Tax Court of Canada Judgments

Date: 20000203

Docket: 97-1179-IT-G

BETWEEN:

JACK GREENWOOD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Associate Chief Judge Garon, T.C.C.

[1] These are appeals from income tax reassessments for the 1987 to 1993 taxation years inclusive.

[2] Initially, the Minister of National Revenue had assessed the Appellant pursuant to subsection 152(7) of the Income Tax Act (the "Act") in respect of the seven years referred to earlier. These assessments were dated March 24, 1995.

[3] Following the March 24, 1995 assessments, the Appellant filed his T1 tax returns for the 1987 to 1993 taxation years on or about June 13, 1995. On September 27, 1996, the Minister of National Revenue reassessed the Appellant in respect of each of the above-mentioned seven taxation years and the present appeals are from these reassessments.

[4] The Appellant stated that he did not file tax returns between 1987 and 1993 as well as prior to 1987, because to the best of his knowledge and belief he did not have any taxable income and, in his opinion, there was no requirement to file a tax return in Canada unless one had taxable income or it was demanded that one file a tax return. The Appellant further stated that if he did have taxable income in the years 1987, 1988, 1989 and 1990, it was of such a minimal amount that he was unaware of the amount until he prepared his tax returns. He made no attempt prior to 1995 to compute his income and to determine whether he was in a taxable position or not.

[5] The Appellant, who was at all material times an accountant, had been practising his profession as a sole practitioner from 1967 to 1987. During that time, he operated under the name, Greenwood and Company, Chartered Accountants ("Greenwood and Company"). The Appellant continued to hold himself out as a chartered accountant despite the fact that the Institute of Chartered Accountants had expelled him in 1984.

[6] In 1977, a firm by the name of Chartac Small Business Services Ltd. ("Chartac") was incorporated. It was an accounting service company. Six other firms including as part of their names the word "Chartac" were incorporated some time later, allegedly to preserve the name "Chartac". Reference was made on a few occasions to a company in the above group of companies by the name of "Chartac Business Services Ltd." For practical purposes, I will treat the latter company as the same as "Chartac Small Business Services Ltd." that is, being one company described, as indicated earlier, as Chartac. The Appellant's wife, Mrs. Adeana Greenwood, and Mrs. Margaret Fleming were the sole shareholders of Chartac. The Appellant was a director of Chartac. During the examination for discovery, the Appellant stated that he was not a shareholder of Chartac for "creditor proofing" reasons.

[7] According to the Appellant, Greenwood and Company and Chartac both carried on an accounting business and operated out of the same room. Greenwood and Company had approximately 100 clients and Chartac had, by his count, 686 clients. There were eight or nine women working for Chartac and the Appellant stated that "quite a bit of the work that was done for the Greenwood clients was done by the Chartac staff". (Transcript at page 121). The Appellant himself stated that the two firms were a "common operation".

[8] The Appellant's accounting practice and the Chartac business were sold in 1987 to a Mr. Irwin Phillips. The consideration for the assets of the firms was $150,000.00; $140,000.00 was attributable to the sale of the name, goodwill and client lists and the remaining $10,000.00 represented the sale price of the office equipment. After disbursements, the Appellant received a share of the proceeds, which was divided 50/50 between him and his wife.

[9] The terms of the sale required a $75,000.00 down payment followed by three successive annual payments of $25,000.00, such payments bearing an annual six percent interest rate. In addition, the Appellant agreed to work on a contract basis to help the transition to new ownership. The Appellant initially was paid $200.00 a day but later agreed to a salary of $750.00 per month. The Appellant continued to work for Mr. Irwin Phillips, the purchaser of the business of the firms referred to above. The Appellant also carried out during the relevant years his own accounting practice, Greenwood and Company, out of his home.

[10] In addition to considering himself to be in a non-taxable position, the Appellant did not own any property. According to the Appellant, his wife owned all of the properties since 1966. This is evidenced, in his view, by the fact that all the properties were in her name. Prior to 1966, the properties were held jointly by the Appellant and his wife, Adeana Greenwood, as appears from Exhibit A-3.

[11] The Appellant's wife apparently purchased several properties over the years. See Exhibit A-3. The Appellant and his family resided in New Westminster at 56 Seventh Avenue ("New Westminster property") from 1973 until 1987. It was the Appellant's position that his wife purchased the New Westminster property for $35,000.00 in 1973, of which the payment of $26,250.00 of the purchase price was secured by a mortgage for which the Appellant was a guarantor.

