Tax Court of Canada Judgments

Date: 19981029

Docket: 96-2339-IT-G

BETWEEN:

TIMOTHY R. PEDWELL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

[1] Timothy Pedwell, the appellant, has appealed income tax assessments for 1989, 1990, 1991 and 1992 on the basis that:

(a) no amount ought to have been included in his income for each of the years in appeal in accordance of subsections 15(1) and 57(2) of the Income Tax Act (“Act”);

(b) he did not knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by the Act, make or participate in the making of false statements or omissions on a return of income for any of the years in appeal, and therefore, no penalties ought to be assessed pursuant to subsection 163(2) of the Act; and

(c) the 1989 and 1990 assessments of tax are statute barred: paragraph 152(4)(a) of the Act.

[2] Mr. Pedwell, a lawyer, joined his father’s law firm in 1987, and at time of trial, carried on the practice as a sole practitioner in St. Catharines, Ontario. The bulk of Mr. Pedwell’s practice is real estate law, primarily, residential real estate.

[3] Mr. Pedwell holds several university degrees: Bachelor of Arts in Economics and Political Science, Bachelor of Commerce and Master of Business Administration degree. During his studies he took several accounting courses.

[4] At all relevant times, Mr. Pedwell was the sole shareholder, director and officer of Turgovia Fruit Co. Ltd. (“Turgovia”), a company that, notwithstanding its name, leases bars and restaurants.

[5] Mr. Pedwell also has an interest in 718615 Ontario Ltd. (“numbered corporation”), a company that owns office and apartment buildings. He and his sister, Kimberley Pedwell, each own 50 percent of the issued shares of the numbered corporation. Mr. Pedwell is president and a director of the numbered corporation.

[6] Mr. Pedwell acknowledged that at all relevant times he was the directing mind of both the numbered corporation and Turgovia.

[7] By agreement dated August 12, 1988, Turgovia agreed to purchase from the estate of Clarence E. Peacock, deceased (“Estate”), approximately 84 acres of agricultural land in the town of Pelham, Ontario (“Property”) for the sum of $182,000 plus related costs; the total purchase price was $183,593.[1] The parties agree that Turgovia acquired the Property for the benefit of the numbered corporation. The numbered corporation financed the acquisition of the Property by borrowing the total purchase price from Mr. Pedwell. Mr. Pedwell obtained the funds from his personal resources and by borrowing $100,000 from Turgovia. The numbered corporation recorded the acquisition of the Property in its books as inventory and established a shareholder loan account for the $183,593 advanced by Mr. Pedwell. During the years in appeal, the numbered corporation capitalized all carrying costs associated with the Property. The amounts so capitalized were $12,404 in 1990, $22,311 in 1991 and $749 in 1992.

[8] At about the time the Agreement of Purchase and Sale of the Property was executed, the Estate had applied to the Ontario Municipal Board (“OMB”) for a severance of one acre of the Property. The Property was “essentially a farm” on which the late Mr. Peacock lived with his wife, Lilly Peacock. The one acre parcel (“house lot”) to be severed from the Property contained the Peacock family home where Mrs. Peacock continued to reside. The parties agreed that if the house lot was not severed before closing the purchase price of the one acre would be increased by $2,100; however, the Estate would have the right to repurchase the one acre within one year of closing for the price of $2,100 plus interest at the rate of 10 percent per year from closing. It was assumed severance would be secured within the year. In the meantime, Mrs. Peacock would continue to live on the Property.

[9] Some of Mrs. Peacock’s family were interested in retaining more than one acre of the Property, but Mr. Pedwell informed them that it was not possible in the circumstances.

[10] Mr. Pedwell stated that he acquired the Property through a corporation because he wished to be eligible for a grant from the Ontario Ministry of Agriculture under the “Grape Acreage Reduction Program”. According to this program, said Mr. Pedwell, grants were to be paid to owners of grape-producing land to reduce the number of grape-producing acres. As a solicitor, he said, he would not qualify for a grant because he was not a full-time farmer. In any event, the numbered corporation did not qualify for the grant.

[11] The transaction of purchase and sale was closed on October 31, 1988. The Property had not been severed before closing. It was only in February 1989 that the OMB approved the severance. However, the house lot was never severed from the Property in the manner originally contemplated by the appellant and the Estate.

