BETWEEN:
and
____________________________________________________________________
Appeal heard on November 30, 2006 at Toronto, Ontario.
Before: The Honourable Justice T. E. Margeson
Appearances:
____________________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1997 taxation year is dismissed and the assessment of the Minister of National Revenue is confirmed.
The Respondent shall have her costs of this action to be taxed.
Signed at New Glasgow, Nova Scotia, this 16th day of April 2007.
"T. E. Margeson"
BETWEEN:
RIDGE RUN DEVELOPMENTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] This is an appeal from a Notice of Reassessment dated October 1, 2004 by which the Minister of National Revenue ("Minister") reassessed the Appellant for the amount of $227,122 with respect to tax, $15,922.55 with respect to a late filing penalty, and interest in the amount of $99,061.83.
[2] The Minister took the position that in calculating its income for the 1997 taxation year, the Appellant misrepresented its total income, by including a non-capital loss carried forward from the 1994 taxation year, in the amount of $611,397. The Minister claimed this misrepresentation was attributable to wilful default, or alternatively, to carelessness or neglect.
[3] The Appellant's position is that the assessment for the 1997 taxation year made as of October 1, 2004 is a nullity and requests that the Court confirm the validity of the Notice of Reassessment of October 23, 2003 with respect to the Appellant's 1997 taxation year.
Evidence
[4] Robert Schwartz ("Mr. Schwartz") is a lawyer currently practicing at the firm of Gardiner Roberts LLP in Toronto. He is a senior partner at that firm. He provided legal advice to the Appellant, Ridge Run Developments Inc. ("Ridge Run") starting in and around the year 1992. Stanley Poulton ("Mr. Poulton"), who was a principal of Ridge Run and certainly an officer of Ridge Run was instrumental in retaining his services. This witness testified that Mr. Poulton, a principal of the Appellant was, along with others, being threatened with a legal action by one Catherine Reynal ("Ms. Catherine Reynal") who was a principal in Oakamp Developments Limited ("Oakamp Developments"). This purported Plaintiff took the position that a principal of the Appellant, namely one Peter Miller ("Mr. Miller"), had misused certain funds that were obtained through financing at the Royal Bank of Canadawhich advances she was responsible for. She wished to be put back in the same position that she was in prior to these funds being misused. It became obvious to the Appellant that it would suffer substantial loss and consequently it wanted to know what its legal position was. Mr. Poulton, on behalf of himself and on behalf of the Appellant, obtained the services of Mr. Schwartz and his firm to provide legal advice to them.
[5] Various negotiations took place between the lawyers representing the individuals and companies above referred to and a number of other companies, who were involved in this matter, which resulted in the execution of an agreement, which has been admitted into evidence in Volume I, Tab 1 of the Appellant's Book of Documents. This agreement is dated February [blank] 1994. At the end of the day, the purpose of the agreement was to obtain the best deal with the least possible damage to the Appellant and Mr. Poulton as it was argued that the company and Mr. Poulton were vicariously liable for all of Mr. Miller's actions. In essence, the Plaintiffs "were going to go after everything that both Miller and Poulton had, which included all the various properties that they owned at the time".
[6] In an attempt to shield some of Ridge Run's interests in certain properties, to avoid huge legal fees that would be associated with litigation and time, effort and distraction, the advice was that it would be better off to have it settled. "It was a balancing act because there was a cost."
[7] Finally, the various parties reached the agreement as earlier referred to.
[8] Mr. Schwartz said:
By agreeing to the terms of this settlement, Ridge Run was seeing properties sold at a time it didn't really want to sell, when there was no reason for it to sell. That was a large disadvantage. They were effectively giving away any interest in Huntsville and Stouffville, and I believe there was equity.
[9] The agreement further provided that $18,000 per month was to accrue to Ms. Catherine Reynal or to Oakamp Developments over the term of the agreement. To the extent that that money was available from the properties, it was coming out of the other parties' interests, as well as the legal fees of Aird and Berlis and various other fees.
As Mr. Schwartz put it:
Ridge Run, Greystoke and Stan Poulton were paying a price for this settlement, but we thought it was better than the alternative. Otherwise, we would not have been a party.
[10] This agreement started out as a draft in 1992 but it was ultimately concluded in 1994. There was no deal until this was signed.
[11] Mr. Schwartz said:
I think at the end of the day the notion was: There is a quid pro quo for our throwing everything into the pot, so to speak, and agreeing now to sell assets that we would not otherwise be inclined to sell. At the end of the day everything is going to pay down Royal Bank and indirectly be deemed to be repaying those various book entries.
[12] Mr. Schwartz agreed that there was no analysis done to prove that any of the loans, including the loan to Hill Top Plaza Co-tenancy ("Hill Top") was actually in the amount that was reflected. There was no analysis of the debts that were alleged to be owing by Ridge Run to Termai Investments Limited ("Termai"). At the end of the day, the parties agreed that at that point any loan would be deemed to have been repaid.
[13] He agreed that at no time did anyone ever do a detailed calculation or analysis to determine how much money was applied toward each loan. To the extent that any money went to the Royal Bank of Canada, the book entries indicated that that was the amount that was owing on these loans.
[14] The idea was that this was a final agreement and that all parties would release each other. The agreement required that the parties execute Releases and they were executed in accordance with the agreement. To the extent that there was something in the main agreement that one of the parties had not implemented, the Release would have been subject to it.
[15] He agreed that Ridge Run may have given up some rights to receive an amount of money by signing the Release. As indicated by this witness in cross-examination when the Release was executed, as far as the Appellant was concerned, the matter was ended. Everything to do with the dispute, Ms. Catherine Reynal, the problems with Mr. Miller and his companies was done and finalized.
[16] Stanley Poulton was a land developer, not an accountant. He was familiar with the amount as disclosed in the Appellant's 1994 tax return. He confirmed the Appellant's tax return for the year 1994 as found in Volume 1 at Tab 2 of Exhibit A-1. He confirmed the figures contained in the Statement of Income and Expenses for Hill Top for the year 1994 for the loss on the Dinnerex loan receivable of $176,169; the gain on the forgiveness of Hill Top Loan by Termai of $1,716,442 and that this was the same figure shown on the Hill Top Plaza Co-tenancy Schedule of Co-Tenants' Income Tax Information For The Year Ended April 30, 1994. This showed a write-off of the loan for $1,716,442. This return had been completed by Mr. Miller.
[17] Mr. Poulton explained the type of business that he was in and it was obvious from his evidence that he was experienced, astute and honest in this type of business. In essence he was describing what the Appellant did, as it was obvious that the Appellant did exactly what he did as he was the principal in all of the Appellant's actions.
[18] He indicated that he never took a partner but he did enter into joint ventures. The Appellant had a 100% interest in the Burlingtondevelopment but that was reduced to 50% when Mr. Poulton's lawyer came forward and put the funds into the development. This interest was reduced to 25% to him and his lawyer when 50% was transferred to Fred Fillo ("Mr. Fillo") who turned out to control the company, Oakamp Developments. This company was a supplier of money. The development was called Patriot Fairview Shopping Centre ("Patriot Fairview").
[19] Mr. Fillo did not want to be active so he appointed Mr. Miller as the acting President and Chief Executive Officer. Mr. Poulton considered him to be the "whole company" in all the decisions with respect to Oakamp Developments. The Dinnerex mortgage was to be split between the two companies. He did not know what was to happen to the mortgage under the Settlement Agreement. The tenancy statements, attached to the income tax return for the Appellant for 1994 were prepared by Mr. Miller. The Appellant's interest in the Burlingtonproject was reduced to 12 ½% and then through a sale to Oakamp Developments it became 9.01%.
[20] The Patriot Fairviewshopping centre project dealt with the Royal Bank of Canadaat 20 King Street. This witness was not consulted at anytime with respect to the borrowings that Patriot Fairview may have made with respect to the Royal Bank of Canada. Further, he had no knowledge of the banking arrangements with the Royal Bank of Canada with respect to the Appellant's 9.01%. He was referred to the balance sheet for Patriot Fairview dated June 30, 1994 and he said that the largest liability was a loan to the Bank of Nova Scotia for $2,910,860. When asked about the Settlement Agreement found in Exhibit A-1 at Tab 1 he said that he signed it because the lawyers believed that this was the only way that Ms. Catherine Reynal was going to get any money back and it did not seem to matter to them whether "my company got shredded. We lost a considerable amount of money on this agreement."