[12] In 1976 a house was purchased in the Appellant's wife's name on Fifth Street in New Westminster. According to the Appellant, his wife lived in it for a year and then sold it to their younger daughter. In 1980, the Appellant's wife purchased a property in Manitoba allegedly to be closer to her mother, but eventually returned to Vancouver after only living there for two months. In 1986 a townhouse was purchased in White Rock in Mrs. Greenwood's name, which was sold three months later.

[13] The Appellant testified that in 1987, his wife had purchased a waterfront property on All Bay Road in Sidney ("Sidney property") for $168,000.00. The Appellant was a guarantor on the mortgage. During the examination for discovery, the Appellant stated that he was guarantor on the mortgage because his wife could not have gotten the mortgage on her own owing to the fact that she had no visible sources of income. At trial, the Appellant stated that his wife did in fact have visible income from her Old Age Security and Canada Pension Plan, as well as capital payments from their son with respect to the sale of the New Westminster property and the forthcoming money from the sale of Chartac, of which half belonged to the Appellant.

[14] When the Sidney home was acquired in 1987, the New Westminster property was sold to the Appellant's son for $75,000.00, of which $13,000.00 was paid in cash and the remaining $62,000.00 owing was to be paid on a monthly basis at six percent annual interest.

[15] In 1990, a townhouse was purchased in the name of the Appellant's wife at 15140 150th Street, Surrey, in a complex called Mayfield Green for $134,900.00 ("Surrey property"). The townhouse was sold in 1992. No principal residence designation was made in respect of this property. The money for the purchase of the property came from the Appellant's account at the Pacific Coast Savings Credit Union. According to the Appellant, the money to purchase this house came from his account, merely as a matter of banking convenience. He stated that the money belonged to his wife. The Respondent however, included the $22,575.00 taxable capital gain in the Appellant's income.

[16] In 1993, a house was purchased at 573 Laurier Drive, Kamloops, in Mrs. Greenwood's name for $149,900.00 ("Kamloops property"), a few blocks from their daughter. The source of the funds to purchase the Kamloops property came from the sale of the Surrey property in 1992, which the Minister traced back to the Appellant's account at Pacific Coast Savings Credit Union. The Appellant's wife moved into the home in April 1993, while the Appellant remained in Sidney. The house was listed for sale in August of 1993 for $179,900.00 because, according to the Appellant, his wife did not like living in Kamloops.

[17] The Respondent included the amount of $9,516.79 in computing the Appellant's income for the 1993 taxation year from the sale of the Kamloops property. The Minister assumed that the Appellant purchased the property in Kamloops with the intention of reselling it at a profit and, therefore, included the profit as income. The Appellant maintained that the Kamloops property belonged to his wife and further that it was not a rental property and was not acquired for the purpose of selling it at a profit.

[18] Despite the fact that all of the properties were held in the name of the Appellant's wife, it was the Respondent's position that the Appellant retained the beneficial ownership of the properties. The Respondent alleged that there was an agreement between the Appellant and his wife to the effect that all the assets were to be held in his wife's name for creditor proofing purposes and that at all times the Appellant considered the properties to be "owned by at least himself and his wife as 50/50". (Transcript at page 154).

[19] The Minister further assessed the Appellant for unreported business income for the 1991, 1992 and 1993 taxation years and disallowed a portion of the business expenses deducted by the Appellant for the 1987 to 1993 taxation years inclusive. The Appellant has disputed the Minister's figures and maintains that his true income reflects the amounts that were provided by him in his tax returns. The Appellant however, was unable to show how he computed his income and arrived at the amounts he reported. The following chart shows the respective calculations by the Appellant and by the Minister of both gross and net income during the years 1988 to 1993 inclusive:

GROSS INCOME:

Taxation year Appellant per T1 Minister

1988 $ 5,804.20 $ 5,804.20

1989 $18,478.26 $20,013.26

1990 $22,823.49 $22,850.49

1991 $35,226.65 $44,390.41

1992 $21,791.39 $62,789.19

1993 $26,416.68 $36,733.49

NET INCOME:

Taxation year Appellant per T1 Minister

1988 $ -1,665.80 $ 1,483.80

1989 $ 5,915.26 $11,338.81

1990 $ 5,517.49 $13,919.79

1991 $16,531.05 $33,472.01

1992 $ 4,473.18 $54,357.73

1993 $ 6,893.54 $26,572.25

[20] The Minister also assessed the Appellant for unreported interest income for all seven taxation years derived from the mortgage on the New Westminster property, which was sold to the Appellant's son, and for interest earned from a U.K. account that was in the Appellant's name.

