Date: 19991102
Docket: 97-3214-IT-G
BETWEEN:
AJMER SINGH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Penticton and Kelowna, British Columbia on October 19, 21 and 22, 1999.
[2] The Appellant testified and called Keith Holman, an orchardist; Tom Czernicki, subcontractor; Surinder Singla, developer and general contractor; and Jim Reid, a field manager for B.C. Packers. The Respondent called its auditor on the file, Ronald Scott.
[3] The following are the issues, the respective assumptions and the reasons for judgment respecting each issue.
[4] Issue:
8(a) Whether the Appellant's chief source of income was farming or a combination of farming and some other source of income during the 1989, 1991, 1992 and 1993 taxation years.
Assumptions:
7 a) during 1989 the Appellant was employed full-time as a sawmill worker with Greenwood Forest Products;
b) during 1990 to 1993 inclusive the Appellant worked full-time as a real-estate agent and developer;
c) the Appellant's chief source of income during the 1989, 1990, 1991, 1992 and 1993 taxation years was neither farming nor a combination of farming and some other source of income;
d) the Appellant's chief source of income during 1989 was from working in the sawmill, and his chief source of income in the years 1990 to 1993 inclusive was from real estate development;
e) the Appellant earned the following amounts from employment, real estate sales and development and farming during the 1989 to 1993 taxation years:
|
Year |
Employment Income/ Commissions |
Real Estate Development |
Farming Income |
||
|
GROSS |
NET |
GROSS |
NET |
||
|
1988 |
30,832 |
64,309 |
1,380 |
||
|
1989 |
19,545* |
18,762 |
(10,468) |
||
|
1990 |
21,476** |
549,700 |
11,139 |
33,865 |
2,330 |
|
1991 |
17,304 |
157,500 |
13,459 |
25,606 |
(16,258) |
|
1992 |
404,255 |
129,826 |
48,335 |
(11,325) |
|
|
1993 |
120,683 |
55,077 |
32,910 |
(11,484) |
|
|
1994 |
634,716 |
85,638 |
30,930 |
(27,960) |
|
|
1995 |
474,188 |
50,782 |
15,812 |
(33,191) |
|
|
* plus worker's compensation of $7,120 ** plus worker's compensation of $4,124 |
|||||
f) the Appellant's farming operations during the years under appeal were carried on three properties (the "Farm Properties") – a ten acre parcel in Keremeos, a 9.1 acre property at 2885 Valleyview Road in Penticton and a 9.5 acre parcel known as Lot 1 Valleyview Road, Penticton;
g) the Appellant purchased the farm properties for the purposes of resale at a profit, and not for the purpose of carrying on a full-time farming operation;
h) the Appellant leased out the Keremeos farm property in 1988 and 1993;
i) during the years under appeal, the Appellant did not take any steps to improve the return from the farm properties;
j) the Appellant's farming operations during the years under appeal were carried on for the purpose of subsidizing the holding costs of the farm properties;
Issue 8(a)
Mr. Singh was born in India in 1945. He obtained his university degree there in 1971 with a major in Political Science. Thereupon he taught for one year. He moved to Canada in 1972. He is married and has a family. After working at a variety of jobs in the Penticton area, he was employed by Greenwood Forest Products in 1974 or 1975. He remained employed there until he was injured on the job in 1989. In 1973 or 1974 he had taken a bookkeeping course. While on Workers' Compensation from his job injury in 1989 and 1990, he took a real estate course by correspondence. He passed it and obtained his licence to sell real estate in British Columbia. In 1990 he began to sell real estate in the Penticton area.
Mr. Singh had purchased the Keremeos orchard in 1980 over his wife's objections. It is about a 30 minute drive from Penticton and he had to drive back and forth from Penticton in order to work in that orchard. This was costly and time consuming and he leased the Keremeos orchard to tenants in 1989 and 1993. He grew peaches, apples and cherries there. In Penticton he grows apples and cherries.
