Chamard v. R., [1999] 2 CTC 2854

Tremblay T.C.J.:

This appeal was heard under the informal procedure at Sherbrooke, Quebec, on June 5, 1996.

1. Issue

According to the notice of appeal and the reply to the notice of appeal, the issue is whether, in computing his income tax for the 1990, 1991 and 1992 taxation years, the appellant was correct in claiming child tax credits of $1,928, $1,962 and $1,803, respectively, and a federal sales tax credit of $490 in 1990.

The income of the appellant’s spouse must be taken into consideration.

The appellant contended that her invalid husband had been without a salary since 1990. During 1992, the appellant’s father helped her and her three children make ends meet.

The respondent apparently relied on a deemed capital gain that her spouse allegedly made.

The appellant contended that neither she nor her spouse received a cent of that capital gain.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s reassessments are incorrect. This burden of proof arises from a number of judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486, 3 D.T.C. 1182, [1948] C.T.C. 195 (S.C.C.).

2.02 The facts presumed by the respondent in the instant case are de- scribed in subparagraphs 4(a) to (e) of the reply to the notice of appeal and read as follows:

[TRANSLATION]

4. In making these reassessments for the 1990, 1991 and 1992 taxation years, the Minister assumed the following facts inter alia:

(a) during the taxation years in issue, the appellant was married to Jean Belval; (admitted, but separated in January 1992)

(b) in filing her returns of income for the 1990, 1991 and 1992 taxation years, the appellant claimed refunds of $1,928 for 1990, $1,962 for 1991 and $1,803 for 1992 in respect of child tax credits and $490 for 1990 in respect of the federal sales tax credit, assuming that her spouse’s net income for each of those years was nil; (admitted)

(C) in notices of reassessment sent to the appellant’s spouse Jean Belval, on September 23, 1994, the Minister determined the tax payable by Mr. Belval for his 1990, 1991 and 1992 taxation years by adjusting his net income upward from the amounts which the appellant had reported; (admitted that this is the Minister’s claim)

(d) in thus revising the net income of the appellant’s spouse for the 1990, 1991 and 1992 taxation years, the Minister had to adjust the child tax credit to which the appellant was entitled for those years and established that she was not entitled to any child tax credit; (Minister’s claim)

(e) in thus revising the net income of the appellant’s spouse for the 1990 taxation year, the Minister also had to adjust the federal sales tax credit to which the appellant was entitled for that year and established that she was not entitled to any federal sales tax credit. (Minister’s claim)

3. Evidence of Facts

3.01 Jean Belval, the appellant’s former spouse, testified that he had stopped working as a result of a long illness and therefore received no salary during 1990, 1991 and 1992.

His returns of income show the following income or losses:

3.02 The appellant’s returns for the same years contain the following information:

At the end of 1992, the appellant says, she became a real estate agent for La Capitale.

3.03 Mr. Belval and the appellant apparently divorced in 1993: they filed a petition for divorce on March 8, 1993, (Exhibit A-6) and a consent to the motion for interim relief on March 23, 1993 (Exhibit A-5).

Mr. Belval apparently assigned his property in July 1994.

3.04 According to Mr. Belval, he had been in continuous contact with Mario Caron, a Revenue Canada investigator, since September 13, 1993. They had apparently had a number of telephone conversations and meetings at Mr. Caron’s office.

In a letter dated September 14, 1993, (Exhibit A-8), the day after a meeting with Mr. Caron, Mr. Belval expressed his desire that Mr. Caron act diligently in the investigation undertaken with respect to him. He said he understood the complexity of the work that this entailed.

Mr. Caron testified, for his part, that he had always had a good relationship with Mr. Belval.

3.05 Mario Caron made the reassessments respecting Mr. Belval. The purpose of his investigation was to verify Mr. Belval’s income so as to determine whether the appellant was entitled to the child tax credit.

3.06 A spouse’s maximum net income as allowed by sections 122.2 and 122.4 of the Income Tax Act (the Act), to enable the appellant to obtain the tax credit and the federal sales tax credit, and Mr. Belval’s net income, which Mr. Caron calculated as a result of his investigation, are as follows:

A federal sales tax credit for 1990 may be claimed only if the spouse’s net income was not greater than $27,800.

