Christopher S Guest v. Minister of National Revenue, [1985] 1 CTC 2241, 85 DTC 236

Kempo, TCJ:—

Part I — Issue

The issues to be decided in this appeal may be summarized as follows:

Issue #1

With respect to the 1979 and 1980 taxation years, whether or not a parcel of land (the “Lynwood” property) owned by the appellant can reasonably be considered to have been, in each of these years, used in, or held in the course of, a business carried on in the year by the appellant, vide paragraph 18(2)(c) of the Income Tax Act (the “Act”). In the event that the finding is in the appellant’s favour, then whether or not he is to be allowed a deduction in the amount as claimed, viz:

(i) as to 1979, the amount of $21,932.77 for interest and the amount of $443.37 for property taxes for that year;

(ii) as to 1980, the amount of $42,814.68 for interest and the amount of $725.00 for property taxes for that year.

These issues had not been raised in the appellant’s notice of appeal as filed, and were therefore not dealt with in the respondent’s reply thereto. They were first raised by the appellant after the reassessments, following an objection, had been confirmed by the Minister. Prior to the commencement of the hearing, counsel for the respondent submitted that the Minister was not in opposition to the issues being advanced for the reasons that the appellant had made written requests to Revenue Canada, Taxation for consideration of these expenses, that the request had been considered and denied and that the Minister would be neither surprised nor prejudiced if the matter was heard and dealt with as requested by the appellant. Counsel also indicated acceptance of the contents of the appellant’s two letters of request as what would have been dealt with if the notice of appeal had been formally amended. However, it was the Minister’s position that the contents of Revenue Canada’s letter of reply and denial of the claim were not to be interpreted as being a complete answer nor was such to be interpreted as containing all of the Minister’s assumptions of fact with respect thereto — to which the appellant stated he had no objection.

Issue # 2

Whether or not payments made by the appellant to two individuals during the 1979 taxation year were made in the capacity of an officer of a corporation and, if found to have been made by him in his personal capacity, whether or not they were deductible as being an expense incurred for the purpose of gaining or producing income from a business pursuant to paragraph 18( l)(a) of the Act.

Issue #3

Whether or not the appellant,

(i) for 1979, in failing to include in his return of income for the year, the sum of $23,088.72 received by him as a loan during the year from 386113 Ontario Ltd, qua shareholder, which had not been repaid within one year, vide, subsection 15(2) of the Act; and

(ii) similarly for 1980, except that the amount was $17,150.18,

did so knowingly or under circumstances amounting to gross negligence and accordingly whether or not he is chargeable with the assessment of penalties thereon, pursuant to provisions of subsection 163(2) of the Act.

Other Issues

The other matters that had been raised specifically in the appellant’s notice of appeal, and which pertain to the remaining items in dispute as particularized in the explanatory form T7W-C in respect of the notices of reassessment under appeal, have either been abandoned or withdrawn or settled.

Part II — Decision

A. As to the 1979 taxation year:

The appeal is allowed in part, and the matter is to be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:

(i) the penalties assessed pursuant to subsection 163(2) of the Act are to be vacated; and

(ii) in respect of Lots 1-4 and Lots 45-60 on Plan 340 in Cornwall, Ontario (the “Lynwood” property) the appellant is free of the limitative provisions of subsection 18(2) of the Act for the year and he is to be allowed a deduction for interest in the amount of $21,932.78 and a deduction for property taxes in the amount of $245.03.

In all other respects the appeal is dismissed.

B. As to the 1980 taxation year:

The appeal is allowed in part, and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:

(i) the penalties assessed pursuant to subsection 163(2) of the Act are to be vacated;

(ii) in respect of Lots 1-4 and Lots 45-60 in Cornwall, Ontario, the appellant is free of the limitative provisions of subsection 18(2) of the Act for the year, and is to be allowed a deduction for interest in the amount of $35,384.37 and a deduction for property taxes in the amount of $344.75;

and

(iii) the appellant is entitled, by agreement and consent of both parties, to capital cost allowance in respect of the renovations made by him to his law office premises at 10 Oak Street, Cornwall, Ontario in accordance with Class 13 rate under Schedule II of the Income Tax Regulations.

In all other respects the appeal is dismissed.

Part III — Reasons for Decision

A. Facts

The material facts in this appeal were not seriously in dispute. The appellant is a lawyer. He was called to the Ontario Bar in 1971 following which he commenced a legal practice in Cornwall, Ontario in partnership with one Maurice Gatien which continued until May of 1975. During this period the appellant stated that the bulk of his legal work was in respect of corporate and real estate work to which he devoted approximately one-half of his working day for independent clients, himself, his partner and/or associated companies.

