Hansen v. The Queen

Hansen v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-09-14
Neutral citation
2020 TCC 102
File numbers
2017-1882(IT)G
Judges and Taxing Officers
Johanne D’Auray
Subjects
Income Tax Act
Decision Content
Docket: 2017-1882(IT)G
BETWEEN:
RICK HANSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on June 24, 25, 26 and 27, 2019, at Ottawa, Ontario
Written submissions filed by the parties on September 2, 2020.
Before: The Honourable Justice Johanne D’Auray
Appearances:
Counsel for the Appellant:
Susan Tataryn
Asha Bradford
Counsel for the Respondent:
Ana-Maria Tarres
JUDGMENT
The appeal, from the reassessments made under the Income Tax Act (the “Act”) for the 2007, 2008, 2009, 2011 and 2012 taxation years, is allowed and the reassessments are referred back to the Minister of National Revenue (the “Minister”) for reconsideration and reassessment on the basis that:
- The respondent did not establish that the appellant made any misrepresentation that is attributable to neglect, carelessness or wilful default as contemplated by subparagraph 152(4)(a)(i) of the Act. Therefore, the Minister did not have the authority to reassess the appellant after the normal period for reassessment for the sales transactions that occurred in 2007, 2008 and 2009 taxation years, namely, with respect to the Lakeforest, Pebblewoods and Meadowshire (defined hereafter as “Meadowshire 1”) houses. As a result, the appellant’s claim for the principal residence exemption for these taxation years stands.
- The appellant is not entitled to claim the principal residence exemption for the sale transactions that occurred in 2011 and 2012 taxation years, namely, with respect to the Cedardown and Kilbirnie houses. As a result, the said transactions should be taxed pursuant to subsection 9(1) of the Act. However, the Minister has to take into account, that Ms. Weiland co-owned these houses. Accordingly, Mr. Hansen should be taxed on 50% of the net proceeds.
- In calculating the adjusted cost base for the Cedardown house, an additional amount of $8,531 is allowed as expenses.
- In calculating the adjusted cost base for the Kilbirnie house, an additional amount of $54,387.53 is allowed as expenses.
- The penalties levied by the Minister for the taxation years 2007, 2008, 2009, 2011 and 2012 are waived.
- The management fees in the amounts of $6,600 paid by the appellant to his spouse Ms. Tania Weiland are deductible with respect to the 2009 and 2011 taxation years.
- The advertising expenses in the amount $878 are deductible for the 2009 taxation year.
In all other respects, the reassessments for the 2007, 2008, 2009, 2011 and 2012 taxation years remained unchanged.
The parties will have 30 days from the date of this Judgment to make submissions with respect to costs. Each party will have a further 10 days thereafter to file any responding submissions. If the parties do not advise the Court that they have reached an agreement and no submissions are filed by the appellant, costs shall be awarded in the amount set out in the Tariff of the Tax Court of Canada Rules, (General Procedure).
Signed at Ottawa, Canada, this 14th day of September 2020.
“Johanne D’Auray”
D’Auray J.
Citation: 2020 TCC 102
Date: 20200914
Docket: 2017-1882(IT)G
BETWEEN:
RICK HANSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D’Auray J.
I. OVERVIEW
[1] The issues in this appeal arise from the sale of houses by Mr. Hansen and his spouse, Ms. Tanya Weiland (“the Hansens”) during the taxation years 2007, 2008, 2009, 2011 and 2012. The Hansens sold a house during each of these taxation years. Mr. Hansen claimed the principal residence exemption with respect to the disposition of the houses pursuant to paragraph 40(2)(b) and section 54 of the Income Tax Act (the “Act”) [1] .
[2] The Minister of National Revenue (“the Minister”) disagreed and treated the income from the disposition of the five houses as income from a business or from an adventure in the nature of trade pursuant to subsection 9(1) of the Act. Accordingly, the Minister reassessed Mr. Hansen’s income for the taxation years including the amounts of $69,801, $273,434, $403,776, $54,913 and $187,574 respectively as income.
[3] The reassessments for the taxation years 2007, 2008 and 2009 were issued after the normal reassessment period. The Minister justified it on the basis that Mr. Hansen had made misrepresentations attributable to neglect, carelessness or willful default in reporting his income for the taxation years pursuant to subparagraph 152(4)(a)(i) of the Act.