[21] Having in mind this general factual background, I will now analyse in more detail the evidence and the submissions of the parties in relation to each of the eight matters in issue.

Professional income

[22] For the years 1987, 1988, 1989 and 1990 the increase in the Appellant's income was a result of the Minister decreasing the Appellant's expenses. For the 1991, 1992 and 1993 taxation years the increase in the Appellant's income resulted from the Minister decreasing expenses and increasing gross revenue.

1. Disallowance of expenses - professional income 1987 to 1993

[23] I shall now advert to the expenses disallowed by the Minister of National Revenue for the 1987 to 1993 taxation years in computing the Appellant's income from his business for those years.

[24] The Minister reassessed the Appellant to disallow the personal portion of certain expenses, and to decrease the Appellant's claim in respect of capital cost allowances on the basis that the undepreciated cost of property was not correctly determined.

[25] For GST purposes, the Appellant calculated the portion of certain expenses which was for business purposes as follows: telephone 50 percent; gas and oil 75 percent; auto repairs and maintenance 75 percent; office supplies 100 percent; travel and dining 60 percent and office equipment 100 percent.

[26] In preparing his financial statements, however, the Appellant failed to deduct the personal portion of these expenses. The Appellant conceded this point at trial. The Minister accepted the Appellant's percentages. Therefore, the personal portion with respect to each class of the expenses hereinafter described: telephone 50 percent; automobile 25 percent; and travel/dining 40 percent, should be disallowed.

[27] The Appellant referred to an amount in 1987 of $15,575.00 as being the undepreciated capital cost of property which the Appellant was unable to explain. The Appellant claimed capital cost allowances on three cars, during the period of 1988 to 1993, two of which were owned by Chartac, according to the Appellant's deposition at discovery, it would seem. The Minister disallowed a portion of the capital cost allowances claimed by the Appellant. In my opinion, the Appellant did not offer any evidence to rebut the Minister's position about the matter of the disallowance of a portion of capital cost allowances deducted by the Appellant.

[28] It is clear that the Appellant did not keep sufficient records. He did not calculate his income for the 1987 to 1993 taxation years until 1995 when he was forced to file tax returns. He did not have receipts and guessed with respect to certain amounts. The Appellant merely estimated certain business expenses and was unconcerned about this fact because in his view the amounts were small. For instance, the Appellant stated that the promotional and entertainment expenses claimed were estimates and according to the Appellant, the amounts were so minor that he did not feel the need to strain over undue details.

[29] I find that the Appellant's estimates of these business expenses do not constitute persuasive evidence which would enable me to allow their deduction; therefore, I would maintain the Minister's disallowance of any expenses referred to earlier.

[30] The Minister also disallowed all rental expenses claimed by the Appellant. The Appellant operated his accounting practice out of his home and claimed that he paid rent to his wife. The Appellant however paid no specific amounts to his wife as rent. For instance the Appellant testified that he might bring home $100.00 in groceries and would deduct this as a rental payment. The Appellant was unable to offer any proof that he did in fact pay his wife the amounts claimed as rent. It was the Appellant's position that it did not matter whether he actually paid rent to his wife because so long as she included it in her income, it was an expense to him.

[31] I have come to the conclusion that the Appellant's rental expenses were properly disallowed. The Appellant was unable to offer any evidence that he paid rent to his wife and went so far as to state that it did not really matter whether he did.

2. Unreported business income - 1991 to 1993

[32] In his assessments for the 1991, 1992 and 1993 taxation years, the Minister of National Revenue took the position that the Appellant had failed to include the amounts of income from his professional business of $9,163.76, $40,997.80 and $10,316.81, as appears from paragraph 4 of the Reply to the Notice of Appeal.

