Citation: 2011 TCC 107
Date: 20110307
Docket: 2008-4063(IT)G
BETWEEN:
MARC CAMERON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Hogan J.
I. Introduction
[1]
This is an appeal by
Marc Cameron (the appellant) from a reassessment made December 3, 2007,
pursuant to the Income Tax Act (the ITA) for the 2003 taxation year.
[2]
In determining the
reassessment, the Minister of National Revenue (the Minister) included a gain
of $70,814 as business income earned during the sale of a house in Sherbrooke.
[3]
The appellant submits
that the assessment is incorrect because the gain resulted from the disposition
of a house that was his principal residence. Paragraph 40(2)(b) of
the ITA provides a calculation that can reduce a capital gain resulting from
the sale of a taxpayer's principal residence to zero. However, this provision does
not apply if it is a capital gain. The Minister acknowledged that the appellant
used the house as his residence, but submits that the gain still constituted a
gain in the nature of trade. The appellant submits that the respondent admitted
the assessment had been made after the normal assessment period and it is for
the respondent to show, in accordance with subparagraph 152(4)(a)(i),
that the appellant made a "misrepresentation that is attributable to
neglect, carelessness or wilful default" in order for the Minister to
reopen the 2003 taxation year. The appellant claims that the issue in this case
falls in a grey area and he should be given the benefit of the doubt.
II. Brief summary of facts
[4]
To determine the
appellant's tax payable for the 2003 taxation year, the Minister relied on the
following presumptions of fact (paragraph 8 of the Reply to the Notice of
Appeal):
[translation]
a)
The appellant has worked in the construction
trade for many years.
b)
Between 1998 and 2003, real estate activities
were the main source of the appellant’s income.
c)
Since 1996, the appellant has been purchasing
real property repeatedly for the purpose of selling them quickly for profit.
d)
Often, the appellant would purchase a lot,
construct a residence and sell it quickly for profit.
e)
On May 7, 2001, the appellant acquired a lot on
Charney [sic] Street, in Sherbrooke, for $12,000.
f)
Following the acquisition, the appellant
constructed a residence for himself.
g)
The appellant lived in the property starting in
October 2001.
h)
In November 2002, the appellant leased the
property to a third party.
i)
On April 10, 2003, the appellant sold the
property for $148,000.
j)
Since 1993, the appellant has conducted the
following real estate transactions:
|
Property
|
Acquisition date
|
Transfer date
|
|
3598 Alfred‑Desrochers
|
March 10, 1996
|
July 4, 1997
|
|
3638 Alfred‑Desrochers
|
April 21, 1997
|
September 24, 1998
|
|
3588 Alfred‑Desrochers
|
September 11, 1998
|
July 28, 2000
|
|
5441
Blanchette
|
July 31, 2000
|
April 6, 2001
|
|
649 Charney [sic]
|
May 7, 2001
|
April 10, 2003
|
|
3583 Alfred‑Desrochers
|
December 16, 2002
|
|
|
1671 de
Courville
|
March 14, 2003
|
June 18, 2003
|
k)
Since the sale of the residence on Charney [sic]
Street, the appellant has acquired two other properties, one at 3583 Alfred Desrochers Street and the
other at 1671 de Courville Street.
[5]
The Minister submits
that, to reach the conclusion that the appellant had made a misrepresentation
attributable to neglect, carelessness or wilful default when he filed his
income tax report for the 2003 taxation year, he relied on the following facts
(paragraph 9 of the Reply to the Notice of Appeal):
[translation]
a)
The appellant has worked in the construction
trade for many years and has a good knowledge of the field.
b)
The appellant has been buying and selling real
property repeatedly since 1996.
c)
The appellant's gain represents 70% of his total
taxable income for the year in question.
A. Jacques Savard's
testimony
[6]
Jacques Savard,
Canada Revenue Agency (CRA) auditor, wrote the auditor's report that was used
as the basis for the assessment in question.