[12] Mr. Pedwell recalled that Mrs. Peacock did not appear at the OMB hearing in February 1989. He discovered that she was suffering from cancer and it was “questionable if she would survive”. In the meantime, the neighbour of the Peacocks, who had originally appealed the application for the severance, considered appealing the OMB decision. Mr. Pedwell asked for a meeting with Mrs. Peacock’s three daughters who wished to retain some of the Property for their personal use. Mr. Pedwell said he spoke to Mrs. Peacock’s grandson and daughters, and told them he may have been incorrect when he originally told them they could not retain any portion of the Property. A subdivision of the Property could be obtained through a will. In other words, as Mr. Pedwell described it, the testator may divide the Property into lots and bequeath specific lots to various people, thus subdividing or severing the Property by will. This type of severance did not require the approval of the municipal authority or the OMB. (The Planning Act of Ontario has since been amended to preclude this type of severance: Planning Statute Law Amendment Act, 1991, S.O. 1991 l.9, s.1.)

[13] Mrs. Peacock’s family was interested in pursuing the matter of severing the Property by will.

[14] The appellant prepared a concept plan, dividing the Property into lots and describing who would obtain what lot under the will. He made sure that there were sufficient owners, so that no one owner owned contiguous lots and thus cause two or more lots to merge into one. He said it was his understanding that Mrs. Peacock’s daughters showed Mrs. Peacock the plan and Mrs. Peacock agreed that her family would retain six lots. He said that, except for the lots bequeathed to Mrs. Peacock’s daughters, the lots bequeathed to the others, that is Mr. Pedwell’s mother and father, his brother and his secretary, were to be held by them for the benefit of the numbered company. The benefit to the numbered corporation was that, if the Property were severed and building permits issued, all the lots on the Property would increase in value.

[15] Mr. Pedwell testified that according to the Planning Act a lot severed by testamentary devise may not be held by a corporation.[2] Therefore, the lots were bequeathed to individuals. Mr. Pedwell was not bequeathed any lot since he was a witness when Mrs. Peacock executed her will.

[16] The first step in implementing Mr. Pedwell’s proposal was to reconvey the Property. The Property was conveyed for one dollar to Mrs. Peacock, not the Estate, by Deed dated March 3, 1989, and registered on March 13, 1989. Mrs. Peacock then executed a will, prepared by Mr. Pedwell, stating that on her death the Property was to be severed into approximately 32 separate parcels with frontage on access roads, and one large parcel with no road frontage. Instead of only a one-acre lot to be retained by the Peacock family, the amended transaction called for six of the 32 frontage parcels to be left to the benefit of Mrs. Peacock’s three daughters, each daughter receiving two parcels. The remaining parcels were to be conveyed through Mrs. Peacock’s will to the appellant’s father, Keith Pedwell; mother, Mary Pedwell; brother, Robert Pedwell; and legal secretary, Joyce McLean. The house lot was not among the lots bequeathed to Mrs. Peacock’s daughters.

[17] Mr. Pedwell acknowledged that there was nothing in Mrs. Peacock’s will to indicate that the devisees were trustees or nominees for the numbered corporation. Indeed, he agreed with respondent’s counsel that there was no difference in the wording or nature of the bequests to his parents and brother and those to Mrs. Peacock’s three daughters. Each bequest was made to a devisee “for his (her) own use absolutely”.

[18] Mrs. Peacock died on March 10, 1989.

[19] Upon the death of Mrs. Peacock, the trustees and executors of her estate signed deeds to each of the beneficiaries under her will, transferring the particular lot bequeathed to each under her will. Mr. Pedwell said that the deeds to the lots could not be conveyed to the devisees in trust because the Land Title registry system does not permit registration “in trust”.

[20] Mr. Pedwell stated that his mother, father and brother did not know that the various lots were to be bequeathed to them and that the lots were conveyed to them. At the time the conveyances were made, his parents were visiting California. According to Mr. Pedwell, Mrs. McLean knew that she held the lot in trust because “she did the typing, including Mrs. Peacock’s will”. Mr. Pedwell stated that his father learned that he had legal title only when a real estate agent telephoned him to make enquiries. His father then telephoned Mr. Pedwell to find out what was happening, and that evening, Mr. Pedwell informed his mother and father that they were the registered owners of the lots but not the beneficial owners. The beneficial owner of the lots was the numbered corporation, he informed them. Mr. Pedwell also stated that Mrs. McLean had been his father’s secretary for approximately 25 years and it was not the first time that she held property in trust for a client.