3.06.1 1990

With respect to the net income for 1990, $487,413, reference must first be made to the T7W-C form issued together with the reassessment:

Add:

Non-refundable tax credits: No change.

(a) Taxable capital gain ($62,208) (Exhibit 1-9, Schedule 1)

The capital gain of $62,208 is from the sale of the property at 278-288, 2 avenue, Verdun. The sale was transacted for $1.00 and assumption of

There was no capital gains exemption ($100,000) because he had not reported the gain (subsection 110.6(6) of the Act).

(b) Appropriations of funds ($92,410)

Mr. Belval was the shareholder of the company 139551 Canada Inc. The funds of that company have disappeared.

(c) Unreported business income ($519,873)

What we are dealing with here is a scheme to obtain more credit from five properties situated in Montréal, Ste-Marthe-sur-le-Lac, Richmond and Verdun (Exhibit I-9, Schedule 2). Loans were taken out at financial institutions in order to obtain financing greater than the actual value received. In financial terms, this is what is called “over-mortgaging”. In essence, this is a mechanism for purchasing and reselling properties, the resale price of which is equal to the mortgage on the overvalued property.

3.06.2 1991

The $216,357 in 1991 is explained on the T7W-C form as follows: (a) Taxable capital gain ($118,033)

The gain came from the sale of properties, one on rue Durham in Montréal for $20,250, the other from the sale of 10 properties acquired from the Beauparlant group ($97,783). Mr. Belval was in partnership with Jocelyne Quenneville, who reported this amount.

(b) Appropriations of funds ($185,973)

The money belonging to 139551 Canada Inc., of which Mr. Belval was the shareholder, disappeared and was thus received by Mr. Belval. The money came from the sale of two buildings situated in Granby, one at 597 Dufferin ($91,001) and the other at 1359 rue Principale ($94,972) (Exhibit I-9, Schedule 3).

3.06.3 1992

The $107,881 in 1992 is justified in the T7W-C form as follows:

Less:

Social benefits repayment		1,662.00
Revised net income	$107,881.00
Revised taxable income	$107,881.00
Non-refundable tax credits:
Revised married amount	$	5,380.00
Revised amounts for depen	$	1,668.00	(Exhibit 1-9, Schedule 1)
dent children

(a) Taxable capital gain ($105,000)

This gain was from the sale of the capital property situated at 10274- 10278, avenue D’ Auteuil, Montréal: $105,000

This building was repossessed by the mortgage creditor. Subsection 79( 1 ) of the Act provides for taxation in the event of mortgage foreclosures.

Here again, the $100,000 exemption did not apply to this gain since the gain was not reported.

3.07 As Exhibit 1-11, Mr. Caron filed the written report that he had prepared following his meeting with Mr. Belval on September 13, 1993. It reads as follows:

[TRANSLATION]

Interview started: 3:00 p.m.

The first purpose of this meeting was to serve the following requirements on Jean Belval:

(i) TT return of income for the 1991 taxation year;

(ii) T2 return of income for the fiscal year of the company “Entreprises Jean Belval Inc.” ending on February 28, 1991:

(iii) T2 return of income for the fiscal year of the company “Entreprises Jean Belval Inc.” ending on February 28, 1992;

However, Jean Belval diverted the interview onto his potential problems with Revenue Canada, Taxation:

(i) he said he had no income for 1991;

(ii) he said he had been partners with Daniel Coulombe in real estate transactions since 1988 and that Mr. Coulombe had used his spouse Jocelyne Quenneville as a stand-in;

(iii) he said he had used over-mortgaging in his real estate transactions and asked me whether the money he had obtained in that way was taxable; I told him that the money he had obtained in that way was indeed taxable and that a number of court cases proved that fact; at that point, I told him that both he and Daniel Coulombe were being investigated by Revenue Canada, Taxation:

(iv) he then asked me how he could file the aforementioned TI duly completed so as not to file a false return and consequently be prosecuted for fraud. He said he had no financial resources (welfare) and that he could not afford an accountant. I told him that it was between him and his conscience but that, pending the results of the investigation, he could ask Lise Hennessey for an extension of time in order to delay the requirement process. He said he was prepared to cooperate with Revenue Canada, Taxation, in order to clarify certain real estate transactions;...

