Fioravante Pavan v. Minister of National Revenue, [1980] CTC 2956, 80 DTC 1830

D E Taylor:—This is an appeal heard at the City of Toronto, Ontario, on September 24, 1980, against an income tax assessment for the year 1973 in which the Minister of National Revenue added an amount of $98,435.14 to the reported taxable income of the appellant, and after allowing for an appropriate reserve, assessed the balance to tax. In assessing the appellant, the respondent relied, inter alia, upon sections 3, 4, 9, subsections 248(1), 163(2), paragraphs 12(1 )(c) and 12(1 )(l) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Contentions

For the appellant:

In 1972, as a result of continuous requests from the eventual purchaser, who was assembling land in the vicinity, to sell the property, the owners, notwithstanding my client’s strenuous objections, which included considering legal action to prevent the majority accepting the offer, finally agreed to sell the property. The property had never been listed for sale and without the constant badgering would not have been sold by the group wherein my client had a minority interest. My client had never been previously involved in a purchase and sale of this nature.

Due to an inadvertent oversight on the part of my client’s accountant in preparing his 1972 and 1973 tax returns, the mortgage interest derived from the sale of the property was not reported.

The grounds for appeal are:

(1) that the assessment incorrectly classified the transaction herein as an income rather than a capital gain;

(2) the assessment incorrectly calculated the mortgage interest herein and allocated same to the incorrect years.

For the respondent:

4(a) In a transaction completed on 30 September 1969 the appellant, Gorizzan Holdings Limited (“Gorizzan”) and Romanin Bros Builders Limited (“Romanin”) acquired beneficial ownership in some 48 acres of lands in the Township of Pickering (“the Lands”) at a price of $238,595.80.

(b) The appellant, Gorizzan and Romanin formed a partnership to hold the Lands in which the appellant’s interest was 20% and the partnership carried on business under the name of “Pine Creek Holdings” (the “Partnership”).

(c) The lands at all material times were vacant farm land.

(d) In acquiring the lands the appellant, Gorizzan and Romanin intended to trade in, deal in, or otherwise turn the lands to account for profit.

(e) On or about 12 April 1972 Tonkin Investments Limited offered to purchase the lands from the appellant, Gorizzan and Romanin at a price of $763,712 which offer was accepted; pursuant to the said offer the appellant, Gorizzan and Romanin sold the lands as of 31 May 1972.

(f) The partnership prepared financial statements for the fiscal period ending 30 April 1973 wherein the partnership reported income in that fiscal period on the gain from the sale of Lands in the amount of $457,804.18 and mortgage interest in the amount of $34,371.48, a total of $492,175.66, of which the appellant’s share was $91,560.84 and $6,874.30 respectively, or a total of $98,435.14.

6. The respondent submits that the amount of $98,435.14 is properly included in computing the appellant’s income for the taxation year 1973 as income from a business by virtue of paragraph 12(1 )(l) of the Income Tax Act.

7. In the alternative to paragraph 6 herein, the respondent submits that the amount of $91,560.84 was properly included in computing the appellant’s income for the taxation year 1973 as income from a business of the appellant within the meaning of section 9 and subsection 248(1) of the Income Tax Act and the amount of $6,874.30 was properly included in computing the appellant’s income for the taxation year 1973 on account of an amount received by the appellant in 1973 or receivable by him in 1973 as, on account of or in lieu of payment of, or in satisfaction of, interest by virtue of paragraph 12(1 )(c) of the Income Tax Act.

8. The respondent submits that in failing to include the amount of $6,874.30 on account of mortgage interest in computing his income for the taxation year 1973 the appellant knowingly, or under circumstances amounting to gross negligence acted in a manner permitting the imposition of a penalty with respect to that amount.

Evidence and Argument

The evidence submitted by the appellant completely substantiated the assumptions made by the Minister with regard to the assessment of tax. Counsel for the appellant relied essentially on the argument that although the partnership (including the appellant) had purchased the land with the intention of subdividing it, building homes on it and selling the homes, since they had not done so but rather sold it “en bloc” that the profit was capital gain and not income. Counsel for the respondent pointed out the signal case of Fredericton Housing Limited v Her Majesty the Queen, [1975] CTC 537; 75 DTC 5367, as being in direct opposition to the appellant’s position. The Board accepted the position of the Minister at the hearing, notified counsel for the appellant that the issue with regard to the assessment of tax would be dismissed but reserved the decision regarding the penalty question.

On the penalty question, there are three significant pieces of information. First, the appellant did not include the amount at issue in any way in reporting his taxable income—either as capital gain or income. Second, he did include a complete copy of the financial statement of Pine Creek in his tax return, the statement of income for which reads as follows:

PINE CREEK HOLDINGS STATEMENT OF NET INCOME FOR THE YEAR ENDED APRIL 30, 1973

Sale price—Note 1		$763,712.00
Cost of Sale
Land	$238,595.00
Carrying costs (see schedule)	35,127.22
Real estate fees	38,185.60
Less: discount on mortgage	(6,000.00)	305,907.82
Gain on sale of land		$457,804.18
Mortgage interest income		34,371.48
Net income		$492,175.66
Divided:
Romanin Brothers Builders Limited	40%	$196,870.26
Gorizzan Holdings Limited	40%	196,870.26
F and V Pavan	20%	98,435.14
		$492,175.66

Note 1—During the year the sole asset of the partnership was sold being 47.719 acres—Part of Lots 33 and 7, Concession 1, Township of Pickering.

Closing date—August 21, 1972 Adjustment date—May 31, 1972

Third, at the hearing, while giving evidence in support of the appellant, Mr Adrian Gorizzan, son of one of the original partners noted that Mr Pavan had visited him before filing his 1973 income tax return and had been informed that Gorizzan and Romanin were showing their share of the profit as income not capital gain—on the advice of their accountants.

In my view the simple inclusion of the relevant financial statements in the tax return without reporting the amount involved in some way—capital gain or income—did not discharge the taxpayer’s responsibility for properly filing his return. He was aware and completely aware of two facts—the amount involved (from the financial statements) and that both his partners were reporting it as income (from Mr Gorizzan). There is no doubt that he “knowingly” participated in the filing of the improper income tax return. The penalty is completely proper as imposed on the $6,874.30. No valid explanation was provided by the Minister as to why the penalty was not imposed with regard to the entire $98,435.14 at issue.

Decision

The appeal is dismissed.

Appeal dismissed.