Mr. Singh purchased the 2885 Valleyview farm in 1990 for $96,000 after he became a real estate agent, and immediately applied to have it removed from the Agricultural Land Restrictions programme ("A.L.R.") of British Columbia. He subdivided it and sold two acres from it in 1990 and then built a house on the remaining acreage. The actual farming of this orchard and the Lot 1 orchard have yielded poor income because the original trees had been let go, the weather has at times been poor and prices have been low. Mr. Singh purchased the Lot 1, Valleyview Road orchard in 1992 after he had claimed continuous losses from his other orchard properties except for 1988 when his Keremeos orchard showed a profit. However, in 1988 the Keremeos orchard was leased for a rent and the orchard received crop insurance and subsidies for the previous year. These and the lack of farming expenses in 1988 accounted for that profit.
The Revenue Canada auditor testified that Mr. Singh told him that he expected to profit from subdividing the orchard properties and not from farming. Mr. Singh did not deny these statements. Thus, while he has continued to operate the orchards or to lease them from time to time, his expectation of profit is from the sale of property. This prospect is in accord with his conduct to date.
In R. v. Donnelly, 97 DTC 5499, Robertson, J.A. said:
Any doubt as to whether the taxpayer's chief source of income is farming is resolved once consideration is given to the element of profitability. There is a difference between the type of evidence the taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. In the latter case the taxpayer need only show that there is or was an expectation of profit, be it $1 or $1 million. It is well recognized in tax law that a "reasonable expectation of profit" is not synonymous with an "expectation of reasonable profits". With respect to the section 31 profitability factor, however, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. In other words, we are looking for evidence to support a finding of reasonable expectation of "substantial" profits from farming.
In the present case, it was incumbent on the taxpayer to establish what he might have reasonably earned but for the two setbacks which gave rise to the loss: namely the death of Mr. Rankin and the decline in horse prices. I say this because the Tax Court Judge concluded that but for these setbacks the taxpayer would have earned the bulk of his income from farming in the three taxation years in question. While there is no doubt that the loss of Mr. Rankin, and the changes in American tax law had a negative and unexpected impact on the business, no evidence was presented to show what profit the taxpayer might have earned had these events not occurred and whether the amount would have been considered substantial when compared to his professional income. It was not enough for the taxpayer to claim that he might have earned a profit. He should have provided sufficient evidence to enable the Tax Court Judge to estimate quantitatively what that profit might have been.
Referring to three key factors which are determinable in a chief source of income case, the Court finds:
1. Capital committed
During the years in question the Appellant committed more capital to the development business than to farming from 1990 on. Assumption 7(e) was not refuted respecting development gross which reflects his investment therein.
2. Time spent
Mr. Singh testified that he spent substantially more time on his farm operation than on his development and employment. The number of hours alleged spent in farming was about equal to his employment hours while he was at Greenwood. However, his development business was very active and complicated. It involved constant dealings with various public authorities and applications, subdivisions, construction, the A.L.R., real estate agents and brokers, contractors and subcontractors. Mr. Singh's testimony respecting his hours spent on real estate sales, development and at his Greenwood employment is not accepted. It is refuted by the other evidence and the dollars in evidence, especially when real estate development and sales were his occupations from 1990 on. Based upon his business history, the Court finds that his hours spent on development from 1990 through 1993 far exceeded his time spent on anything else.
3. Profitability
The Appellant claimed substantial farming losses for every year since 1988. On reassessment and objection the losses he claimed were reduced and in 1990 Revenue Canada found him to have a profit of $2,330. The loss of $2,330 initially assessed was the Respondent counsel's error and was corrected during argument. The Appellant called Jim Reid who testified that Mr. Singh's replanting of three acres of cherries about four years ago should yield gross incomes of approximately $13,000 in 1999 and $20,000 in 2000, subject to weather and price conditions. Mr. Singh did not state his income from these three acres in 1999.
