Judgments

[2000] 4 F.C. 616

A-703-98

Timothy R. Pedwell (Appellant)

v.

Her Majesty the Queen (Respondent)

Indexed as: Pedwell v. Canada (C.A.)

Court of Appeal, Stone, Rothstein and Evans JJ.A.— Toronto, May 17; Ottawa, June 12, 2000.

Income tax — Reassessment — Taxpayer found by T.C.C. to have appropriated to himself net proceeds of sale of lot, farmhouse in 84-acre parcel of land, deposit on agreement to sell 16 other lots in same parcel — Parcel belonging to corporation controlled by taxpayer — Appropriation of proceeds of sale, deposit on agreement for sale not basis of Minister’s reassessment, not pleaded by Minister before T.C.C. — Minister bound by own basis of assessment — Not open to Court to construct own basis of assessment different from reassessement — T.C.J. changing basis of assessment without taxpayer having opportunity to address change — Crown, Court bound by assessment appealed from, unless amended, adequate notice given of intention to rely on different basis within limitation period — T.C.J. erred in finding taxpayer liable on basis different from that in Minister’s notice of reassessment.

This was an appeal from a decision by the Tax Court of Canada finding the appellant to have appropriated to himself the net proceeds of the sale of a lot in an 84-acre parcel of land, and a deposit on an agreement to sell 16 other lots in the same parcel. In October 1988, a company controlled by the appellant acquired 84-acres of land for a price of $183,593. In July 1989, the original farmhouse on one of the lots in the 84-acre parcel of land was sold to Mr. and Mrs. David Euler for $135,000 which was paid into the trust account at the appellant’s law firm, Pedwell & Pedwell. That sale generated net proceeds of $125,360. The same year, Landpark Homes Inc. agreed to purchase 16 lots in the 84-acre parcel by making a deposit of $22,500 into the trust account at Pedwell & Pedwell. The Minister reassessed the appellant by adding to his 1989 income tax an amount of $183,593 for the appropriation of the property from the corporation and $106,974 for unreported net profit on the sale of the farmhouse to D. Euler. By notice of reassessment dated April 4, 1996, the Minister allowed the appellant’s objection to the reassessment of $106,974 but maintained the reassessment for $183,593. The Tax Court Judge allowed the appellant’s appeal in respect of the Minister’s assessment based on the appropriation of the 84 acres, but went on to find that the proceeds of $125,360 on the Euler sale and the Landpark deposit of $22,500 were appropriated to the appellant. The issue on appeal was whether the Tax Court Judge erred in finding the appellant liable on a basis different from that in the Minister’s notice of reassessment.

Held, the appeal should be allowed.

Taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge the assessment. The principle that the Minister is bound by his basis of assessment is applicable to a judicial determination on a basis different from that in the notice of reassessment. The Tax Court, like the Crown, is not able to change the basis of reassessment after a limitation period expires. It is not open to the Court to construct its own basis of assessment differently from the basis of the Minister’s reassessment of the taxpayer. Where the Minister does not change the basis of assessment before the limitation period expires, the Tax Court Judge is bound by the assessment at issue before the Court. On his own motion, the Tax Court Judge changed the basis of that assessment without the appellant having the opportunity to address the change. By referring the matter back to the Minister to reassess on the basis that the Euler proceeds and the Landpark deposit were appropriated, he allowed the Minister to appeal his own reassessment. The Crown and therefore the Court are bound by the assessment appealed from, unless it has been amended, or adequate notice given of an intention to rely on a different basis for it, within the limitation period and before judgment is rendered by the Tax Court, which was not the case here. Where the basis of the Minister’s assessment is one transaction, the Court cannot, ex post facto, broaden the scope of the assessment to include other transactions. The Tax Court Judge erred in finding the appellant liable on a basis different from that in the Minister’s April 4, 1996 notice of reassessment which was at issue in the tax appeal. It was also an error for the Tax Court Judge to find, without evidence, that the Landpark deposit was paid to the appellant.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 152(9) (as am. by S.C. 1999, c. 22, s. 63.1).