[21] Apart from contacting Mr. Schwartz with respect to his legal position he relied upon the advice of his accountant, Harold Grabowski ("Mr. Grabowski"). Mr. Grabowski attended at Mr. Schwartz' office with him and he was asked to go through the agreement and let this witness know what his thoughts were as a chartered accountant. However, he did not provide Mr. Poulton with any documents or on the issue as to whether or not the agreement should be executed. He could not remember having received any other specific documents, including working papers other than the agreement found in Volume I, Tab 1. He received this from Mr. Schwartz' office. He identified his signature on the agreement on his own behalf and on behalf of the Appellant. He also identified other signatures contained in the agreement. Further, he identified his signature on the Mutual Release Agreement dated June 29, 1994. The document was signed in Aird and Berlis' office on the 29th of June and he remembered signing it. He believed that his accountant had a copy of it but was not sure that anyone else did. He gave it to John Gamble and that would have been some time after 1994.
[22] In cross-examination the witness indicated that once the commercial developments were built, Ridge Run would keep them and earn revenue from them and, if the time was right, would sell them. In the course of dealing with companies and the development business over a number of years he had a chartered accountant by the name of Mr. Grabowski and two other chartered accountants. The returns for him and his companies would have been done by these accountants. They also prepared financial statements. He never looked at them because he simply did not understand them. Things would be put in front of him and he would sign them.
[23] He admitted signing the 1994 and 1997 tax returns for the Appellant. He was the sole shareholder and President of the Appellant. He did not identify any other employees of the Appellant and it was obvious that he did what had to be done for the Appellant in terms of the land development. If he needed others he would go out and hire them for that particular time.
[24] With respect to the Appellant's accounts, he had fired his accountant and Mr. Miller recommended that he take the Appellant's accounts down to Arthur Andersen & Co. SC ("Arthur Andersen"). They were there for two years. They sent them back to his office and said that they were so muddled and so confusing that it was not the kind of work that they did.
[25] He was asked about the accounting for the Huntsville Co-tenancy Ltd. ("Huntsville Co-tenancy") and he said that it was his understanding that Mr. Miller did the statements and that if there was a tax situation he would pass them along to Arthur Andersen. They in turn would go back to Mr. Grabowski from Mr. Miller and not from Arthur Andersen. He agreed that Mr. Andersen would have taken the financial statements for 1994 and reviewed them and made some revisions. He was not aware of whether or not Arthur Andersen reviewed or had input into any other of the co-tenancy agreements except Huntsville Co-tenancy.
[26] He was referred to the Hill Top Plaza Co-tenancy Statement of Income and Expenses found at Tab 2 of Exhibit A-1 and the figure of $1,716,442 shown as a gain on forgiveness of HTP loan - Termai. He could not say whether or not he was aware of this amount in 1994 when he signed the income tax return. He vaguely remembered that Mr. Grabowski would give all of the "stuff" to him and say "sign here" and that is what he did. He did not ask any questions about it. He never received an accounting of the results of all of the transactions that were referred to in the agreement. He did not take any action to receive such an accounting. He did not think it would make any difference.
[27] He admitted that without an accounting he did not have any idea of how much of the Termai loan was forgiven at the end of the day. He did say that he did not think they owed them anything. He did say that when his accountant, Mr. Grabowski got the information about the $1.716 million gain on forgiveness of the HTP loan - Termai he thought it was ridiculous. As far as he was concerned there was no forgiveness of debt. This was repeated to him by Gordon Williamson ("Mr. Williamson") three months ago but Mr. Williamson was not going to be testifying.
[28] Mr. Gabrowski did say that the Appellant was going to have to pay tax on this amount even though he did not get it. Mr. Grabowski was at Mr. Schwartz' office and he asked them both to go through the agreement and tell him what the damages were going to be. After two days he was not told anything of what the cost would be to the company which was the extent of his involvement except that he came to Mr. Gamble's office with him on two occasions. He was in the office of Aird and Berlis when he signed the Mutual Release. Mr. Schwartz was there and the other lawyers and parties were there. He did not get a copy of any of these documents for some time after that. Mr. Schwartz had them and he later provided them to him. He did not know whether he gave a copy of the Release to Mr. Grabowski.
[29] Fidelia Louie ("Ms. Louie") testified that she was an appeals officer with Canada Revenue Agency ("CRA"). She has held that position for thirteen years. Prior to that she was an auditor with Revenue Canada and before that she was a staff accountant at Ernst & Young. She possessed the CGA designation. She has held that designation for about twenty years.
[30] She was the officer of CRA who raised the assessment that is currently under appeal. After the Notice of Objection was received she contacted the Appellant's solicitor. At a meeting he explained how the loan from Termai to Hill Top came about. She obtained the auditor's file with respect to the Appellant for the 1997 taxation year. She perused the working papers and the auditor's report. She also referred to the principal file that was referred to in the auditor's report.
[31] A principal file is created when an auditor reviews a taxpayer company and as a result of this review she also reviews other related companies. The principal file contains most of the documentation or paperwork. In this case, that was the Oakamp Developments file. When she met with the Appellant's solicitor she told him that she had obtained the agreement referenced in this case. This was located in the Oakamp Developments file. At that point in time she had not seen the Mutual Release that had been executed. For the taxation year 1997 the auditor on the file had denied a non-capital loss carry forward applied against taxable income. The auditor took the position that there was a forgiven loan in 1994. She adjusted the non-capital loss carry forward balance and, as a result, the balance available for application for the taxation year 1997 was reduced.
[32] The auditor was applying the provisions of section 80 of the Income Tax Act ("Act") and in doing so relied upon the financial statements. These statements are found in Exhibit A-1 at Tab 2, being the last four pages of that tab referable to the taxation year 1994 for Hill Top.
[33] In the Statement of Income and Expenses, there is a line item called GAIN ON FORGIVENESS OF HTP LOAN - TERMAI, $1,716,442. That gain was reassessed by the auditor to reduce the non-capital loss balance of 1994. In the financial statements the Appellant had reported the gain on the forgiveness, for $1.7 million. However, for income tax purposes, it was taken out on schedule T2S(1), one of the income adjustment schedules and consequently was never reported. The T2S(1) is a reconciliation of accounting income to taxable income. On the T2S(1) form, the Appellant had deducted the gain on the forgiveness of debt which was recognized for accounting purposes. In effect, the gain was not declared. The Appellant had not applied the forgiveness that appears in the financial statements to any non-capital losses in 1994 or any other year.
[34] She produced the Agreement at Tab 1 for the Appellant's counsel and he went away with it to a second meeting. There were further communications between the witness and the Appellant's counsel including telephone conversations over a considerable period of time from 2002 to September 2003. The issue that was being looked at was whether or not the loan was forgiven. She concluded that in order for the debt to be discharged the creditor had to take some action in forgiving the liability. However, the only statement that indicated that there was a forgiveness was how it was filed in the tax return of Hill Top, that is referred to at Tab 2 in the Income Statement. The Appellant's counsel did not produce any evidence from Termai saying that the loan was forgiven. Based on that information she believed that it was not sufficient for the auditor to rely on just the financial statements to assess the forgiveness.
[35] Discussions took place about a settlement and making other adjustments, such as disallowing a non-capital loss application in 1997 and reassessing the forgiven amount in 2000 when the loan was statute-barred for collection under the Statute of Limitations Act. She made the adjustment and concluded from the settlement agreement that there was a forgiveness of debt.
[36] She reversed the auditor, allowed the non-capital loss to be applied to 1997 and added to income in 2000, the forgiven amount. Based upon these discussions she determined that there was no loan forgiven in 1994. Consequently, she removed the forgiven amount that the auditor used to reduce the non-capital loss balance carry forward. By making that adjustment, there would be a non-capital loss available for application in 1997 and so she allowed that.
[37] The statute of limitations kicked in since it was six years after the last payment in 2000. In that year the creditor was barred from collecting any debt from the taxpayer. That is when it was considered that the loan was forgiven. At that point in time there was no more loss available to be reduced. Under subsection 80(13) of the Act the forgiven amount was to be included in income.
[38] At the time that she issued the reassessments for the December 1997 taxation year, it would have been barred in the event that there was no objection. She issued a reassessment in the absence of a signed waiver as she believed it was the right thing to do.
[39] At the time that the reassessment was issued in 2000 the witness had not seen the Mutual Release. No document was received to support this. She did not receive any documents indicating that there was no forgiveness of debt. Further, representations were made with respect to other payments being made to Ms. Catherine Reynal. Ms. Louie asked for a waiver to be signed so that she could make the adjustment. If she had seen the Mutual Release prior to issuing this reassessment for 1997 and the reassessment for 2000, she would not have issued those reassessments because this would have supported the Respondent's position that the loan was discharged in 1994.