The appellant began his involvement in the acquisition and development of real estate in 1972, either alone, with others or via companies. Such acquisitions included residential and commercial rental properties and developed and undeveloped land. Of significance to him was the acquisition in 1972 and 1973 by Stenan Developments Ltd (of which the appellant was a one-third shareholder and an active participant) of two subdivision properties in Cornwall consisting of approximately 165 potential lots each. The properties were subsequently subdivided and some of the lots were serviced. Thirty to forty of these lots had residential housing constructed thereon before 1975.

In May 1975, due to his involvement in these real estate activities and the shortcomings of the company’s operating manager, the appellant sold his law practice to his partner, acquired the other two-thirds interest in the company and spent the next two years devoted entirely to the real estate business of that company and also to the business of a newly-formed company, Stenan Construction Ltd. Stenan Developments Ltd would acquire, develop, rezone and service the real estate and then sell it to Stenan Construction Ltd to build houses upon. During this two-year time period Stenan Developments Ltd itself acquired a commercial rental property and an interest in several vacant properties.

It was the appellant’s evidence and opinion that depressed market conditions in Cornwall and financial or contractual difficulties with the Royal Bank caused Stenan Construction Ltd to be petitioned into bankruptcy by the Bank, and Stenan Developments Ltd to be placed into receivership. This occurred in January of 1977.

In 1977 the appellant acquired, on his own account, four partially completed semi-detached dwellings, which he completed and sold between 1977 and 1979. He also stated that from 1977 until early 1979 he was relatively inactive due to litigation with the Royal Bank and that all of his business during this period was conducted either in his own personal name or through his holding company, 386113 Ontario Ltd. Prior to restarting a law practice in October of 1978, he stated that for this two-year period his sole living income had been generated through borrowings on properties and/or income generated from properties.

In 1978 he acquired, on his own account, a 32-acre waterfront property from the Throsby family in Lancaster, Ontario, which he still owns (hereinafter called the “Throsby” property). During the first two or three years of ownership he made applications for draft approval of a plan of subdivisions into 15 two-acre lots and application for amendment of the official plan to permit rezoning of the property from rural to estate residential. He also performed soil tests at the request of the governing Health Unit and retained a surveyor and consultants to prepare aerial studies at the request of the local conservation authority. A draft plan of subdivision had been approved but not registered. According to the appellant the servicing of the lots would occur only after the subdivision plan had been registered.

From October of 1978 until March of 1979 the appellant carried on a limited law practice in Lancaster, Ontario. In the summer of 1979 a settlement was reached with the Royal Bank in respect of the Stenan Development/Construc- tion litigation under which the appellant purchased from the Bank, on his own account, a 20-lot parcel of vacant land located in the Lynwood Subdivision of Cornwall and which the Royal Bank had previously retained under a venture interest with Stenan Developments Ltd. Issue No 1, supra, is in respect of this property (hereinafter called the “Lynwood” property).

In the Lancaster area the appellant acquired (date of acquisition was not disclosed) two blocks of land which he severed into five lots for resale. He also acquired, finished and resold a house and property adjacent thereto. The said five lots were lost under power of sale in 1984.

He also acquired, in 1979, a residential dwelling and a block of land located in Lancaster. The dwelling was sold and severances were obtained for several parts of the balance of the property. One lot was sold with the remainder stated as being held for further development.

Also in 1979 the appellant acquired a fifty-acre block of land in the Lancaster area. Unsuccessful attempts were made to obtain severances of several lots across the front of the property pending rezoning and subdivision of the balance. The property was lost under power of sale in 1983.

An interest in a 42,000 square foot building located on eleven acres of land on the St Lawrence River was acquired by the appellant in 1979 either on his own account or through Charlottenburgh Properties Limited in which he had an interest. The evidence is unclear on this point. The building housed a health club and roller rink, the latter business being owned and operated by Disco Wheels Skating Centre Ltd in which the appellant held an interest. The building and all but three and one-half acres were sold in 1981. As partial consideration of the sale, Charlottenburgh acquired an equity in five apartment buildings, several of which were sold since 1983.

In the early spring of 1979 the appellant hired another lawyer for his law practice and by the fall of 1979 he stated that he was once again devoting the bulk of his time and effort to his own real estate and business ventures, whether alone or with others or through companies in which he held an interest.

In filing his returns of income for the 1979 taxation year the appellant reported, inter alia:

From this, expenses totalling $69,912 were deducted with respect to his alleged business activities. A net loss of $180 was reported as total income for tax purposes.