[4] The Minister also levied penalties for all the taxation years in issue under subsection 163(2) of the Act on the basis that Mr. Hansen had knowingly or under circumstances amounting to gross negligence, made a false statement or omission in filing his income tax returns.
[5] At trial, the respondent conceded that should this Court find that Mr. Hansen’s gain from the sale of the houses was on income account, Mr. Hansen should be taxed on 50% of the net proceeds, as he co-owned the properties in question on an equal basis with his spouse, Ms. Tania Weiland.
[6] At trial, the parties also filed a Partial Consent to Judgment for the 2009 and 2011 taxation years. Pursuant to this Partial Consent to Judgment, the appellant is entitled to deduct in his 2009 and 2011 taxation years the amount of $6,600 paid to his spouse Ms. Tania Weiland, as management fees. The appellant is also entitled to deduct for his taxation year 2009, the amount of $878 as advertising expenses.
[7] The trial was scheduled to continue on September 22, 2020. The only issue left to be determined was the adjusted cost basis (“ACB”) of each property and in particular whether the appellant could include in computing the ACB any additional amounts over and above what the Minister of National Revenue had already allowed. On September 2nd, 2020, the parties informed the Court that they had reached an agreement on the ACB of the properties.
II. FACTS
[8] Mr. Hansen has a grade 9 education. From 1995 to 2010, he operated Concrete Works, a concrete pouring business, and later Dig-Rite, a foundation repair business.
[9] After completing high school, Ms. Weiland completed a course in hotel management. She currently works as a manager of two sales departments in a downtown Ottawa store. She has also worked as bookkeeper for Central Precast.
[10] Mr. Hansen and Ms. Weiland were unable to have children and therefore decided to adopt. Their first attempt at adopting proved unsuccessful and disheartening. In 2004 a young boy was placed in their care as the first step under an adoption program. However, during the Christmas season of 2004, the birth mother decided that she did not want the adoption to proceed. The boy was removed from the care of the Hansens. This was a traumatic experience for the Hansens, as the child had become part of their family life.
[11] After this very difficult experience, the Hansens were approached by a social worker with respect to adopting twins. In 2005, after a through selection process, the birth mother selected the Hansens to adopt the twin baby girls. One of the conditions of the adoption was that Ms. Weiland stay at home until the children began school. The Hansens testified that the girls’ welfare was at heart of the decisions they made, including with respect to housing.
[12] At the time of the adoption, the Hansens were living at 305 Mill Street, Merrickville, Ontario. They had been living there since 1999.
[13] The Hansens did not find the house suitable for raising young children. It had four-stories with the laundry in the basement. The staircases were steep, and Ms. Weiland testified that she was afraid of falling down them while carrying the babies. In addition, the location of the house was not ideal. It was close to the highway and far from Mr. Hansen and Ms. Weiland’s parents. It was also located far from Mr. Hansen’s place of work — he had to commute forty-five minutes to get to work. This was not ideal as Mr. Hansen worked long hours.
[14] The Hansens therefore sold the house in August 2006. They used Grapevine, an online website designed to sell homes commission free. The Minister did not reassess Mr. Hansen on the sale of this house.
6951 Lakeforest Walk, Greely, Ontario (“Lakeforest”),
[15] On April 8, 2006, the Hansens bought a house at 6951 Lakeforest Walk in Greely, Ontario. They moved into the house on August 18, 2006. The purchase price was $450,000.
[16] The Lakeforest house was a used single-level bungalow in a new development. The Hansens felt that the Lakeforest Walk area was a good place to raise young children, since it was a new subdivision and parks for children were planned.
[17] The Lakeforest house was also located closer to the Hansens’ respective parents as well as to Mr. Hansen’s place of work in Ottawa. His commute was reduced by 40 minutes per day.
[18] Once in the Lakeforest house, the Hansens personalized it to their liking. They painted the great-room chocolate brown and the girls’ bedrooms pink. They installed various custom light fixtures and pot lights. They changed the countertop in the kitchen and in the bathroom to granite. They had a gas line installed for a gas-powered dryer, despite the fact that the house had come with an electric dryer. They bought new appliances, finished the deck that the builder had begun and painted the garage. They also took care of the landscaping, including planting trees, and had the laneway paved as required pursuant to a sale covenant.
