 7, 1977, the appellant had purchased a property at 4080-4100 Barclay Avenue for $93,500 (Exhibit A-l, Tab 14, page 35) which was held in trust for his son to the extent of $11,500 (Exhibit A-l, Tab 15, page 42). On September 8, 1977, the appellant purchased 4340-4360 Barclay Avenue for $80,000 (Exhibit A-l, Tab 23, page 74) which was held “in trust” for his son to the extent of $9,000 (Exhibit A-l, Tab 25, page 85).

On February 6, 1978, the appellant sold the property at 4080-4100 Barclay Avenue for $130,000 (Exhibit A-1, Tab 26, page 88); the property at 4260-4280 for $135,000 (Exhibit A-l, Tab 27, page 97) and the property at 4340-4360 for $131,575 (Exhibit A-l, Tab 28, page 102). The proceeds of these sales were reinvested in two buildings on Walkley Street, Montréal. For the 1978 taxation year the appellant, who described himself as unemployed, declared income in the amount of $4,795.

On August 27, 1980, the Superior Court of Quebec ordered the dismissal of the appellant as tutor to his son (Exhibit A-l, Tab 37, page 146 and Exhibit A-5). On November 27, 1980, the Public Curator of Quebec sought information with respect to the sale by the appellant of the three Barclay Avenue properties which the Curator considered as having been held “in trust” for the appellant’s son; the reinvestment of the proceeds of the sale in the two Walkley properties; the son’s bank accounts; rental revenues, etc. (Exhibit A-l, Tab 38, page 149). On March 18, 1981, judgment by default to render account as required by the Public Curator on November 27, 1980, was issued against the appellant and the Superior Court fixed the amount owing to his son at $171,923.65 (Exhibit A-5). The appellant was unable to pay the amount and his residence was seized. In 1980, the appellant had purchased gold on margin and sustained a loss of $600,000.

In late 1978 and early 1979, Miss Mary Seccareccia, a field auditor with the Department of National Revenue (under the supervision of Mr Clouette as group head) carried out the investigation of the appellant’s income. In her testimony, Miss Seccareccia stated that at the time of the audit, the appellant had no records, no books, no trust accounts and she was unable to trace the source of the appellant’s investment income. The appellant at that time submitted a few documents in the form of several personal bank accounts in which there were numberous transfers of money made from one branch of a bank to several other branches, which transfers were practically impossible to follow. The auditor stated she had no choice but to assess the appellant by means of the net worth method on which she spent many hours.

The first assessment dated August 29, 1980, was made on the basis of the appellant’s and his wife’s net worth and, as a result, an amount of $139,950.73 was added to the appellant’s income and a penalty was imposed.

Following the appellant’s notice of objection of November 24, 1980, the Minister of National Revenue on April 14, 1983, issued a second reassessment, this time however, with respect to the appellant only and, the son’s capital having been taken into account, the undeclared income of $139,950.73 was reduced to $42,652.42 and the penalty adjusted downward to $747.77.

As a result of several further corrections made to the Minister’s net worth assessment during the trial, the undeclared income was further reduced from $42,652 to some $28,000. According to Mr Clouette’s last statement as a witness, that figure is apparently not accurately determined either, and I do not believe that the Court can properly be asked to second-guess the assessor as to what the appellant’s undeclared income in 1978 really was.

It seems to me that the importance and usefulness of the objection stage in our appeals procedure is too often overlooked and not taken advantage of. Many of the facts, figures and, indeed, some issues of a case become known to one or the other of the parties in an appeal only when presented to the Court. This, I suspect, is what happened in the case at bar. Had the pertinent documents in Exhibit A-l been available at the objection stage and had there been open and frank discussions between the appellant and the Minister’s representative at that stage of the procedures, this case in my opinion would not have gone to trial.

Surely, a reasonably accurate amount of unreported income can be established by the Minister, either in his original assessment or as a result of further information obtained during the objection stage but, in any event, the amount should be established before confirmation by the Minister and, certainly, before the Court is asked to decide the issue. In this appeal, as I see it, the Minister does not know what amount of undeclared income he wants to tax the appellant for the 1978 taxation year.

On the basis of the trust deeds and the contracts referred to in Exhibit A-l, I am satisfied, as indeed was the Superior Court of Quebec, that certain properties were purchased “in trust’’ for the appellant’s minor son. There is no dispute that the income from the properties purchased with moneys awarded to the appellant’s son as damages for injury, is not taxable in his hands until he has reached the age of 21, by virtue of paragraph 81(l)(g. 1) of the Act.

With respect to the imposition of penalties, the respondent did not succeed in establishing that the appellant, knowingly or under circumstances amounting to gross negligence, omitted to declare all his income in 1978.

Although I do not believe that counsel for the appellant’s unrestrained language with respect to the Minister’s assessment of the appellant in an obviously complicated case was either proper or necessary, he did establish that the Minister’s assessment was wrong. In my opinion, the respondent was unable to deter- mine the amount of income, if any, the appellant failed to report in his 1978 taxation year.

The appeal for the 1978 taxation year is therefore allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis of the above reasons. The appellant is entitled to party and party costs.

Appeal allowed.