For the year 1980, the appellant reported a loss of $22,311 from his legal practice and income in the amount of $26,982.47 from 386113 Ontario Ltd. The amount of $8,467.87 was reported as total income for the year for tax purposes after inclusion of some other miscellanous items of income.

The amounts set out in issue # 3 were, admittedly, not included in the appellant’s returns of income for the 1979 and 1980 years respectively. However prior to giving evidence the appellant made it quite clear that he was not admitting that those amounts were required to be included; his position was that he was simply allowing it to stand for purposes of the appeal. No evidence was adduced in respect of issue # 3 by either party.

In 1981 the appellant forfeited his deposit on an offer to purchase 14 serviced lots in Stratford, Ontario due to business pressures and high interest rates.

As noted earlier issue # 1 is in respect of the Lynwood property purchased by the appellant from the Bank in 1979 upon settlement of their litigation with Stenan Developments Ltd. The purchase price was for $175,000 (Exhibit A-3) which was financed in full by funds borrowed from Norman Warner and secured by mortgage registered against the property for the amount of $185,000 as collateral security (Exhibit A-4). The principal amount advanced thereunder was stated to be $175,000 plus the additional sum of $10,000 was to be added thereto to be applied against interest accruing due. The term of the mortgage deed was for one year and the interest rate was specified to be four per cent above the prime loan rate for small business charged by the Canadian Imperial Bank of Commerce, calculated half yearly and payable monthly on the 18th day of each month.

The evidence tendered by the appellant in support of his interest claim of $21,932.77 arises out of a handwritten statement allegedly prepared by the mortgagee, Mr Warner, who was not present to give evidence in respect thereof. The statement had been produced earlier to counsel for the respondent who advised the Court that for the purposes of expediency there would be no objection to it being filed as an exhibit provided it was understood that it would be without the admission of the Crown that the amounts therein were either correct or were expended or accrued in the year — the Crown’s position being that the whole of the appellant’s claim was being denied. The statement was received into evidence as Exhibit A-6 which had attached thereto a letter dated March 17, 1981 pur- portedly from the Canadian Imperial Bank of Commerce addressed to Mr Warner and listing the Bank’s minimum lending rate commencing January 5, 1979 and for 27 subsequent dates, the last one being from December 19, 1980 until the date of the letter (March 17, 1981). The statement showed a detailed interest calculation on the principal sum of $175,000 purportedly based on the Bank’s rate from time to time plus the four per cent. No payments thereon were recorded or made.

The appellant’s evidence as to the acquisition and description of the subject Lynwood property, and the difficulties he encountered in its development, was stated thus:

The lots were at that time registered as subdivision lots, but unserviced, and were physically situated between two other portions of the original Stenan properties. To the south, there remained approximately fifteen or twenty registered and serviced singlefamily lots, in what had been previously a very dynamic or fast-developing residential area. To the north was an unserviced block of land. (P 41, 11 16-23)

It was my intention to proceed to enter into a subdivision agreement with the City of Cornwall, and install municipal services on the twenty lots, and then to either build or sell the lots as serviced lots. (P 41, 11 26-30)

I encountered difficulties in approaching the servicing matter, because as it turned out, there was a neighbouring registered but unserviced subdivision to the east which was also involved in either foreclosure or power of sale proceedings at the time. It appeared that the other subdivision to the east would require the installation of a large storm sewer across the twenty lots which I owned. And as a result, the City of Cornwall required that in the servicing, I double the size of my storm sewer which would otherwise be required. The cost of that enlargement would have been approximately $40,000.00 or $50,000.00 and would have benefited only the neighbouring subdivider to the east. (P 42, 11 6-17)

At the same time, it became apparent that I, as owner of the twenty lots, would have to install a sanitary sewer trunk line across the property of the neighbour to the east or wait for him to install the said trunk line in the course of developing his property. I made numerous attempts to contact the neighbouring owner to make arrangements to service the properties jointly, and to allocate the costs on an equitable basis. (P 42, 11 18-25)

For numerous years — I guess it’s five years now, that property has been in limbo. It is not clear who owns or has the right to dispose of or develop the adjoining subdivision. And the twenty lots, due to the additional cost of servicing outlined, as well as to other conditions which I will deal with, would not be marketable at a profit, without the co-operation of the neighbouring owner. (P 42, 11 26-29; P 43, 11 3-6)

The other factors which affected the developability of the twenty lots were numerous. I have some building start figures for single-family residential buildings in Cornwall year by year, which indicate the market conditions prevailing at the time of acquisition and subsequently. In 1977 there were 112 single-family starts; 1978, 155; 1979, 106; 1980, 99; 1981, 45; 1982, 38; 1983, they started to come back again and they are up to 118. (P 43, 11 7-14)

Now, the selling price of the lots situated on the original Stenan lands to the south of the twenty lots were approximtely $15,000 to $16,000 in 1975. None of those lots has yet traded, to the best of my knowledge, at a price over $18,500. And, the last of those lots was only sold in 1984. (P 42, 11 15-19).

