Theophil Decock v. Minister of National Revenue, [1984] CTC 2541, 84 DTC 1523

Rip, TCJ:—This is an appeal from income tax assessments issued against the appellant for 1975, 1976, 1977 and 1978. The issues are whether certain properties disposed of by the appellant in the three earlier years were on account of capital or income; the assessment for 1977 also imposed a penalty purportedly in accordance with subsection 163(2) of the Income Tax Act (“Act”). This appeal was heard on common evidence with the appeals of Joyce DeCock and Fred & Ted's Construction Ltd (Fred and Ted’s).

Theophil DeCock, the appellant, described his occupation as “unemployed”. In fact he is president and sole shareholder of “Fred and Ted’s”, a corporation engaged in the construction business in the Okanagan Valley of British Columbia. Mr DeCock is also president and sole shareholder of Detra Holdings Ltd (“Detra”) and Detra Management and Appraisals Ltd, two other companies engaged in the real estate business. Mr DeCock personally owns, and has owned, interests in various real estate ventures. Mr DeCock impressed me as a person who during the years of the appeal was, and still is, experienced in real estate and at all times relevant to this appeal had a good knowledge of the real estate market in the Okanagan Valley.

Prior to 1975 Detra, together with a Mr Steiner and a Mr Freeheart, purchased land near the river canal in Penticton, BC overlooking and adjacent to a nine hole “pitch and putt” golf course. Steiner was a lawyer from Vernon, BC with substantial real estate experience; the appellant previously had done business with Steiner and knew of Steiner’s reputation. The land was subdivided into about 32 lots and each “partner” took as his property eight lots for development. Homes were built on the lots and subsequently sold.

Sometime in early 1975, while houses in the subdivision were being built, Steiner advised the appellant a real estate agent had contacted him and informed him the golf course adjacent to the development was for sale. Together with Steiner and a Mr Fisher, a developer and builder, the appellant acquired for $1,000 an interest in an option to purchase the golf course. According to the appellant’s evidence, prior to acquiring the option he never discussed with Steiner or Fisher what they would do with the golf course once it was purchased; the appellant claims he wanted the golf course to continue to operate because the golf course was an attraction to people buying lots in the neighbouring development. Mr DeCock added that by moving two mobile homes from their location on the course a few more holes could be added to the course and make it even more attractive.

However within 30 days of obtaining the option the appellant learned Steiner and Fisher wanted to leave the golf course “as is’’ to have it available for future development. According to the appellant Steiner “didn’t really care about the people who bought lots’’; he “couldn’t care less once the lots were sold’’. Steiner did not see the golf course as an attraction to people but as land to be developed. There was, says the appellant, a “disagreement’’ between himself and his two partners. The appellant said he had his money “tied up’’ in other projects and could not “buy the other two out’’; therefore he had “no choice’’ but to transfer his interest in the option to Steiner in exchange for a lot, lot 12, in the neighbouring development; the lot had a value of $10,000 as agreed by Steiner and the appellant. In his 1976 income tax return the appellant reported a capital gain on the disposition of his interest in the option in the amount of $9,000. The respondent assessed the gain as business income for 1975.

Steiner and the appellant agreed to the exchange of the option for lot 12 on or about May 2, 1975. By a letter dated September 15, 1975, Steiner, on his firm letterhead, reported to the appellant that lot 12 “has now been conveyed into the name” of the appellant and the deed of conveyance had been registered. The appellant did not question these facts. Undoubtedly the disposition took place in 1975 and any gain in respect of the disposition of the option is to be included in income for 1975.

In the appellant’s view municipal authorities in 1975 would not agree to a change of zoning of the golf course to residential.

The appellant was unable to produce the option agreement, nor could he remember its terms; but he did recollect they “were good terms”.

The disagreement in respect of the golf course was not the first disagreement the appellant had with Steiner. Earlier they also disagreed as to the nature of the development bordering the golf course. They could not agree as to style of home, cost of homes, and numerous other matters.

In my view the best that can be said in favour of the appellant’s case on this issue is that when he acquired the interest in the option he had no idea at all what he and his associates would do with the golf course once the option was exercised. He knew Steiner was interested in development, pure and simple, yet he was content to join Steiner, with whom he recently had differences of opinion, without even asking Steiner what his plans were for the golf course once it was acquired. The appellant did not strike me as naive or innocent; he was fully cognizant what a venture with Steiner may yield. That the golf course was next to land owned by Detra and was being developed with Steiner (and another) was no doubt an attraction; but in my view the option was acquired not as capital property but as property that could be easily dealt with as and when circumstances presented themselves; the gain on the transfer of the option was correctly assessed in 1975.