[19] Not long after moving in, the Hansens became dissatisfied with the Lakeforest house and decided they had to move. The house was located close to an industrial site known as the Brenning Pit, which has a gravel excavation site and a timber mill. Large trucks from the Pit passed the house from approximately 6:00 am in the morning until late at night. The noise from the trucks was quite loud and the vibration from the trucks made the house shake. In addition, it created a large amount of dust. They also did not find the configuration of the house convenient for raising the girls. Ms. Weiland stated that it was difficult for her to keep an eye on the girls due to the house’s configuration. The twin’s bedrooms were located at the opposite end of the home from the master bedroom. In addition, the basement staircase was poorly located in the middle of the house. One of the girls pushed the baby gate and fell down the basement stairs.
[20] They, therefore, decided to sell the Lakeforest house. To that end, on January 21, 2007, five months after moving into the house, they purchased a lot located on Pebblewoods Drive, Manotick, Ontario.
[21] On April 19, 2007, the Hansens sold the Lakeforest house using Grapevine for $552,000. They moved out of the house on June 8, 2007, having lived there for approximately ten months.
6148 Pebblewoods Drive, Manotick, Ontario (“Pebblewoods”)
[22] For the Pebblewoods house, the Hansens decided to construct a bungalow‑style home and hired an architect to design custom plans. Both Mr. Hansen and Ms. Weiland testified that the house was their “dream home”. The main level had 3000 square feet and the basement 1500 square feet. They moved into the house in early September 2007.
[23] At that time, the girls were two years old. The Hansens stated that the house was customized to their taste and for the girls’ security and enjoyment. They ensured that the staircase leading to the basement was located towards the back of the home for the girls’ security. They also built the girls’ bedrooms closer to the master bedroom to better keep an eye on the girls. They ensured that the girls’ bedrooms were the same size with a connected bathroom between the rooms. The sinks in the bathroom were lowered so that the girls could use them without booster steps.
[24] The Hansens installed the floor joists closer than usual to prevent the floors from cracking. They raised the floors in the basement so that the basement would not feel cold and damp when the girls played there. They also built a playroom in the basement for the girls. They built a sound-proof theatre room. They had a TV installed in the island in the kitchen at a low height so that the girls could watch it. They installed eight-foot doors throughout the house. They installed granite counters and upgraded cupboards. The house had over seventy-five pot lights and at least thirty dimmer switches. A natural gas line was connected to the house to power both the BBQ and the dryer. They also installed a back-up generator. Both Mr. Hansen and Ms. Weiland testify that if they had been built the house with the intention of reselling it, they would not have added so many features and upgrades.
[25] The Hansens did not use a general contractor to build the house. Instead, Mr. Hansen hired and supervised individual tradespeople. He explained that he relied on referrals from contractors he had met while operating Concrete Works to find the tradespeople.
[26] Mr. Hansen was also involved in the construction of the house; he poured the concrete floors in the basement and garage himself, laid the brick for the fireplace, and cleaned up after the tradespeople every day.
[27] The Hansens paid $136,972 for the Pebblewoods lot including the purchase fees. They stated that the cost of construction was $605,123 for a total of $742,094.40.
[28] The Hansens testified that they quickly became unhappy with the neighborhood. They became concerned for the girls’ security, due to a “coyote invasion” in Greely. They testified that coyotes often came near the houses, scavenging for garbage and other food. A neighbourhood boy was attacked by a coyote and a neighbour’s dog killed. Ms. Weiland started to worry about the girls’ safety and did not allow them to play outside. They had to give the family dog to her sister in law, because they were too afraid that a coyote would attack the dog. At trial, the Hansens filed documents establishing that that there had been a coyote infestation in their neighbourhood at the time.
[29] In addition, according to the Hansens, houses on Pebblewoods Drive were subject to vandalism and the street seemed to be a favourite spot for teenagers to speed and race their cars.
[30] In light of these issues, the Hansens decided to sell. They listed the house with a real estate agent, Mr. James Wright, seven months after they had moved in and on May 2, 2008, they sold it for $870,000. They moved out on August 25, 2008.