[33] The Appellant stated that his clients always paid him by cheques, which he deposited into one of two accounts, the Pacific Coast Savings Credit Union account or the Surrey Metro Savings Credit Union account. The deposits into these two accounts consisted of Old Age Security and Canada Pension Plan payments, accounting revenue and, according to the Appellant, "other deposits", about which he could not offer evidence.

[34] The Appellant relied on his bank statements to calculate his income. In order to calculate his professional income, he would examine the deposits that were made into these two accounts and eliminate deposits that were not linked to his accounting practice. The Respondent submitted that the Appellant's evidence was not sufficient to overcome the onus of proof on the Appellant.

[35] In calculating his income, the Appellant excluded several deposits, which he characterized as "other deposits". The Appellant did not know whether these amounts, which were not included in calculating his income, did in fact include accounting income. When the Appellant was questioned with respect to certain amounts included as "other deposits", the Appellant stated that there was a strong probability that it was practice income. The Appellant further admitted that he could not guarantee that the income figure he arrived at was in fact correct.

[36] In 1991 deposits were made into the Appellant's account to fund the purchase of the Surrey townhouse. There is a discrepancy of approximately $10,000.00 between the deposits and the purchase price. On cross-examination, the Appellant admitted that this excess could have been accounting revenue that he did not include in computing his income for the year in question.

[37] In December 1990, the Appellant received $4,000.00 for accounting work, which should have been included in his accounting revenue for the 1991 fiscal year. This money was deposited into a Bank of Montreal account. Earlier, however, the Appellant stated that all of his accounting revenue was deposited into either the Surrey Savings Credit Union or Pacific Coast Savings Credit Union accounts. A further amount of $1,750.00 was deposited into the Bank of Montreal account in 1991, which represented accounting revenue from Mr. Irwin Phillips, the purchaser of Appellant's practice and business of Chartac. On October 30, 1992, the Appellant invoiced a client for $975.00, which should have been included in calculating his accounting revenue for the 1993 taxation year. There were no bank deposits made in 1993 to the Pacific Coast Savings Credit Union or Surrey Savings Credit Union accounts in the amount of $975.00 to reflect this accounting revenue. The Appellant was unable to offer an explanation other than perhaps the money was deposited into the Bank of Montreal account because $7,800.00 was deposited into the Bank of Montreal account during that year.

[38] The Respondent submitted that since he did not take into account the deposits made into the Bank of Montreal, the Minister's assessment was "under-inclusive" as to the Appellant's gross revenue.

[39] The Appellant reported $21,791.39 in accounting fees in 1992. The Appellant's bank statement analysis, however, only seemed to include the deposits made to the Surrey Savings Credit Union account. The Appellant stated that he did not know how much accounting revenue was deposited in the Pacific Coast Savings Credit Union account because the Pacific Coast Savings Credit Union deposits were credited to the cash clearing account. The Appellant was unable to show what deposits made up the accounting fees of $21,791.39 that he computed.

[40] The Appellant was paid $500.00 from "Basran SCU", a client, "re Queenswood", which should have been included in computing his income for the 1992 taxation year. According to the Appellant, it was a company that he incorporated for a client. There were no "fees deposited" in the amount of $500.00, however there were several "other deposits" in the amount of $500.00.

[41] The Respondent's position was that the Appellant failed to include for the 1992 taxation year the $500.00 received as accounting fees in computing his accounting revenue for the year. The Appellant, however, stated that while he received $500.00 from the client $300.00 was paid out for the incorporation fees. The Appellant himself however could not be sure of the explanation for his failure to include the $500.00 as "fees deposited".

[42] The Appellant calculated his practice revenue for the 1993 taxation year as $26,416.68. The Appellant once again was unable to identify the bank deposits that made up that particular revenue.

[43] From the Appellant's own evidence, the Appellant was unable to show how he arrived at his own gross income calculations for the years 1991, 1992 and 1993.

[44] In short, I do not believe on the examination of the Appellant's entire evidence that the Appellant has demolished the burden of proof resting upon him with respect to the amounts added to his gross income for the taxation years 1991, 1992 and 1993.

3. Recapture of capital cost allowances

[45] The third matter has to do with the recapture of capital cost allowances with respect of the office equipment sold in 1987 as part of the Appellant's practice and Chartac business.