Income Tax Act, S.C. 1970-71-72, c. 63, ss. 6(1)(a) (as am. by S.C. 1980-81-82-83, c. 140, s. 1), 15(1) (as am. by S.C. 1988, c. 55, s. 8), 56(2) (as am. by S.C. 1987, c. 46, s. 15), 163(2) (as am. by S.C. 1988, c. 55, s. 142).

CASES JUDICIALLY CONSIDERED

APPLIED:

Continental Bank of Canada v. Canada, [1998] 2 S.C.R. 358; (1998), 163 D.L.R. (4th) 430; 98 DTC 6501; 229 N.R. 44.

APPEAL from a decision by the Tax Court of Canada ((1998), 99 DTC 63) finding the appellant to have appropriated the net proceeds of the sale of a lot in an 84-acre parcel of land, and a deposit on an agreement to sell 16 other lots in the same parcel. Appeal allowed.

APPEARANCES:

Douglas H. Mathew for appellant.

Judith Sheppard for respondent.

SOLICITORS OF RECORD:

Thorsteinssons, Toronto, for appellant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by

Rothstein J.A.:

ISSUE

[1]        This is an appeal from an October 29, 1998 decision of the Tax Court of Canada [(1998), 99 DTC 63] in which the appellant was found to have appropriated to himself:

(1) the net proceeds of the sale of a lot in an 84-acre parcel of land belonging to a company he controlled; and

(2) a deposit on an agreement to sell 16 other lots in the same 84-acre parcel.

The learned Tax Court Judge found the appellant liable to include the appropriated sums ($125,360 + $22,500 = $147,860) in his income in his 1989 taxation year.[1] He also found that the appellant was liable to a penalty under subsection 163(2) [as am. by S.C. 1988, c. 55, s. 142] of the Income Tax Act [S.C. 1970-71-72, c. 63].

[2]        The appellant says that the appropriation of the proceeds of the sale of property and the deposit on the agreement for sale did not form the basis of the Minister’s reassessment and was not pleaded by the Minister before the Tax Court. The appellant argues that the Tax Court Judge was not entitled to find the appellant liable on a basis not in the Minister’s reassessment or pleaded by the Minister.

FACTS

[3]        The transactions giving rise to this matter are complex, but for the purposes of this appeal may be simplified. The appellant is a lawyer and was a shareholder and directing mind of 718615 Ontario Inc. On October 31, 1988, the company acquired 84 acres of land in Pelham, Ontario, for a purchase price of $183,593 including closing costs.

[4]        On or about July 4, 1989, one of the lots in the 84-acre parcel of land was sold to Mr. and Mrs. David Euler for $135,000. The sum of $135,000 was paid into the trust account at the appellant’s law firm, Pedwell & Pedwell, and of the net proceeds of $125,360, $100,000 was paid out of the trust account to another company owned by the appellant and $25,360 was paid out to the appellant himself.

[5]        In 1989, Landpark Homes Inc. agreed to purchase 16 lots in the 84-acre parcel. A deposit of $22,500 was paid into the trust account at Pedwell & Pedwell.

[6]        In a notice of reassessment dated October 31, 1994, the Minister reassessed the appellant by adding to his income for his 1989 taxation year:

Appropriation re: Inventory of lots taken from your corporation	$ 183,593
Unreported net profit on sale of farm house to D. Euler	$ 106,974 $ 290,567

[7]        Apparently, the appellant was able to convince the Minister that the unreported net profit on the sale of the farmhouse to D. Euler of $106,974 constituted a double counting, in the sense that the alleged unreported net profit was included in the sum of $183,593, which was the purchase price for the 84 acres. This Court was told that the sale to Euler was sufficiently close in time to the acquisition of the 84 acres that there was no gain attributed to the sale of the Euler lot. Accordingly, by notice of reassessment dated April 4, 1996, the Minister allowed the appellant’s objection to the reassessment of $106,974.