The appellant says he acquired lot 12 in order to construct a house on that lot for his family. He stated in 1975 his companies’ activities were becoming concentrated in the Penticton area and it would be easier to live where most of his work was located at the time rather than in Kelowna, where he resided. He acquired lot 12 in September 1975; construction of the house started in early May 1976 and was completed in August of that year. An offer to purchase the house, which was accepted, was made on August 11; another offer may have been accepted earlier but, according to the appellant, fell through because financing may not have been available to the prospective purchaser.

The appellant testified he may have put a little more handcrafted work on the house on lot 12 than other houses in the subdivision built by Detra but essentially the house was the same as the others.

In preparation for his move to Penticton the appellant testified he put his home in Kelowna up for sale at the end of 1974 or early 1975, prior to acquiring lot 12. The Kelowna house was never listed with an agent. An information sheet, dated January 15, 1975, concerning his Kelowna home had been prepared. A Mr Daniel Donovan Fergusson, a real estate agent, testified he requested an exclusive listing from the appellant at the time and several times later but was refused because the appellant “felt it wasn’t to his advantage” to list the property. The appellant testified he was getting offers to purchase the Kelowna home but they were too low compared to what the house actually cost him. The Kelowna property remained unlisted when it was finally sold in January 1983.

The appellant testified he did not want to own two homes, one in Kelowna and one in Penticton, and therefore did not want to move to Penticton until the Kelowna house was sold. Then, in mid-1976, his businesses were no longer centred in Penticton and therefore he decided to sell the house in Penticton. He never actually moved into the house in Penticton.

I find it difficult to accept the appellant’s argument that lot 12 was acquired solely to build a home on it. I do not believe the appellant was very serious — if he was serious at all — about selling his home in Kelowna and moving to Penticton. The Kelowna house was on the market for about 16 months when he started building the house in Penticton; also by August 1976, and probably before, (since the appellant had testified he had accepted at least one other offer to purchase the lot-12 house prior to his last acceptance of an offer) he abandoned plans to live in Penticton. Surely by May 1976 the appellant knew, or ought to have had some indication, he was having difficulty in selling his Kelowna home and that his business was slowing down in Penticton. I am of the view that when the appellant acquired lot 12, situated in the subdivision Detra was developing, he knew lot 12 could very easily be included for sale with the other houses in the subdivision, even if he owned that lot personally. I must therefore conclude the profit from the sale of lot 12 was income from a business.

In 1976 Fred & Ted’s purchased land in Salmon Arm, BC for $45,000 and built a 14-unit apartment block on that property. By agreement they dated October 17, 1976, a month or so before the apartment building was completed, Fred & Ted’s agreed to sell the property, including the building built thereon and known as “Caprice Manor”, to the appellant and Joyce DeCock, his wife, for $280,000 payable by assumption of mortgage of $175,700 and the balance to be paid “by” September 30, 1977. According to the agreement “possession date” was to be December 1, 1976. The deed of land transferring the property was dated April 7, 1977 and was registered on May 12, 1977. Mr DeCock claimed the deed was not registered until Fred and Ted’s received the last advance from the mortgage company so that he and Mrs DeCock could “avoid paper work” in assuming the mortgage.

Mr DeCock testified his wife “figured it was a good investment, clean and maintenance free. She thought it should be a good building. She wanted something to keep. She spoke to the accountant and she purchased the building”. The building was described by the appellant as “a nice building with aluminum siding and brick and was close to three schools”. The appellant thought his prospective tenants would be school teachers.

After the agreement of October 17, 1976, was signed the DeCocks opened a bank account in their joint names for the operation of the Caprice Manor. All bills after October 1976* [1] were paid by the DeCocks.

The Caprice Manor was sold by the DeCocks on December 20, 1977 for $330,215.72. Mr and Mrs DeCocks both treated the sale as a disposition of a capital asset. The respondent reassessed the appellant and Mrs DeCock on the basis the profits on the sale of the Caprice Manor were on account of income.

Mr DeCock testified they had difficulties with the building. He advertised for a manager for the apartment and received 14 applications, one on a napkin, some on the back of cigarette packages. He interviewed some of the applicants and found the interviews going from “bad to worse”. In the meantime he or Mrs DeCock were spending two and a half hours a day travelling between Kelowna and Salmon Arm to look after the apartment. Mrs DeCock testified she would go to Salmon Arm one or two days a week. A young married couple named Barron was found to take the management job in February 1977. But they were not happy with their fee, which was five per cent of the gross rentals, since the building was only a little more than 50 per cent rented and they also had to pay a monthly rent of $249 for their own suite in the building. The Barrons eventually quit.