[7]
Mr. Savard testifies
that his audit led him to discover that the appellant had purchased lots and
constructed three houses on Alfred‑Desrochers
Street in Sherbrooke. He adds that he did not believe the appellant's
explanation regarding the reasons why he sold his residence on Charny Street. According to Mr. Savard, the appellant said he
wanted to stay in that house but, at the first opportunity, he sold it. The
auditor notes that the appellant works in the construction trade as a labourer,
and he built almost all the houses that he later sold. According to the
auditor, the appellant would normally purchase a lot, build most of the
residence then live in the family unit before selling it shortly thereafter,
and he did this repeatedly. According to the witness, this shows the
appellant's intent to sell each of the properties once he began their
construction. Mr. Savard analyzed the appellant's income reports and the
estimated earnings on the sale of residences he had built for the period of
1997 to 2003 and he noted that the income from the sale of the residences was
significantly greater than all the other income sources the appellant declared
for those same years. According to Mr. Savard, the other income the appellant
declared was insufficient to cover his family's cost of living.
B. Appellant's testimony
[8]
The appellant explained
that he worked as a carpenter for a general contractor. He had that job for 10
years until 1998. Then he was an insurance broker and then a massage therapist,
which is his current occupation.
[9]
The houses that he
built to live in with his family were built on weekends and holidays. The
appellant explains that it generally takes him around 6 to 8 weeks to build a
single-family house. The first house that he occupied at 3598 Alfred‑Desrocher Street was very simple. The appellant had a third
house that he had to sell to build the single-family house at 3638 Alfred‑Desrocher Street. This house had three bedrooms on the
first floor. According to the appellant, the birth of a fourth child led him to
move again. He built a house at 3588
Alfred‑Desrochers Street
to have four bedrooms on the first floor. He lived in this house with his
family for 23 months. The appellant testified that because of marital issues,
the family moved to 5441 Blanchette
Street. The situation
deteriorated quickly and the appellant and his ex-wife took turns living in the
house on Blanchette Street. After his marriage broke down, the
appellant built the house at 649
Charny Street, and moved in
with his common-law spouse. He had joint custody of his four children, and as a
result, he built four bedrooms to accommodate them. Following the permanent
separation with his ex-wife, the appellant sold his undivided share of the Blanchette Street residence to his ex-wife's new spouse.
[10]
The appellant testified
that he wanted to remain in the Charny
Street residence but two
unexpected factors led him to change his mind. His mother, Ms. Palardy,
bought a lot at 2002 Alfred‑Desrocher
Street. The lot was very
large and faced the Magog River.
[11]
He helped Ms. Palardy
build a residence on the lot. The lot was very large, and Ms. Palardy decided
to subdivide it and sell one of the two parcels. In the end, she gave this
second lot to her son where he had built the house at 3583 Alfred‑Desrochers Street. The appellant still lives in this
residence today with his four children. He also operates a massage therapy
business from this location. The appellant testified that he did not expect his
mother to give him this parcel of land. He decided to sell his Charny Street residence to go live at 3583 Alfred‑Desrochers Street because it is a better location near the
water.
[12]
The appellant also
stated that his new common-law wife wanted a child. This also led the appellant
to renovate his Alfred-Desrochers residence to add a fifth room on the first
floor. His new spouse gave birth to a baby, but it turns out the appellant was
not the father of this child. This led to their separation and currently, the
appellant lives alone with his four children in this residence.
III. Issues
[13]
Was the Minister’s reassessment
for the 2003 taxation year after the normal taxation period warranted?
[14]
Was it warranted for
the Minister to add a business income of $70,814 to the appellant's income for
the 2003 taxation year?
IV. Analysis
[15]
The issue is whether,
in his tax return for the 2003 taxation year, the appellant made a
misrepresentation attributable to neglect, carelessness or wilful default such
that the Minister may, pursuant to subparagraph 152(4)(a)(i) of the
ITA, make the assessment in question after the expiry of the normal
reassessment period. Subparagraph 152(4)(a)(i) provides:
152(4) Assessment or reassessment [period of limitation] — The Minister may at any time make an
assessment, reassessment or additional assessment of tax for a taxation year,
interest or penalties, if any, payable under this Part by a taxpayer or notify
in writing any person by whom a return of income for a taxation year has been
filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer’s normal
reassessment period in respect of the year only if:
(a) 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
…
[16]
Under this provision,
aside from a misrepresentation, the Minister must also show on a balance of
evidence that the misrepresentation is attributable to neglect, carelessness or
wilful default by the appellant.
