Toolsie v. R., [1998] 1 CTC 2803, 98 DTC 1106

Watson D.J.T.C. .

This appeal was heard in Kitchener, Ontario on October 20, 1997.

The Minister of National Revenue (the “Minister”) assessed the Appellant for the 1984 taxation year on October 18, 1985. Pursuant to paragraph 152(4)(a) of the Income Tax Act (the “Act’) the Minister reassessed the Appellant for the 1984 taxation year on March 4, 1993 to include in income the amount of $35,500 as taxable gain from the disposition of a property composed of part of lot #36 in German County Tract, Woolwich Township, Ontario (the “Property”).

In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) in 1968, the Appellant purchased the Property, for $6,000.00;

(b) the value of the Property on December 31, 1971 for the purposes of calculating capital gain on disposition of the Property is equal to or less than $24,000.00;

(c) in 1984, the Appellant disposed of the Property and received proceeds , of disposition of $95,000.00;

(d) in the 1984 taxation year, the Appellant’s taxable capital gain from the disposition of the Property is $35,500.00, determined as follows:

Proceeds	$95,000.00
Valuation on December 31, 1971	24,000.00
Capital Gain	$71,000.00
Taxable Capital Gain (50%)	$35,500.00 ;

(e) in filing his 1984 income tax return, the Appellant made misrepresentation that is attributable to neglect, carelessness or wilful default or has committed fraud in filing the return or in supplying information under this Act;

(f) in the 1984 taxation year, the Appellant’s income from other sources amounted $25,390.00;

(g) the Appellant knowingly, or under circumstances amounting to gross negligence in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omission in his income tax return for the 1984 taxation year, as a result of which the federal tax that would have been payable by him for the said year, if the tax had been assessed on the basis of the information provided in his return, was less than the tax in fact payable by the amount of $8,013.20.

At the hearing of the appeal, the Appellant, who was the only witness to give evidence, admitted that he had purchased the property in 1968 for $6,000 and that the value of the property on December 31, 1971, for the purposes of calculating capital gains, to be equal to or less than $24,000 (“V-day value”). In his testimony he stated that in 1984, he agreed to sell the property to Mr. Thomas Jutzi for $90,000; however, when the purchaser failed to come up with the payment and when he concluded that the property was under priced at $90,000, the Appellant did not complete the deal. Mr. Jutzi sued the Appellant and, although the Appellant was reluctant to go through with the sale, he foresaw prolonged litigation that would be costly to him in both money and time. In November 1984, the Appellant agreed to minutes of settlement to “deliver forthwith to the plaintiff executed deed in registrable form” for the property and the plaintiff would pay “forthwith damages in the amount of $95,000”; the title was transferred on November 6, 1984 by deed that stated the total consideration was $95,000. The Appellant was convinced that there had not been a “disposition of any property” but forced on him by the court action.

In cross-examination, the Appellant admitted that prior to his onset of Multiple Sclerosis in 1989, he had practised law in Ontario as a member of the bar and had appeared before the Tax Court as counsel for clients in cases dealing with similar problems to his and had also acted for clients at the objection level in dealings with Revenue Canada.

The issues to be decided are as follows:

1. Whether the Minister properly included the Appellant’s taxable capital gain in his income for the 1984 taxation year;

2. whether the Minister is statute-barred from attempting to review and reassess the Appellant for the 1984 taxation year, more particularly, pursuant to paragraph 152(4)(a) of the Act, whether the Appellant made a misrepresentation that was attributable to neglect, carelessness or wilful default, or committed fraud in filing the return or in supplying information under the Act when he did not report a taxable capital gain arising from the disposition of property in the 1984 taxation year; and

3. whether the Minister properly levied a penalty pursuant to subsection 163(2) of the Act, more particularly, whether the Appellant knowingly, or under circumstances amounting to gross negligence in the carrying out of a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in his 1984 tax return when he failed to report a taxable capital gain.