The cost of servicing lots in Cornwall from 1975 until 1984 has increased by perhaps fifty per cent. (P 43, 11 20-22)

The lots to the south were serviced prior to 1976. The end result is that, due to the depressed market for speculative homes or tract homes; due to the availability of serviced lots in abundant supply; due to the cost of servicing unserviced lots; and due to the problems encountered wtih the neighbour, I have determined over the past five years that it would be foolhardy to attempt to service the twenty lots and market them until the problems resolve themselves. (P 43, 11 24-29; P 44 11 3-5).

At this point in time and at all points in time I have intended to develop and service, both the twenty lots in Cornwall and the fifteen lots in Lancaster, and either to sell those individually or in joint venture with local builders. (P 46, 11 11-14)

I should point out that the depression in the Cornwall and area real estate market stemmed, both from high mortgage interest rates over much of the period in question, and from layoffs and high unemployment in the area which resulted in a net outflow of people from the Cornwall area. (P 46, 11 15-20)

With respect to his activities in the three years following the taxation years currently under appeal, the appellant had this to say:

I should say that in March of 1983, I sold my law practice of Mr Syrduk, to devote my full time to my business interests. Due to the cash flow problems encountered by myself and my associates, it became imperative in 1981, 1982 and 1983 that we devote our greatest attention to liquidating our largest liabilities and improving cash flow. My subdivision development properties held little promise for those purposes. And accordingly, our efforts were directed to the larger commercial ventures in which we were engaged. I have over the last four or five years drawn income by way of director’s fees, management fees, arrangement fees and legal fees, in reasonably significant amounts from the ventures in which I have been participating. I would hazard to say that any income I have generated over that period stemmed directly or indirectly from my real estate ventures. (P 51, 11 6-21)

With respect to issue #2, the facts were that an individual by the name of Mr Dow made a deposit on his purchase of a serviced building-lot from Stenan Developments Ltd, which company defaulted on its undertaking to obtain a discharge of the existing mortgage in favour of Seel Mortgage Corporation. An individual by the name of Mr Glaude made a deposit on his purchase of a house from Stenan Construction Ltd, which company defaulted on its delivery of the house. The defaults occurred at the time that the receivership/bankruptcy actions had been taken with the subsequent refusal by the Bank and the Receiver to acknowledge that the deposit funds were trust funds. Each of these two individuals had their own legal representation both at the outset and during the course of their transactions, with the appellant acting in a legal capacity on behalf of Stenan Developments/Construction, as the case may be. The appellant’s evidence was succinct:

I was not acting for either Mr Glaude or Mr Dow. I had no commitments as a lawyer, as a professional, with respect to the funds which were quasi-trust funds. (P 67, 11 20-23)

I acted only for Stenan. I had no obligation to Mr Dow or Mr Glaude, but I was the sole shareholder of Stenan and I was also a member of the Law Society. And although I have no legal or moral obligation to either man, I decided that my business reputation, both as a lawyer, businessman or real estate dealer were definitely prejudiced, or would be, if they were not compensated. I took it upon myself to borrow the money personally. I paid for a partial discharge of Mr Dow’s lot and paid part of Mr Glaude’s claim, undertaking to pay the balance in due course. I have been contacted by solicitors for both parties who indicated that the matter would be referred to the Law Society in due course, were their clients not protected. I made every effort to recover the funds from the Receiver, but could not, certainly not in time to help Mr Dow. So, while I had no legal obligation and while I had no moral obligation, in my opinion, I felt that my reputation in Cornwall would suffer if I did not make the required compensation payments. And I made them in the nature of promotional payments or to protect the goodwill which I have built in the community. (P 67, 11 25-29; P 68, 11 3-18)

The appellant acknowledged having received a letter from the lawyer for Mr Glaude dated April 12, 1978 (Exhibit R-3) which alleged, inter alia:

We take the position that the said deposit given by Mr Glaude to Stenan Construction Limited, that these monies were in fact trust monies, to be held in trust until completion of the sale and in the event that the sale failed to materialize, that the monies received in trust as a deposit would be returned to Mr Glaude.

It would appear, that in fact these monies were not held in trust and therefore both Stenan Developments Limited and its officers are possibly in breach of trust and that they have probably converted these trust monies to their own use. Mr Glaude cannot afford any further payments and I have advised him not to make any further payments

and in the event the officers of Stenan Construction Limited fail to assume responsibility and fail to pay the Caisse Populaire de Cornwall Nord Limitée, Mr Glaude will take action against them in order to protect his interests.

