John J Froese v. Minister of National Revenue, [1981] CTC 2282, 81 DTC 240

The Chairman:—The appeal of Mr John J Froese is from income tax reassessments dated May 26, 1978 and June 7, 1979, with respect to the 1971 taxation year by which the Minister of National Revenue added to the appellant’s income an amount of $15,865.08 with respect to the sale of certain properties.

At the outset of the hearing, it was agreed between the parties that the sole issue before the Board was whether or not the Minister’s reassessment was Statute barred. It was also agreed that for purposes of this appeal, subsection 152(4) of the Income Tax Act, SC 1970-71-72, c 63, as amended would apply.

The statement of facts, as contained in the notice of appeal, reads as follows:

1. The appellant is an individual who resides in the Province of British Columbia.

2. By notice of re-assessment dated May 26,1978 the appellant was re-assessed to tax with respect to his 1971 taxation year so as to include in income the amount of $15,865.08 with respect to certain real property transactions and with respect to which penalties were assessed pursuant to subsection 163(2) of the Income Tax Act and pursuant to section 19 of the BC Income Tax Act.

3. The appellant subsequently filed a notice of objection to the notice of reassessment aforesaid. By notice of re-assessment dated June 7, 1979 the penalties aforesaid were deleted but otherwise the notice of re-assessment dated May 26, 1978 was confirmed.

Appellant’s submissions:

4. The appellant says that he is not taxable pursuant to any of the provisions of the Income Tax Act in respect of the amount aforesaid.

5. In the alternative the appellant says that The Minister of National Revenue is barred by statute from re-assessing the appellant’s 1971 taxation year and in this regard the appellant says that he has not made any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in the filing of his return or in supplying any information under the Income Tax Act. The appellant relies on subsection 152(4) of the Income Tax Act.

The respondent’s statement of facts are as follows:

1. He admits the allegations of fact contained in paragraphs 1, 2 and 3 of the Notice of Appeal herein.

2. He does not admit allegation of fact contained in paragraphs 4 and 5 of the Notice of Appeal.

3. The Appellant, a former farmer, in 1970 became involved in the real estate and house contracting business.

4. In 1971, the Appellant reported net income from lot sales as follows:

Gross Proceeds		$24,700.00
Deduct: Cost		$15,345.47
	Gross Profit	$ 9,354.53
	Expenses	$	275.02
Add:	Interest Income (6 lots)	$	480.93
	Net Income	$ 9,560.44

5. For his 1972 taxation year, the appellant reported a net income of $7,115.58 from the sale of a further two lots.

6. For his 1973 taxation year, the Appellant reported the sale of a further seven lots, and in determining his his net income, reduced the proceeds by the proceeds from the sale of the six lots in 1971. The Appellant reported a net profit from the sale of the thirteen lots as follows:

Gross Proceeds		$35,199.50
Cost		$28,498.73
		$ 6,700.77
Less: Cancellation of 1971 sale
1971 Gross Profit included above	9,354.33
Less: Overclaimed Cost	(2,192.21)
	7,162.32
Less: Cash collected	(1,300.00)	$ 5,862.32
Gross Profit		$	838.45
Expenses		$	822.97
Net Profit		$	15,48

7. For his 1974 taxation year, the Appellant reported income from contracting and disposal of a lot #177 (separate from lot 177 in 1971) and reported lots on hand as at December 31, 1974, lots 260 and 284.

8. As a result of an Audit by the Respondent, it was determined that:

(a) the proceeds from the sale of the six lots in 1971 was understated and costs overstated;

(b) on an accrual basis, twelve lots were unreported over the initial six;

(c) two of the unreported lots were subsequently reported in 1972, (lots 198 and 216);

(d) lot 199 for which the Appellant received a down-payment in 1971 and the balance in 1973, was not reported by the Appellant in the period 1971 to 1973;

(e) the sale of lots 195 and 213 were not reported by the Appellant in his 1971, 1972 or 1973 taxation years;

(f) the Appellant received 1971 commission income of $450 which was not reported;

9. By Notice of Reassessment dated May 26th, 1978, the Respondent:

(i) Added to the Appellant’s income the profit from the sale of lot 198, transferred from 1972, $3,507.79, and reduced the income by $2,061.59 to reflect the mortgage reserve per section 85B.

(ii) Added to the Appellant’s income the profits on 12 lots sold in 1971, namely $51,182.42 and then applied section 85B of the former Income Tax Act reducing the income by $25,962.82.

(iii) Assessed penalties pursuant to section 163(2) of the new Income Tax Act.

10. Upon further reassessment, dated June 9th, 1979, the Respondent deleted the penalties.

11. In so assessing the Apellant, the Respondent assumed inter alia, that:

(a) The Appellant reported the sales in 1971 of only the lots for which he received the full purchase price;

(b) the cost of the six lots reported sold in 1971 were overstated and the proceeds from their sale understated;

(c) twelve lots which had been sold by the Appellant but not paid for in full in 1971 were not reported in the Appellant’s 1971 Tax Return;

(d) two of the unreported lots referred to in paragraph (c) above, Lots 198 and 216, were reported by the Appellant in his 1972 taxation year;

(e) the sale of Lot 199, for which the Appellant received a down payment in 1971 was not reported in his 1971, 1972 or 1973 Tax Returns;

(f) the sale of Lots 195 and 213 were not reported in the Appellant’s 1971,1972 or 1973 Tax Returns.

(g) The lots on hand as at December 31, 1974 were Lots 260 and 284;

(h) the Appellant sold only one lot in 1974, namely Lot 177;

(i) the Appellant received commission income of $450 in 1971;

Respondent’s submissions:

13. The Respondent submits that the Appellant by:

(a) understating the proceeds from the sale of the six lots reported sold in 1971 and over-stating their costs;

(b) not reporting on an accrual basis twelve lots which were sold in 1971;

(c) failing to report the sale of Lots 195, 199 and 213 in either his 1971, 1972 or 1973 taxation years;

(d) not reporting commission income received in 1971 of $450;

has made misrepresentations in filing his income tax return for the 1971 taxation year, attributable to neglect, carelessness, or wilful default.

14. The Respondent therefore submits that the Appellant has been properly assessed in accordance with the above-noted provisions of the Income Tax Act.

Sumary of Facts

The apellant had been engaged in mixed farming for some 23 years and operated his farm on a cash basis. In the fall of 1968, he sold his farm for $62,500 and acquired a house and a five-acre parcel of land for $29,000. He also invested in land with a view of subdividing and selling lots. By 1969 he had 24 divided lots available for sale. Transactions relative to these lots in 1971 are the subject of the Minister’s reassessments of May 1978 and June 1979.

The respondent, having the onus of establishing the facts on which he may properly reassess the appellant after the expiration of four years as provided for under subsection 152(4) of the Act, called as witness Mr Mark Kopystecki, an appeals officer with the Department of National Revenue. On examination-in-chief it was established that Mr Kopystecki was not the person who had made the audit but had been assigned to review the appellant’s file which took him two days to complete. A Mr Cossack was the auditor for the Department of National Revenue who was later called as witness for the appellant.

The evidence given by Mr Kopystecki was taken from the appellant’s tax returns for 1971, 1972 and 1973 and on a series of the appellant’s statements of income from 1971, 1972, 1973, 1974 and 1975, as well as various land conveyances to which the appellant was a party during the 1971 taxation year (Exhibit R-2).

From the information contained in the appellant’s tax returns and statements of income, a rather complicated work sheet was compiled and produced as Exhibit R-1. The work sheet for the period of 1971, 1972 and 1973 and the appellant’s income for each of those years was considered under three aspects: the income from land sales reported in the appellant’s tax returns; income, (assessed as a result of the review of the appellant’s land transactions) from the sale of lots calculated on an accrual basis and the sale of lots computed on a cash basis.

The appellant prior to 1968 had been reporting his farming income on a cash basis. In 1971 he reported his income from the sale of land on a cash basis and was reassessed on an accrual basis.

It is the respondent’s submissions that not only should the appellant have reported his land sales on an accrual basis but that there are serious discrepancies between the income from the sale of lots as reported by the appellant in 1971 and the income from those sales as computed on the cash, as well as on accrual methods of accounting. It is on the basis of both these submissions that the respondent contends that the appellant’s reassessments by the Minister for the 1971 taxation year are not statute barred.

There appears to be agreement that in 1969, after giving up three lots for road construction purposes, the appellant had 24 lots ready for disposal. Some of the lots, once sold, were repossessed or repurchased by the appellant during 1971, 1972 and 1973. According to the appellant’s 1970 tax return, the appellant disposed of five lots during that year which are not referred to in the subsequent land transactions in 1971, 1972 and 1973, Exhibit A-1. The appellant would have had 14 lots on hand at the beginning of 1971.

In his 1971 tax return, the appellant reported an amount of $24,700 as gross profits from the sale of lots 177, 178, 179, 180, 182, 183, and a net income from the sales of $9,560.44. In a statement of adjustment dated July 1, 1971, the sale price of the said lots is $31,800, Exhibit R-2 (AWP-5). The cost of the lots sold, as shown in the statement of profit on lots sold, is $2,192.21 per lot, Exhibit R-2 (PL-2a). The cost of the lots therefore is $13,152 and not $15,347.47 as shown in the appellant’s return. The respondent suggests that the six lots sold in 1971 for which the full purchase price was received, were the only sales reported in the appellant’s 1971 return and that he underestimated the proceeds of sale and overestimated their cost price in so doing.

In 1971 the appellant also sold lots 184, 185, 198, 199, 213, 195, 190, 191, 192, 193, 194 and 216, which were not paid in full in 1971 and were not reported in the appellant’s 1971 tax return.

Lot 183 was sold to the appellant’s brother in 1971 for the sum of $5,000; lot 195 was also sold in 1971 for $4,900 to the Teichrobs; the proceeds from both sales were received by the appellant in 1971, Exhibit R-2 (AWP-9) and Exhibit R2-A, and neither were reported in 1971, 1972 or 1973.

Lots 198 and 199 were sold in April 1971 for $9,700 with a $3,000 down payment. The balance of payment was not reported in 1972 or 1973 (Exhibit

R-2 (AWP-8)).

In 1974 the appellant sold lot 177 and at Deceber 31, 1974, the appellant had not yet sold lots 260 and 284. The 24 lots the appellant had available for sale at the end of 1970 were therefore accounted for in the respondent’s audit review work sheet.

The appellant, in examination-in-chief and in cross-examination, confirmed that he considered that a sale was made only when cash was received. The appellant as well as, Mr Cossack, the respondent’s auditor, pointed out the complexity of some of the transactions in which the appellant had to repossess or repurchase some of the lots sold.

As suggested by counsel for the appellant, the sole issue in this appeal is whether the respondent can properly reassess the appellant after the expiration of four years after the date of mailing of the original assessment, as provided for under subsection 152(4) of the Act.

Subsection 152(4) of the Act reads as follows:

Idem. The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year had been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

By notice of reassessment dated June 7, 1979, the penalties imposed by the respondent in his reassessment dated May 26, 1978, were deleted but the balance of the assessment was confirmed.

In my opinion, the fact that the respondent may have deleted the penalties previously imposed under subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, does not automatically preclude him from reassessing the appellant after a period of four years if the conditions set-out in subsection 152(4) of the Act have otherwise been met.

There can be no doubt that although the recording of land sales on a cash basis may be acceptable for purposes of accounting, it is not the method which the Income Tax Act requires of taxpayers in reporting their income from a business of selling land. Notwithstanding that the appellant, as a farmer, may have been accustomed to reporting his income on a cash basis and, as innocently as it may have been done, reporting subsequent land sales in his tax return on a cash basis rather than on an accrual basis, distorts the amount of income earned by the appellant in the taxation year in which it was earned and constitutes a “misrepresentation” within the meaning of subsection 152(4) of the Act.