[40] It was her position that the forgiveness of the loan in 2000 by virtue of expiry of the limitation period would be inconsistent with the financial statements of Hill Top that were filed for 1994. In the financial statements the forgiveness of the loan was recognized in 1994 and they were talking about 2000. Further, the Mutual Release would be consistent with the financial statements filed for Ridge Run and Hill Top that were filed with the 1994 return because the Mutual Release was executed in June of 1994 and the statement was for the taxation year of 1994.
[41] Following the reassessments for 1997 and 2000 a further Notice of Objection was received. It was noted in the Notice of Objection that the loan was actually forgiven in 1994 and that the Appellant had documents to show that. This was a Notice of Objection for the taxation year 2000. Further conversations took place with the Appellant's solicitor and the Minister subsequently received the Mutual Release in question. There was no Notice of Objection filed for 1997. This reassessment gave Ridge Run more non-capital losses.
[42] As a result of receiving the Mutual Release, the witness concluded that the liability that was being looked at was released in 1994 and the loan was forgiven. She looked at the year 1997 and there was no objection filed. It was statute-barred. The Mutual Release was signed in 1994 and the taxpayer should have recorded a forgiveness in 1994 and it was not done. She believed that there was a misrepresentation in filing the 1994 return.
[43] As a result of that misrepresentation, 1997 was incorrectly filed because the taxpayer utilized a non-capital loss balance which had been reduced to nothing. The taxable income for 1997 was being misrepresented.
[44] Further, the witness concluded that the failure to produce the Mutual Release indicated that evidence was withheld which withholding led her to believe that there was no forgiveness in 1994 on the previous assessment.
[45] Ultimately, based upon this information, the witness reinstated the auditor's assessment. She accepted the forgiveness as happening in 1994 and applied subsection 80(3) of the Act, reducing the non-capital loss carry forward balance by the forgiven amount. In doing that, the non-capital loss carry forward balance was reduced. As a result, there was no non-capital loss available for application for 1997. Her position was that it was to the taxpayer's benefit not to present the Mutual Release because she was prepared already to reassess, allowing the non-capital loss application and reducing the taxable income for 1997.
[46] In cross-examination the witness admitted that on the basis of discussions with counsel for the Appellant that, as the amount of $261,000 had been paid as a result of the Settlement Agreement, she allowed the deduction.
[47] This amount was deducted from the amount of the outstanding indebtedness. Before she knew there was a Mutual Release, it was determined that the loan was forgiven in 2000. If the payment was made in 1997 the amount forgiven would be the loan itself minus whatever was paid against it. The difference would be the amount forgiven in 2000. That was prior to Ms. Louie's knowledge of the Mutual Release.
[48] The witness would not agree with counsel for the Appellant that the reason that she deducted $261,790 from an amount otherwise added to the assessment by her was the provisions of subparagraph (v) on page 41 of the Settlement Agreement. She said that the deduction was made when she did not have this clause in mind. Whatever evidence she did have showed that the taxpayer paid that amount. The taxpayer pays that amount and in her mind the taxpayer is entitled to the deduction, so the deduction was allowed. She was not really referring to the Settlement Agreement. In relation to Patriot Fairview it was shown that they paid an amount of $261,000, so she allowed the deduction.
[49] The witness was asked what this representation was made in the 1994 taxation return. She said that in filing the 1994 tax return and based on the Mutual Release that was presented to her later on, the liability was discharged in 1994. The taxpayer did not include that forgiveness in the 1994 taxation year. According to subsection 80(3) of the Act the forgiveness has to be used to reduced the non-capital loss carry forward balance which is on the T2S(4). On the fourth page after the T2S(1) schedule there is "Continuity of Losses Carried Forward". The taxpayer misrepresented the non-capital loss carry forward balance by not reducing the balance by the amount of the forgiven debt. She agreed that the purpose for the T2S(1) was to reconcile net income for tax purposes from accounting purposes.
[50] She was referred to four pages of the return for 1994 being the T2S(1), the T2S(4), the T2S(1) supporting schedule and the last two pages of the return. She was asked whether, as a result of looking at all four of those pages, was there any concealment taking into account reporting for tax purposes and the difference between reporting for tax purposes and reporting for accounting purposes. The answer was that now that they were aware that there was a Mutual Release signed in 1994, the T2S(4) was obviously incorrect because the taxpayer failed to reduce the non-capital loss balance by that forgiveness amount. That is a misrepresentation because the taxpayer is knowingly not reducing the balance.
[51] It was then suggested to the witness that it was possible that an accountant that was not an employee of CRA might conclude that these amounts were in fact not to be included in computing taxable income. Her response was that as a professional accountant they should note all these sections of the Act and how they should be applied.
[52] She further admitted that in the last four or five pages the Appellant disclosed the nature of the matter which is now before the Court as to its tax treatment as forgiveness of the Hill Top loan by Termai in its financial statements attached to the return. Further, she said that the amount was disclosed that there was a gain but it did not disclose the debt that is supposed to be used to offset the loss balances. If I looked at it as an assessor, there was a gain in the financial statements but it was not included in income. As an assessor she would say that there was a forgiveness. The forgiveness should have been used to offset the loss carry forward and it should have been shown on the T2S(4) and it was not. She admitted that when the assessment was made in September 1998, this was an incorrect assessment.
[53] In redirect, the witness was referred to a document at Tab 4 called "Settlement of Co-tenancy receivable from Oakamp". The applicable reference was with respect to Ridge Run's contribution of $261,790 towards settlement of the Oakamp Developments receivable in proportion to Ridge Run's interest in the co-tenancy. She received the document from the principal file in the Oakamp Developments' tax return. From a loan forgiveness point of view, if a loan was forgiven in 1994 this payment would not have any effect on it because the payment was made in 1997. If the loan was forgiven subsequent to 1997, this amount would reduce the loan amount. It would be used to offset the loan. It was taken as something that had been paid in 1997.
[54] Ultimately she said that the she allowed the adjustment just for settlement purposes since the taxpayer paid it out. It was a payment in connection with earning income. Since it was to the benefit of the taxpayer she did not really question it.
[55] At the conclusion of the evidence, it was concluded that Tab 16 had not been proved and consequently it was not to be considered as one of the exhibits.
Argument on Behalf of the Appellant
[56] Counsel reminded the Court that this appeal is with respect to the 1997 taxation year even though much evidence was given with respect to the 1994 taxation year. With regards to the 1994 taxation year, the only real evidence was with respect to the Notices of Assessment which are referred to under Tabs 3, 5, 6, 7 and 10 of Volume 1, Exhibit A-1.
[57] It is only the Notice of Reassessment of October 23, 2003 which is subsisting and the Notice of Reassessment of October 1, 2004 is a nullity. The agreement which is found in Exhibit A-1, Volume 1 at Tab 1 is of the greatest significance. The entire agreement was designed to put into Oakamp Developments' and Ms. Catherine Reynal's hands the funds that would put them in the position that was equivalent to the position that they were in before the funds of Oakamp Developments were used for the joint venture or co-tenancy arrangements established by Mr. Miller with Mr. Poulton. The proceeds of those funds had the effect at the same time of reducing the amount of Termai receivables, one of which was the very loan that is an issue in this appeal, that is a loan by Termai to Hill Top in which Ridge Run was a 50% participant.
[58] Counsel referred to pages 29 and 30 of the Settlement Agreement. In effect, Oakamp Developments was paid even though Ridge Run did not owe it anything but Ridge Run owed Termai and Termai owed Oakamp Developments. This loan was to be paid.
[59] At the end of the day, when everything was done, if money was still owing, it would be paid or, if too much money had been paid, it would be recovered.
[60] The initial issue is to determine the forgiven amount. The Minister has employed the provisions of subparagraph 80(3)(a)(ii) of the Act in making this assessment. This subparagraph was amended prior to the period in issue here, and prior to that, the subparagraph did not contain any provision defining what the forgiven amounts were although it did provide for the inclusion in income of forgiven amounts. As a result or consequence of the application of the Settlement Agreement and the Mutual Release, for which provisions were made in the Settlement Agreement and executed on June 20, 1994, that amount is nil.
[61] The effect of this agreement and the Mutual Release was that the parties gave up a number of rights by virtue of the agreement and the Release and there was no forgiveness.
[62] These various rights were not illusory rights put there for cosmetic purposes. According to the evidence given by Mr. Schwartz, Mr. Poulton had done nothing that would make him the subject matter of litigation. Mr. Poulton had a cause of action against Termai and Mr. Miller because Mr. Miller was supposed to provide the financing. That meant financing that could be used, not financing that would result in actions that would call all the money back at an inappropriate time as would appear to be the results of these actions. The contract made provision for management fees to be forgiven that were otherwise payable. It was uncertain what these amounts might have been at any time but to set out the revenue test dollar for dollar would have been a mathematical impossibility.
