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Tax

Income tax

Administration and enforcement

Director liable for corporation’s unpaid balance of source deductions following bankruptcy

G was majority shareholder and director of corporation. Corporation experienced severe financial difficulties and G retained services of trustee in bankruptcy. G was unable to fulfill proposals and corporation made assignment into bankruptcy on August 1, 2006. On August 26, 2006, new trustee in bankruptcy was appointed and CRA collections issued proof of claim on August 28, 2006 addressed to first trustee in bankruptcy. Revised or amended proof of claim was filed with second trustee in bankruptcy on July 24, 2007. Documentation corroborated G’s version of facts as to change of trustee in bankruptcy on August 26, 2006, filing of proposal on June 29, 2006, and that all real property was transferred to mortgagee pursuant to final order of foreclosure and that court appointed receiver-manager took possession and control of cash in bank, accounts receivable, and machinery and equipment such that there was no equity available to bankrupt estate. G was assessed under s. 227.1 of Income Tax Act (ITA) from liability of corporation for unpaid balance of source deductions together with penalties and interest in amount of $66,865.44. G appealed from notice of assessment. Appeal dismissed. Words “with all due dispatch” set out in s. 152(1) of Act had no bearing on analysis. G did not sign or deliver letter of resignation and merely assumed that he was no longer director of corporation as of bankruptcy date. On basis of evidence, G was still director of corporation when notice of assessment was issued in May 2012. There was insufficient evidence to show that G discharged his statutory duty of care for due diligence defence to apply. Signed proof of claim was admissible as evidence. There was nothing in statutory language contained in s. 227.1(2)(c) of Act requiring delivery of signed proof of claim to G as director and nothing prevented G from following up with CRA representative or her successor to verify that there would be sufficient assets to meet outstanding CRA claim, and nothing preventing G from following up or concluding arrangement with CRA in months after bankruptcy. Sending proof of claim to first trustee was error, however, on basis of wording of s. 166 of Act, assessment could not be vacated. Nothing turned on fact that amounts owing changed between date of initial proof of claim and second proof of claim.
Grant v. The Queen (2017), 2017 CarswellNat 3033, 2017 TCC 121, Guy R. Smith J. (T.C.C. [General Procedure]).

Tax

Goods and Services Tax

Rebates

Immigration status not relevant for determining eligibility for new housing rebate

Property owner and his wife were citizens of United Kingdom (U.K.) who sold their U.K. home and came to Canada, with their passports stamped for admission for six months. Owner entered into agreement to purchase newly built home in Canada and, immediately upon closing, moved in. Before expiry of six months, owner and wife left Canada briefly and returned, receiving stamps for further six month stay. Owner’s three children were born in Canada and family continued practice of regular travel and re-entry. Owner’s application for new housing rebate under s. 254(2) of Excise Tax Act was refused on basis house could only be considered secondary place of residence because of owner’s visitor immigration status. Owner appealed. Appeal allowed. It was clear that owner and family had resided in house in Canada for at least ten months each year since its purchase and there was no evidence that they had available to them any other place of residence anywhere in world. Requirement to be satisfied was whether housing unit was occupied as primary place of residence, which was very distinct from either buyer’s residence status in Canada for income tax law purposes or whether buyer was lawfully present or resident in Canada for immigration law purposes. Home occupied as only place of residence could not be characterized as anything other than owner’s primary place of residence. Immigration status of owner and wife as non-citizens of Canada was not relevant for new housing rebate purposes. Minister did not present any evidence on immigration law. Characterization of house did not turn on whether owner could have been subject of removal order or deportation or whether owners’ intention to use house as primary place of residence was risky plan given their immigration status as visitors. Owner intended to acquire house as sole place of residence and had used it as that ever since closing on purchase.
Parthiban v. R. (2017), 2017 CarswellNat 608, 2017 TCC 30, Patrick Boyle J. (T.C.C. [Informal Procedure])

Tax

Income Tax

Administration and enforcement

Taxpayer liable for gross negligence penalty

Taxpayer was certified general accountant whose participation in charitable donation program, on invitation of close friend, led to reassessments and significant tax liabilities for three taxation years during period when he lost employment. Friend then promised that such liabilities could be “reversed” by having organization prepare his next tax return. Taxpayer, who was spending significant amount of time outside Canada to assist with family’s foreign farm venture and was anxious about tax liabilities, authorized friend to look after preparation and filing of tax return. Taxpayer’s income tax return was prepared by organization to report net business loss of $274,576.54, eliminating his taxable income for that year as well as for three preceding years. Minister reassessed taxpayer under Income Tax Act, denying loss and imposing gross negligence penalty. Taxpayer appealed only to challenge penalty. Appeal dismissed. Statements in taxpayer’s income tax return claiming business income and expenses were false. Taxpayer’s education and work experience provided him with knowledge and understanding of business and financial matters. Taxpayer did not make inquiry into previously unknown tax preparing organization, partly because of misplaced trust in friend. Warning signs included magnitude of claimed business loss, ready visibility of false entries about business income and separate statement of business activities, and absence of tax preparer’s name and contact information in box beside where he signed. Taxpayer failed to see warning sign of referral by friend who had also recommended donation program. Friend’s “explanation” clearly did not explain how taxpayer could be entitled to refund of taxes but he readily agreed to let friend proceed as proposed to clear tax liabilities, without insisting on full explanation of contents of return. Considering all factors, taxpayer was wilfully blind when he signed return. Placing undue trust in tax preparer, to extent of signing return without reviewing it, demonstrated indifference as to whether Act was complied with or not. Taxpayer made false statements in tax return under circumstances amounting to gross negligence.
Rowe v. The Queen (2017), 2017 CarswellNat 3032, 2017 TCC 122, Don R. Sommerfeldt J. (T.C.C. [General Procedure]).

Tax

Income tax

Administration and enforcement

Minister awarded costs after taxpayer failing to appear at status hearing

Taxpayer’s appeal from reassessments was dismissed due to his failure to appear at status hearing. Taxpayer’s application to set aside dismissal was dismissed. Costs submissions received. Minister awarded costs in amount of $19,689. Minister was entirely successful in application, relating to significant amount of money as underlying appeal involved approximately $1.165 million. Amount of work involved in application was not significant and issues were neither complex nor of any broader importance. Taxpayer was responsible both for delaying hearing of application and for unnecessarily extending hearing itself. Taxpayer’s conduct during application, seeking repeated adjournments shortly before scheduling hearing, gave impression of intentional delay and abuse of court’s goodwill. Taxpayer’s conduct during underlying appeal strongly reinforced impression of intentional delay, as everything about his conduct screamed of someone who desperately wanted to delay resolving tax problem. Taxpayer’s lack of communication with counsel led to lack of preparation that extended duration of proceedings. Four-day hearing of this application was extraordinarily long, as such applications normally took no more than one day. Taxpayer’s conduct significantly affected duration of proceedings. Taxpayer was not credible and, as great deal of time was wasted proving that he had received communications that he denied receiving, hearing would have been much quicker if he had admitted truth. Considering all factors and particularly taxpayer’s conduct, award of costs in excess of tariff was appropriate. Figure proposed by Minister was entirely reasonable.
Wolsey v. R. (2017), 2017 CarswellNat 688, 2017 TCC 34, David E. Graham J. (T.C.C. [General Procedure]); additional reasons (2016), 2016 CarswellNat 5312, 2016 TCC 236, David E. Graham J. (T.C.C. [General Procedure]).

Tax

Goods and Services Tax

Special rules

Taxpayer reassessed as no evidence of consent to act as agent of third party

N, who was sole shareholder of P Inc., incorporated P Inc. to carry out renovations on hotel owned by numbered company owned by N’s friend A. In February 2011, numbered company granted power of attorney to P Inc. and gave P Inc. power to act for numbered company in all matters pertaining to hotel. A signed direction to pay authorizing disbursement of CMHC funds to P Inc. and specifying that P Inc. was appointed to act for A in matters pertaining to mortgage and to manage and finish renovations. N paid renovations out of own pocket on each floor, and, once floor passed inspection, CMHC advanced funds which would be disbursed to P Inc. in accordance with direction to pay. No management agreement existed between N and A and P Inc. did not invoice A or numbered company for work. P Inc. was reassessed for net harmonized sales tax (HST) of $47,314.05 for reporting period from January 1, 2011 to March 31, 2011. In November 2012, Minister assessed P Inc. in respect of making of taxable supplies, and HST collectible was $69,492, input tax credits were $25,992.07 interest was assessed of $3,168.17 and failure to file penalty was $1,739.98. In March 2014, Minister reassessed P Inc. disallowing input tax credits previously allowed. In 2015, Minister further reassessed P Inc.’s ITCs of $22,177.95 resulting in net tax liability of $47,314.05. P Inc. appealed as to Minister’s finding of its net tax liability. Issue for determination was whether numbered company consented to P Inc. acting as its agent regarding renovations. Appeal dismissed. P Inc. was not acting as agent for numbered company for renovations since numbered company did not consent, explicitly or implicitly, to P Inc. acting in that capacity. Evidence did not establish that A expressly consented to agency relationship with P Inc. for renovations or that it gave implicit consent to do so. Only evidence submitted with respect to renovations was that P Inc. performed functions that general contractor would normally do. P Inc. failed to show that it was acting as agent for numbered company in performing these functions.
Persepolis Contracting Inc. v. The Queen (2017), 2017 CarswellNat 2477, 2017 TCC 89, Sylvain Ouimet J. (T.C.C. [Informal Procedure]).