[21] On May 17, 1989, Mr. Pedwell, on behalf of the numbered corporation, listed the house lot for sale for the price of $140,000. On June 15, 1989, a Mr. David Euler and Mrs. Euler agreed to purchase the lot for $135,000. The numbered corporation accepted the offer the following day. The transaction closed on or about July 4, 1989. The net proceeds were paid to Pedwell and Pedwell, Mr. Pedwell’s law firm, in trust. The firm drew cheques from its trust account to the numbered corporation, as to $100,000, and to Mr. Pedwell, as to $25,360. None of the proceeds from the sale of the lot went to the numbered corporation, and there was no change in Mr. Pedwell’s loan account with the numbered corporation. The latter still owed him $183,593, according to its books of account. Mr. Pedwell acknowledged that the numbered corporation’s financial statements are prepared at the end of each year “in the normal course”.

[22] The profit from the sale of the house lot was calculated by Mr. Pedwell’s accountant to be $106,974. Neither Mr. Pedwell, the numbered corporation nor any other member of his family reported this profit in a tax return for 1989 or for the period in question. During the course of Revenue Canada’s audit of Mr. Pedwell’s 1989 tax return, Mr. Pedwell wrote Revenue Canada that the Peacock family home, the house lot, was his principal residence and, therefore, the profit on the sale of the house lot was not subject to tax. In his letter of June 28, 1994 to Revenue Canada, Mr. Pedwell wrote as follows:

It would seem by your letter, that the Department is taking the position that the taxation is levied according to the legal ownership of property rather than on the basis of beneficial ownership of property. Would you confirm that this is, indeed, the position of the Department. As discussed with you and with the other investigators while meeting with R. Forsyth, the ownership of the land is of some importance in our determining proper tax treatment.

Mr. Forsyth was the accountant for Mr. Pedwell, Turgovia and the numbered corporation.

[23] Mr. Forsyth prepared a summary of balance sheets of the numbered corporation as at June 30, for each of 1992, 1991, 1990 and 1989. The land acquired from Mrs. Peacock is shown as an asset of the numbered corporation in each of the four years. Also, a shareholder loan representing the amount advanced by Mr. Pedwell to the company is shown as a corporate liability: the summary of balance sheets does not reflect that the proceeds from the Euler sale, and the subsequent distribution of the proceeds from Mr. Pedwell’s law firm, reduced the corporation’s liability to Mr. Pedwell. Mr. Pedwell could not explain why, if the numbered corporation beneficially owned the lots, the loan was not reduced since, in his view, part of the loan was repaid to him. He stated it was only when he started to prepare for the appeals at bar that he realized that the numbered corporation’s liability was overstated by $135,000.

[24] With respect to his claim of the house lot as a principal residence, Mr. Pedwell stated that he lived in the farm house for several months and thought he could claim the home as his principal residence. He said he later realized the numbered corporation, not he, would have to account for any gain on the house lot. Mr. Pedwell also added that, since the house lot did not have a building permit, there was only a nominal gain on its sale.

[25] In 1989, Landpark Homes Inc. in trust (“Landpark”) agreed to purchase from Keith Pedwell, Mary Pedwell and Mrs. McLean, 16 of the lots for $1,080,000. Landpark paid a deposit of $22,500, that is, $1,500 per lot. The deposit was retained by the Appellant. Here, too, the deposit is not reflected on the balance sheet of the numbered corporation as at the end of 1989 or other financial period. Transactions with Landpark were to close on the earlier of December 31, 1990 or upon Landpark requesting a deed to a lot, but no sale of any lot took place. Some time in 1993 or 1994, Mr. Pedwell recalled, the principal of Landpark asked that the deposit be returned, and Mr. Pedwell gave the money to him.

[26] Building permits are issued by the town council. The Town Council of Pelham refused to issue building permits for any of the lots on the Property. As a result, in 1992, Mr. Pedwell’s parents and brother, as well as Mrs. McLean, took legal action against the Corporation of the Town of Pelham to compel the issuance of building permits, among other things. In 1990, the Pedwells, Mrs. McLean and Landpark had sued the Corporation of the Town of Pelham for damages resulting from the refusal to grant the building permits. The Pedwells and Mrs. McLean represented in the pleadings that they were the owners of the lots pursuant to Mrs. Peacock’s will. They never represented they held lots in trust for the numbered corporation.