[63] There was no accounting kept because there were no dates fixed for the disposition of assets. If you interpret subsection 80(3) of the Act as it existed in 1994, the first challenge is to determine the forgiven amount in the definition in that subsection. Given the nature of the transaction in 1994 and the provision of the Settlement Agreement, according to the evidence of Mr. Schwartz, that forgiven amount, because of set off, was zero.
[64] Mr. Schwartz concluded in his evidence that at the end of the day, as a result of the agreement, all of the indebtedness of Ridge Run and Oakamp Developments was considered as paid in full. That is what the agreement was intended to do. In the final agreement, all of the parties were going to release each other.
[65] In the alternative, if there was any forgiven amount, if it could be any amount at all, it is the amount that existed in 1994 and at no other time. The Mutual Release is dated June 29, 1994. The fiscal period of the Appellant ends in September. Therefore, at any time means "at the time of the 1994 taxation year of the Appellant, and no other time". The repetition of the words "at that time" three times in that paragraph must mean something. It is submitted that it means that the losses carried forward up to the year 1994 are to be deducted as a consequence of the addition to income of whatever the forgiven amount was.
[66] Clause (ii) of that provision says that the amount so applied does not, because of this subsection, reduce the debtor's non-capital loss for the preceding taxation year. The argument is that in 1994 it is appropriate for the Minister to add to the income of the taxpayer any forgiven amount of a commercial obligation to reduce the amount of losses carried forward from prior taxation years, but that is the only year in which that can be done. You cannot do it to effect a subsequent taxation year, and that is exactly what has happened here. The Minister is carrying this reduction of an assumed forgiven amount against non-capital losses in 1994 and prior years and applying them in 1997. This is not possible under the section.
[67] Clause (ii) of this provision has not been subject to judicial interpretation. The Minister can assess a forgiven amount at that time, for that year, when the amount is forgiven, and at no other time and in that process is entitled to apply that forgiven amount in reducing the prior year's non-capital losses. But, if he does not assess for the year at that time when the amount is forgiven, he is barred from doing what customarily would follow, and that is reducing it in a subsequent taxation year. He has one chance, and that is to do it in the year in which the amount is forgiven because in subsequent years that amount of the loss carried forward is reintroduced into the scheme of things and can be deducted in computing the income of the taxpayer.
[68] When the clause says, "reduce the debtor's non-capital loss for the preceding taxation year", that means all years prior to 1994.
[69] Thirdly, counsel argued that the assessment before Court for the year 1997 is statute-barred. The Minister issued a Notice of Reassessment on October 23, 2003 as a result of a Notice of Objection. This was in spite of the fact he indicated to the accountant that she would not issue the reassessment until she received a waiver. She did not receive a signed waiver. This was the last arrow in the Respondent's quiver. The Minister could not issue another Notice of Reassessment for the same taxation year. The Minister could not issue further reassessments for the same year because of the Notice of Objection being filed. The Minister is subject to the provisions of the Act, subsection 152(4).
[70] No other provisions of the Act which allow reassessments apply here since the taxpayer never requested a reassessment for loss carry back or for any other purpose.
[71] In order for the Minister to make a further reassessment under the provisions of subsection 152(4) of the Act, there must be a misrepresentation. Evidence was given as to what this misrepresentation was for the year 1997. There was evidence about 1994 and it might be reasonable under normal circumstances to assume that somehow this had an effect upon 1997 but there was no evidence about it. Without some evidence of any kind with respect to 1997, the Court cannot find a misrepresentation. At the most what the Respondent says is, "We are reassessing you because you disclosed that you had forgiveness of debt on your financial statements." This is not a misrepresentation. It is an incorrect statement because it was not a forgiveness but a payment. Nevertheless, it is the Respondent who is relying upon these words.
[72] Counsel referred to the T2S(1) form which was a form provided by the Respondent for the purpose of disclosing the change or reconciliation of financial statements for accounting purposes and tax purposes. There is a variety of alterations that accountants make changing from accounting to tax purposes under the Act. The reason for relying on subsection 152(4) of the Act would have to be that this was a misrepresentation. If it is, it is a misrepresentation that it is attributable not to wilful default -- it cannot be wilful default. It is shown right there on the statements and the figures balance. The amounts are disclosed. It is not neglect. To neglect it would be a mistake because the forms require professional accountants who prepare these documents to set these matters out. The returns are prepared by the accountant.
[73] Here, these statements were prepared properly. If there was any misrepresentation, it was a misrepresentation of the interpretation of the law. That kind of misrepresentation is not included within the definition of what permits the Minister to reassess beyond the normal reassessment period of three years. Under subsection 152(4) of the Act, the cases make it clear, that in the absence of a misrepresentation attributable to neglect or carelessness or wilful default, there can be no other additions to income or reassessment itself. This did not take place here.
Argument on behalf of Respondent
[74] Counsel agreed that the end result of the agreement was that, at the end of the day, everything was going to be over. The Appellant admitted that he executed a Mutual Release on June 29, 1994. This Release included the obligations in question, those related to Hill Top. Mr. Poulton was given a copy of this Mutual Release, although he does not know when it was, and he gave it to some person or persons, including his accountant. The important point is that the Appellant clearly knew about the Mutual Release and clearly understood it as a result of the discussions with Mr. Schwartz as his professional advisor, and had it in his possession.
[75] It is the Respondent's position that upon the execution of this Release a commercial debt owing by Ridge Run was forgiven. The amount of that forgiveness was not less than the amounts that appear in Volume I, Tab 2 in the Income Statement for Hill Top at the second page in the back of the tab. The inference is clear that these financial statements would have been presented to Arthur Andersen. Counsel asked the question, "What happens when a loan is forgiven?" From an accounting perspective, both financial statements are absolutely correct. From a financial accounting point of view, if a loan is forgiven, it is brought into income in the income statement. That is accounting. What is the effect of the Act?
[76] Prior to the time in question, that was the treatment. The Act said that forgiven amounts come into income. For the period in question, the revised section 80 of the Act applies.
[77] The second matter to be dealt with is the principal amount alleged to have been forgiven. The Appellant has been unable to quantify the amount forgiven other than $1.7 million that is in evidence in the Joint Book of Documents. He has adduced no cogent evidence to indicate that the Arthur Andersen amount is incorrect. He argues that because there was a quid pro quo no forgiveness occurred. In order to establish that there was no forgiveness in 1994 the Appellant would have to adduce evidence that it is impossible for him to adduce because there was never an accounting. Who knows why there was never an accounting? There could many reasons for that. People did not want to pay the cost of it, perhaps. People did not want to be bothered, perhaps. They just wanted it to be over. As Mr. Schwartz said, "whether your up or down, it is over".
[78] It was suggested by counsel for the Appellant that the amendment to 9(d) of the agreement prevented any other claims being made. There was nothing in that amendment that could prevent an application for an accounting. It is not making a claim. It is not asking for money back. It is just asking for an accounting of what were the proceeds, what were the debts, where did they go?
[79] Failure to include a provision in the agreement for an accounting might have been improvident, it might have been deliberate or maybe because they did not want to be bothered. The fact of the matter is that, in the absence of being able to trace the funds to show what was repaid and what was not repaid, the Appellant cannot dispute the $1.7 million amount of forgiveness that was filed with the tax return in the financial statements.
[80] She disputed the argument of the Appellant that if there was a forgiveness, it does not effect the 1997 taxation year. This argument is absolutely wrong. Under subsection 80(3) of the Act you no longer bring, for taxation purposes, debt forgiveness into income. What you do first is reduce non-capital losses. If you use up those and there is still some forgiveness left over you move on to farm losses. That is (b). If you use up those and you still have some forgiveness left over, you move on to (d). That is capital losses -- et cetera. As Ms. Louie said in her evidence, if you run through all that ordering and you still have some forgiveness left over then it comes into income.
[81] In the case at bar, there were no other orderings. We know we are within (a) on the amounts and the facts of this case. What do you do for Ridge Run? The forgiven amount at the time is $1.7 million and there is no evidence to dispute that. "It shall be applied to reduce it that time" - which is 1994. That is the year of the forgiveness as the subsection goes on:
(a) The debtor's non-capital loss for each taxation year that ended before that time to the extent that the amount so applied does not exceed the loss balance.