[46] The Appellant disputed the recapture of the capital cost allowances in respect of the office equipment. The Appellant maintained that the office equipment belonged to Chartac and that Greenwood and Company's only assets were a chair, an adding machine, a desk and an old typewriter. The Appellant did not tender in evidence the completed sale agreement with a schedule listing the equipment sold, to show what equipment the $10,000.00 was attributable to.

[47] The Minister included $10,000.00 in the Appellant's income for 1987 based on the Appellant's own records that were prepared in 1995. In effect, the Appellant prepared a Capital Account for Jack Greenwood for 1987 – 1994, where it was shown that equipment in the amount of $10,000.00 is included in the Appellant's Capital Account. The Appellant admitted that there were several deficiencies in the Capital Account in question and stated that the $10,000.00 in equipment was not supposed to be put in his Capital Account. In cross-examination, in answer to the following question:

Q. But at least according to your capital accounts summary there, it was Jack Greenwood that had $10,000.00 worth of equipment.

He replied thus:

A. Yes, and if one goes to the next page where the accounting for that year is done and the sale of Chartac, you'll find at the very, very first entry, is to take the $10,000.00 out and put it straight into Chartac. That's exactly as large as life right here, journal entry number three, taken out, out of Greenwood and charge it to Chartac, that's exactly where it went, Your Honour.

(Transcript at page 132, line 10 to line 19).

At one point he expressed himself thus in responding to the question put by counsel for the Respondent:

Q. Well besides the UK accounts listed there, there's also a listing for equipment in the amount of $10,000.00 on January 1, 1987.

A. Yes, it was shown there, but it wasn't supposed to be there because when I did - - when I started out in 1987, the year of the sale of the Chartac, in effect, I incorporated the sale of Chartac, the $150,000.00, et cetera, et cetera, for purely working paper convenience, I included it under the name of Jack Greenwood.

(Transcript at page 128, line 10 to line 18.)

The Appellant, however, was unable to offer proof that Chartac received the $10,000.00 to which reference was just made.

[48] In conclusion, there is no evidence that refutes the Minister's assumption in subparagraph 12 i) of the Reply to the Notice of Appeal, according to which "the Appellant had fully depreciated the Furniture and claimed CCA in his tax returns prior to the 1987 taxation year". If the Appellant claimed depreciation in prior years in respect of the furniture, it was because he was the owner of the subject property. Also, the documentary evidence supports the position of the Minister of National Revenue. I am also influenced by the fact that the Appellant did not give satisfactory explanations as to why he was not able to produce the completed sale agreement and, more particularly, the schedule to the latter agreement setting out the items of property that were included in the sale. Upon the whole, I do not accept his testimony as credible on this branch of the case and I confirm the Minister's reassessment in respect of this matter.

4. Loan to the Appellant's son

[49] The fourth matter relates to the inclusion in the Appellant's income for the 1987 to 1993 taxation years of interest in respect of a loan made in 1987 to the Appellant's son in the amount of $62,000.00.

[50] The Appellant also disputed the inclusion of interest from the loan that was made to the Appellant's son to purchase the New Westminster property. In his testimony at the trial, the Appellant contested the fact that interest was paid, despite the fact that the mortgage provided so. According to the Appellant, the lawyer who represented his wife at the time of the sale of the New Westminster property included the stipulation relative to the six percent interest rate per year in the mortgage contract. Furthermore, the Appellant denied that the interest would have been payable to him.

[51] The Appellant's family home in New Westminster was purchased in 1973 and sold to the Appellant's son in 1987 for $75,000.00 of which $13,000.00 was received in cash and a mortgage was taken for the remaining $62,000.00 with a six percent interest rate per year.

[52] The Minister reassessed the Appellant on the basis that the interest was received by him and that it belonged solely to the Appellant. At trial, the Respondent conceded that at most 50 percent of the interest should be attributed to the Appellant.

[53] From the evidence, it appears that the Appellant's son began making payments in the amount of $550.00 per month in September 1987, which eventually increased to $600.00 per month in approximately 1992 or 1993. During the examination for discovery, which was held about two months prior to the trial, the Appellant stated that his son made the payments "faithfully". The Respondent's contention was that if in fact payments were made by the Appellant's son commencing in September 1987 at $550.00 per month and increasing to $600.00 per month in January 1993, more than $62,000.00 would have in fact been paid by the Appellant's son. The Appellant denied charging interest on the money that his son borrowed and attempted during trial to say that perhaps the payments were not made every month.