[31] On May 12, 2008, the Hansens purchased the lot on which their next house would be built. It was also located in Manotick, at 1135 Meadowshire Way. The Hansens resided in the Pebblewoods house for eleven months that is from September 2007 to August 25, 2008.
1135 Meadowshire Way, Manotick, Ontario (“Meadowshire 1”),
[32] The Hansens paid $252,168 for the lot that they purchased on May 12, 2008 to build the Meadowshire 1 house. They stated that they incurred construction costs of approximately $605,000. After living in a trailer, they moved in the Meadowshire 1 house on September 13, 2008.
[33] The design of the Meadowshire 1 house was based on the same custom plan that had been drawn up for the Pebblewoods house, except that the master bedroom and the laundry room were larger and a loft was added over the garage to serve as Mr. Hansen’s office for his business.
[34] The house was constructed in the same manner as the Pebblewoods house with Mr. Hansen hiring subcontractors and doing some of the work himself.
[35] Both Mr. Hansen and Ms. Weiland testified that soon after they had moved in, Mr. James Wright, the real estate agent who had sold the Pebblewoods house, approached them and asked if he could show Meadowshire 1 to his clients, Mr. Scott Murray and Ms. Catherine Murray (“the Murrays”). The Hansens initially declined Mr. Wright’s request, as they did not want to sell. However, Mr. Wright persisted and eventually the Hansens agreed to allow a visit.
[36] When the Murrays visited the house, they immediately wanted to buy it. The Hansens stated that they initially refused to sell but when the Murrays insisted and made an offer of $1,150,000, they agreed to sell. The sale date was in May 2009 and the closing date was on September 14, 2009.
[37] Both Mr. Hansen and Ms. Weiland testified that they regretted agreeing to sell the Meadowshire 1 house and they approached Mr. Wright to see if they could rescind the sale. Mr. Wright advised them that if they did, they would be in breach of contract and would probably have to compensate the Murrays for cancelling the sale. Mr. Hansen and Mr. Weiland both testified that they also consulted a lawyer to see if they could rescind the sale contract. The Murrays were never made aware of these initiatives.
[38] Mr. Wright confirmed the Hansens’ testimonies that they did not want to sell the house when he first approached them. He also confirmed that after they had agreed to sell the house, the Hansens approached him to see if they could rescind the sale. Due to possible monetary consequences, they decided to go ahead with the sale. Mr. Wright testified that in his estimation the Meadowshire 1 house was not built by the Hansens for the purposes of resale. In his view, a house built for resale does not include so many features and upgrades.
[39] Ms. Weiland stated that another factor that they took into consideration in selling the Meadowshire 1 house was that Mr. Hansen’s health had declined. Initially, Mr. Hansen thought that he had Parkinson’s disease, since his hands kept shaking. Following extensive medical testing, Mr. Hansen was diagnosed with vertigo and an essential tremor. The condition was largely attributable to the stress of operating his business. In light of this, Mr. Hansen decided to stop operating the business and sold it to a company on the condition that they retain his employees.
[40] Ms. Weiland testified that she was concerned that if Mr. Hansen could not work as much as he had in the past, they might not have the financial capacity to maintain a house as big as the Meadowshire 1 house in the future. That said, in cross-examination, she testified that they had financial capacity to keep the Meadowshire 1 house.
[41] The Hansens resided in the Meadowshire 1 house for 10 months, from November 12, 2008 until they moved out on September 14, 2009.
125 Cedardown Private, Nepean, Ontario (“Cedardown”)
[42] After selling the Meadowshire 1 house, the Hansens rented a townhouse and started to look for a house to buy. At the time, Monarch Developments Inc. (“Monarch”) was building townhouses on Cedardown Private in Nepean. This location suited the Hansens since their daughters did not have to change school.
[43] On June 5, 2009, the Hansens bought an end unit townhouse from Monarch at 125 Cedardown Private, Nepean. The price was $280,270.
[44] The Hansens moved into the house on December 2, 2009. They immediately made improvements by removing the carpet and installing hardwood on the main floor, installing Berber carpet in the basement, changing the kitchen counters to granite and installing a kitchen backsplash, having a gas line connected to the home for a gas dryer, installing a fence in the backyard, planting shrubbery, and building a backyard deck.