There was no doubt that at all times material the appellant was an officer, director, and, for all intents and purposes, the sole shareholder of both Stenan Construction Ltd and Stenan Developments Ltd.

B. The Appellant’s Position

1. Issue #1. The appellant asserted that the evidence, taken as a whole, indicated that his real estate activities amounted to a business, that he acquired and held the subject Lynwood property, as well as all of the other parcels of land, in the course of the business; such business being a real estate business that went far beyond the simple buying and selling of unimproved real estate by way of an adventure or collective adventures in the nature of trade. He was an active dealer in real estate and took every reasonable step to develop or attempt to develop and improve the properties (including the subject Lynwood property) for sale in an improved or altered state all in the manner of and in the course of a business.

With respect to the Lynwood property, that he had substantiated the business reasons and other factors beyond his control that prevented him from actually developing and servicing the lots further than what he had done in the year in order to put them in a more saleable state.

The Lynwood property was not an isolated transaction but was acquired by him in the course of an established and ongoing business for the purpose of development and resale, and that he had indicated all the factors which prevented him from realizing that intention, particularly during the 1979 and 1980 taxation years, and to the present.

The bulk of his activity has been in the real estate industry, either personally or through corporations from which he drew income.

His real estate activities generally, and specifically gua the Lynwood property, do not amount to an adventure in the nature of trade but are that of an ongoing business and that the Lynwood property was held in the course of that business carried on in the year notwithstanding the absence of any gross revenue therefrom for the year or any previous year. Accordingly, he submits, he is free of the limitative provisions of subsection 18(2) of the Act for the 1979 and 1980 taxation years qua the Lynwood property.

He further submits that the only evidence before the Court with respect to the quantum of his claim for interest and taxes was his uncontradicted evidence that there was a debt in respect thereof. Since this was supported by numerous collateral documents and correspondence that, presuming his uncontradicted evidence is accepted as credible, the evidence tendered as a whole should be accepted as sufficient proof.

2. Issue #2. The appellant asserted that, given the nature of his activities both legal and non-legal in the area, the payments made were reasonable and were incurred reasonably to enable him to earn an income, both as a lawyer and businessman, in the community. That if he had not made those payments his reputation would have suffered and his ability to earn an income would have been substantially impaired. Accordingly he submits he is entitled to claim those payments as reasonable business expenses within the meaning of paragraph 18( l)(a) of the Act.

3. Issue #3. The appellant asserted that his simple position that the inclusions of the unreported amounts are to stand should not be construed as a clear admission that the amounts were required to be included. Further, there was no evidence before the Court to support a conclusion that his failure to include these amounts was done knowingly or under circumstances amounting to gross negligence. Therefore the penalties should be vacated.

C. The Respondent’s Position

1. As to issue #1, the Lynwood property was not used in, or held in the course of, a business carried on in the year by the appellant but rather it was an adventure in the nature of trade and therefore the application of subsection 18(2) of the Act prohibits the deduction of interest and property tax expenses. These expenses ought to be recuperated upon disposition pursuant to general accounting principles in view of the fact that paragraph 53(l)(h) of the Act applies only to capital dispositions.

The matter pertains to one large project with no development having been made thereon for the years under appeal. There is no issue being taken as to the reasons advanced therefor. The property was not held in a business but rather was held in an adventure in the nature of trade. The legislators saw fit to make a distinction between a “business” and an “adventure in the nature of trade” for the purposes of subsection 18(2) of the Act: the definition of “business” in section 248 clearly excludes an adventure in the nature of trade for the purposes of subsection 18(2). That by the very reading of the subsection, the Court must consider a piece of land and that the piece of land in the case at bar represents the situation of an adventure in the nature of trade.

The cases of Tara Exploration and Development Co Ltd v MNR, [1970] CTC 557; 70 DTC 6370 (Ex Ct), affd [1972] CTC 328; 72 DTC 6288 (SCC) and Masri v MNR, [1973] CTC 448; 73 DTC 5367 (FCTD) are distinguishable on their particular facts and issues.

2. As to issue #2, the payments were made by the appellant in his capacity as officer of, and therefore on behalf of, Stenan Developments Ltd or Stenan Construction Ltd which precludes a deduction therefor on his own account.

Alternatively, if the Court finds that the payments were made to protect the appellant’s goodwill and reputation as a businessman, and/or as protection of his right to practise law, then such are not deductible as a current expense in any event, but are to be capitalized either against the loss of his legal practice or his business, if there was one.

