Federal Court of Appeal Decisions

     A-54-96

CORAM:      STONE J.A.

     STRAYER J.A.

     ROBERTSON J.A.

B E T W E E N:

     JOHN G. NESBITT

     Appellant

     (Plaintiff)

     " and "

     HER MAJESTY THE QUEEN

     Respondent

     (Defendant)

HEARD at Toronto, Ontario on Tuesday, November 5, 1996

JUDGMENT delivered at Ottawa, Ontario on Friday, November 15, 1996

REASONS FOR JUDGMENT BY:      STRAYER J.A.

CONCURRED IN BY:      STONE J.A.

     ROBERTSON J.A.

     A-54-96

CORAM:      STONE J.A.

     STRAYER J.A.

     ROBERTSON J.A.

B E T W E E N:

     JOHN G. NESBITT

     Appellant

     (Plaintiff)

     " and "

     HER MAJESTY THE QUEEN

     Respondent

     (Defendant)

     REASONS FOR JUDGMENT

STRAYER J.A.

     This is an appeal from a decision of January 5, 1996 of the Trial Division in which the learned trial judge upheld the right of the Minister to reassess the appellant's 1981 income tax more than four years after the original assessment.

     Prior to March, 1981, the appellant owned a 50% interest in the Orangeville Mall. On March 1, 1981, he transferred 65% of that 50% interest to another company. He thus retained a 35% interest in a one-half share, or, in other words, a 17"% interest, in the Mall. The Mall was sold in May, 1981, for a total capital gain for the owners of $4,065,111.00. It is not in dispute that the appellant's share of that capital gain was 17"% of $4,065,111.00 or $711,394.00 of which $355,697.00 would have been taxable.

     However, when the appellant filed his 1981 return, prepared by his accountant and signed by him, the total taxable capital gains reported by him on line 17 were $181,933.71. Working papers attached showed that this was based on the calculation of his capital gain on the sale of the Mall as being $71,139.42 together with other capital gains realized that year. The basis of the calculation concerning the Mall was shown in the working paper as follows:

Taxpayer's share

35% of " of $4,065,111.00 = $71,139.42

[While the decimal points were not included, their location was amply clear from the vertically-lined paper used].

     On October 4, 1982 the Minister sent a notice of assessment of the appellant's 1981 tax without challenging the amount of his capital gain from the Mall as reported on line 17 of his return. After the expiry of four years following that assessment, the Minister on May 4, 1987 issued a reassessment assessing the appellant on the basis of a capital gain from the sale of the Mall of $711,394.00, with the consequent increases in his taxable income.

     The issue before the Trial Division was whether such a reassessment was invalid as being issued beyond the four year limitation period. It was common ground that for the reassessment to be valid when made after that period the Minister would have to demonstrate that the taxpayer had made a "misrepresentation . . . attributable to neglect, carelessness or wilful default .. . ." as provided by subparagraph 152(4)(a)(i) of the Income Tax Act. The appellant contended that, as an examination of the working paper would have revealed that $71,139.42 was not the correct result of a calculation based on the percentages of the total capital gain on the Mall (all accurately stated), there had been no misrepresentation. That is, the Minister could have corrected line 17 himself based on the information determinable from the working paper. It was also argued, inter alia, that a misrepresentation must be one of fact and that a wrong calculation, based on accurately reported facts, could not itself be a misrepresentation of fact. The appellant conceded that the error in his return, however characterized, was a careless one for which he was responsible even if the miscalculation was the work of his accountant.

     I agree with the reasoning and the conclusions of the learned trial judge, on the issues before him, that there was a misrepresentation by the appellant for which the latter was responsible.

     A further issue was raised for the first time before us, however, which must be addressed. The appellant argues that there could be no operative misrepresentation, for the purposes of subsection 152(4), because by the time of the expiry of the four year limitation period the Minister was actually aware of the mistake in the appellant's 1981 return. The alleged evidence of this knowledge is largely derived from a letter of August 6, 1986 from an auditor at Revenue Canada to the appellant. (There was some dispute whether this letter was ever received by the taxpayer or his representatives, but I need not resolve that issue as the letter is relied on to indicate the knowledge of its author, not of the addressee). This letter asserted that the appellant's share of "income" on the sale of the Mall was $711,394.00. While at that point the department was treating his share of the sale receipts as income and not capital gain, it is argued that officials were obviously aware of the error in calculation in the 1981 return of whatever proceeds the appellant was entitled to from the Mall sale. While this letter had originally been submitted to the trial judge he never ruled on its admissibility as he did not find it necessary to do so, the precise issue now raised not having been argued before him. The letter was, however, included in the Appeal Book by consent of both parties and we may properly have regard to it as relevant to the argument made as to the state of the Minister's knowledge prior to the expiry of the limitation period. As this issue is also clearly covered by pleadings, wherein the defendant (respondent) had alleged misrepresentation, it is open to us to address it. This evidence of the Minister's knowledge is in documentary form and we are simply being asked to draw certain legal conclusions from that evidence.¹ Further, this new issue was clearly set out in the appellant's factum and the respondent has not been taken by surprise nor has counsel for the respondent objected to it being addressed on appeal.

     Even assuming that the letter of August 6, 1986, could be taken to prove the Minister's knowledge by that date (two months prior to expiry of the four-year limitation period) of the true facts and that there had been a misrepresentation, I do not believe this assists the appellant. It appears to me that one purpose of subsection 152(4) is to promote careful and accurate completion of income tax returns. Whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed. A misrepresentation has occurred if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment. It remains a misrepresentation even if the Minister could or does, by a careful analysis of the supporting material, perceive the error on the return form. It would undermine the self-reporting nature of the tax system if taxpayers could be careless in the completion of returns while providing accurate basic data in working papers, on the chance that the Minister would not find the error but, if he did within four years, the worst consequence would be a correct reassessment at that time.

     Thus it is irrelevant that the Minister might, despite the misrepresentation on the return form, have ascertained the true facts prior to the expiry of the limitation period. The faulty return was when submitted, and remained, a misrepresentation within the meaning of subparagraph 152(4)(a)(i) of the Act.

     The appeal should therefore be dismissed with costs.

    

                                 J.A.

I agree

A.J. Stone J.A.

I agree:

J.T. Robertson J.A.

__________________

1      See e.g. Maple Leaf Lumber Company Limited et al v. Canada (1983) 52 N.R. 206 at 216-17 (F.C.A.).