[45] Ms. Jessica Wright, the daughter of Mr. Wright, the real estate agent used by the Hansens, visited the Hansens to have them sign some documents relating to the sale of the Meadowshire 1 house. At the time, she was studying to become a real estate agent. Ms. Wright was taken by the improvements and the tasteful finishes made by the Hansens to the Cedardown house. She testified that she told the Hansens that if they ever sold the house, she would be interested in buying it. When asked in cross-examination why she thought Mr. Hansen would want to sell, she answered “I figured it would be a matter of time.”
[46] As it turned out, the Cedardown house was not a good buy for the Hansens. Mr. Hansen’s truck was too large to be parked properly in the laneway reserved for the townhouse leading to complaints from his next-door neighbour that the truck was taking up too much space. To resolve the issue, Mr. Hansen decided to park his truck in the guest parking area. This led the other neighbours to object, as they did not want Mr. Hansen to use the area to park his truck. In addition, the neighbours complained about the Hansens having loud social gatherings. Letters from the Hansen’s neighbor, Mr. Mohammad Alsayyar, threatening to call the Ontario Provincial Police if the gatherings did not stop, were filed as evidence. [2]
[47] On April 25, 2010, the Hansens sold the Cedardown house to Ms. Wright for $339,947. No listing agent was involved. At that point, the Hansens had found another house — located at 512 Kilbirnie Drive, Nepean, Ontario. On January 10, 2011, the Hansens moved out of the Cedardown house.
[48] The Hansens lived in the Cedardown house from December 2, 2009 to January 10, 2011, namely 13 months.
Purchase of a lot - 1136 Meadowshire Way, Manotick, Ontario
[49] On August 26, 2009, before moving out of the Meadowshire 1 house and into the Cedardown one, the Hansens purchased a lot at 1136 Meadowshire Way (Meadowshire 2), in Manotick. The lot was located just across from the Meadowshire 1 house. The sale transaction for the lot closed on September 30, 2009.
512 Kilbirnie Drive, Nepean, Ontario (“Kilbirnie”)
[50] Mr. Hansen explained that while driving by the Monarch sales center in Nepean in February 2010, he noticed that Monarch had just released a new batch of single-family homes. He decided to visit and, seeing there was an available home, decided to purchase it. The house was located at 512 Kilbirnie Drive.
[51] The Hansens testified that they purchased the Kilbirnie house, a newly constructed single-family home from Monarch, almost by happenstance, seizing the opportunity to get out of their situation with the Cedardown house. They purchased it on February 10, 2010 but did not move in until January 2011. The purchase price was $400,646.
[52] They made improvements to the Kilbirnie house, such as installing a custom granite countertop in the kitchen, installing custom window coverings, partially finishing the basement, installing a gas line for a gas clothes dryer, installing a fiberglass pool, installing a fence, building a patio, and doing backyard landscaping.
[53] According to Mr. Hansen and Ms. Weiland, as was the case with the Cedardown house, the Kilbirnie house was not their dream home but they were happy with it until they could build the Meadowshire 2 house. They knew that it would take almost a year to build the house. In fact, the Hansens applied for a building permit to construct a house at Meadowshire 2 on April 14, 2011, four months after moving into the Kilbirnie house.
[54] The Hansens sold the Kilbirnie house on May 10, 2012 for $602,492 and moved out in July 2012. On May 27, 2011, the Hansens asked their financial institution for a loan in order to build the Meadowshire 2 house.
[55] The Hansens resided in the Kilbirnie house for 19 months; namely, from January 2011 to July 20, 2012.
[56] After selling the Kilbirnie house using Grapevine, Mr. Hansen and his family moved into the house at Meadowshire 2, where they were still residing at the time of trial.
[57] Mr. Hansen stated that for financial reasons, he was more involved in the construction of the Meadowshire 2 house than he had been for the earlier houses. He borrowed money from his parents to finish the house and repaid them after the Kilbirnie house was sold.
Testimony of Mr. Marsh
[58] Mr. Marsh is a certified professional accountant (“CPA”). He started working in accounting in 1975 primarily with the accounting firm of Kelley, Marsh & Associates. He has been the accountant of Mr. Hansen since 1996 and has had a business relationship with Ms. Weiland since the mid-1980’s.
[59] Mr. Marsh met the Hansens on an annual basis to prepare their income tax returns. The Hansens always informed him of their house transactions. Mr. Marsh testified that he asked the Hansens why they had sold their house and their intentions with respect to their new house. He stated that if he had doubted the Hansens, he would have stopped working for them, since his policy was to work only with upstanding clients.
[60] Mr. Marsh recalled the reasons why the Hansens had sold their houses: the Lakeforest house being too close to the Brenning Pit, the problem with the coyotes with respect to the Pebblewoods house and the high unexpected offer made on the Meadowshire 1 house. He stated that taking into account the intention of the Hansens at the time of purchase and the circumstances which led them to sell the houses, he concluded that they qualified for the principal residence exemption and prepared their income tax returns accordingly.
Financing of the transactions
[61] The Hansens used a home equity line of credit (“HELOC”) to finance the purchase of their homes. Unlike a traditional mortgage, which requires the payment of interest and principal, a HELOC requires only payment of interest for a period of time. In addition, a HELOC does not have a fixed term that locks a borrower in for a fixed period. This flexibility allowed the Hansens to close a sale transaction without significant penalties.
[62] The evidence showed the Hansens usually obtained a HELOC when it was time to build their next house. For example, they mortgaged via a HELOC the Lakeforest house in order to build the Pebblewoods house. They took a HELOC on the Kilbirnie house to build the Meadowshire 2 house, namely, a few days after they had applied for a permit to build the latter house.
III. ISUES TO BE DECIDED
[63] There are four questions at issue:
a) Whether the Minister was entitled to reassess the 2007, 2008 and 2009 taxation years pursuant to subparagraph 152(4)(a)(i) of the Act, that is, after the normal reassessment period;
b) Whether Mr. Hansen’s gain from the sale of the houses was business income, an adventure or concern in the nature of trade, or a capital gain subject to the principal residence exemption for the taxation years 2007, 2008, 2009, 2011 and 2012;
c) If the gain was business income or an adventure in the nature of trade, whether the Minister correctly denied some of the expenses claimed by Mr. Hansen with respect to the sale transactions;
d) If the gain was business income or adventure in the nature of trade, whether the Minister correctly assessed the penalties under subsection 163(2) of the Act.
IV. POSITION OF THE PARTIES
[64] Mr. Hansen submits that the Minister could not reassess him after the normal reassessment period for the 2007, 2008 and 2009 taxation years as he did not make a misrepresentation within the meaning of subparagraph 152(4)(a)(i) of the Act. He consulted a CPA, Mr. Marsh, to obtain professional advice at the time of filing his income tax returns. He explained to Mr. Marsh in a forthright manner that his intentions were to stay in the houses, but for legitimate reasons and circumstances beyond his control, he and his spouse had decided to sell the houses. In light of the explanations given by Mr. Hansen, Mr. Marsh advised him that he was entitled to claim the principal residence exemption.
[65] At the time of each purchase, Mr. Hansen argues that it is clear that he and his spouse’s motivation was not sell the houses. If their motivations had been to sell the houses at a profit, they would have not customised the houses and added the many upgrades. Mr. Hansen submits that all the decisions that he and his spouse made with respect to the houses were primarily motivated by concerns they had for their girls. Accordingly, their motivation in selling each house was not to make a profit, as in an adventure or concern in the nature of trade, and even less so as a business. Hence, the sale proceeds were on account of capital, and as permitted by paragraph 40(2)(b) of the Act, exempt from taxation because the houses were their principal residences.
[66] Mr. Hansen submits that the Minister was not justified in reassessing him after the normal reassessment period for the 2007, 2008 and 2009 taxation years. When a taxpayer has thoughtfully, deliberately and carefully assessed the situation and has filed based on what he or she believes bona fide to be the proper method, the Minister cannot open statute-barred years because she does not agree on how a taxpayer has reported his or her income.
[67] If this Court were to find that the sales were on the account of business income, Mr. Hansen submits that he should be entitled to deduct additional expenses than what the Minister has already allowed.