[54] In my opinion, the Appellant did not discharge the burden of proof with respect to the assumptions of fact made by the Minister in subparagraphs 12 r), s) and t) of the Reply to the Notice of Appeal (except as to the amount of the loan which is $62,000.00 rather than $70,000.00), as I was not persuaded by the Appellant's testimony.

[55] For instance, at trial the Appellant testified that he did not know if the monthly payments were made by the Appellant's son every month while on discovery he asserted that the payments were made faithfully. Also, the Appellant's version to the effect that his son made regular monthly payments in respect of the mortgage loan beginning in the fall of 1987 at $550.00 and at $600.00 beginning in 1992 or 1993 until say January 1999 (as he admitted at discovery that a payment had been made in that month) cannot be reconciled with his statement that no interest had been paid by his son on the subject mortgage loan, because the sum total of payments made during the period ending January 1999 would be in the vicinity of $80,000.00. Furthermore, it was not suggested that the January 1999 payment referred to at discovery was the last payment to be made by the Appellant's son under the mortgage loan.

[56] I have serious doubts about the Appellant's credibility in respect of his assertion that no interest was paid on the subject loan and the ownership of the New Westminster property. Having regard to the Respondent's concession at trial regarding the joint ownership of this property, I would allow the appeal in part in relation to the inclusion in the Appellant's income of interest relative to the mortgage loan to the Appellant's son and I hold that 50 percent of the interest received from the mortgage should be included in the Appellant's income for the years in issue.

5. Interest on U.K. account

[57] The fifth matter involves the inclusion in the Appellant's income for the 1987 to 1993 taxation years of interest on moneys held in an account with the Leeds & Holbeck Building Society in the United Kingdom ("U.K. account").

[58] The main issue with respect to the interest income on the U.K. account is the ownership of the moneys in the above-mentioned account. The Appellant denies that these interest amounts were his. The Appellant maintains that while the account was in his name, it was his mother's account.

[59] The U.K. account earned £ 15,121.63 over a period of six years. The Appellant did not include these interest amounts in computing his income because in his opinion, it was not his income. According to the Appellant, the account belonged to his mother and was merely held in the Appellant's name under a general power of attorney. When the Appellant's mother died in January 1995, he had the account transferred to a joint account held by him and his wife.

[60] The Appellant admitted that he could have written to the Leeds & Holbeck Building Society to advise of the transfer of the Appellant's mother's account to the Appellant's name, however the Appellant stated that he did not have this letter to produce to the Court because he did not feel that it was necessary.

[61] Part of the purchase price of the Surrey townhouse came from the U.K. account. The Appellant stated that he had "borrowed" £ 16,000.00 from the U.K. account in 1990 to finance the purchase of the Surrey property. As evidence that the U.K. account did not belong to him the Appellant was able to show that he deposited £ 13,792.57 (over $30,000.00 Cdn.) into the account in 1994. The Appellant testified that this money was deposited by him to repay the amount that had been "borrowed" from his mother's account in 1990.

[62] On the other hand, the Appellant did not hesitate to include the interest earned from the U.K. account, in his income, when it served his purposes. When the Appellant applied for a loan to finance the purchase of the Surrey property he included the interest on the money in the U.K. account as income. The December 31, 1990 Statement of Account from the U.K. account states that the interest earned was £ 3,647.61. The Appellant included £ 6,930.45 as income in his 1990 Income Statement. On the loan application, the Appellant lists his assets as the family home (Sidney property), the mortgage on the New Westminster property and the U.K. account, describing it as a trust account; the Appellant has for income tax purposes denied that these assets belong to him.

[63] The Appellant admitted that the characterization of the assets differed depending on whether it was a loan application to a financial institution or income tax returns were involved. He further admitted that there could be some technical discrepancies in his loan application and that he had signed "a document that was not 100 per cent technically correct". (Transcript at page 196).

[64] With some hesitation, I have concluded that it is likely that the moneys in the above account with the Leeds & Holbeck Building Society belonged to his mother during the years in issue. Among other factors, I took into account the General Power of Attorney dated August 22, 1985, the deposit the Appellant had made in 1994 in partial reimbursement of a withdrawal made earlier on this account and the transfer of the moneys to a joint account held by the Appellant and his wife following his mother's death.