[82] In this case there were losses from 1991, 1992 and 1993. She disagreed with the argument of the Appellant that because of (ii), the Minister can only reduce that once and that reduction is for 1994. That is not what (ii) says. That is not at all what (ii) does. What it means is that you have a $1.7 million forgiveness. You are applying that as at 1994. 1994 has a non-capital loss balance that includes losses from prior taxation years. In 1994 you reduce the 1991, 1992, 1993 non-capital loss balances that otherwise would have been applied in 1994. You do not as a result of this forgiveness go back and reopen 1991, reopen 1992 and reopen 1993 to reduce those loss balances. That is the effect of (ii). If it were not there, the argument might be that you would have to reduce a non-capital loss for each taxation year before the Minister could go back and reopen the prior years.
[83] The legislation is clear. You do the calculation in 1994. You deal with the loss balance in 1994. The ordering of dealing with that loss balance is dealing with the prior taxation years non-capital losses that would otherwise be applied to 1994, and you do not touch the earlier years. The provisions of the Act go on through the various subparagraphs of section 80 and deal with what happens if you still have not used up the amount of that forgiveness, culminating, in an income inclusion.
[84] The Respondent's position is that Ridge Run made a misrepresentation. The misrepresentation is the way that it treated the forgiveness in the 1994 income tax return but the misrepresentation is also for 1997 and the application of the non-capital loss carry forward. It misrepresented to the Minister in 1997 the amount of its 1997 loss carry forward and Ms. Louie testified to that effect. Ms. Louie was quite clear in her evidence as to how the misrepresentation arose in 1997. What she could have done was to go back and reassess the 1994, 1995, 1996 and 1997 years but she did not. The misrepresentation is in the T2S(4).
[85] If you look at the T2S(4) for 1994 it showed a non-capital loss carry forward of $1,265,349 or however much they used but that is a misrepresentation because the loss carry forward balance was not that amount. That amount is to be reduced by the $1.7 million forgiveness under section 80 of the Act.
[86] That affects the non-capital loss carry forward to subsequent years. This resulted in a misrepresentation in 1994, 1995, 1996 and 1997.
[87] For purposes of misrepresentation, counsel referred to the case of Venne v. The Queen, 84 DTC 6247 in support of her position that taxpayers must exercise reasonable care with respect to its returns. There was a misrepresentation attributable to neglect and the fact that Mr. Poulton, on behalf of the Appellant, did not read its returns before signing them is evidence of that.
[88] It is unknown whether Mr. Grabowski, the Appellant's accountant, was negligent or deliberately did what he did. However, the Court should draw an unfavourable inference against the Appellant for the failure to produce Mr. Grabowski in evidence. If the Appellant wished to make a case that the non-capital loss in 1994 as carried forward to 1997 was correct, then he should have produced Mr. Grabowski.
[89] The Appellant cannot escape the consequences of his accountant's neglect or negligence when he did not make any effort to question him or supervise any aspects of his income tax returns. There was the $1.7 million dollars income included in 1994. If he had bothered to look at Ridge Run's return, he would have questioned where the $1.7 million dollars was shown. If he was told that it need not be reported then he may have avoided being considered to be negligent or careless. However, he did not do that. The Court does not know what explanation Mr. Grabowski would have given. Not bothering is tantamount to neglect.
[90] In this case, we are not talking about gross negligence or wilfulness. What he did was neglectful and careless. He admitted that, in later years, he sat down with Mr. Grabowski to look at his income tax returns and at that point he realized he should have been doing that all along, and at that point he fired him.
[91] Counsel referred to the case of Can-Am Realty Limited et al. v. The Queen, 94 DTC 6293. It concluded that the taxpayer cannot redeem himself by blaming the accountant. As in that case, it is not enough for counsel for the Respondent to argue that the T2S(1) showed the reconciliation, the deduction and the effect of that forgiveness, if there was one and that was not concealed. It was right there. It is not enough to argue that if CRA had been doing their job on that initial assessment, that would have been caught, that would have been adjusted and we would not be here, in effect.
[92] In the case of Nesbitt v. The Queen, 96 DTC 6045, it was noted that it is not enough for the Appellant to say that it was all disclosed or it was all there and CRA should have seen that this was an error. That case basically decided that the term "any misrepresentation" was synonymous with the expression "incorrect". The same situation applies in the case at bar.
[93] The case of Minister of National Revenue v. Taylor, 61 DTC 1139 stands for the proposition that:
The words "any misrepresentation", as used in the section, must be construed to mean any representation which was false in substance and in fact at the material date, whether an innocent or a fraudulent misrepresentation.
As in the case at bar, there was a misrepresentation in the filing for which the Appellant is responsible. Whether or not there is a misrepresentation through neglect or carelessness in the completion of the return is determined at the time when the return is filed. If there is an incorrect statement in the return, at least one that is material to the purposes of the return and to any future reassessment, the Appellant is liable.
[94] In Nesbitt v. R., 96 DTC 6588, the capital gain was critical. In the case at bar, the calculation of the non-capital loss is critical and material to the purposes of the return. It does not matter that the Minister could or did not by careful analysis of the supporting material see the error on the return form. As indicated in that case:
... It would undermine the self-reporting nature of the tax system if taxpayers could be careless in the completion of returns while providing accurate basic data in working papers, on the chance that the Minister would not find the error but, if he did within four years, the worst consequence would be a correct reassessment at that time.
[95] Again, in the case of Snowball v. The Queen, 97 DTC 512, the Court held that the negligence retains its consequences whether it is the negligence of the taxpayer, the accountant or another tax preparer.
[96] In the absence of evidence from Mr. Grabowski, or Mr. Poulton to give an explanation as to why $1.7 million was just being ignored, this is a prima facie case of negligence on behalf of the accountant and the taxpayer. What happened here, on the basis of the evidence, was a misrepresentation first of all and secondly it was attributable to neglect. Even an innocent misrepresentation is attributable to neglect.
[97] It was a misrepresentation in supplying information under the Act both in 1994 and 1997. It also occurred at the time that Ms. Louie was dealing with the first Notice of Objection. This was after the auditor had reassessed the non-capital loss carry forward for 1997. The auditor took the position that there had been a forgiveness in 1994 and consequently this reduced the non-capital loss balance carry forward. There was nothing to apply to 1997 and so she reassessed 1997 with no application of losses.
[98] A Notice of Objection was filed and Ms. Louie was handling it. She met with the Appellant's representative and indicated that she had been looking for a document to determine whether or not there was a forgiveness in 1994 and to determine on what facts the accountants had based this $1.7 million loan forgiveness. As a result of representations on behalf of the Appellant, and in the absence of anyone producing to her a Release referable to 1994, she concluded that the auditor's adjustments were wrong. There had not been a forgiveness in 1994 because the agreement itself, which was the only document she had, did not say there was a forgiveness in 1994. As a result of her understanding that there had been an agreement between the Appellant and CRA, that the forgiveness was to be recognized in 2000, Ms. Louie reassessed 2000.
[99] Subsequently, she received a Notice of Objection for 2000 stating that the forgiveness did not occur in 2000. There was forgiveness in 1994. In the course of dealing with this Notice Objection she saw for the first time the document at Tab 9 which she had been looking for, for one year and a half. This was the Release which clearly showed that as of 1994 whatever amount Ridge Run owed to Termai was gone. The only evidence of that amount is the statements of Arthur Andersen as to the Appellant's share of the $1.7 million.
[100] Taking into account the evidence of Mr. Poulton with respect to the Release and all the other evidence that it was signed in 1994 or sometime thereafter, and that it was in the possession of the Appellant all along, and it was not supplied to the Respondent, that was certainly a misrepresentation in supplying information under the Act. As a result of those misrepresentations, Ms. Louie was misled to reassess the 2000 taxation year believing that there was no Release in 1994. When the Notice of Objection for 2000 was filed indicating there had been a Release in 1994, she concluded that she was deceived and there had been a Release all along. That was a misrepresentation in supplying information under the Act.
[101] This was a misrepresentation made to induce CRA to reassess 2000 when the Appellant was in possession of a Release for 1994. This is surely a misrepresentation in supplying information. Whether it was innocent or not, it was enough for the Minister to open up a statute-barred year. Any misrepresentation with respect to 1994 is as much a misrepresentation for 1995, for 1996 and for 1997 when it is, as is the case here, carried forward and applied to each of those subsequent taxation years.
[102] With respect to the loan having been paid off, there was no quantification, but if there was, it was only that which is settled in the income statements. Other than that, they were throwing all of the assets into the mix and in essence did not know what was being paid off or what was not being paid off or how much of one indebtedness might be paid off.
[103] Counsel reiterated that the Minister was not seeking to justify the reassessment for 1997 on the basis on the Notice of Objection. The Minister was seeking to justify the reassessment on the basis of subsection 152(4) of the Act. She confirmed that the Minister's ability to reassess under section 167 or 169 of the Act was spent in the absence of the provisions of subsection 152(4) of the Act.