[17]
The respondent submits
that the appellant made a misrepresentation by treating the profit from the
disposition of the property in question as a capital gain rather than a taxable
income gain. On this, the CRA auditor wrote:
[translation]
Summary: Mr. Cameron is and was in the construction field. He
manages and also maintains income property. He knows real estate and is aware
of the opportunities in the field. He would purchase a lot, almost completely
build a residence, live in the family unit and then sell it within a short
period of time, and he did so repeatedly. The income for his cost of
living came largely from this activity because the other income declared would
barely have supported his cost of living and the residences he had obtained.
The likelihood of an intention to sell his residences is supported by the great
number of transactions in the same neighbourhoods, including many on the same
street.
In short, Mr. Cameron worked as a construction contractor but
on a smaller scale with a reduced team all while attempting to avoid paying
income tax.
Another transaction showing his business income, from
De Courville, shows that Mr. Cameron is in a business whose income
was declared as a capital gain; we did not open the time limit for this
transaction.
Indeed, four days after the March 2003 purchase, he signed with a
real estate agent to put the housing property on the market at a set price below
the municipal evaluation. This building was sold just 3 months after a few
renovations and cleaning were done, and the signing of many leases to future
lessees in this building that was nearly abandoned when he purchased it, which
increased the value of the building. These facts are documented in a separate
report Ft# 44.
[18]
Regarding real property,
the Act does not provide any criteria to distinguish a capital gain from
business income from a commercial transaction. Each case is different and the
circumstances surrounding it must be reviewed to address the issue. In Happy
Valley Farms Ltd. v. The Queen,
the Court considered the following factors in determining whether the sale of
real property was income:
a)
The nature of the
property sold and how the taxpayer used it;
b)
The length of the
ownership period;
c)
The frequency or number
of other similar transactions by the taxpayer;
d)
The work expended on or
in connection with the property;
e)
The circumstances
giving rise to the sale of the property; and
f)
The taxpayer's motive
regarding the sale of the property at the time of purchase.
[19]
The CRA auditor focused
on the second and third factors to justify his findings. Even if the
circumstances that led to the sale could be interpreted as supporting the
respondent's position, the real question is whether subparagraph 152(4)(a)(i)
applies to a taxation year that is otherwise time-barred when the facts
considered incorrect are presented because the taxpayer interpreted the
circumstances to favour the non-taxation theory since they fall in the grey
zone of tax law. It would appear that the case law allows us to answer this
question in the negative when the taxpayer's position is not unreasonable.
[20]
The starting point is Regina
Shoppers Mall Limited v. The Queen ,
a Federal Court decision. The central issue in that case was whether the
taxpayer should have included the profit of the sale of a lot in its income tax
return as a capital gain or as income. The taxpayer had included it as a
capital gain, and the Minister found that there was a misrepresentation that
allowed him to assess after the normal period. Addy J., at paragraph 10 of the
decision, explained that when a taxpayer files an income tax return on what he
believes to be the proper method, after thoughtful, deliberate and careful
assessment, there can be no misrepresentation. This position was accepted by
the Federal Court of Appeal at paragraph 7 of its decision.
[21]
Moreover, at paragraph
15 of his judgement, Addy J. explained that the act does not impose on
taxpayers the duty to report in a manner which the Minister prefers. If the
taxpayer carefully considers his position and does not attempt to deceive the
Minister, there is no misrepresentation.