ADJUSTMENT TO BUSINESS INCOME:

Appropriation re unreported profit on the

sale of the farmhouse and lot to

Euler allowed                                                      ($106,974)

However, the reassessment for $183,593 for the appropriation of the property from the corporation remained.

[8]        It was from the April 4, 1996 notice of assessment that the appellant appealed to the Tax Court of Canada.

[9]        In his notice of appeal, the appellant, referring to the remaining transaction giving rise to his reassessment, identified the issue to be decided as:

Whether the Property (84 acres) was appropriated from the Corporation by the Appellant.

[10]      The basis of the Minister’s reply was the alleged appropriation of the 84 acres from the company to the appellant. This is clear from the amount of the assessment, $183,593 which was the purchase price and closing costs on the acquisition of the 84 acres. However, the subsequent transactions, being the Euler sale and the receipt of the Landpark deposit were not entirely ignored. Assumptions 8(j) to (m) dealt with the sale of the Euler lot:

(j)   on or about July 4, 1989, Lot 21 on which the original farm house was situated was sold to David and Sharon Euler (the “Eulers”) for $135,000; of the $125,360 net proceeds from this sale, $100,000 went to Turgovia, as repayment of the Appellant’s loan, and $25,360 went to the Appellant;

(k)  none of the proceeds from the sale of Lot 21 went to the Corporation and there was no change to the Loan Account in respect of the transfer to Peacock or the sale of Lot 21 to the Eulers;

(l)   the profit from the sale of Lot 21 was calculated by the Appellant’s accountant to be $106,974; neither the Appellant, nor any member of his family, nor the Corporation reported this profit in their tax returns for 1989;

(m) The sale of Lot 21 was not the sale of the Appellant’s principal residence;

Assumptions 8(o), (p) and (q) dealt with the receipt of the deposit from Landpark:

(o)  on October 23, 1989 Keith Pedwell, Mary Pedwell and McLean entered into an agreement of purchase and sale with Landpark Homes Inc. (“Landpark”) to sell 16 of their lots for $1,080,000 (the “Agreement”);

(p)  upon entering into the Agreement, Landpark paid a deposit of $22,500 which was retained by the Appellant; the said amount was not reflected on the balance sheet of the Corporation;

(q)  the Transferees did not hold the lots in trust for the Corporation or for the benefit of the Corporation.

[11]      The appellant says that the Minister’s reassessment, his pleadings and approach in the Tax Court treated the acquisition of the 84 acres for $183,590 as the appropriation. However, he argues that the Tax Court Judge found there was no such appropriation. Indeed, the Tax Court Judge stated [at paragraph 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.

The Tax Court Judge allowed the appellant’s appeal in respect of the Minister’s assessment based on the appropriation of the 84 acres to the appellant. However, the Tax Court Judge then went on to find that the proceeds of the Euler sale, $125,360, and the Landpark deposit, $22,500, were appropriated to the appellant. The relevant part of the judgment of the Tax Court reads:

The appeals from assessments of tax made under the Income Tax Act for the 1989, 1990, 1991 and 1992 taxation years are allowed with costs to the respondent and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:

(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;

[12]      The appellant says the Euler and Landpark transactions were not the basis of the Minister’s reassessment, nor were they the focus of the pleadings in the Tax Court, and the Tax Court Judge erred in finding the appellant liable on a basis not contained in the reassessment or pleadings.

ANALYSIS

[13]      It is not necessary to deal with the appellant’s pleadings argument. In my respectful opinion, the Tax Court Judge erred in finding the appellant liable on a basis different from that in the Minister’s notice of reassessment.