[104] With respect to counsel for the Appellant's argument that if there was a misrepresentation then it was only a misrepresentation of law, he should have presented the evidence of Mr. Grabowski as to his interpretation of what the law was as he was the one who did it. Other than that, the non-capital loss calculation in the case at bar was no different from the capital gain calculation in Nesbitt, supra. No such explanation was given and no such evidence was produced. Counsel for the Appellant had no basis upon which to make the argument that it was a misinterpretation of the law.
Rebuttal
[105] In rebuttal, counsel for the Appellant took the position that none of the cases referred to by counsel for the Respondent had anything to do with this case. The facts were entirely different. Counsel for the Respondent was confused at the interaction of subsection 152(4) of the Act and the Appellant's argument with respect to the provisions of subparagraph 80(3)(a)(ii) of the Act. When counsel for the Appellant referred to this subparagraph he was not arguing that there was any relationship to the provisions of subsection 152(4) of the Act. All he was saying with respect to this subparagraph was that because of the way in which the section reads, to deal with the setting off against the "forgiven amount", the losses carried forward for the previous year is in 1994. But by so doing you have no impact on those losses before 1994 as they apply to subsequent taxation years, such as 1997. In other words, if they do not write them off in 1994 by assessment, they do not write them off at all.
[106] He confirmed that if there was evidence of misrepresentation with respect to each individual taxation year, then the Minister may reassess at any time for that year but the Minister can only reassess with respect to the year for which a misrepresentation was made. Subparagraph 152(4)(a)(i) of the Act goes on to say:
... (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 ...
[107] If it is fraud that is alleged, the fraud must be related to the filing of the return or the supplying of the information. The supplying of the information must be accompanied by the fraud. Here there was no fraud and there was no situation where information was not supplied. All of the information that was required was supplied. The 1997 tax return included the information.
[108] The return was properly filed. The Appellant is not alleging that someone made any mistake other than that there is a discrepancy in determining whether the amount is properly identified on the second last page of the return as a forgiveness of debt. The amount was correct; it was prepared as a financial statement which was then adjusted by the accountants. Counsel for the Respondent also admitted that she accepted the accuracy of the T2S(1) for 1994 and the T2S(1) schedule for 1994.
[109] He disagreed with counsel for the Respondent's suggestion that someone should have taken the figures that appear on the summary, which is an adjustment from accounting to tax purposes, and then applied them against the losses that were carried forward from 1991 to 1993. However, a reasonable accountant would not do that. If you had already on the T2S(1) adjusted the amounts from accounting to tax purposes and taken them off, he would not then make any deduction from the losses carried forward from 1991 on the T2S(4). It would not happen.
[110] The Appellant need not call Mr. Grabowski to have him tell the Court what the law is. That issue is for the Court to determine. These entries were made from a professional capacity to reflect an adjustment from accounting to a tax purpose. That is what they show. They are all there. All the documents are there. There was nothing hidden. There was nothing concealed. As long as the return is right, it does not matter whether the taxpayer understands it or not. That is the situation in this case. This was a professional accounting decision. The two accountants determined that it should be applied in this way in dealing with this amount. They had done it in a way in which not only the profession generally deals with it but in the way in which the provisions under the Act as reflected in the forms supplied under the Act required you to do it.
[111] They made the adjustments to show what the difference was. They came to a conclusion that it should be treated in the fashion that they did and they did it. It was an expression of a professional opinion by an accountant or firm of accountants. It was not a wilful default. They did not make default in doing anything.
[112] There was no carelessness. There was no neglect. Someone sat down and made these calculations actively. They were directing their minds to the very thing that they were doing, it is not in a slovenly, slip shod manner.
[113] With respect to the year 1994, the amount was included in income. It did not have to be included in income subject to tax. It was shown on the financial statements and on the tax return.
[114] With respect to the year 1997, there is no evidence that the Appellant failed to take into account the forgiven loan when computing income for the 1997 taxation year. Ms. Louie did not say that. There was little or no discussion with respect to 1997. In any event, there was nothing to suggest that anything happened in 1997.
[115] There was nothing on the T2S(4) for 1994 which disclosed improper calculations. It was of no consequence that Mr. Poulton did not notice the $1.7 million because the Appellant is not asking the Court to absolve it from the responsibility of filing an accurate and complete return, but that is what the Appellant did.
[116] Counsel submitted that the Appellant has not been negligent. It dealt with the amount of $1.7 million by appropriately dividing it in two. It included financial statements for Hill Top, and on the last page of the tax return they reflected the pro-rata share of the amount that is reflected on the second last page of being some $800,000. The T2S(1) reflects a conversion of accounting purpose revenue to tax purpose revenue. There was a schedule to the T2S(1) which identifies specifically the breakdown of the amounts that are dealt with. Included on that T2S(1) schedule are two amounts reflective of the treatment of the money that was identified on the second last page of the tax return. Every requirement under the Act was properly attended to. That was the Appellant's submission and there was no evidence to the contrary.
[117] The final submission was that the T2S(1) was in substance, that is to say with respect to quantum, absolutely accurate. There were no mistakes. There was not a dime out of place. In fact, it is an analysis by a professional who adjusts on a regular basis income for financial statement purposes to income for tax purposes. It is not a misrepresentation of fact but, rather, a representation of an opinion which may or not or may not be a misrepresentation. It is a representation of an opinion of a professional who determines that that is the way to make the required adjustment.
[118] It was an adjustment for which provision was made in the forms that were supplied and it recognizes procedures in the accounting profession. It was not a misrepresentation of fact within the meaning of Nesbitt, supra. If there was any mistake in it at all it was made by the assessor by treating it differently from the way the professional accountants of the Appellant treated it. The assessor believed that this amount represented a true forgiveness of debt within the meaning of subsection 80(3) of the Act. That is what she believed. This was not a forgiveness of debt with a forgiven amount which is equivalent to the $800,000 which is what the assessor did.
[119] The Appeal should be allowed. The assessment of October 1, 2004 for the 1997 taxation year should be set aside and the Court should confirm the validity of the assessment made with respect to that taxation year prior to the date, which is October 23, 2003. The Court should also allow costs to the Appellant.
Surrebuttal
[120] Counsel for the Respondent further submitted that the misrepresentation for the 1994 return was in the T2S(4) by the failure to reduce non-capital losses. In 1997, the misrepresentation seen at Tab 14, was in the 1997 T2S(4) which carries forward that over-statement of non-capital losses available to be applied to 1997. On the basis of the Appellant's returns if you look at the T2S(4) for 1994, there were losses for 1991, for 1992 and 1993. If you look at the T2S(4) for 1997, you still have 1992 and 1993 losses available and now you have 1994 losses available too. But they were not there according to the evidence of the Respondent. They were gone prior to 1997.
[121] The misrepresentation for 1997 is that the Appellant claimed it had non-capital losses available under section 3 to deduction against income. That is the reference that is made in paragraph 39 of the Reply to the computation of income. The Respondent was talking about section 3 income. In fact there were no deductions available. Section 80 of the Act used them up prior to 1997.
[122] With respect to the amount of $261,000, this amount was allowed to be deducted by Ms. Louie because the amount had been paid. But it had no effect on the 1994 forgiveness. In spite of the assessor's action allowing this deduction, this amount was not deductible but it has nothing to do with the Respondent's position insofar as 1997 is concerned.
[123] The Appellant's position with respect to subparagraph 80(3)(a)(ii) does not fit within the scheme of the Act. "You cannot wipe out losses in one year and suddenly, like the phoenix rising from the ashes, there they are again to be applied in 1995, in 1996 and in 1997." The Respondent's interpretation of subparagraph 80(3)(a)(ii) earlier submitted is the correct one.
Analysis and Decision
[124] This case was well-presented and ably argued by two knowledgeable and experienced litigators. The Court was most impressed by the demeanour of counsel not only towards the Court but towards each other. It was most refreshing.
[125] Counsel for the Appellant argued that the first question under the provisions of subparagraph 80(3)(a)(ii) of the Act was to determine the forgiven amount. He took the position that the combination of the effect of the agreement and the Mutual Release was that the parties gave up a number of rights by virtue thereof and there was no forgiveness. He did admit that it was uncertain what these amounts might have been, but at any time to set out the revenue test dollar for dollar would have been virtually impossible mathematically. He admitted that there was no accounting kept because there were no dates for the disposition of assets.
[126] Mr. Schwartz concluded in his evidence that at the end of the day, as a result of the agreement, all of the indebtedness of Ridge Run and Oakamp Developments were considered as paid in full and that is what the agreement was intended to do. In the end, all of the parties were going to release each other.