[65] The appeals for the taxation years 1987 to 1993 inclusive should be allowed on this branch of the case and I hold that the interest from the U.K. account should not have been included in the Appellant's income by the Minister's reassessments for the years in question.

6. Kamloops property

[66] The sixth matter involves the inclusion in the Appellant's income of the gain that was made on the sale of the Kamloops property.

[67] There are two issues with respect to the Kamloops property. First, whether the gain should be included in the Appellant's income and, if in the affirmative, whether the gain was on income or capital account.

[68] As appears from paragraph 9 of the Reply to the Notice of Appeal, the Minister included the amount of $9,516.79 as unreported income on the sale of the Kamloops property in 1993 based on the assumption that the purchase and sale of the property in question was an adventure in the nature of trade.

[69] The Minister reassessed the Appellant in respect of the sale of the Kamloops property on the basis that the Appellant was the sole owner of the property. However, at trial the Respondent modified her position through her counsel, as appears from Transcript, page 155, line 10 to line 15.[1] As a matter of fact, counsel for the Respondent acknowledged in substance that the property was owned jointly by the Appellant and his wife and, therefore, half of the gain should be included in the Appellant's income.

[70] I find that the funds to purchase the Kamloops property came at least to a substantial extent from the proceeds of the sale of the Surrey property, which the Respondent traced to the Appellant's bank account with the Pacific Coast Savings Credit Union.

[71] The Kamloops property was listed at a price $30,000.00 more than the purchase price, four months after it was purchased. The Appellant stated that his wife purchased the property in order to be closer to their daughter, who lived a few blocks away. In the Respondent's view, the fact that the Appellant's daughter lived on the same street could have indicated that their daughter knew the market and informed her parents that the house was a "great deal".

[72] Several improvements were made to the house. Appliances were purchased, a gas fireplace was built, gardening was done, venetian blinds were installed, and a ceiling fan was put in.

[73] The Appellant maintained that the Kamloops property was not a rental property and was not acquired for the purpose of selling it at a profit. However, according to a Pacific Coast Credit Union Loan Application made by the Appellant in November 1993, the Kamloops property was characterized as a rental property. The Appellant did not understand how the property could have been listed as such.

[74] During the examination for discovery, the Appellant stated that it was never his nor his wife's intention to sell the house in Sidney and to move to Kamloops. At trial, however, the Appellant modified this to say that it was never his intention to leave Sidney.

[75] Having regard to the acquisition in April 1993 of the Kamloops property and its subsequent sale, seven or eight months later, the further fact that the Appellant and his wife purchased another townhouse in Surrey in 1996, which was sold in 1997, and all the circumstances surrounding the purchase and sale of the Kamloops property, including the duration of the ownership of the Kamloops property, and the reason for selling the latter property, which I do not accept, I have concluded that the acquisition and sale of the Kamloops property was an adventure in the nature of trade. The gain made on the sale of this property was not on account of capital. In coming to this conclusion, I am relying on the decision of the Exchequer Court of Canada in the case of Racine, Demers and Nolin v. M.N.R., 65 DTC 5098, where Justice Noël, as he then was, at page 5103 said this:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such motivation exists will have to be based on inferences flowing from the circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

[76] Having regard to all the circumstances including the fact that there was no suggestion that the Appellant loaned money to his wife and the observations of counsel for the Respondent on the joint ownership of the property, I have concluded that the property was jointly held by the Appellant and his wife. Such gain was on income account. Half of the gain made on the sale of the Kamloops property should therefore be included in the Appellant's income for the 1993 taxation year. The appeal from the reassessment for the 1993 taxation year should be allowed to that extent.

7. Surrey property

[77] The seventh issue has to do with the inclusion in the Appellant's income of the taxable capital gain made on the sale of the Surrey property.

[78] First, it is to be noted that the Minister, in computing the Appellant's income for the 1993 taxation year, included $22,575.00 as a taxable capital gain with respect to the sale of the Surrey property in 1993, as appears from paragraph 10 of the Reply to the Notice of Appeal. It was the Respondent's primary submission that the entire taxable capital gain from the Surrey property be included in the Appellant's income. In the alternative, the Respondent submitted that half of the taxable capital gain should be included in the Appellant's income.

[79] The money to purchase the Surrey property, a townhouse, came from the Appellant's bank account at the Pacific Coast Savings Credit Union. According to the Appellant's own records, several amounts were deposited into this account to finance the purchase of this townhouse, as appears from Exhibit A-7, a green sheet entitled "JACK GREENWOOD BANK DEPOSITS: 1990-1991 (Y/E [sic] JAN. 31.1991)", contained in the 1991 purple binder. The Appellant testified that his wife deposited money into the account on occasions and that the bulk of the money deposited to purchase the house belonged to her. The Appellant, however, was unable to offer any evidence to support this contention beyond the statement that they were his wife's funds and not his. At another point in cross-examination, however, the Appellant stated that his "wife would not normally, Your Honour, if ever, keep any of her funds, her savings, her lifetime savings in an account under my name". (Transcript at page 181, line 8 to line 10). Basically the Appellant's assertion was that his wife deposited moneys into his account for the purchase of the Surrey townhouse, rather than using her own account.

[80] The evidence discloses that an additional amount of $35,000.00 was "borrowed" from the U.K. account and was deposited into the Appellant's account to fund the purchase the Surrey townhouse. The U.K. account was in the Appellant's name, but the Appellant maintained, as noted earlier, that the U.K. account was a trust account that belonged to the Appellant's mother and was in the Appellant's name pursuant to general a power of attorney.

[81] On the basis of the above evidence, I find that the Appellant did not offer any credible evidence to establish that a substantial part of the moneys to purchase the house came from his wife. Not only did the money to purchase the Surrey property come from the Appellant's bank account at the Pacific Coast Savings Credit Union, but as well several amounts deposited into this account over which he had control, (including the moneys from the U.K. account) were used to purchase this property and came from him.

[82] I would therefore conclude that it is likely that the Appellant was the sole beneficial owner of the Surrey property. The entire taxable capital gain made from the sale of the Surrey property should be therefore attributed to him and included in his income for the 1993 taxation year.

8. Capital gains deduction

[83] The eighth issue relates to the disallowance by the Minister of National Revenue of the capital gains deduction claimed by the Appellant in respect of the sale of his accounting practice and the Chartac business.

[84] The Appellant's practice and the Chartac business were sold in 1987; the proceeds were paid over a number of years. The basis of the disallowance was that the Appellant failed to file his return for the year in which he had a capital gain within one year of the date that such return was to be filed, pursuant to subsection 110.6(6) of the Act.

[85] Subsection 110.6(6) of the Act as it read in the relevant year provided as follows:

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

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

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

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

[86] The Respondent further argued that the Appellant was required to file an income tax return for the 1987 taxation year according to subsection 150(1) of the Act. Former subsection 150(1) read as follows:

A return of income for each taxation year in the case of a corporation (other than a corporation that was a registered charity throughout the year) and in the case of an individual, for each taxation year for which tax is payable or would be payable if this Part were read without reference to sections 127.2 and 127.3, in which the individual has a taxable capital gain or has disposed of a capital property, or for which a payment has been received by the individual under section 164.1, shall, without notice or demand therefor, be filed with the Minister in prescribed form and containing prescribed information.

[87] It was the Respondent's position that the Appellant knowingly failed to file a return of income for the 1987 taxation year. The Appellant himself conceded that "there is no contest on the fact that we lost the capital gain allowance on the sale there" as to this matter and accepted that he was not entitled to the capital gain deduction. (Transcript at page 333).

[88] I would therefore conclude that the Minister's assessment should stand in this respect and that the Appellant is not entitled to the capital gains deduction with respect to the sale of the Chartac business.

[89] In conclusion, I would allow the appeals and refer the assessments back to the Minister of National Revenue for reconsideration and reassessment as indicated below:

a) The amount of interest included in the Appellant's income for the 1987, 1988, 1989, 1990, 1991, 1992 and 1993 derived from the mortgage loan to the Appellant's son should be reduced by half.

b) The amount of interest from the Leeds & Holbeck Building Society account should not have been included in the Appellant's income for all the years in issue.

c) Only half of the profit made on the sale of the Kamloops property should be included in the Appellant's income for the 1993 taxation year.

[90] Having regard to the observations of counsel for the Respondent on the matter of costs at the conclusion of this trial, there shall be no costs.

Signed at Ottawa, Canada, this 3rd day of February 2000.

"Alban Garon"

A.C.J.T.C.C.

---