Nabavi v. R., [1998] 1 CTC 2887, 98 DTC 1256

Bonner T.C.J.:

The Appellant appeals from assessments of income tax for the 1985, 1988 and 1989 taxation years. The issues are:

(a) For the 1985, 1988 and 1989 taxation years whether the Appellant failed to file returns of income as and when required by subsection 150(1) thereby rendering him liable to penalties under subsection 162(1) of the Income Tax Act.

(b) For the 1988 and 1989 taxation years:

(i) Whether the Appellant is entitled to deduct in the computation of income amounts described in the pleadings as “additional expenses”.

(ii) Whether an income gain of $79,000 was realized by the Appellant on the sale of his interest as purchaser in an agreement of purchase and sale of real property is income of the Appellant.

(c) Whether the Appellant is liable to a penalty under subsection 163(2) of the Act in respect of the $79,000 gain on the disposition of the agreement of purchase and sale.

The Appellant did not suggest that he was not required by subsection 150(1) of the Act to file returns of income for the 1985, 1988 and 1989 taxation years because tax was not payable for those years. Rather, in relation to 1985, his position was that he was “under the impression that” a return had been filed on time on his behalf by his accountant. He suggested that the return had been lost by Revenue Canada. It was, he said, his practice to sign his income tax return forms in blank and leave them with his accountant for completion and filing.

The Appellant is a real estate salesman. For 1988 and 1989 he reported his income from this occupation in the form of salary from Kam Nabavi Realty Inc. (“Nabavi Inc.”) a corporation of which he was sole shareholder and officer. Nabavi Inc. earned commission income from services rendered by the Appellant acting as its employee. As to 1988 the Appellant explained that he and his accountant were trying to choose a fiscal year for his corporation. It would seem that it was thought that once a fiscal year had been selected for Nabavi Inc. the amount of the Appellant’s income and the amount of corporate income could be ascertained. [1]

Evidence was given at the hearing of the appeal by Robert Schell, a Revenue Canada employee. His evidence was clear and unequivocal and I accept it. All three returns were filed late. The 1988 and 1989 returns were filed on September 6, 1991. The 1985 return was filed on March 5, 1992. There is simply no credible evidence supporting a finding that a 1985 return was filed before 1992 and lost by Revenue Canada. There was no conceivable justification for the late filing of any of the three returns. The subsection 162(1) penalties were properly imposed.

I turn to the second issue, that of the supposed “additional expenses”. The Appellant offered no particulars whatever of the nature and amount of the alleged expenses. The corporation in computing its income deducted a broad range of expenses presumably incurred by it in earning its commission income. There was a complete absence of evidence demonstrating that the Appellant incurred any deductible expense in earning the wages paid to him by the corporation. I do not propose to speculate with respect to the nature, amount or basis for deduction of the additional expenses to which the Appellant thinks he is personally entitled. This branch of the appeal therefore fails.

I turn next to the gain realized on the sale in 1989 of the rights of the purchaser under an agreement of purchase and sale of 2242 Kings Avenue, West Vancouver. The Appellant entered into an agreement to purchase the property on or about February 14, 1989. He did so in the name of Mr. K. Nabavi and/or Nominee. The Appellant purported to assign his interest in the agreement of purchase and sale to his spouse at some time between the 14th of February and the 10th of April 1989. The consideration for that supposed assignment was said to be $1,000. The purchaser’s interest in the agreement was sold to J. Bosa on or about April 10, 1989. The vendor named in the agreement with Mr. Bosa was Mary Andrea Nabavi, the Appellant’s spouse. A gain of $79,000 was earned on the sale. It is the Appellant’s position that he assigned his interest in the agreement to his spouse on or about March 27, 1989 and that the $79,000 gain was earned by her.

The Appellant gave a long and detailed account of the circumstances leading up to the transactions. I have no doubt that some but only some of the elements of what he said were true.