[27] Mrs. McLean died in 1992. The lot in her name was included in her estate. Mr. Pedwell stated that he “has not been able to go to her husband and tell him the property is not hers”. She had married only two years prior to death. Mr. Pedwell stated that he and his father had had a very close relationship with Mrs. McLean as a result of her long service with the law firm, and that he was reluctant to do anything that may cause any strife with her family.

[28] Respondent’s counsel questioned Mr. Pedwell about the deed transferring the house lot to the Eulers. The deed identifies the transferors as Mr. Pedwell and his mother. Mr. Pedwell explained that, since he once lived in the house, he had an unregistered interest in the lot. He was president of the corporation that owned the lot. In aggressive questioning from the counsel for the respondent, Mr. Pedwell replied that he may have had an interest in the house lot that the purchaser wanted released. He declared that, in any real estate transactions he has been involved in where a corporation sells realty, the directors of the corporation declare that they have no interest in the property. In any event, the numbered corporation is not identified as a party in the deed.

[29] Mr. Pedwell agreed that his mother received no money from the Eulers for the sale of the house lot.

[30] The summary of balance sheets states that at the end of 1989 the numbered corporation owed shareholders $204,381. In cross-examination, Mr. Pedwell acknowledged that he is the only shareholder of the numbered corporation who advanced money to the corporation. Earlier, he had loaned funds to the corporation for the acquisition of an office building. However, he recalled that his sister invested approximately $10,000 in the corporation. Mr. Pedwell, however, could not state what portion of the amount due to shareholders was owed to him and what portion was owed to his sister. He could not inform counsel whether he obtained $100,000 from Turgovia to advance to the numbered corporation by way of a loan, or otherwise. He said the money went through his law firm. He explained the advance from Turgovia was indirect: Turgovia issued a cheque of $100,000 to his law firm and the appellant issued a cheque of $82,000 to the law firm; then, the law firm issued a cheque for $182,000 for the purchase of the Property from the Estate.

[31] Mr. Forsyth is a Certified General Accountant who, at all relevant times and at the time of the trial, practised in St. Catharines. He made representations to Revenue Canada on behalf of Mr. Pedwell. Mr. Forsyth was not called as a witness to testify at the appeal at bar, although he was available. Mr. Pedwell said that he and Mr. Forsyth had not spoken “in months”.

[32] Mr. Pedwell declared declarations of trust were signed by his parents and brother, as well as Mrs. McLean, that the beneficial owner of the lots was the numbered corporation. The declarations of trust were executed “within a month” of Mrs. Peacock’s death, he said. One document was signed by all the registered owners as well as the numbered corporation. Mr. Pedwell, the appellant, signed on behalf of the numbered corporation. He said that his brother, mother and father signed the declarations at their home and he then took the documentation to his office. Mr. Pedwell believed his sister may have been at his parents’ home to witness to execution of the declarations of trust, but he could not recall. Mrs. McLean signed the declaration of trust at the law office. Neither could he recall whether only one document or several copies were signed. And he could not recall “specifically” if any copies were given to his mother or his father. In any event, there was a break-in in his law office on March 21, 1993 and many of his records, including the declarations of trust, were stolen, he declared.

[33] Mrs. Mary Pedwell, the appellant’s mother, testified that she was a transferee of the interest in several lots under the will of Mrs. Peacock. She stated she had no idea she was the transferee until her son so advised her on her return from California. She also said she signed a document to the effect that the lots in her name belonged to the numbered corporation. She acknowledged she did not receive any proceeds from the Euler sale notwithstanding that she was the registered owner of the house lot.

[34] Mr. Keith Pullen, a business auditor with Revenue Canada, also testified. Mr. Pullen audited the numbered corporation. When he was assigned the audit in 1993, he noticed that the numbered corporation had failed to file returns for 1990, 1991 and 1992. He got in touch with Mr. Pedwell to ask him to file returns for those years. The returns were not forthcoming and he caused a “compliance letter” to be forwarded to Mr. Pedwell. On July 13, 1993, he met Mr. Pedwell at the latter’s office to discuss the transactions concerning the Property. Mr. Pedwell referred him to Mr. Forsyth. Mr. Pedwell also advised Mr. Pullen that certain documents were missing due to the break-in at his office.