There is an analogy between the decision in Griffith v MNR, 11 Tax ABC 323; 54 DTC 470 (TAB) and the circumstances of the case at bar.

If the appellant, instead of making the payments had been sued, then any legal fees incurred in defending the action would be on account of capital; vide, BP Oil Ltd v The Queen, [1980] CTC 408 at 409; 80 DTC 6252 at 6253 (FCA) and Farmers Mutual Petroleum Ltd v MNR, [1967] CTC 396; 67 DTC 5277 (SCC).

3. As to issue #3, no evidence was given on behalf of the respondent nor by the appellant with respect thereto. The very basis upon which the penalty was imposed was the importance of the discrepancy of what had been originally

reported and what had not been reported: viz, for 1979 a loss of $180 with an unreported amount of $23,088.72, and for 1980 a total income of $8,467 with an unreported amount of $17,150.18. The appellant is a lawyer and is knowledgeable in business. All of these circumstances, in the absence of an explanation, are indicative of, at least, a gross negligence and that the Minister has therefore satisfied the burden of proof thereof as required by subsection 163(3) of the Act.

Ghadban v MNR, [1981] CTC 2651; 81 DTC 622 (TRB) is authority for the proposition that the failure of a taxpayer to explain why the amounts were not reported may be used in support of a finding of gross negligence.

D. Analysis

Issue #1

Part A. It is my opinion that the proper inference and deduction that may be drawn from the appellant’s whole course of conduct, viewed in light of all the circumstances, is that his acquisition and holding of the subject Lynwood Property formed an integral part of the carrying on of a business or scheme of profitmaking by him during his 1979 and 1980 taxation years beyond that of an adventure in the nature of trade.

During the period 1972 to 1980 the appellant acquired and rapidly gained an expertise in respect of the acquisition, development, subdivision, construction on and resale of improved real estate, first through exclusive involvement via two of his own companies (since 1975) and then on his own account. There is no question but that he was thoroughly knowledgeable in respect of real estate development in the area by and during the taxation years in issue.

More particularly, during the three-year period 1977-1979 inclusive the appellant, on his own account, had acquired seven parcels of property — all of which, save the Lynwood land in question, had been subjected to some form of development activities and/or improvement by him followed by sale or holding for sale, as the case may be.

In Tara Exploration and Development Company Limited v MNR, [1970] CTC 557; 70 DTC 6370, Jackett, P (as he then was) said at 567 CTC; (6376 DTC):

. . . To carry on something involves continuity of time or operations such as it involved in the ordinary sense of a “business”. An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.

The Federal Court of Appeal in Birmount Holdings Ltd v The Queen, [1978] CTC 358; 78 DTC 6254, was of the opinion (at 372 CTC; 6263 DTC) that:

. . . The question as to whether a business is or was being carried on must be solved as a question of fact having regard to the circumstances of a particular case. The fact that, as distinguished from an investment, certain activities have been found to constitute an adventure in the nature of trade, does not of itself, preclude finding that those activities amount to carrying on business.

Activities involving the acquisition and sale of real estate found not to be an isolated event but rather as a part of a series of “adventures” has been held to constitute the carrying on of a business: Masri v MNR, [1973] CTC 448; 73 DTC 5367, (FCTD) and Loeck v The Queen, [1978] CTC 528; 78 DTC 6368, (FCTD). When the factual circumstances point to the contrary, this result would not pertain: Jellaczyc v MNR, [1985] 1 CTC 2158; 85 DTC 184, a decision of Sarchuck, TCJ and Norman Direnfeld v MNR, [1985] 1 CTC 2200; 85 DTC 172, a decision of Brule, TCJ.

In viewing the totality of the appellant’s course of conduct it is difficult to infer that his activities qua each of the seven parcels of property aforementioned were severable or isolated, or that each property or group of properties represented a project or projects as a series of isolated adventures in the nature of trade as opposed to their holding or use in the carrying on of a business of real estate development.

In MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125 (Ex Ct), after reviewing and analyzing the leading British cases in respect of the meaning of the term “adventure in the nature of trade”, the Court said at 199 CTC; 1131 DTC:

. . . It is, I think, plain from the wording of the Canadian Act, quite apart from any judicial decisions, that the term “trade” and “adventure in the nature of trade” are not synonymous expressions . . . .

The decision of CIR v Livingstone et al (1926), 11 TC 538 was referred to in Taylor at 203 CTC; 1134 DTC wherein Lord President Clyde said:

. . . The trade of a dealer necessarily consists of a course of dealing, either actually engaged in or at any rate contemplated or intended to continue.