[127] On the other hand, counsel for the Respondent's position is that upon the execution of the Release, a commercial debt owing by Ridge Run was forgiven. The amount of that forgiveness was not less than the amounts in issue in this case as shown in Exhibit A-1, Tab 2 in the Statement of Income & Expenses for Hill Top. Her position was that the Appellant was unable to quantify the amount forgiven other than the $1.7 million that is in evidence in the Joint Book of Documents. There is no evidence to indicate that the amount of $1.7 million was incorrect. In order to establish that there was no forgiveness in 1994, the Appellant would have had to adduce evidence that is impossible for him to adduce because there was never an accounting.
[128] It was her position that the amendment to 9(d) of the agreement did not prevent any other claims being made. There could have been an accounting and there was nothing to prevent that. Whatever the reason for failing to include in the agreement, a provision for an accounting, it was not done. Consequently, the argument is that the Appellant is unable to trace the funds to show what was repaid and what was not repaid and in the end result he cannot dispute the $1.7 million amount of forgiveness that was filed with the tax return and the financial statements.
[129] The only evidence that was given with respect to a possible forgiveness of a loan was the evidence of Mr. Poulton and the evidence of Mr. Schwartz. The best evidence that Mr. Schwartz gave in support of the Appellant's position on this issue was that the loan was not to be forgiven but to the extent that there were monies owed to the various entities they were being repaid by virtue of the operation of the agreement. To paraphrase the answer given by Mr. Schwartz to the Court's question during the trial, with respect to this issue, he said that at the end of the day the end result was that all of the indebtedness that Ridge Run owed to Oakamp Developments was considered to have been paid. That is what it amounts to.
[130] However, this witness did admit that there was no analysis done to prove that any of the loans, including the loan to Hill Top was actually in the amount that was reflected. There was no analysis of the debts that were alleged to be owing by Ridge Run to Termai and at no time did anyone ever do a detailed calculation or analysis to determine how much money was applied towards each loan. The money was to be applied to the indebtedness of the Royal Bank of Canada.
[131] The only other evidence with respect to the debt having been repaid rather than forgiven was the evidence of Mr. Poulton himself. At page 93 of the transcript, Mr. Poulton admitted that without an accounting he had no way of saying how much of the Termai loan was forgiven. He did say that after it sunk in, what was happening to him, he went down to see the accountant with Arthur Andersen. It was about two or three weeks after he had received the statement from Mr. Miller in 1994. He asked him about the statements. One document was referable to a $1.716 million amount. Mr. Grabowski indicated to the accountant that it was ridiculous because Mr. Poulton was going to have to pay it back and he did not get it. Mr. Poulton said that he received a letter saying that in effect there was no forgiveness of debt as far as they were concerned. This was repeated by Mr. Williamson three months ago.
[132] Insofar as the Court is concerned, this evidence is insufficient to establish on the balance of probabilities, to the Court's satisfaction, that the indebtedness was indeed paid off by the operation of the agreement. In order to accomplish this there would have to have been accounting so that at the end of the day, the parties could look at the various amounts of money that were owing at the outset and the various amounts of money that came in or applied to the debt, so that it could be established from a mathematical point of view that either all or some part of an amount alleged to be owing to the Appellant, was indeed paid off and not forgiven.
[133] The evidence of Mr. Schwartz amounts to nothing more than conjecture or supposition without further direct evidence of an accounting nature as to monies received, how they were applied, how much money, if any, was left over owing to the different entities.
[134] The evidence of Mr. Poulton was insufficient to meet this burden in the absence of the evidence of the accountant or any other document which showed the amount was indeed paid off and not forgiven.
[135] The position of the Appellant was contrary to various statements which were created by the accountant. The very amount in issue was referred to as "gain on forgiveness of HTP loan - Termai of $1,716,442".
[136] The Appellant's argument in this issue is rejected.
[137] The second argument raised by the Appellant is that if there was any forgiven amount, if it could be any amount at all, it is the amount that existed in 1994 and at no other time. The Mutual Release was dated June 29, 1994. The fiscal period of the Appellant ends in September, therefore "at any time", within the statute means "at the time of the 1994 taxation year the Appellant, and at no other time". It means that the losses carried forward up to the year of 1994 are to be deducted as a consequence of the addition to income or whatever the forgiven amount was.
[138] The argument is that in 1994 it was appropriate for the Minister to add to the income of the taxpayer any forgiven amount of a commercial obligation to reduce the amount of losses carried forward from prior taxation years, but that is the only year in which that could be done. You cannot do it to effect a subsequent taxation year and that is exactly what has happened here. The Minister is carrying this reduction of an assumed forgiven amount against non-capital losses of 1994 and prior years and applying them in 1997. This is not possible under the section.
[139] If the Minister does not assess for the year at that time, in 1994, when the amount was forgiven, he is barred from doing what customarily would follow, and that is reducing it in a subsequent taxation year. He has one chance, and that is to do it in the year in which the amount is forgiven. It was in subsequent years that the amount of loss carry forward is reintroduced in the scheme of things and can be deducted in computing the income of the taxpayer.
[140] Counsel for the Respondent agreed with this interpretation of subsection 80(3) of the Act except to the extent that you no longer bring, for taxation purposes, debt forgiveness into income in the year that it is forgiven. What you do first is to reduce non-capital losses. If you use up those and there is still some forgiveness leftover you move on to farm losses and that is (b). If you use up those and you have some forgiveness leftover you move on to (d). None of the other clauses apply to the situation at bar.
[141] She argued that the forgiven amount was $1.7 million and there is no evidence to dispute that. That amount shall be applied to reduce at that time which is 1994, "the debtor's non-capital loss for each taxation year that ended before that time to the extent that the amounts so applied does not exceed the loss balance."
[142] It does not mean that the Minister can only reduce that once. That is not what (ii) says. That is not what it does. She went on to explain, as set out in the summary of evidence, how the section works for the taxation year. What (ii) means is that you do not go back as a result of forgiveness and re-open 1991, 1992 and 1993 to reduce those loss balances. If that were the case then the argument might be that you would have to reduce a non-capital loss for each taxation year before the Minister goes back and re-opens the prior years. As far as counsel was concerned the legislation is clear. You do the calculation in 1994 and you deal with the loss balance in 1994. Another way of dealing with the loss balance is dealing with the prior taxation years non-capital losses that would otherwise be applied to 1994, and you do not touch the earlier years. The provisions go on to the various subparagraphs of section 80 and deal with what happens if you still have not used up the amount of that forgiveness, culminating in an income inclusion.
[143] Ms. Louie, in her testimony, said that the auditor applied the provisions of section 80 of the Act and in so doing relied upon the financial statements of the Appellant. The statements were found at Exhibit A-1 at Tab 2 referable to the year of 1994 for Hill Top. There was a line item called "GAIN ON FORGIVENESS OF HTP LOAN - TERMAI", which has already been referred to, in the amount of $1,716,442. The gain was reassessed by the auditor to reduce the non-capital loss balance in 1994. In the financial statements the Appellant had reported the gain on the forgiveness for $1.7 million. However, for income tax purposes it was taken out of Schedule T2S(1) of the income adjustment schedules, and consequently was never reported. She said that she accepted the forgiveness as happening in 1994 and applied subsection 80(3) of the Act reducing the non-capital loss carry forward balance by the forgiven amount. In doing that, the non-capital loss carry forward balance was reduced. As a result, there was no non-capital loss available for application for 1997. All of this was in accordance with the provisions of subsection 80(3).
[144] The Appellant's position with respect to subparagraph 80(3)(a)(ii) does not fit within the scheme of the Act, he said:
... that you can wipe out losses in one year and suddenly, like the Phoenix rising from the ashes, there they are again to be applied in 1995, 1996 and 1997.
[145] The Respondent's interpretation of subparagraph 80(3)(a)(ii) is clearly incorrect.
[146] The Court concludes that Ms. Louie fully interpreted and applied the provisions of subsection 80(3) of the Act in making the assessment as she did. The Court can see nothing in the wording of subparagraph 80(3)(a)(ii) which causes it to conclude as the Appellant has. The words "at the time" as used in the subsection, even though the words were used three times do not lend themselves to the interpretation that the Appellant has put upon this provision. The argument of counsel for the Appellant on this issue, although ingenious, is rejected.
[147] That leaves for consideration the issue of the violation of the provisions of subsection 152(4) by the Appellant. That section reads as follows:
Subject to subsection (5), the Minister may at any time assess 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, and may
(a) at any time, if 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, ...
[148] The Appellant has taken the position that the taxpayer's fraud that is alleged must be related to the filing of the return in the supplying of information. It is the Court's finding that under this section it is sufficient if the Minister is able to show that the taxpayer made any misrepresentation that is attributable to neglect, carelessness or wilful default in the return or in supplying information under this Act and this includes representations made to CRA by the Appellant or its agents or accountants acting on behalf of the Appellant.