[68] The respondent submits that Mr. Hansen made a misrepresentation attributable to neglect, carelessness or wilful default in reporting income for the years 2007, 2008 and 2009. Accordingly, the Minister was justified in reassessing him after the normal reassessment period. Mr. Hansen had enough experience in the construction field to be aware that he was engaged in the business of selling houses or in an adventure in the nature of trade. His intention when buying the houses was to sell them at a profit.
[69] The respondent submits that the Hansens sold five homes from 2006 to 2012. The income that the Hansens made on each house exceeded the income gained by Mr. Hansen’s business in the year that the sales occurred. Mr. Hansen was working in the construction field. He knew that the market for houses was good. The Hansens were buying or building homes in popular neighbourhoods. In addition, the Hansens used the HELOC to finance their business venture to avoid paying penalties. Therefore, Mr. Hansen made a misrepresentation by omitting to report the income arising from the sale of the houses.
[70] As for penalties, the respondent submits Mr. Hansen knew or ought to have known that he had to report the income arising from the sales of the houses as business income or an adventure in the nature of trade. In addition, Mr. Hansen was also grossly negligent in not reporting the income arising from the sales of the houses since a person with his experience would have known to report the sales’ income as business income. Therefore, the Minister was justified in imposing penalties under subsection 163(2) of the Act for every taxation year in issue.
[71] With respect to the penalties, Mr. Hansen submits he did not under report his income, and as such, the penalties are not justified.
V. LAW AND ANALYSIS
Statute-barred years 2007, 2008 and 2009 taxations years — Lakeforest, Pebblewoods and Meadowshire
[72] The provision that allows the Minister to reassess after the normal assessment period is subparagraph 152(4)(a)(i) of the Act. It states as follows:
Assessment and reassessment
152 (4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if
a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act,
[Emphasis added.]
[73] The Minister reassessed Mr. Hansen’s 2007, 2008 and 2009 taxation years after the normal reassessment period. Accordingly, the sale transactions with respect to the Lakeforest, Pebblewoods and Meadowshire 1 houses were reassessed after the normal period for assessing a taxpayer.
[74] On the other hand, the Minister was within the time limit prescribed by the Act, to reassess the sale transactions with respect to the Cedardown house in 2011 and the Kilbirnie house in 2012.
[75] When the Minister assesses a taxpayer after the normal reassessment period, she has the burden of establishing that the taxpayer made a misrepresentation that is attributable to neglect, carelessness or wilful default. It is clear from the case law that the Minister cannot open statute-barred years simply because she does not agree with the manner in which a taxpayer has reported his or her income.
[76] The case law does not consider that there has been misrepresentation as contemplated by subparagraph 152(4)(i) of the Act when a taxpayer has been reasonable in the manner that he or she has reported his or her income. This reasoning is found in the decision of Regina Shoppers Mall Ltd. v R, [3] in which Justice Addy of the Federal Court stated that Minister cannot reassess after the normal assessing period, where a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he or she believes bona fide to be the proper method:
10. Where a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152 (1056 Enterprises Ltd. v. Canada, [1989] 2 C.T.C. 1, 89 D.T.C. 5287). In Levy (J.) v. Minister of National Revenue, [1989] 2 C.T.C. 151, 89 D.T.C. 5385 at page 176 (D.T.C. 5403), Teitelbaum, J. quotes with approval the following statement by Muldoon, J. in the above case:
Subsection 152(4) protects such conduct, and perhaps only such conduct, where the taxpayer thoughtfully, deliberately and carefully assesses the situation as being one in which the law does not exact the reporting of that which the taxpayer bona fide believes does not exist.
[Emphasis added.]
[77] Other decisions have followed and broadly interpreted the principle propounded in Regina Shoppers Mall. In Cameron v The Queen, [4] Mr. Cameron purchased and sold seven properties between 1996 and 2003. Justice Hogan of this Court held that because the taxpayer had taken “a thoughtfully considered position”, the Minister was not entitled to reassess beyond the normal reassessment period even if she took a different position. Justice Hogan wrote:
[18] Regarding real property, the Act does not provide any criteria to distinguish a capital gain from business income from a commercial transaction. Each case is different and the circumstances surrounding it must be reviewed to address the issue. In Happy Valley Farms Ltd. v. The Queen, the Court considered the following factors in determining whether the sale of real property was income:
a) The nature of the property sold and how the taxpayer used it;
b) The length of the ownership period;
c) The frequency or number of other similar transactions by the taxpayer;
d) The work expended on or in connection with the property;
e) The circumstances giving rise to the sale of the property; and
f) The taxpayer's motive regarding the sale of the property at the time of purchase.