However, the large losses claimed and, except for 1990, the losses reassessed confirm the evidence that Mr. Singh did not change his farming practises and replanted low priced fruit when he had to, depending on tree maturity. These practises confirm his statements to the auditor that the profit will be in subdividing. It should be noted that Keith Holman's testimony is accepted; he established that it is virtually impossible to make a profit in traditional fruit. Rather, the profit is in selling the land. He stated that traditional apples are currently being sold by the growers for 6 ¢ per pound and in the stores in Penticton for $1.00 per pound. Field costs alone are 16 ¢ per pound without allowing for capital costs or interest expenses. Mr. Singh's statements to the auditor that the farms were purchased to subdivide and sell at a profit are confirmed by the evidence relating to the farms themselves and his other occupations. Assumptions 7(a), (b), (c) and (d) are correct. Assumptions 7(f), (g), (h), (i) and (j) are correct. It should be pointed out that the declining prices of fruit during the years in question made it questionable or possibly inadvisable to attempt to improve the return from traditional fruit farming which was then the main farming activity in the area.
Mr. Singh did not present evidence to show what profit he might have earned had the setbacks due to weather and low prices which he described not occurred. Nor did he lead any evidence to indicate whether any prospective farming income would have been substantial when compared to his other income.
[5] For these reasons, his appeal of issue 8(a) is dismissed. The Court finds that Mr. Singh's chief source of income in his 1989, 1991, 1992 and 1993 taxation years was not from farming or a combination of farming and some other source.
[6] Issue:
8(c) Whether the Appellant failed to report all of the proceeds he received from the sale of 202-95 Eckhardt to his brother, and if not, whether the Minister correctly imposed a penalty under Subsection 163(2) of the Act on this amount.
Assumptions:
7 vv) in April, 1992 the Appellant sold a condominium unit at 202-95 Eckhardt Avenue, Penticton to his brother Gurdial Chabal, for $75,000;
ww) at the time the Appellant disposed of the condominium unit at 202-95 Eckhardt Avenue to Gurdial Chabal, it had a fair market value of not less than $83,000;
xx) in his 1992 T1 income tax return, the Appellant reported the proceeds from the sale of 202-95 Eckhardt as $70,000 rather than $75,000 thereby underreporting his income by $5,000;
yy) in underreporting the proceeds he received from the disposition of 202-95 Eckhardt, the Appellant knowingly, or in circumstances amounting to gross negligence made false statements or omissions in filing his return of income for his 1992 taxation year;
Issue 8(c)
The Appellant testified that when he met with his accountant to prepare his 1992 income tax return the accountant asked him what price he had sold 202-95 Eckhardt for. They were talking about the "Eckhardt property" and Mr. Singh misinterpreted the individual unit which was being discussed and gave the wrong figure resulting in the $5,000 error.
Mr. Singh had developed, built and sold the units at 95 Eckhard. The evidence that he did not keep books and that his records were very poor, or non-existent, was not contested. He has a university degree, he was an active real estate agent, he had a course in accounting and by the end of 1992 he had developed over $1,000,000 in property and was allegedly operating three farms. In these circumstances records, cheques, invoices and receipts should have been part of his everyday business procedure. A conversation with his accountant about the price of a property he sold to his brother should not have been necessary. The records should have been in order. While a simple conversational mistake might appear minor, in Mr. Singh's circumstances it was part of a pattern of conduct which constitutes, at the least, gross negligence whereby he made a false statement in filing his return of income for his 1992 taxation year.
[7] Mr. Singh's appeal of this issue is dismissed.
[8] Issue:
8(d) Whether the Minister correctly included in the Appellant's income for his 1990 taxation year the amount of $4,000 from the disposition of an option to purchase a condominium unit, and whether the Appellant's failure to report this amount justified the imposition of a penalty under subsection 163(2) of the Act.
Assumptions:
7 o) during 1990, the Appellant disposed of an option (the "Option") to purchase a condominium unit located at 60 Chateau Drive, Penticton, for $4,000;
p) the Appellant had previously acquired the Option from the owner of the property at 60 Chateau Drive for no consideration;
q) the Appellant acquired the Option with the intention of purchasing and reselling 60 Chateau Drive at a profit;
r) the Appellant did not report the disposition of the Option or the profit he received therefrom on his 1990 T1 income tax return;
s) in failing to report his gain on the disposition of the Option, the Appellant knowingly, or in circumstances amounting to gross negligence made false statements or omissions in filing his return of income for his 1990 taxation year;
Issue 8(d):
Exhibit A-2 contains two offers to purchase dated September 24, 1990. Mr. Dhaliwal's offer of sale to Mrs. Singh is not signed by Mr. Dhaliwal. The second offer to purchase from Mrs. Singh to the Grewals appears to be signed by all the parties.