The evidence of the appellant was not indicative of abandonment during the two years in question of his activities or intentions to subdivide and develop the subject Lynwood land for profitable sale: Lyle A Meredith v The Queen, [1975] CTC 570; 75 DTC 5412 (FCTD) and The Queen v Dorchester Drummond Corp Ltd, [1979] CTC 219 at 225; 79 DTC 5163 at 5169 (FCTD).

Accordingly the Lynwood land can reasonably be considered to have been, in the year, held in the course of a business carried on in the year by the Appellant, vide paragraph 18(2)(c) of the Act.

While factually not on point with that of the case at bar, the statement of Lord Diplock in American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue, [1978] 3 All ER 1185 (PC), at 1189, is apt:

The carrying on of “business”, no doubt, usually calls for some activity on the part of whoever carries it on, though, depending on the nature of the business, the activity may be intermittent with long periods of quiescence in between.

As time passed it became more apparent to the appellant that his objectives in respect of this land may not be realizable in the near future. Perhaps ensuing events may prove that they may not be realizable at all. As noted, supra, two other parcels of land were lost under power of sale, one in 1983 and the other in 1984.

Part B. In respect of the matters pertaining to the accuracy of the respective amounts claimed for mortgage interest and propery taxes for each of the respective taxation years, I have no reason to doubt the credibility of the appellant and the uncontroverted evidence as to his belief that the mortgage interest statement (Exhibit A-6) was accurate.

Accordingly I am satisfied that, on a preponderance of the evidence, interest may be claimed as particularized in the statement in the amount of $18,250.86 for the period commencing June 18, 1979 to December 18, 1979. I do not know what the correct interest amount would be from December 18 to December 31 as the interest was expressed to be calculated half-yearly and payable monthly. To this will be added the amount of $3,681.92 for interest that the appellant paid to the vendor, the Royal Bank, on the delayed closing of the purchase of the property (Statement of Adjustments, Exhibit A-7).

As to the interest calculation for the 1980 taxation year, the appellant’s claim for interest is for $42,814.68. The mortgage interest statement (Exhibit A-6) was prepared on interest calculations from the 18th to the 18th day of each month and for the reasons just given I do not know what the correct amount would be for the period January 1, 1980 to January 18, 1982. I therefore am able to allow the interest amounts shown to have been calculated on the statement for 11 periods, commencing February 18, 1980 to December 18, 1980 inclusive, as there is no calculation for the stub period December 18 to December 31. The interest shown as charged in the statement totals $35,384.37.

The statement of adjustments, supra, (Exhibit A-7), indicates adjustments for unpaid property taxes commencing 1977 to the date of closing, May 18, 1979. The net adjustments in favour of the appellant for the 1979 propery taxes (ie January I to May 18) was $245.03 on an interim basis. The evidence adduced (Exhibit A-8) indicated the actual 1979 taxes pertaining to 16 of the 20 lots (Lots 45-60) amounted to $557.37 and the interim 1979 taxes pertaining to Lots 1-4 totalled $70.20. Accordingly the amount allowable for property taxes for the 1979 year would be $382.54, being the aggregate amount of $627.57 less the vendor’s adjustment therefor of $245.03.

The appellant claims a deduction of $725 for 1980 property taxes. Tax Notices produced into evidence (part of Exhibit A-8) for the 20 lots verify interim property taxes in the aggregate amount of $344.75. The evidence is confusing and not at all satisfactory as to proof of the amount of the actual property taxes for the year. A collection letter (Exhibit A-10) from Tri County Credit Service Ltd was in respect of property tax arrears, however the amounts shown therein in respect of each of the lots do not specify the year or years in arrears or the amounts for the year or years in arrears. Accordingly the amount allowable for the 1980 property taxes is $344.75.

Issue #2

As I see it the evidence tendered by the appellant in support of the deductibility by him of these two payments falls far short of establishing that they were beyond that of protection or preservation of his general goodwill in the community.

The case of Frappier v The Queen, [1976] CTC 85; 76 DTC 6066 (FCTD) is authority for the proposition that payments of this nature may be allowed as a current deduction in circumstances where the taxpayer has established that they had been made for the purpose of gaining or producing income from his or her business or property.

In that case, and amongst other things, the plaintiff had established that her line of work as a securities saleswoman depended on her personal reputation of reliability. Walsh, J found, at 92 CTC; 6071 DTC:

. . . Plaintiffs personal reputation as a reliable securities salesperson was built up over a period of 17*/2 years and was a very valuable possession. The very life blood of this business, as in the case of an insurance agent is the continual flow of repeat business from satisfied clients and the acquisition of new clients largely as a result of referrals from them. If clients suffer a loss as a result of their dealings with the agent, even though the loss was occasioned by bankruptcy of her employer and was not her fault, they will be dissatisfied and place their future business elsewhere in this highly competitive field. Moreover they will recount their experience to others and this will damage the reputation of the agent further. Plaintiff is to be commended for having accepted the moral responsibility for the losses of her clients, and by arranging to make them good undoubtedly assured continuation and expansion of her clientele in this field, as is shown by the increase in the number of clients she now serves and her continually increasing income from commissions on her sales.