[149] The argument of counsel for the Appellant that the fraud, if there is any, must be related to the filing of the return or the supplying of information, might be well taken. However, that is not the determining factor in this case as the Minister is basically relying upon the allegation that there has been a misrepresentation attributable to neglect, carelessness or wilful default.
[150] According to counsel for the Appellant, there is no evidence of any misrepresentation, on behalf of the Appellant, its servants or agents or accountants. All of the information was supplied and any reasonably trained accountant would have been able to interpret it in such a way as to make the proper assessment. Therefore, any error that resulted was not as a result of any actions of the Appellant but rather due to the erroneous actions of the Minister. The Appellant's final position was that whatever the Appellant did was not a misrepresentation in fact, but rather, the opinion of a professional who determines that that is the way to make the required adjustment, which may or may not be a misrepresentation under the Act.
[151] Counsel said that there was no evidence with respect to any misrepresentation. However, Ms. Louie gave evidence which was given in a very straightforward and professional manner. She spent a considerable amount of time on this issue and referred to various actions by the Appellant which she considered to be misrepresentations. She underwent a very rigorous cross-examination where it was suggested that an error was made by the Minister and not by the Appellant.
[152] She held fast to her position that there was a misrepresentation in the manner which she suggested. She would not accept the argument of counsel for the Appellant that it is possible that an accountant that was not an employee of CRA might conclude that these amounts were in fact not to be included in calculating taxable income. Her response was that as a professional accountant, they should note all of these sections of the Act and how they should be applied and they did not do that.
[153] In spite of her position, that the Appellant disclosed the nature of the matter to the Court as to its tax treatment, and as forgiveness to the Hill Top loan by Termai in its financial statements attached to the return, and that it disclosed a gain, it did not disclose the debt that is supposed to be used to offset the loss balances. Her position was that if she looked at it as an assessor, there was a gain in the financial statements but it was not included in income. As an assessor she would say that there was a forgiveness. The forgiveness should have been used to offset the loss carry forward and it should have been shown on the T2S(4) and it was not.
[154] Counsel for the Respondent, based upon the evidence given by Ms. Louie, took the view that Ridge Run made a misrepresentation. The misrepresentation is in the way it treated the forgiveness in the 1994 income tax return but the misrepresentation was also in 1997 in the application of the non-capital loss carry forward. It misrepresented to the Minister in 1997 the amount of its 1997 loss carry forward as Ms. Louie indicated.
[155] The misrepresentation was in the T2S(4). Looking at the T2S(4) for 1994 it shows a non-capital loss carry forward of $1,265,349 or however much they used but that is a misrepresentation because the loss carry forward balance was not that amount. The amount has to be reduced by the $1.7 million forgiveness under section 80 of the Act.
[156] That is a misrepresentation in the returns. That action affects the non-capital loss carry forward to subsequent years. This resulted in a misrepresentation in 1994, 1995, 1996 and 1997.
[157] The Court is satisfied that these arguments by counsel for the Respondent are well taken. It is satisfied that there was a misrepresentation by the persons who filed the returns on behalf of the Appellant, for which misrepresentation the Appellant is responsible.
[158] There was no evidence before the Court that the agent of the Appellant, Mr. Poulton, who signed the returns, asked any question whatsoever about the $1.7 million in issue. If he had questioned the returns as to where the $1.7 million was shown, and was told that it need not be reported, then he may have avoided being considered to be negligent or careless. He did not do that. As counsel for the Respondent pointed out, Mr. Poulton in his evidence as much admitted that he was neglectful and careless so much so, that in later years when he sat down with Mr. Grabowski to look at his income tax returns Mr. Poulton realized that he should have been doing that all along and at that point he fired him.
[159] The point made by counsel for the Respondent that in the absence of evidence of Mr. Grabowski or Mr. Poulton to give an explanation as to why this $1.7 million was just being ignored, this is a prima facie case of negligence on behalf of the accountant and the taxpayer. The Court is satisfied that this was a misrepresentation and it was attributable to neglect.
[160] The Court is further satisfied that there was a misrepresentation made in supplying information under the Act both in 1994 and in 1997. It occurred at the time that Ms. Louie was dealing with the first Notice of Objection. This was after the auditor reassessed the non-capital loss carry forward in 1997. Ms. Louie reassessed the year 1997 with no application of loss. The Notice of Objection was filed and Ms. Louie dealt with it and met with the Appellant's representatives and indicated that she had been looking for a document to determine whether or not there was a forgiveness in 1994 and to determine on what facts the accountants had based the $1.7 million dollar loan forgiveness.
[161] As a result of representations made on behalf of the Appellant and in the absence of anyone producing to her a release referable to 1994, she concluded that the auditor's adjustment was wrong. She concluded that there had not been a forgiveness in 1994 because of the agreement itself, which was the only document she had, and it did not say there was a forgiveness in 1994. This resulted in her understanding that there had been an agreement between the parties and that the forgiveness was to be recognized in 2000 and so Ms. Louie reassessed 2000. After that she received a Notice of Objection for 2000 stating that the forgiveness did not occur in 2000. It was alleged that there was a forgiveness in 1994.
[162] In the course of dealing with this Notice of Objection she saw for the first time the document at Tab 9, the Mutual Release, which she had been looking for, for one and a half years. This was a Release which clearly showed that as of 1994 whatever amount Ridge Run owned to Termai was gone. The only evidence of that amount are the statements of Arthur Andersen as to the Appellant's share of the $1.7 million.
[163] The Court agrees with counsel for the Respondent that taking into account the evidence of Mr. Poulton with respect to the Release and all the other evidence that the Release was signed in 1994 or sometime thereafter, there was a misrepresentation in supplying information under the Act. The misrepresentation led Ms. Louie to reassess the 2000 taxation year believing that there was no Release in 1994.
[164] The misrepresentation was further magnified in the Notice of Objection for 2000 which was filed indicating that there had been a Release in 1994. She concluded that she was deceived and that there had been a Release all along. That was a misrepresentation in supplying information under the Act insofar as the Court is concerned. As counsel for the Respondent argued, this was a misrepresentation made to induce CRA to reassess 2000 when the Appellant was in possession of a Release for 1994.
[165] The Court agrees with counsel for the Respondent that any misrepresentation with respect to 1994 is as much a misrepresentation for 1995, 1996 and 1997 as this amount was carried forward and applied to each subsequent taxation year.
[166] Counsel for the Appellant opined that a reasonable accountant would not have acted otherwise than the Appellant's accountant had in the case at bar. He had already, on the T2S(1), adjusted the amounts from accounting to tax purposes and taken them off. He would not then make any deduction from the losses carried forward from 1991 on the T2S(4). There was no evidence given by Mr. Grabowski, the accountant for the Appellant, or anyone else to support this proposition and it is completely contrary to the evidence put forward by Ms. Louie. She rejected that proposition when it was put forward to her by counsel for the Appellant.
[167] The argument of counsel for the Appellant is that the return was correct and nothing was concealed. The return was right and therefore it does not matter whether the taxpayer understood it or not. It was a professional accounting decision. As indicated, there is no evidence to support this position, which is contrary to that taken by Ms. Louie.
[168] Counsel for the Appellant argued that the profession generally deals with it in this way using the forms supplied under the Act to the taxpayer. The accountants for the Appellant concluded that they should be treated in the fashion that they were. It was an expression of a professional opinion by an accountant or firm of accountants. It was not wilful default. However, the evidence of Ms. Louie disagrees with that and so does the Court.
[169] The Court is satisfied that the Appellant, through its agents and accountants violated the provisions of subsection 152(4) and the Minister was entitled to make the assessment sought to be expunged in this case.
[170] The Court is satisfied that the Appellant has not rebutted the presumptions, contained in the Reply, where necessary, and as a result the appeal is dismissed and the Minister's assessment is confirmed.
[171] The Respondent shall have her costs of this action to be taxed.
Signed at New Glasgow, Nova Scotia, this 16th day of April 2007.
"T. E. Margeson"
Margeson J.
COURT FILE NO.: 2004-4537(IT)G
STYLE OF CAUSE: RIDGE RUN DEVELOPMENTS INC. AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: November 30, 2006
REASONS FOR JUDGMENT BY: The Honourable Justice T.E. Margeson
DATE OF JUDGMENT: April 16, 2007
APPEARANCES:
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Counsel for the Appellant : |
John A. Gamble, Q.C. |
|
Counsel for the Respondent: |
Marie-Thérèse Boris |
COUNSEL OF RECORD:
Barrister and Solicitor
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada