Tax Court of Canada Judgments

Date: 20021129

Docket: 2000-3798-IT-G

BETWEEN:

IAN MORRISON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bell, J.T.C.C.

ISSUES:

[1]            The issues with respect to the Appellant's 1995 taxation year are:

1.              What is the adjusted cost base ("ACB") for purposes of determining the capital gain subject to tax in respect of the disposition of a house and land initially regarded by the Appellant as a principal residence not subject to tax on disposition? The Appellant, at the hearing, acknowledged that only three-fifths of the gain on the sale was attributable to his principal residence.

2.              Is the Appellant subject to a penalty assessed by the Minister of National Revenue ("Minister") pursuant to the provisions of subsection 163(1) of the Income Tax Act ("Act")?

FACTS:

[2]            The Appellant, in 1991, purchased 155 acres of undeveloped mountain side property. It was located in an area that was zoned with minimum lot sizes of 74.1 acres.

[3]            In 1993 he built a residence on the property. His application for subdivision into two parcels to take advantage of the minimum lot size was denied.

[4]            In 1995 the Appellant sold the entire land and house for $1,009,600. He failed to declare the gain made upon that sale. Although the Minister, at the time of reassessment, took the position that the cost of land allocable to the principal residence was $68,007.07, the Respondent, at the hearing, agreed that the full cost of the land, namely $142,420.20 was the adjusted cost base of that land, the Minister having accepted that the entire lot was part of the principal residence.

[5]            The reassessment of the Appellant's 1995 taxation year included the figure of $483,760 as the cost of improvements to the land. The Appellant's position, at the hearing, was that this sum should be increased by the amount of $57,744.76 which are described by him as:

Expenses not reported to Accountant.

These expenses are itemized as follows:

survey: before construction	1177
custom book case	4139.77
fireplaces - rock facings	8392
well litigation; release	10844
legal fees re well	150
excavation in access tunnel	1584.67
chicken coop	4007.32
trench hydro and water too coop; labour	950
exercise equip	4500
pool table	10000
septic system	2500
generator; Onan diesel	3500
trucking - to level building site	6000
total	57,744.76

The Appellant's position is, therefore, that the total adjusted cost base of the property is $683,924.96 made up as follows:

Land	142,420
Improvements	483,760
Other allowable expense	57,744.76
Total	683,924.76

[6]            The issue respecting the adjusted cost base of the property can now be restated as to whether the sum of $57,744.76 should be included in the adjusted cost base in the principal residence computation.

[7]            The Appellant gave detailed evidence respecting services and materials obtained for each sum totalling $57,744.76. He was cross-examined on that evidence in great detail by Respondent's counsel. Counsel, in such cross-examination, referred to a letter sent by Reginald J. LaBonte, C.A. ("LaBonte"), on January 25, 1999 to Revenue Canada Taxation. In this letter LaBonte set forth that the total cost of the property had been determined as $646,046 detailed as follows:

Land	$ 142,420
Construction cost - see attached schedule	456,760
Capitalized interest	17,620
Property taxes (1992 & 1993)	2,426
Miscellaneous costs (all < $1,000)	27,000
	$ 646,046

[1]

[8]            LaBonte testified that as of 2002 he had been the Appellant's Accountant for a period of 15 years. He said that he discussed the principal residence question with the Appellant when preparing the Appellant's income tax return. He advised the Appellant that he did not think any tax was payable. He then stated that his advice was incorrect. He said that the Appellant had given him all the information respecting his principal residence and that it was an oversight on his firm's part not to have reported the transaction. He explained the oversight in that his firm should have used a formula which, when ultimately employed, revealed that three-fifths of the gain was not subject to tax. LaBonte said that he would have included the appropriate amount had he done that computation and not simply assumed that the full amount was exempt from tax as a principal residence exemption. He said that it was not the Appellant's place to second guess him respecting his opinion.

[9]            The Minister of National Revenue ("Minister") assessed a penalty pursuant to subsection 163(1) of the Act as a result of the Appellant's failure to report income for one of the three taxation years preceding the 1995 taxation year under appeal and for 1995. Appellant's counsel acknowledged that there had been such reporting failure.

[10]          Respondent's counsel acknowledged, based upon the decision in Consolidated Canadian Contractors Inc. v. Canada, [1998] G.S.T.C. 91 that the defence of due diligence respecting the Appellant's income reporting failure for the 1995 taxation year was available to the Appellant.

[11]          Respondent's counsel cross-examined the Appellant in detail respecting the miscellaneous costs set out in LaBonte's letter to Revenue Canada, each of which was described as being under $1,000, totalling the estimated $27,000. The Appellant was clear in his statements that no part of the said sum of $27,000 was included in the amount of $57,744.76 aforesaid. Respondent's counsel also asked Appellant whether he had referred to the principal residence provisions in the Act. Appellant responded in the negative.

APPELLANT'S SUBMISSIONS:

[12]          In summary, Appellant's counsel stated that the Appellant's evidence respecting the $57,744.76 was satisfactory and that he was adequately cross-examined without that evidence being compromised. He stated that some items of which the Appellant was not certain could have been higher or lower.

[13]          Regarding the penalty, counsel submitted that the Appellant had exercised reasonable care in providing all documents and all financial information about the house to LaBonte respecting his 1995 return. Counsel referred to LaBonte's evidence to the effect that he had all he needed and that he made the error respecting the principal residence exemption and voluntarily acknowledged that he had done so. He said he had, in making such error, failed to provide the proportionate formula rule which, if applied, would have resulted in three fifths of the gain constituting a principal residence exemption. He stated further that if LaBonte had applied that rule, the return would have been filed correctly in this regard and that this gives a due diligence defence to the Appellant. He submitted that the evidence demonstrated a satisfactory level of communication between the Appellant and his accountant, LaBonte. He said that LaBonte was not kept in the dark and that he prepared the return on the basis of his own mistake. He referred to LaBonte's evidence that he discussed the income tax return with the Appellant and that the Appellant had signed the return. He also stated that not only did the Respondent not seriously challenge that fact but provided no evidence to the contrary. He then submitted that the Appellant, in providing all information respecting his house sale to his chartered accountant, a professional, had exercised all reasonable care to ensure errors not be made and, accordingly, had exhibited due diligence and should not be subject to the subsection 163(1) penalty.

[14]          Counsel then submitted that the ACB of the house and land was $683,924.76 for the purpose of determining the capital gains and that there should be no subsection 163(1) penalty.

RESPONDENT'S SUBMISSIONS:

[15]          Respondent's counsel submitted that the sum of $57,744.76 claimed by the Appellant as an addition to the $483,760 of improvements was already included in the latter sum. He then said that if the Court was favourably disposed to accept the $57,744.76 it should reduce that sum by the amount of $27,000 referred to in LaBonte's aforesaid January 29, 1999 letter to Revenue Canada and, in such case, only the balance of $30,744.76 should be added. That would fix the ACB of the property at $656,924.76.

[16]          Regarding penalty, Respondent's counsel submitted that the Appellant had not taken all reasonable care with respect to his 1995 income tax return and that engaging the services of an accountant was not enough to meet the due diligence test. He referred to Roberts (K.) v. Canada, [1997] G.S.T.C. 58 in which Bowman, J., as he then was, ruled that reliance on one's bookkeepers cannot constitute due diligence.

He then referred to SDC Sterling Development Corp. v. Canada, [1997] G.S.T.C. 103 in which Christie, J.T.C.C., relying on Roberts, said that if "a well known national accounting firm" gave insufficient or erroneous advice to the Appellant, that does not go to establishing due diligence. Counsel then submitted that the actions of one's agents are the actions of that person.

[17]          Counsel also submitted that the Appellant had received erroneous advice and that he had not looked at Revenue Canada's interpretation bulletins. With respect to the Court's question as to what he should have done, counsel replied that he should have read the Income Tax Act.