Of the 22 clients to whom the plaintiff Frappier had made a voluntary reimbursement, it was shown that 19 had done further business with her following the payments and that several of them had referred friends and relatives to her.

In the case at bar the appellant had shown that during the taxation year in question, 1979, he had been spending the bulk of his time and effort away from his legal practice in favour of his, and his corporate, real estate interests.

The appellant had not shown that his right to practise law was or could have been in jeopardy. Further, it is clear from the last paragraph of the letter from the lawyer for Mr Glaude (Exhibit R-3) that action was threatened to be commenced against the officers of Stenan Construction Ltd.

To capsulate the matter, it has not been shown by the appellant that, in light of the business and commercial realities of the matter, the reimbursements had been made in order to facilitate the carrying on of his business or profession. The evidence was much too vague to determine whether the deduction would be a proper one.

Finally, the appellant had not, as I understood it, taken the clear alternative position or assertion that the payments, at the very least, could have been fiscally capitalized. In view of the vagueness of the evidence and all of the circumstances of the case I am not able to make any finding of fact or make any conclusion in law relative thereto.

Issue #3

The appellant has withdrawn his appeal with respect to the inclusion of income amounts of $23,088.72 for 1979 and $17,150.18 for 1980. The Minister’s factual assumptions in the reply to notice of appeal, filed, that these amounts represented unpaid loans received through his shareholder’s loan account with 386113 Ontario Ltd were not rebutted.

The appellant has not conceded the penalty levied pursuant to subsection 163(2) of the Act. No evidence was called by the respondent, or given by the appellant, as to the penalty. The amount of the penalty and its method of calculation was not disclosed in the pleadings.

It is obvious that this appellant failed to ensure that all income for the years in question was in fact reported; however that in itself does not establish gross negligence, that is, in the words of Strayer, J in Venne v The Queen, [1984] CTC 223 at 234; 84 DTC 6247 at 6256:

. . . A high degree of negligence tantamount to intentional acting, and indifference as to whether the law is complied with or not.

and again at 236 CTC; 6258 DTC:

. . . The subsection obviously does not seek to impose absolute liability but instead only authorizes penalties where there is a high degree of blamewortheness [sic] involving knowing or reckless misconduct.

Any implications or inferences arising out of the fact that the unreported amounts are large when laid alongside the reported ones, on the one hand, may be somewhat offset by the fact, on the other hand, that the respective amount arose out of the application of subsection 15(2) of the Act. For instance, there was an absence of any evidence indicating that the appellant was, inter alia, aware of or was likely to have been aware of those provisions taken together with circumstances which could amount to a misrepresentation by him or by his company as to the existence, nature and status of the loan.

The words of Tax Review Board Member, D E Taylor (as he then was) in Rawsthorne v MNR, [1981] CTC 2187 at 2202; 81 DTC 116 at 126 are apt:

When the Minister is not content to merely tax the income but demands penalty on the tax, he (the Minister) must establish why it was left out of income. As I see it, the amount in question in this appeal could be left out of income in one of three ways:

(a) “neglect”;

(b) “knowingly”; or

(c) “under circumstances amounting to gross negligence”.

The Minister must demonstrate that the term “knowingly” or “gross negligence” are applicable, or at least determine [to] the Board’s satisfaction that simple “neglect” does not fit the facts.

A final comment and observation should be made in respect of the procedural aspect of this issue.

Counsel for the Minister indicated that he would not be calling any independent evidence as to the penalty, and as noted earlier the appellant gave no evidence with respect thereto. Due to my previous ruling, counsel for the Minister did not attempt to elicit this evidence from, and thus attempt to discharge his onus through, the appellant himself. At the time of this hearing the decision of Rouleau, J in The Queen v Wellington Taylor, [1984] CTC 436; 84 DTC 6459 had not been received from the Federal Court, Trial Division. In any event, whether or not a permitted wide-ranging cross-examination of the appellant would have brought about a different result is now mere conjecture.

Part IV — Conclusion

The matters under appeal for each of the appellant’s 1979 and 1980 taxation years are to be referred back to the respondent for reassessment in accordance with the directions as set out in Part II — Decision of these reasons for judgment.

Appeal allowed in part.