[14]      In Continental Bank of Canada v. Canada,[2] Bastarache J. explains that taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge the assessment. He stated:

The Crown is not permitted to advance a new basis for reassessment after the limitation period has expired. The proper approach is expressed in The Queen v. McLeod, 90 D.T.C. 6281 (F.C.T.D.), at p. 6286. In that case, the court rejected the Crown’s motion for leave to amend its pleadings to include a new statutory basis for Revenue Canada’s assessment. The court refused leave on the basis that the Crown’s attempt to plead a new section of the Act was, in effect, an attempt to change the basis of the assessment appealed from, and “tantamount to allowing the Minister to appeal his own assessment, a notion which has specifically been rejected by the courts”. Similarly, the Federal Court of Appeal has described such attempts by the Crown as “a belated attempt to put the appellant’s case on a new footing” (British Columbia Telephone Company v. Minister of National Revenue (1994), 167 N.R. 112, at page 116).

McLachlin J. stated [at paragraph 18]:

The Minister should not be allowed to advance a new basis for a reassessment after the limitation period has expired.

[15]      While the parties referred to a number of older authorities on the issue, Continental Bank now makes it clear (subject to subsection 152(9) [Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1 (as am. by S.C. 1999, c. 22, s. 63.1)] which applies to appeals disposed of after June 17, 1999 and is not relevant here in any event) that the Minister is bound by his basis of assessment. While this case does not involve the Minister advancing a different basis of assessment, I think the principle in Continental Bank is applicable to a judicial determination on a basis different from that in the notice of reassessment.

[16]      First, if the Crown is not able to change the basis of reassessment after a limitation period expires, the Tax Court is not in any different position. The same prejudice to the taxpayer results—the deprivation of the benefit of the limitation period. It is not open to that Court or indeed this Court, to construct its own basis of assessment when that has not been the basis of the Minister’s reassessment of the taxpayer.

[17]      Second, while it is open to the Minister to change the basis of assessment before the limitation period expires, where he does not do so, in my respectful opinion, the Tax Court Judge is bound by the assessment at issue before the Court. Fairness requires that the taxpayer be given a reasonable opportunity to contest a new basis of assessment. If the Tax Court Judge decides on a basis of assessment not at issue during the court proceedings, the taxpayer is deprived of that opportunity.

[18]      Here, on his own motion, the Tax Court Judge, in his decision and after the completion of the evidence and argument directed to the Minister’s basis of assessment, changed the basis of that assessment without the appellant having the opportunity to address the change. This is clear because the Tax Court judgment allowed the appellant’s appeal, i.e. found that there was no appropriation of property which was the basis of the Minister’s assessment, but then referred the matter back to the Minister to reassess on the basis that the Euler proceeds and the Landpark deposit were appropriated. What has taken place is tantamount to allowing the Minister to appeal his own reassessment.

[19]      I do not say that the Minister cannot assess in the alternative. However, that was not done here.

[20]      It is true that the Minister’s assumptions make reference to the Euler sale and the Landpark deposit. However, that does not assist the Minister in these circumstances. These assumptions were included to support the Minister’s assessment based on the appropriation of the 84 acres from the company to the appellant. That was the context in which the appellant addressed them, not that they were the basis of the assessment themselves. This is made clear in the proceedings before the Tax Court Judge. The Minister’s witness, Keith Alexander Pullan, tax auditor, confirmed that the assessment was with respect to the appropriation of the 84 acres and not the Euler proceeds:

Mr. Mathew

Q.   But is it right to say that the assessments against Mr. Pedwell are in respect of the appropriation of property? Right?

A.   Correct.

Q.   The property alone. I’m not talking about the Euler proceeds. I’m talking about the entirety of the property assessed to him.

A.   Yes. Correct. Yes.

In addition, the April 4, 1996 reassessment explicitly deleted the reference to the Euler sale, leaving as the only basis of assessment the alleged appropriation of the 84-acre parcel on its acquisition.

[21]      The Minister advances two arguments. The first is that the issue in a tax appeal is whether the tax is too high. The implication of this argument is that anything can be argued in the Tax Court and the Tax Court Judge is limited only to the amount of the assessment. In other words, as long as a finding does not exceed the amount of the tax assessed by the Minister, the Tax Court Judge is free to find liability against the taxpayer on any basis, whether included in the notice of reassessment or not, provided the taxpayer has notice and an opportunity to respond.