[35] Mr. Pedwell informed Mr. Pullen that he sold the house lot but did not report the transaction because the house lot was his principal residence and was, therefore, not subject to tax. Mr. Pullen and another auditor interviewed people living near the Property and they informed him that nobody had lived in the Peacock home on the house lot since Mrs. Peacock’s death. Mr. Pullen stated that while Mr. Pedwell said he lived on the house lot and that the house lot was his principal residence, he did not represent that he personally had owned the house lot.

[36] Mr. Pullen testified that he and Mr. Pedwell discussed the beneficial ownership of the Property by the corporation and how the lots were divided. Mr. Pedwell informed him that family members were holding the lots for the numbered corporation. Mr. Pedwell said the minute book of the numbered corporation was with Mr. Forsyth.

[37] On July 14, 1993, Mr. Pullen met Mr. Forsyth at the latter’s office and reviewed all of Mr. Forsyth’s records with respect to the numbered corporation. Mr. Forsyth did not have the minute book of the numbered corporation or any trust agreement. He spoke “only briefly” with Mr. Forsyth because “he was very busy”.

[38] When reviewing Mr. Forsyth’s files, Mr. Pullen saw work sheets, deposit slips and lists of expenses made by Mr. Pedwell, as well as cheques and bank statements. He acknowledged that he did see some agreements of purchase and sale of lots, but was of the view only the sale to the Eulers was consummated.

[39] Among the material Mr. Pullen found in Mr. Forsyth’s files was a work sheet entitled “Pedwell Sales” (Exhibit R-1, tab 22). According to this document, Mr. Forsyth appeared to presume that the vendor of the house lot was the numbered corporation and the vendor of the house lots to Landpark was Mr. and Mrs. Pedwell, the appellant’s parents. A third sale was also indicated, a sale in February 1990 to one Prysiazny from Robert Pedwell, Mary Pedwell and a person referred to as “Blair”, presumably Mrs. McLean’s widower. Mr. Forsyth set out the tax rates applicable on the sale of the lots, depending on whether the vendor was an individual or a corporation. If the vendor was an individual, Mr. Forsyth considered whether the individual was eligible for a capital gains exemption. On the other hand, if the vendor were a corporation, Mr. Forsyth considered the possibility of “a strip to other low tax rate co.” and a “strip to other low tax rate person”.

[40] Mr. Pullen acknowledged that Revenue Canada assessed Mr. Pedwell on the basis that he appropriated the Property from the numbered corporation when the numbered corporation conveyed the Property to Mrs. Peacock. The registered owners of the lots were designated by him to be owners for his benefit. Revenue Canada agrees that the original transfer of the Property by the Estate to the numbered corporation was a valid transfer of property to the corporation. When the house lot was sold and when Landpark deposited $22,500 for the purchase of other lots, the funds did not go to the numbered corporation but to Mr. Pedwell. The numbered corporation did not report any sale of land in its tax returns. This, in Revenue Canada’s view, confirmed that Mr. Pedwell became the beneficial owner of the Property lots. Mr. Pullen acknowledged that he relied on the flow of funds on the sale of the house lot and the Landpark deposit to determine that an appropriation had taken place. He said he never considered that Mr. Pedwell resided on the house lot nor that the numbered corporation sold any lots to Mr. Pedwell.

[41] A section 163(2) penalty was issued against Mr. Pedwell, declared by Mr. Pullen, because he did not report the income on the sale of the properties, that is, the sale to the Eulers and the deposit by Landpark.

[42] In his examination for discovery, Mr. Pullen explained that in his view Mr. Pedwell’s mother, father, brother and Mrs. McLean were both legal and beneficial owners of the lots. At trial, he declared that, if Mrs. Pedwell, for example, wanted to keep the money received on the sale of the house lot, she could have done so. Asked by the appellant’s counsel why Mrs. Pedwell was not assessed, Mr. Pullen replied that when the “property goes through the will, the property became the appellant’s property”, and that his mother decided to let him keep the money. In any event, Mr. Pullen said, the appellant was the “mastermind” of the transaction, and Revenue Canada could therefore assess under subsection 9(1) of the Act, that the proceeds of sale were business income to the appellant. At trial, his position was that Mr. Pedwell, not his mother, owned the house lot and the other lots.