ANALYSIS AND CONCLUSION:

Subsection 163(1) of the Act reads as follows:

Every person who

(a)            fails to report an amount required to be included in computing the person's income in a return filed under section 150 for a taxation year, and

(b)           had failed to report an amount required to be so included in any return filed under section 150 for any of the three preceding taxation years.

is liable to a penalty equal to 10% of the amount described in paragraph (a), except where the person is liable to a penalty under subsection (2) in respect of that amount.

Subsection 3 states:

Where in an appeal under this Act, a penalty assessed by the Minster under this section or section 163.2 is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

[18]          Respecting the first issue, I accept, without question, Appellant's evidence that he expended, in addition to the agreed amount of $483,760, the amount of $57,744.76 on improvements to the land whose cost was $142,420.20 thereby reaching a total of $683,924.96. I am further satisfied that the Appellant expended the sum of $27,000, described in the Appellant's letter to his accountant, and that it was not part of the sum of $57,744.76 and that it should not, as suggested by Respondent's counsel, reduce the total cost. The result is that an ACB of $683,924.96 should be used in determining the taxable capital gain for the 1995 taxation year.

[19]          With respect to the penalty, the Reasons for Judgment in Roberts read, in part:

Here it is true the Appellant hired bookkeepers for one of the periods in question and paid them what appears to be excessive amounts for their incompetence and inaction. This might justify an action by the Appellant against them, but it does not amount to due diligence.

Although the learned judge stated that the accountants were the Appellant's agent and the Appellant is responsible for what they did or failed to do, he also referred to them as "overpaid and essentially useless bookkeepers". There is no evidence or suggestion that LaBonte was incompetent or useless. He appeared to be a very professional man who freely and openly admitted his error, attributing no blame on the part of the Appellant.

[20]          In SDC Sterling the Court stated that particulars of what the Appellant's accounting firm did or did not do were not spelled out in evidence at the hearing. Also, the Appellant was delinquent in filing many of its GST returns. Those types of circumstances do not pertain here.

[21]          I do not subscribe to the notion that a taxpayer, in circumstances such as those of the Appellant, cannot be said to have exercised due diligence for the purpose of avoiding a penalty under subsection 163(1) of the Act. He, in the preparation of his 1995 taxation year income tax return engaged the services of the chartered account who had assisted him for years and to whom he had given all relevant information, all in respect of a formula concept contained in the Income Tax Act which is not easily understood. The suggestion by Respondent's counsel that he should have read the Interpretation Bulletin or read the Income Tax Act cannot have been seriously advanced by Respondent's counsel. The appeal will be allowed so that the ACB of the Appellant's property is $683,924.96 and the penalty assessed will be deleted.

Signed at Ottawa, Canada this 29th day of November, 2002.

"R.D. Bell"

J.T.C.C.

COURT FILE NO.:                                                 2000-3798(IT)G

STYLE OF CAUSE:                                               Ian Morrison v. Her Majesty the Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           September 12, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge R.D. Bell

DATE OF JUDGMENT:                                       November 29, 2002

APPEARANCES:

Counsel for the Appellant: R. Keith Oliver

Counsel for the Respondent:              Eric Douglas

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

                                                                                               

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-3798(IT)G

BETWEEN:

IAN MORRISON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on September 12, 2002 at Vancouver, British Columbia, by

the Honourable Judge R.D. Bell

Appearances

Counsel for the Appellant:                  R. Keith Oliver

Counsel for the Respondent:                              Eric Douglas

JUDGMENT

                The appeal from the reassessment made under the Income Tax Act for the 1995 taxation year is allowed, so that the adjusted cost base of the Appellant's property is $683,924.96 and the penalty assessed will be deleted, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

                Costs are awarded to the Appellant.

Signed at Ottawa, Canada this 29th day of November, 2002.

"R.D. Bell"

J.T.C.C.