Mr. Scott testified that in two conversations Mr. Singh never stated that Mrs. Singh, rather than the Appellant, was the recipient of the $4,000 or the party to the 60 Chateau deal. Exhibit R-1, Tab 8 is a statement in Mr. Singh's handwriting that "we made $4,000 on the sale". "We" is not "I". Moreover, Mrs. Singh's agreement with Grewals specifies that Mr. Singh is occupying the property. Nothing conflicts with Mr. Singh's testimony refuting the assumptions. His evidence is accepted.
[9] His appeal is granted respecting issue 8(d).
[10] Issue:
8(e) Whether the Minister correctly included in the Appellant's income for his 1991 taxation year the Appellant's profit of $6,278 from the sale of property at 310 Green.
Assumptions:
7 t) in September, 1986 the Appellant purchased a farm at 310 Green Drive, Penticton ("310 Green");
u) in October 1986 the Appellant made an application to have 310 Green removed from the Agricultural Land Reserve but the application was refused;
v) in April, 1989 the Appellant applied to the City of Penticton to subdivide 310 Green into two lots;
w) the application for subdivision was given tentative approval on May 4, 1989;
x) the Appellant obtained a building permit to construct a house on one of the lots (still referred to as 310 Green Drive) in November, 1989 and began construction of a house shortly thereafter;
y) on January 18, 1990, prior to the completion of the house at 310 Green, the Appellant listed it for sale;
z) the Appellant sold the house at 310 Green for $160,000 by agreement dated February 21, 1990;
aa) at no time did the Appellant or his family ordinarily inhabit the house at 310 Green as a principal residence;
bb) the Appellant in purchasing 310 Green, did so with the intention of turning the property to account by means of resale at a profit in the course of business;
cc) the Appellant had extensive experience in construction and resale of "spec" homes;
dd) the cost of the house and land disposed of by the Appellant at 310 Green was not more than $153,721.33, leaving the Appellant with a net profit from the sale of $6,278.67;
Issue 8(e)
The Appellant only contested assumption (dd). During the audit Mr. Singh estimated the cost of construction at $127,000. During the hearing Mr. Singh gave evidence of his calculations respecting other properties he built from which he extrapolated a cost per square foot of $83.05. Using this he calculated a loss of $35,321.35. Mr. Singh stated that because he and his accountant treated 310 Green as a principal residence he did not keep any receipts. However, his evidence on this issue is not credible. Mr. Singh never lived in 310 Green. As a result, his estimates and calculations are not accepted. The assumptions are not refuted.
[11] The appeal of this issue is dismissed.
[12] Issues:
8(f) Whether the Appellant's profit from the sale of New Lot A in 1991 was income from business and whether the Minister correctly calculated that profit;
8(g) Whether the Appellant's profit from the sale of New Lot B in 1992 was income from business and whether the Minister correctly calculated that profit.