[43] The bulk of Mr. Pedwell’s practice is devoted to real estate. However, no proper journal entries were made either in his own books of account or in those of the numbered corporation. In addition, the numbered corporation did not file any tax returns for three years. Revenue Canada, Mr. Pullen said, was never advised by Mr. Pedwell of any theft or of his inability to file on behalf of the corporation. It is only when requirements to file were sent to him by Revenue Canada that the corporation filed the necessary returns. Mr. Pedwell did all the legal work concerning everything and anything to do with the transaction; he prepared Mrs. Peacock’s will and he prepared the deeds giving effect to the will. Mr. Pullen also testified that Mr. Pedwell had represented taxpayers at the St. Catharines office of Revenue Canada and was, or should have been, aware of the requirement to file accurate file returns. Therefore, Mr. Pullen recommended that penalties be issued against Mr. Pedwell.

[44] Once Mr. Pedwell decided to have the numbered corporation convey the Property to Mrs. Peacock for the purpose of bequeathing various lots to persons designated by him, Mr. Pedwell, it appears from the evidence, lost sight of the fact that the numbered corporation owned the Property. Once he caused the lots to be devised to his parents, brother and Mrs. McLean, Mr. Pedwell thought he could deal with these lots any way he desired without regard to their true beneficial ownership.[3]

[45] Mr. Pedwell would determine the beneficial owner of a lot at the time that lot was sold. Until a lot was sold, he did not concern himself with the mundane matter of its true ownership. Thus, when the house lot was sold to the Eulers, he seized upon the possibility that the profit on the sale could be free of tax if the house lot constituted his principal residence. As a lawyer specializing in residential real estate, he knew that this position was viable only if the house lot were beneficially owned by him and that he actually lived in the house on the lot.

[46] By representing to Revenue Canada that the house lot had been his principal residence, he was also representing – directly or otherwise – that he was the beneficial owner of the house lot. It is not surprising, therefore, that officials at Revenue Canada, acting on Mr. Pedwell’s representations, took the position that he became beneficial owner of the lots devised to members of his family and Mrs. McLean.

[47] The work sheet entitled “Pedwell Sales” (Exhibit R-1, tab 22), prepared by Mr. Forsyth, confirms to some degree that someone, either Mr. Pedwell or Mr. Forsyth, considered that lots devised to Mr. Pedwell’s parents and brother and Mrs. McLean possibly may be owned beneficially by different persons. These persons are designated owners of lots, that is, the numbered corporation, as to the house lot, Mary Pedwell and Keith Pedwell as to some lots (lots 7 to 25 subject to a sale agreement with Landpark) and others as to the lots subject to a sale agreement with Prysiazny. There was also reference to another lot, “Pt. 23”, to which there is no designated vendor.

[48] The respondent’s position is that Mr. Pedwell directed the transfer of the lots to his parents and brother and Mrs. McLean for his benefit. Mr. Pedwell caused the numbered corporation to transfer the Property to Mrs. Peacock so that she could devise the property to persons who would hold legal title to the lots for Mr. Pedwell’s benefit, thus conferring a benefit to Mr. Pedwell within the meaning of subsection 15(1) of the Act.

[49] In my view, the numbered corporation continued to hold beneficial ownership of the Property before the conveyance to Mrs. Peacock, after the conveyance to Mrs. Peacock and after her death when the lots were devised to members of Mr. Pedwell’s family and Mrs. McLean.[4]

[50] Respondent’s counsel submitted that compliance with the Planning Act means that devisees must be beneficial owners of the Property by operation of law. Thus, the members of Mr. Pedwell’s family must be the beneficial owners of the lots. I do not agree. The Planning Act does not create ownership rights in property but merely regulates the exercise of existing property rights. One cannot make conclusions about ownership on the basis of apparent compliance with the Planning Act. In Re Wood and Dennet,[5] Maloney J. wrote, at 343:

The operation of the Planning Act with respect to land under the Land Titles Act is dependent upon the provisions of the latter Act which define the estates of registered owners. In subjecting transfers of title to subdivision control provisions, the Planning Act cannot be seen to vitiate or redefine what in law constitutes ownership of such lands. ...