Tax

Income tax

Capital gains and losses

Taxypayer’s securities trading gains reassessed as income

Taxpayer maintained two investment accounts at company, one for Canadian and one for U.S. dollar positions. Taxpayer’s strategy was to invest in diversified securities that had potential for 30 percent returns. In early 2009, taxpayer liquidated holdings in both accounts and converted them in cash to supposedly pay off mortgage. Taxpayer, however, purchased and sold stocks costing about $2.5 million. Taxpayer’s total gain was $550,000. Taxpayer reported his gains and losses on these positions as capital gains in his 2009 income tax return. Canada Revenue Agency (CRA) reassessed to include full amount in income. Taxpayer appealed. Appeal dismissed. Reassessment characterizing gains as income gains was not incorrect. Taxpayer was trading in securities as business activity, or at least was buying and selling securities as part of adventure in nature of trade. Taxpayer’s primary intention when purchasing securities was to sell them at profit as soon as reasonable return could be realized. Taxpayer spent considerable time each day monitoring markets beyond what he said was required for his employment. Nature of gains realized by taxpayer buying and selling securities in his investments accounts bore close similarity to what he was doing in his investment dealer positions for decades. Taxpayer was buying and selling throughout year, and his holding periods were clearly short and often very, very short. On balance of probabilities, taxpayer did not satisfy Court about his mortgage paydown plans. There were no bank documents showing when taxpayer committed to renew mortgage. Surely at some point in first part of taxpayer’s 2009 reinvestment activities, he realized that he was picking securities for quickest target cumulative return. Combined results of not being able to conclude taxpayer’s investment strategy was unchanged in 2009 or that he liquidated in 2009 in order to pay off mortgage, and not having been given detailed evidence regarding prior years meant Court only considered actual activity in his accounts in 2009. Taxpayer’s expertise extended to what he regarded as trading activities; whilst his securities trading activities in 2009 may not have risen to level of him carrying on business of trading securities, they appeared to handily meet all of requirements to have been considered adventure or concern in nature of trade. Taxpayer was not treated differently or singled out because his investments were in securities.
R. v. Foote (2017), 2017 CarswellNat 1729, 2017 TCC 61, Patrick Boyle J. (T.C.C. [General Procedure]).

Tax

Goods and Services Tax

Administration and enforcement

Sole officer, director and shareholder not entitled to represent corporation

Corporation filed motion seeking order to allow Z to represent corporation in action. According to Z’s affidavit, he was sole officer, director and shareholder of corporation. No details were provided as to financial situation of corporation and it was not alleged that corporation was unable to pay. Relevant rule was in s. 30(2) of Tax Court of Canada Rules (General Procedure). Rule did not provide specific requirements as to when relevant leave was to be granted. It was left for court to develop reasonable criteria taking into account variety of circumstances. Motion dismissed. Corporation had not demonstrated that it was unable to pay for counsel. With over $115,000 at stake, this was not case where legal costs would overwhelm amount at issue. Case was not as easy or straightforward as corporation believed it to be. Based on documents that corporation attached to notice of appeal and on reply filed by Minister of National Revenue, biggest amounts in issue appeared to be related to output tax. Based on materials, assessment was in large measure based on Minister’s analysis of deposits into corporation’s bank accounts and into Z’s bank account. Corporation seemed to claim that deposits into Z’s account related to Z’s business unrelated to corporation’s business. Organizing evidence of detailed nature relating to all deposits in issue and all input tax credits in issue was not likely to be easy or straightforward. Both corporation’s submissions and affidavit asserted that all of corporation’s representations were pure factual documents and that documents were unavailable in audit process. It was not clear that Z understood that he would have to testify to explain documents and put them in context to show errors in bank deposits analysis and to show why certain input tax credits were justified. Z would not be able to adequately represent corporation. There was no necessity to allow agent because of inability to pay counsel, given that amount in issue was significant, that it was not shown that Z was able to adequately represent corporation, and given public interest in having effective trial process while attempting to limit costs.
WJZ Enterprises v. R. (2017), 2017 CarswellNat 1404, 2017 TCC 57, Gaston Jorré J. (T.C.C. [General Procedure]).
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An estate trustee who took an ‘egregious' position in litigation has been ordered to personally pay more than $140,000 in costs. Will this ruling serve as an appropriate caution to executors on how they conduct themselves in litigation?
Yes, this will remind trustees of the potential exposure of significant awards being made against them personally.
No, it’s unlikely this ruling will dissuade executors from engaging in unreasonable conduct during litigation.