Upon reading this document by Mr. Caron, Mr. Belval admitted that it constituted an accurate description of the interview. However, Mr. Caron answered “no” to Mr. Belval’s question as to whether the police had made the referral to Revenue Canada, Taxation. He said he was persecuted by the police.

However, it appears from Mr. Caron’s report (Exhibit 1-11) that the answer was “yes”.

The Court was informed of the matter as a result of a request by the respondent to reopen the hearing. In filing Mr. Caron’s report, at the Court’s request, counsel for the respondent filed only one page. However, the reference to the police referral to the Department of National Revenue appears on the second page, which contained only three lines. It was after the hearing concluded that the respondent realized this error and therefore requested that the investigation be reopened so that the Court was informed of this fact.

In my view, however, the fact that the Revenue Canada investigation was initiated in response to information from a police force in no way changes the basis of the assessment. The evidence showed that the taxable amounts assessed were based on figures that appear in documents extracted from contracts examined at the registry office or from the financial statements of Mr. Belval’s partners. The examination of Mario Caron by Mr. Lessard (Transcript, pp. 136-197) and the cross-examination of Mr. Belval (Transcript, pp. 197-241) left no doubt as to the good faith of Mr. Caron and counsel for the respondent.

3.08 Mr. Belval complained and said it was unfair that he had not been allowed the $100,000 capital gains exemption provided for in subsection 110.6(6) of the Act for 1990. It was moreover denied again for 1992.

4. Analysis

4.01 It is the Court’s view that the calculations and explanations presented by the witness, Mr. Caron, were fair and reasonable in the circumstances. This witness’s credibility is not in doubt.

In his letter dated September 14, 1993, Mr. Belval himself admitted the complex nature of Mr. Caron’s work in his own case (3.04).

Mr. Belval admitted that he had over-mortgaged his properties (3.07).

4.02 Mr. Belval complained that he had not been allowed the $100,000 capital gains exemption (3.08) for the years 1990 and 1992. First, subsection 110.6(6) of the Act is clear:

110.6(6) Failure to report capital gain.

Notwithstanding subsections (2), (2.1) and (3), where an individual has a capital gain for a taxation year from the disposition of a capital property and knowingly or under circumstances amounting to gross negligence

(a) fails to file a return of his income for the year within one year after the day on or before which he is required to file a return of his income for the year pursuant to section 150, or

(b) fails to report the capital gain in his return of income for the year required to be filed pursuant to section 150,

no amount may be deducted under this section in respect of the capital gain in computing his taxable income for that or any subsequent taxation year and the burden of establishing the facts justifying the denial of such amount under this section is on the Minister.

Second, the Court does not doubt that there was gross negligence.

Lastly, even if the respondent had allowed the exemption provided by Parliament, this deduction in respect of the capital gain would not have reduced Mr. Belval’s income to an amount less than the maximum allowed by the Act for claiming the child tax credit and the federal sales tax credit. The total exemption was apparently used up as of 1990 and the revised taxable income would in any case have been $387,413, far more than the maximum net income allowed: $63,329 and $27,800 for the federal sales tax.

4.03 A similar request was also made for 1992. Once an exemption is denied, can it be claimed in another year for a capital gain from the disposition of another property?

It is my view that it can, because it relates to another year and not to the same real estate transaction, provided of course that the taxpayer did not knowingly, or in circumstances amounting to gross negligence, fail to report the capital gain. It is difficult for an individual not knowledgeable in these matters to conclude that the seizure of a capital property by a mortgage creditor will become a capital gain for him. Furthermore, there were no appropriations of funds or unreported business income during that year, 1992 (as in 1990). As the burden of proof on this point was on the respondent and no evidence was adduced with respect to 1992, the Court gives the taxpayer the benefit of the doubt. The $100,000 exemption thus reduces Mr. Belval’s income to $7,881 ($107,881 - $100,000), which means that the child tax credit can be applied to 1992.

4.04 Accordingly, Mr. Belval’s income in 1990 and 1991 was far greater than the maximum allowed under sections 122.2 and 122.4 of the Act.

The appellant may not be allowed the child tax credits for those two years. However, the credit may be allowed for 1992.

5. Conclusion

For the foregoing reasons, the appeal is dismissed for 1990 and 1991 and allowed for 1992.

Appeal allowed in part.