In the meantime trouble continued at the Caprice Manor and the DeCocks testified they continued to travel back and forth between Kelowna and Salmon Arm. The RCMP were called to investigate thefts in the building, the fire marshall complained of false alarms emanating from the building and tenants and tenants’ friends were causing damage to the building. According to Mr DeCock there was not much to do in Salmon Arm except cause problems. Finally he and Mrs DeCock decided “either we have to get better tenants or get rid of it (ie the apartment block)”. The appellant was of the view there was no tenant amenable to him and his wife and since he and his wife were tired of driving to Salmon Arm they decided to sell the property.

According to Mrs DeCock all business decisions were left to her husband, so much so that in cross-examination she replied it would not surprise her to learn she owned properties she had no idea she owned. These would be properties her husband may have purchased for her without her knowledge. Mrs DeCock acknowledged she did not know how much money she contributed to the purchase of the Caprice Manor as this decision was her husband’s. It appears that every- thing of a business nature — no matter how minor — was decided by Mr De Cock and Mrs DeCock, who may have been consulted at times, was “happy with the decisions he made”. In his evidence, Larry DeCock, the son of Mr and Mrs DeCock, also testified that his father made all business decisions. It is therefore difficult to accept Mr DeCock’s evidence that the decision to buy the Caprice Manor was his wife’s. Mr DeCock, to put it in the clearest terms, called the shots.

Mr DeCock had experienced difficulties in other apartment blocks he owned. At the Bel Air Manor, an eight-unit apartment building in Penticton, there were problems in obtaining someone to manage the buildings; Calgary Manor, a twelve-unit apartment building in Penticton also had management problems; Brookside Manor, a fourteen or sixteen-unit apartment in Kelowna, experienced heating problems. Mr DeCock knew from experience the operation of an apartment block was not free from aggravation.

Mr DeCock had sold multi-unit properties he owned prior to 1976. In April 1972 he purchased land to build the Brookside Manor which he sold in August 1973. He built the Calgary Manor with a partner in 1973 and sold the building in the spring of 1974. And in 1973 he was a member of a joint venture which built an apartment block known as the Marquis Manor which was sold in 1975. All of these sales yielded a profit to the appellant.

The Caprice Manor was acquired by the appellant as an asset which, based on experience, could easily be sold, if necessary. The profit to the appellant from the sale of the Caprice Manor was therefore income from a business.

Mr DeCock was assessed a penalty by the respondent pursuant to subsection 163(2) of the Act; the respondent alleges that the appellant knowingly, or under circumstances amounting to gross negligence in the carrying out of a duty or obligation imposed by the Act acquiesced in the making of an omission in his 1977 income tax return.

The appellant acknowledged there was omitted from his 1977 income tax return certain management fees paid to him of $22,500. The appellant says these management fees came from two joint ventures which he participated in. One joint venture, Lacombe Housing, was a development of six duplexes and three or four houses which were built on speculation and sold; a second joint venture, Kelowna Light Industrial, was the construction of an industrial building in Kelowna. The books of each project were maintained by Stewart and Company, the appellant’s accountants. All cheques issued by either joint venture required the signature of Mr Stewart and either Mr DeCock or his co-venturer. All cheques were written by Stewart and Company.

Stewart and Company also prepared Mr DeCock’s 1977 tax return. Mr DeCock testified that for the preparation of his return he gave Mr Stewart a list of management fees, including the fees he received in 1977 from the Lacombe Housing and Kelowna Light Industrial joint ventures.

Mr DeCock went to Mr Stewart’s office to sign the tax return ‘‘on the last day” required to file his income tax return for 1977. The 1977 tax return of the appellant is dated May 1, 1978, although Mr DeCock testified he was not certain the return was signed that day. Mr DeCock testified he “did not have time to read” the return. “I signed it and did not think I had to check a chartered accountant.” Mr DeCock said he relied on Mr Stewart. The appellant says he knew he received fees from Lacombe Housing and Kelowna Light Industrial joint ventures and “I had a top notch accountant and so I signed the return and sent it off’ without being aware of the omission of the $22,500 of income. The appellant said that since Mr Stewart signed the cheques and Mr Stewart received a list of management fees paid to Mr DeCock during the year he assumed that the management fees from these two joint ventures were included in his return. Mr DeCock testified he did not verify the contents of the return, although he may have checked to see if his address was correct; “I probably just glanced at the return”. In answer to a question from the Court the appellant replied he did not even look to see what his taxable income for 1977 was, nor was he even curious as to how much tax he owed for 1977.

In cross-examination the appellant acknowledged he had previous difficulties with the respondent. He had been assessed a penalty and had been prosecuted and convicted for failure to report income “‘or something like that”, according to the appellant, for at least one previous year.

The appellant’s excuse for not verifying his income tax return was that it was the last day for filing and there was a lot of people in the office of Stewart and Company waiting to sign their own returns. He felt rushed and since he had utmost faith in his accountant he signed what he was given.

Subsection 163(2) is a penal section. The burden of establishing the facts justifying the assessment of the penalty under subsection 163(2) is on the respondent (vide subsection 163(3)). The appellant admitted that he failed to report $22,500 of income in 1977. Since the essential fact of the omission of income was not an issue, the respondent must therefore prove to the Court’s satisfaction the omission of this amount from the appellant’s tax return was made with the knowledge of the appellant or was due to circumstances amounting to gross negligence by the appellant in carrying out of any duty or obligation imposed by or under the Act.

The appellant says he gave his accountant a list of management fees, including his fees from the two joint ventures. He said he had utmost faith in his accountant. The appellant testified his accountant wrote and signed the cheques representing the management fees. The appellant testified he did not intend to suppress income and that he did everything he ought to be expected to do in the circumstances but his accountant committed an error. The appellant’s view is that he should not be liable for his accountant’s error. The accountant was not called as a witness.

The appellant knows full well the consequences of filing an income tax return containing — if that is the word — an omission of income. He had been convicted previously of failing to report income and was fined and assessed a penalty. And what he says his behaviour was when it came to sign the return is simply not credible: while he says he “glanced” at the return to check his address he was not even curious to find out his income for the year, or, what I find even more difficult to accept, how much tax he had to pay for the year.

True — if we accept the appellant’s evidence — the appellant’s accountant was extremely negligent. But a taxpayer, in particular a businessman who knew his various sources of income, cannot and does not exculpate himself from liability by handing over his tax affairs to a professional and blindly, without question, and in this case without even any interest, accepting what the professional has done.

In a criminal offence the Crown must establish a mental element, namely, that the accused who committed the prohibited act did so intentionally or recklessly, with knowledge of the facts constituting the offence or with willful blindness toward them [vide Regina v City of Sault-Ste Marie (1978), CCC (2d) 353, at 362 per Dickson, J, as he then was].

In the earlier part of these reasons I gave my observations of the appellant; he appears to be an astute businessman who is nobody’s fool. From my observations of the appellant I am of the view that he had a good idea of his approximate income for 1977 before his tax returns were prepared. To have verified his estimate of income to the amounts reported in his returns would have been a normal act of an average person. Had he done so his suspicions would have been aroused and then he would have been able to make further inquiries to his accountant. He simply did not want to know what was in the return. This “willful blindness’’ to the facts, according to Devlin, J, as he then was, in Roper v Taylor, [1951] 2 TLR 284, is actual knowledge in the eyes of the law.

The reasons of Cattanach, J in Udell v MNR ([1969] CTC 704; 70 DTC 6019) are of no assistance to the appellant. In Udell, the taxpayer’s income tax return was prepared by a chartered accountant who made a number of errors and omissions in the return which was signed by Mr Udell. Mr Udell knew that one of the years in issue was not successful from an income point of view and he had suffered a loss; he assumed the loss reported on his income tax return was due to capital cost allowance. Further, while Mr Udell’s review of the return was casual, the profit and loss reported on the returns coincided approximately with his own estimate of his profit and loss for the year and therefore he did not scrutinize the return as closely as he should. Mr DeCock did not review his 1977 return of income even casually, he only glanced at it to see, perhaps, if his name and address were correct. In Udell the accountant corroborated Mr Udell’s testimony; Mr Stewart was not called as a witness in this appeal. Mr Udell did not concur, ether tacitly or silently, with his accountant’s omission. Mr DeCock on the other hand may have remedied his accountant’s error by checking his declared income for the year or asking Mr Stewart some very simple questions. In evidence Mr DeCock said he, together with his companies, were paying Mr Stewart fees of about $50,000 a year. Surely Mr Stewart would have met with Mr DeCock to discuss his return at the time had Mr DeCock suggested it. In my view Mr DeCock, knowingly and under circumstances amounting to gross negligence in the carrying out of a duty or obligation under the Income Tax Act, “participated in, assented to or acquiesced in’’ the omission of $22,500 of fees in his return of income for 1977.

The appeals are therefore dismissed.

Appeals dismissed.