Assumptions:
ee) in September, 1990 the Appellant purchased an acreage with a small house adjacent to Highway 97 legally described as Lot 5 DL 455 Plan 4744 ODYD ("Lot 5") for $125,000;
ff) in November, 1990 the Appellant purchased a vacant acreage adjoining Lot 5, also adjacent to Highway 97 near Summerland legally described as Lot A DL455 Plan 29327 ODYD (Lot "A"), for $55,000;
gg) in April, 1991 the Appellant consolidated Lot 5 and Lot A and resubdivided them to leave the existing house on a much smaller lot, Lot A Plan KAP44951 ("New Lot A"), and to create a larger adjoining vacant acreage, Lot B Plan KAP44951 ("New Lot B");
hh) the Appellant sold New Lot A with the house in May, 1991 for $100,000;
ii) the Appellant's cost of the house and New Lot A was $88,024.83 and after the real estate commission on the sale, his profit from the sale of the property was $7,250.00;
jj) the Appellant reported the sale of the house and New Lot A in his 1992 T1 tax return;
kk) after April 1991 the Appellant took steps to develop New Lot B into a 14 lot bare land strata-title subdivision;
ll) in March 1992 the Appellant sold New Lot B and the subdivision plans to Shorecrest Homes Ltd. for $253,000;
mm) the Appellant's cost of New Lot B, including real estate commission, was $136,768.00 and the his profit on the sale was $116,232.00;
nn) the Appellant reported a capital gain of $78,292.59 from the sale of the New Lots A and B and claimed a capital gains deduction thereon of $40,682 in his 1992 T1 tax return;
oo) the Appellant in purchasing the Lot A and Lot 5, did so with the intention of turning the properties to account by means of resale at a profit in the course of business;
pp) the Appellant's major motivation in acquiring Lot A and Lot 5 was the possibility of resale at a profit;
qq) the real estate market in the Southern Okanagan area was rising rapidly during the time that the Appellant purchased Lot 5 and Lot A and sold New Lots A and B;
rr) at all times after 1989 the Appellant was in the business of land development and resale;
ss) the profit realized by the Appellant on the sale of New Lots A and B was income from business;
Issues 8(f) and (g):
Assumptions (ee) to (nn) inclusive and (qq) were not refuted. What remains is the question of capital or income. In Happy Valley Farms Ltd. v. The Queen, 86 DTC 6421 (F.C.T.D.), Rouleau, J. set out the criteria for this question. Using them, the Court finds:
1. The nature of the property sold.
The Appellant purchased land in two lots, consolidated and resubdivided them and then commissioned a subdivision plan which divided the large parcel into 14 lots.
2. Length of period of ownership.
The total time from purchase to sale was 18 months. They were done by Mr. Singh, a real estate agent who, both before and after this was actively subdividing, and/or, developing and selling land.
3. Frequency of transactions.
This strata plan of the 14 lots and its steps were done in April, 1991. In 1986 the Appellant had attempted to remove 310 Green from the A.L.R.; in May he subdivided it. In 1991 he was developing 95 Eckhardt into condominium units which he sold in 1992. In 1990 he bought one Valleyview farm property in Penticton and in 1992 he bought the other in order to subdivide them. The 14 stratified lot plan was merely another subdivide and sell transaction.
4. Work expended on the property.
On the evidence, his work was all associated with legal re-lotting and subdivision plans.
5. Circumstances responsible for sale.
The 14 lot property was listed with another agent and sold the same day. There is no evidence of outside pressure or influence which forced the sale.
6. Motive.
From the beginning the motive was obviously to flip the house and land for a profit.
The transaction from beginning to end was conducted to earn a profit. The Appellant was in the business of buying and selling real property for a profit and Lots A and B were simply two more in a series of transactions and attempted transactions which constituted a business.
Mr. Singh testified that as part of the sale price for $100,000 of Lot A he took a trade of a mobile home which was valued at $32,500 (Exhibit A-7). He testified that he incurred substantial costs to set this up and sell it. However, the purchase and sale of the mobile home is a separate transaction. While he testified that he lost money on it, there is no evidence that he ever reported that transaction or if the expenses were buried in another project. Given Mr. Singh's lack of records, proven failure to report income, and myriad of dealings in which the alleged expenses might have arisen, his testimony is not accepted for the purpose of affecting the outcome of issues 8(f) and (g)
[13] For the foregoing reasons, the appeal of issues 8(f) and 8(g) is dismissed.
[14] Issue:
8(h) Whether the Appellant overclaimed expenses on the Eckhardt project by $16,161.80 in 1992, and if so, whether the Minister correctly imposed penalties under Subsection 163(2) of the Act on that amount.