It is not necessary to determine here whether the appellant’s “misrepresentation” was the result of wilful default or fraud in filing his return, it is sufficient in my view that the misrepresentation be attributable to neglect or carelessness. It is very difficult for me to conceive that the appellant could not or would not reasonably obtain professional advice, if necessary, and proceed with the same care in accurately reporting his income from the sale of land, as he evidently did in having the land surveyed and subdivided, in order to realize the greatest possible income from their sales. On that basis alone the appellant in my opinion misrepresented his income for 1971 due to neglect and carelessness in reporting his income on the cash method of accounting.

In cross-examination the appellant did not succeed in weakening the credibility of the respondent’s witness, nor in creating doubts as to the accuracy of the respondent’s work sheet and supporting documents.

On the basis of the evidence, I find that there are discrepancies in the appellant’s reported 1971 income as compared to his income reassessed after review by the respondent resulting, not only from the difference in the accounting method used by the appellant in computing his income, but more importantly as a result of income from the sale of three lots in 1971: (lot 213 R-2, AWP-9; lot 199, R-2, AWP-8 and lot 195, R-2, AWP-10), which was not reported by the appellant in his 1971 tax return.

In the appeals of John West v MNR, [1980] CTC 2255; 80 DTC 1226, and Roselawn Investments Limited v MNR, [1980] CTC 2216; 80 DTC 1271, cited by counsel for the appellant, the facts of course were different from those of the instant appeal but in each of these cases the Minister failed to satisfy the onus which rested on him. In the instant appeal, it is my opinion that the Minister has satisfactorily established that the appellant misrepresented his income due to neglect or carelessness on two grounds:

(a) reporting land sale income on a cash basis and

(b) not reporting income from disposition of three lots.

The decision of the Exchequer Court of Canada in MNR v Maurice Taylor, [1961] CTC 211; 61 DTC 1139, also cited by the appellant is in my view very helpful in determining the present issue.

As I interpret Mr Justice Cameron’s remarks, once the Minister has established that “any misrepresentation’’ has been made by a taxpayer in his tax return, whether it is wilful or not and whether it is innocent or fraudulent, the Minister has a right to reassess beyond the four-year limit. Although a taxpayer, who is considered to have wilfully or fraudulently made misrepresentation in his return, may find himself involved in the application of other sections of the Income Tax Act, such an eventuality has no bearing on the Minister’s right to reassess beyond the four-year limit if “any misrepresentation” has been established by the Minister.

In the decision of the Federal Court, Trial Division, in MNR v Louis Bisson, [1972] CTC 446; 72 DTC 6374, cited by the respondent, Mr Justice Pratt appears to have further qualified the concept of “misrepresentation” on pages 454 and 6380 which reads as follows:

In my view, the fact that the legislator referred not only to “misrepresentation” but to “fraud” indicates that, by the first word, he meant innocent misrepresentation which, without being fraudulent, are still culpable in the sense that they would not have been made if the person committing them had not been negligent. I therefore conclude that a taxpayer who, without any negligence on his part, commits an error in declaring his income, does not make a misrepresentation within the meaning of subparagraph 46(4)(a)(i). When the Minister seeks to rely on this provision to proceed with a re-assessment after four years, he must therefore not only show that the taxpayer committed an error in declaring his income but also that that error is attributable to negligence on his part.

Subparagraph 152(4)(a)(i) of the Act specifically refers to “any misrepresentations” attributable to “neglect” or “carelessness”. I do not believe that in this context any inference other than their generally accepted meaning can or should be given to the words “neglect” or “carelessness” which is the contrary of the reasonable care that is ordinarily, usually, or normally given by a wise and prudent person in any given circumstances.

In the instant appeal, I am satisfied that the respondent not only established the existence of misrepresentations in the appellant’s 1971 tax return but satisfied the Board that the misrepresentations are attributable to neglect and carelessness; that the appellant did not exercise normal and reasonable care in the proper preparation and computation of his income on an accrual basis for his 1971 tax return; and that he failed to report in 1971 and subsequent years the proceeds from certain lands sold in 1971.

For these reasons, the appeal is dismissed.

Appeal dismissed