[22]      I think Continental Bank is dispositive on this point. The Crown and therefore the Court are bound by the assessment appealed from, unless it has been amended, or adequate notice given of an intention to rely on a different basis for it, within the limitation period and certainly before judgment is rendered by the Tax Court. This was not the case here.

[23]      The second of the Crown’s arguments is that what transpired is all part of one scheme; that the acquisition of the 84 acres, the sale to Eulers and the deposit received from Landpark cannot be separated for tax purposes. However, what transpired were three separate transactions involving different parties:

(1) the acquisition of the 84 acres;

(2) the sale of one lot to Eulers; and

(3) the deposit received from Landpark for 16 lots.

This is seen in the Minister’s notice of reassessment. In the October 1, 1994 reassessment, the appropriation of the 84 acres is listed, followed by the alleged unreported profit on the Euler sale. On the April 4, 1996 notice of reassessment, the Euler transaction is eliminated. The necessary implication is that the appellant need have no further worry that the Euler proceeds constituted an appropriation to him and that he may concentrate on the acquisition of the 84 acres. This was confirmed before the Tax Court Judge in the excerpt from the transcript quoted above. Finally, nowhere on the reassessments is there any mention of the Landpark deposit of $22,500.

[24]      I do not say that the Minister might not base an assessment on a scheme consisting of more than one transaction. However, taxation is transaction-based (or perhaps deemed transaction-based) and if more than one transaction is to form the basis of assessment, the assessment must reflect that fact. Where the basis of the Minister’s assessment is one transaction, the Court cannot, ex post facto, broaden the scope of the assessment to include other transactions.

[25]      There is a further reason for allowing this appeal with respect to the Landpark deposit. The evidence included a cheque for $22,500 drawn by Landpark and payable to “Pedwell & Pedwell (In Trust)”. The back of the cheque indicates that it was deposited to the Pedwell & Pedwell trust account. The appellant’s evidence was that the money was paid into the trust account and when the deal aborted, was repaid with interest.

(Q) Did any money change hands on that deal?

(A) There was initial deposits. Looking at the offer, I think it was around $22,500.00

(Q) And what became of those, out of those funds?

(A) Well, those deposits were put into our trust account at the law firm, Pedwell & Pedwell, and Mr. Breit Cruize, I can’t give you the exact date, but somewhere around 1993, `94, asked for his money back and it was paid back to him with the interest that accumulated on it.

[26]      The appellant was not cross-examined as to whether the deposit had been taken out of the trust account other than when it was repaid to Landpark. There was no other evidence regarding the deposit. Yet the Tax Court Judge found [at paragraph 55]:

He [the appellant] also caused Pedwell and Pedwell to pay him the Landpark deposit of $22,500.

Of course, the Trial Judge is entitled to draw inferences. However, the inferences must have some basis in the proven facts. Here the respondent was unable to point to any facts from which an inference could have been drawn that the deposit was paid out of the trust account to the appellant.

[27]      On the contrary, the evidence was that the Landpark transaction was subject to conditions which were not satisfied, which is what led to the $22,500 being refunded. It would seem that if the appellant had taken funds from his trust account for his own use when they were still impressed with a trust, he would be in more serious trouble than he faced with the Minister’s reassessment. Yet there was no evidence of a breach of trust or any other indication that would support the Judge’s statement that the $22,500 was paid out of the trust account to the appellant. Appellant’s counsel pointed out that had he known the Landpark deposits were at issue, he would have produced the law office trust account records and the refund cheque to Landpark from the trust account.

CONCLUSION

[28]      I am of the respectful opinion that the learned Tax Court Judge erred in finding the appellant liable on a basis different from that in the Minister’s April 4, 1996 notice of reassessment which was at issue in the tax appeal. I am also of the view that it was an error for the Tax Court Judge to find, without evidence, that the Landpark deposit was paid to the appellant.

[29]      The appeal should be allowed with costs and the Minister’s reassessment should be quashed.

Stone J.A.: I agree.

Evans J.A.: I agree.

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