[22]
Petric v. The Queen shows the courts have broadly interpreted
the principle propounded in Regina Shoppers Mall. That case was not
about an issue of capital gain or income, but the fair market value of the
property. Madam Justice Lamarre stated:
38 …The matter of
fair market value is a controversial issue, to be settled on the basis of the
interpretation of the facts in evidence, as is the question of whether proceeds
of disposition should be characterized as income or as a capital gain (Regina
Shoppers Mall Limited) or of whether corporations are associated (1056
Enterprises Ltd.)…
[23]
And later, she added:
40 Although
fair market value is ultimately a question of fact to be resolved by the trier
of fact, it is mostly a question of opinion answered by analysing different
methodological approaches. Certainly the Minister is entitled to disagree
with a taxpayer's view of fair market value and can reassess, within the
limitation period, on the basis of his own evaluation. However, where the
issue is whether the Minister should be allowed the benefit of an exception to
the application of the limitation period, it must be shown that the taxpayer
made a misrepresentation in filing his or its tax return. In the case at
bar, I am of the view that unless it can be said that the appellants' view of
fair market value was so unreasonable that it could not have been honestly
held, there was no real misstatement.
[Emphasis
added]
[24]
In Savard v. The
Queen,
the Tax Court of Canada stated again that taxpayers have the right to disagree
with the Minister in their interpretation of the Act, without this necessarily
being considered a misrepresentation. Tardif J. stated:
78 Does a
person have to include, when he or she fills out a tax return, everything that
might be income, based not on his or her own analysis but on speculation as to
what the Agency might want to attribute to him or her? I do not believe so.
In this case, there was enough information to justify the interpretation
adopted by the Appellant: that he had no obligation to declare the payments of
fees by his employer as taxable benefits. In fact, the debate as to who really
benefited from the services for which the fees were paid is clear evidence of
how complex the case was and how much confusion surrounded it.
[Emphasis
added]
[25]
Recently, in Chaumont
v. The Queen,
the taxpayer's interpretation was clearly incorrect, but the fact he had
acted in good faith lead the Court to find that there was no misrepresentation.
Tardif J. stated:
15 Although
the appellant's submissions were unusual and even surprising, they were neither
far-fetched nor unreasonable enough for it to be concluded that he made a
wilful default or mistake with the intent to escape from his Canadian tax
obligations.
16 Firstly,
he expressed his objection, and secondly, he took initiatives to show that his
allegations had merit, while taking into consideration the fact that certain
income, specifically, pension income paid to a citizen who lives in a country
other than the one that pays the pension, is not taxed.
…
18 To
conclude that the appellant's conduct was a wilful default or that it
constituted a sufficient error to permit the Minister to assess beyond the
normal period, would affect any taxpayer's right to contest the merits of an
assessment, and would cause the limitation period imposed by Parliament to be
essentially theoretical.
[26]
In the light of the
above-noted decisions, it appears that adopting a thoughtfully considered
position that contradicts the Minister's position does not in itself mean the
taxpayer made a misrepresentation that would allow the Minister to assess
outside the normal period.
[27]
I do not feel that the
appellant's interpretation of the facts can be considered unreasonable. When he
built the residence on Charny
Street, he could not have
anticipated that his mother would give him a lot with a preferred location next
to the river. Also, I can only imagine that, in similar circumstances, the
majority of taxpayers would also be tempted to move in order to take advantage
of the benefits of living in a house near the shore of a navigable river. In
such circumstances, the owner reaps the benefits of a main and secondary
residence without having to pay the costs related to both. This is a very
likely motive that would explain the sale of the house on Charny Street for personal reasons. The Minister had three years
from the date of the first notice of assessment to reassess the taxpayer, and
at the same time, shift the burden of proof onto him. This was not done and, as
a result, the Minister must accept the consequences of not having proven, on a
balance of probabilities, that the misrepresentation alleged is due to one of
the circumstances that allow a reassessment to be made after the normal
assessment period.
[28]
For all these reasons,
the appeal is allowed, the assessment is vacated and costs are awarded to the
appellant.
Signed at Ottawa, Canada, this 7th day of March 2011.
"Robert J. Hogan"
on this 20th day
of April 2011.
François Brunet,
Revisor
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