The Appellant did not advance any coherent argument in support of the proposition that the gain was on capital account and there really is not much to be said for that proposition in light of the Appellant’s occupation and his whole course of conduct. The Appellant indicated that late in 1988 he and his spouse were living in rental housing. The real estate market was active and prices were rising. He wished to buy a house while he could still afford to do so. With that in view he asked another agent at Joy Realty Inc. to contact the trustees of the church which owned the property at 2242 Kings Avenue. Late in 1988 or early in 1989 the Appellant made an offer to purchase the property. The trustees of the church were slow to respond. The Appellant indicated that with the passage of time he began to think that his offer would not be accepted and he commenced to look at other houses. On January 23, 1989 he made an offer to purchase a property at 1750 Queens Avenue, West Vancouver. There were counter offers and a final agreement to buy that property was made on February 7, 1989. Four days later the Appellant entered into a written agreement to buy the Kings Avenue property from the trustees of the church. The agreement contained the following provision: “This offer is subject to ratification by the Diocese of New Westminster on or before April 12, 1989. This subject condition is for the sole benefit of the vendor.”

The Appellant’s testimony was that the Kings Avenue property was more attractive than the other and that he therefore set out to sell the Queens property. The Kings property consisted of a single dwelling house located on two lots. The Appellant indicated that his plan was to move the house to one of the lots and to sell the other lot. He testified that he and Myrna Joy, who owned the real estate firm at which he worked, [2] measured the Kings Avenue house and found that the plan to move it could not succeed. The house was five feet too wide and could only fit on one lot if turned through 90 degrees. Myrna Joy thereupon started to look for a buyer and, I gather, found one without delay.

On March 21, 1989 the church authorized the Appellant to apply for a subdivision of the property and it waived the condition in the agreement. The Appellant successfully negotiated an agreement with owners of the adjacent property for an easement to permit the installation of underground services to 2242 Kings Avenue. The Appellant’s actions bear a marked resemblance to those of a real estate developer and, I have no doubt, added to the value of the property. The Appellant testified that he contacted his accountant with respect to the tax implications of the transaction on Kings and was advised to transfer his interest to his spouse for $1,000 so that she could utilize the lifetime capital gains exemption in reporting the transaction for tax purposes. It is not clear whether Mrs. Nabavi was of the view that she had earned the gain. The $1,000 consideration for the assignment to her was never paid. She did not report the transaction in her tax return. In any event the reasoning of the accountant and tax adviser suggests that the purported assignment to the Appellant’s spouse was made at sometime after the interest assigned had been resold by the Appellant to Mr. Bosa or, at least after it was clear that it could be resold at a very substantial profit. In the former case the profit belonged to the Appellant because it had been earned by him. In the latter paragraph 69(1 )(/?) of the Act applies.

In my view, there can be no doubt that the gain on 2242 Kings Avenue was, as found by the Minister of National Revenue income from an adventure in the nature of trade. The Appellant, who made his living in the real estate business, entered into an agreement to buy 2242 Kings in a rapidly rising market and only a few days after he had agreed to buy 1750 Queens. He proceeded as soon as the condition in favour of the vendor was satisfied with plans to subdivide the property as required by the terms of the sale to Mr. Bosa. It may be that the Appellant’s preferred course of action was to move the house at 2242 Kings onto one lot for occupation as his residence and to sell the other. However, the evidence does not support a conclusion that the intention to occupy 2242 Kings as a residence was the sole intention underlying the purchase. In my view the Appellant bought it with at least a secondary if not a primary intention of turning it to account for profit. The gain is therefore income of the person who carried out the adventure in the nature of trade which gave rise to the profit. That person was the Appellant.

Finally I will observe that the penalty levied under subsection 163(2) of the Act for failure to report the gain on the sale of the Kings Avenue property was properly levied. The Appellant’s failure to report the gain in his returns of income was not in my view the result of innocent oversight or confusion. The Appellant is evidently a person who is prepared to bend the facts in an effort to escape tax. In my view the evidence supports a conclusion in the balance of probabilities that he knowingly failed to disclose his gain and thereby rendered him liable to the penalty.

The appeals are dismissed with costs.

Appeal dismissed.