Assumptions:
7 zz) in 1991 the Appellant purchased property at 95 Eckhardt Avenue, Penticton and during 1991 and 1992 he constructed a condominium complex (the "Eckhardt Project") containing four residential units and four commercial units;
aaa) the Appellant incurred expenses of $399,206 for the development and construction of the Eckhardt Project;
bbb) in his 1992 T1 income tax return, the Appellant claimed expenses for the development and construction of the Eckhardt Project of $415,368 and thereby overclaimed expenses and underreported income from the sale of the units by $16,162;
ccc) in overclaiming the expenses on the Eckhardt Project, the Appellant knowingly, or in circumstances amounting to gross negligence made false statements or omissions in filing his return of income for his 1992 taxation year;
Issue 8(h)
Respecting the $16,162, the Appellant put forward the proposition that, while he failed to report these expenses, he understated his expenses on Greenwood Drive by $17,768.18 in another year which was allowed. Therefore, those should be offset. In both cases these arose due to the Appellant's failure to report, lack of bookkeeping and absence of records.
The Appellant attempted to prove various expenses which would reduce the overclaim in Eckhardt with copies of cheques and bills from 1991 and 1992. However, it could not be established if these had already been claimed, if they had been paid or what they had been paid for if they were paid. Tom Czernicki testified willingly for the Appellant and signed a document that said the Appellant paid him $3,000. Mr. Czernicki is believed as to his work and the fact that he was paid. However, whether he was paid in 1991, 1992 or some other year is a matter of guessing. Mr. Czernicki honestly did not know dates and was uncertain about what work he did. He was sometimes paid in cash and he worked as an itinerant labourer for the Appellant at odd tasks. There was nothing substantial in the evidence on this issue which refuted the assumptions.
On the evidence, the Appellant was grossly negligent in overclaiming expenses on the Eckhardt property. He had the training, experience and business knowledge to keep records. He was in a variety of activities. It is clear that he made a conscious choice not to keep records, to confuse his transactions or hide them and to file false returns of income tax in 1992.
[15] The appeal of the issue of overclaimed expenses is dismissed. The penalties were correctly imposed under subsection 163(2) of the Income Tax Act on the amount of $16,161.80.
[16] Issue:
8(k) Whether the Appellant made misrepresentations attributable to neglect, carelessness or wilful default in the filing of his 1990 and 1991 tax returns.
Assumption:
7 hhh) the Appellant made misrepresentations attributable to neglect, carelessness or wilful default in filing his returns of income for his 1990 and 1991 taxation years.
Issue 8(k)
The Appellant's 1990 income tax return is dated December 9, 1991. His 1991 income tax return is dated April 30, 1992.
The history of the Appellant's income tax returns is at the very least one of neglect or carelessness in filing his returns of income for his 1990 and 1991 taxation years. He had substantial training by then. He had commenced operating farm land in 1980. He had attempted to remove property from the A.L.R. in 1986 and had subdivided property at 310 Green where he built and sold a house in 1990. He did not refute assumption 7(cc) that by that time he had built and sold "spec" homes. He was an active real estate salesman and in 1990 he bought a Valleyview farm to subdivide and sell. There is a set pattern of taking advantage of the land and building boom in the Penticton area and going off books to accomplish it tax free. Such a pattern is one that can be politely described as of wilful default.
[17] The appeal of this issue is dismissed.
[18] Issue 8(b) was agreed to as to the following fair market values:
220 Greenwood $37,000
12599 Taylor Place $93,250
202-95 Eckhardt $75,000
204-95 Eckhardt $77,000
[19] Mr. Singh withdrew his appeal respecting issues 8(i) and 8(j) at the opening of the hearing. They read:
Whether the Appellant failed to report rental income from the Oliver rental property in 1993;
Whether the Appellant overclaimed expenses and underreported his profit from the disposition of the Oliver rental property in 1993.
[20] Therefore, Mr. Singh's appeal of issue 8(d) for his 1990 taxation year is referred to the Minister of National Revenue for reconsideration and reassessment. His appeals of other issues for 1990 are dismissed. His appeals for the other years before the Court are dismissed.
[21] The Respondent is awarded party and party costs.
Signed at London, Ontario this 2nd day of November 1999.
"D.W. Beaubier"
J.T.C.C.