[51] In any event I am not necessarily agreeing with Mr. Pedwell that the subdivision of the Property took place in accordance with the Planning Act. The appeals at bar may be resolved without any such finding on my part. As I have already stated, on the facts before me, the numbered corporation at all relevant times was, and continues to be, the beneficial owner of the severed lots devised to Mr. Pedwell’s family members and Mrs. McLean.[6] A trial on matters related to the Planning Act has been heard by the Ontario Court of Justice (General Division) but was under reserve at time of trial.[7]

[52] When the transaction with the Eulers closed, the proceeds of the sale was the property of the numbered corporation. The numbered corporation never received a penny of the proceeds. This was not due to any simple error but was the natural consequence of Mr. Pedwell not directing his mind to the obvious question of beneficial ownership of the lots in general and the house lot in particular. He looked for the best possible tax advantage on the sale of the house lot; who the beneficial owner was did not trouble him. Had he been acting as solicitor for a client other than the numbered corporation in this series of events, Mr. Pedwell surely would be the subject of legal action by the client.

[53] The payment of the proceeds of the Euler transaction into the Pedwell and Pedwell trust account and the payments out of the trust account to Turgovia and Mr. Pedwell were appropriations of property to Mr. Pedwell. The appropriations aggregated the net proceeds of sale, that is, the amount of $125,360.

[54] Since I have found that the numbered corporation at all times was the beneficial owner of the severed lots, it was the numbered corporation’s obligation to pay carrying and other costs of the lots in 1990, 1991 and 1992. The costs paid by the numbered corporation were for its own account and not for the benefit of Mr. Pedwell.

[55] The amount of $125,360 received from the Eulers plus the amount of $22,500 Mr. Pedwell received from Landpark constituted property belonging to the beneficial owner of the house lot and the lots agreed to be sold to Landpark. Mr. Pedwell acknowledged he was the directing mind of both the numbered corporation and Turgovia. He is also the directing mind of Pedwell and Pedwell law firm and it was he who directed the funds to be distributed so that his loan of $100,000 from Turgovia would be paid off. This was done because Mr. Pedwell’s position was that the house lot was his principal residence for purposes of the Act, a situation he knew could exist only if he had been the beneficial owner of the house lot. He also caused Pedwell and Pedwell to pay him the Landpark deposit of $22,500. The failure to record the Euler and the Landpark transactions in the numbered corporation’s books of account is not even remotely similar to the circumstances found in Clayton Long v. the Queen.[8] In Long, Bowman T.C.C.J. found, at 1421, that a simple erroneous failure to adjust a loan account which is susceptible of correction does not create taxability. In the facts at bar, failure to adjust the numbered corporation’s loan account was not a simple error. It was not an error at all; it was intentional. Mr. Pedwell had the money in hand and was content with this fact.

[56] Mr. Pedwell was grossly negligent in failing to report the money he appropriated from the numbered corporation in 1989. He is a lawyer practising real estate law. He also has a university degree in business administration and studied accounting. He has also negotiated with Revenue Canada on behalf of his own clients having tax problems. Mr. Pedwell’s background is not similar to Mr. Venne’s, for example.[9] Mr. Pedwell is aware of his responsibilities under the Act. As a real estate lawyer, he was trying to achieve a particular goal of legitimately subdividing the Property but once the Property was subdivided, he ignored who had the beneficial ownership of the lots.

[57] Mr. Pedwell, knowingly or under circumstances amounting to gross negligence in the carrying out of a duty or obligation imposed by the Act, participated in the making of a false statement and omission in his 1989 tax return and is liable to a penalty pursuant to subsection 163(2).

[58] I also conclude that, in view of my findings with respect to the penalty assessed under subsection 163(2), the 1989 taxation year is not statute barred since Mr. Pedwell made a misrepresentation in his tax return for 1989 that was attributable to neglect or carelessness or wilful default within the meaning of subparagraph 152(4)(a)(i) of the Act.

[59] I therefore allow the appeals, with costs to the respondent, as follows:

(a) for 1989,

(i) the amount of money appropriated by the Appellant from 718615 Ontario Incorporated was $147,860, the aggregate of the proceeds from the Euler sale of $125,360 and $22,500 received on deposit from Landpark;

(ii) the penalty assessed for 1989 pursuant to subsection 163(2) be adjusted accordingly;

(b) the assessment for 1990 is statute barred;

(c) for 1991 and 1992, the amount added to income as appropriation re: lot development costs paid for by the numbered corporation be deleted, and penalties relating thereto be cancelled.

Signed at Ottawa, Canada, this 29th day of October 1998.

“G.J. Rip”

J.T.C.C.

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