Taking into consideration all of the circumstances, including the testimony of the Appellant, the admissions and the documentary evidence, I am satisfied that the Appellant transferred the property in 1984 in return for a compensation of $95,000 and giving the words their plain and ordinary meaning, a “disposition of any property” within the meaning of sections 38, 39 and 40 of the Act that was in effect in 1984 and that the Minister properly included the taxable capital gain resulting from the disposition in the Appellant’s income for the 1984 taxation year.

Insofar as the Appellant’s contention that the reassessment is statute- barred because it was made beyond the normal period for reassessment, I rely on the words of Bowman, J. of this Court in the case of Sarraf v. Minister of National Revenue (1994), 94 D.T.C. 1506 (T.C.C.):

Mr. Sarraf contends, however, that the reassessment is “statute-barred” i.e. that it is made beyond the normal reassessment period. A brief review of the rules relating to the making of reassessments after the normal reassessment period may be worthwhile:

(a) where a taxpayer wishes to attack an assessment as having been made beyond the normal reassessment period (defined in subsection 152(3.1) - generally, in the case of an individual, three years (or four years with respect to taxation years prior to 1983) from the date of mailing the original assessment for the year or of the notification that no tax is payable) the basis of challenge should be pleaded and it is for the taxpayer to establish a prima facie case that the reassessment has indeed been made beyond that period, unless the date of the original assessment is obvious from the material before the court;

(b) if a taxpayer has, in a return of income, made a misrepresentation that is attributable to neglect, carelessness, or wilful default or has committed a fraud in filing the return the Minister is entitled under subsection 152(4) of the Income Tax Act to assess beyond the normal reassessment period. The Minister’s entitlement to reassess beyond the normal reassessment period must be established by proving the existence of any of the elements set out in subparagraph 152(4)(a)(i). It is up to the Minister to do so;

(c) if those elements are established the onus shifts back to the taxpayer under paragraph 152(5)(b) to establish that the failure to include in the return an amount included in a reassessment beyond the normal reassessment period did not result from any misrepresentation that is attributable to negligence, carelessness or wilful default.

In each case the shifting onus is a civil one and may be satisfied by making out a prima facie case which, if unrefuted by the opposing party, stands.

In the facts of this case, I am satisfied that there is clearly no question of fraud involved; however, I am satisfied that the Appellant did not exercise reasonable care in the filing of his 1984 income tax return and that the Minister was entitled to reassess him by including in his 1984 income the applicable capital gain from the disposition of the property pursuant to paragraph 152(4)(a) of the Act.

Insofar as the penalty is concerned, I am satisfied that the Minister has not succeeded, pursuant to subsection 163(2) of the Act in establishing on a balance of probabilities that the Appellant knowingly or under circumstances that amounted to gross negligence, made a false statement or omission in his 1984 return; I am not satisfied that the Appellant had the required intention to make a false statement or that his failure to use reasonable care amounted to gross negligence.

In the case of Venne v. R. (1984), 84 D.T.C. 6247 (Fed. T.D.), Strayer J. (as he then was) stated:

’’Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional action, an indifference as to whether the law is complied with or not.

This decision was also followed by Teskey J. of this Court in the case of Johnson v. Minister of National Revenue (1990), 90 D.T.C. 1930 (T.C.C.), at 1934:

Keeping these judicial comments in mind, I do not find that high a degree of negligence on Johnson’s part. Granted, the Appellant did not exercise the care of 2808

a reasonable person and he should have questioned the accountant before signing the return.

The Respondent has failed to prove that the Appellant “knowingly” transferred the shareholder’s loan at an improper value. The loan was probably worth its face value at the alleged date of transfer. The Appellant failed to prove his alleged date of transfer because of sloppy incomplete documentation. His whole conduct amounts to negligence but not gross negligence.

The appeal is allowed only insofar as the penalty is concerned and the matter is referred back to the Minister for reconsideration and reassessment on this basis.

Appeal allowed in part.