[19] The CRA auditor focused on the second and third factors to justify his findings. Even if the circumstances that led to the sale could be interpreted as supporting the respondent's position, the real question is whether subparagraph 152(4)(a)(i) applies to a taxation year that is otherwise time-barred when the facts considered incorrect are presented because the taxpayer interpreted the circumstances to favour the non-taxation theory since they fall in the grey zone of tax law. It would appear that the case law allows us to answer this question in the negative when the taxpayer's position is not unreasonable.
[20] The starting point is Regina Shoppers Mall Limited v. The Queen, a Federal Court decision. The central issue in that case was whether the taxpayer should have included the profit of the sale of a lot in its income tax return as a capital gain or as income. The taxpayer had included it as a capital gain, and the Minister found that there was a misrepresentation that allowed him to assess after the normal period. Addy J., at paragraph 10 of the decision, explained that when a taxpayer files an income tax return on what he believes to be the proper method, after thoughtful, deliberate and careful assessment, there can be no misrepresentation. This position was accepted by the Federal Court of Appeal at paragraph 7 of its decision.
[21] Moreover, at paragraph 15 of his judgement, Addy J. explained that the act does not impose on taxpayers the duty to report in a manner which the Minister prefers. If the taxpayer carefully considers his position and does not attempt to deceive the Minister, there is no misrepresentation.
[78] While Petric v The Queen [5] concerned the fair market value of the property and not the issue of capital gain or income, the Court adopted the same approach to the Minister’s power to reassess outside the limitation period. Justice Lamarre stated:
38 . . . The matter of fair market value is a controversial issue, to be settled on the basis of the interpretation of the facts in evidence, as is the question of whether proceeds of disposition should be characterized as income or as a capital gain (Regina Shoppers Mall Limited) or of whether corporations are associated (1056 Enterprises Ltd.) . . .
[79] And later, she added:
40 Although fair market value is ultimately a question of fact to be resolved by the trier of fact, it is mostly a question of opinion answered by analysing different methodological approaches. Certainly the Minister is entitled to disagree with a taxpayer's view of fair market value and can reassess, within the limitation period, on the basis of his own evaluation. However, where the issue is whether the Minister should be allowed the benefit of an exception to the application of the limitation period, it must be shown that the taxpayer made a misrepresentation in filing his or its tax return.
[80] In Savard v The Queen, [6] this Court again stated that taxpayers have the right to disagree with the Minister in their interpretation of the Act, without this necessarily being considered a misrepresentation. Justice Tardif stated:
78 Does a person have to include, when he or she fills out a tax return, everything that might be income, based not on his or her own analysis but on speculation as to what the Agency might want to attribute to him or her? I do not believe so. In this case, there was enough information to justify the interpretation adopted by the appellant: that he had no obligation to declare the payments of fees by his employer as taxable benefits. In fact, the debate as to who really benefited from the services for which the fees were paid is clear evidence of how complex the case was and how much confusion surrounded it.
[81] Recently, in Chaumont v The Queen, [7] the taxpayer’s interpretation was incorrect, but the fact he had acted in good faith lead the Court to find that there was no misrepresentation. Justice Tardif stated:
15 Although the appellant’s submissions were unusual and even surprising, they were neither far-fetched nor unreasonable enough for it to be concluded that he made a wilful default or mistake with the intent to escape from his Canadian tax obligations.
16 Firstly, he expressed his objection, and secondly, he took initiatives to show that his allegations had merit, while taking into consideration the fact that certain income, specifically, pension income paid to a citizen who lives in a country other than the one that pays the pension, is not taxed.
. . .
18 To conclude that the appellant’s conduct was a wilful default or that it constituted a sufficient error to permit the Minister to assess beyond the normal period, would affect any taxpayer's right to contest the merits of an assessment, and would cause the limitation period imposed by Parliament to be essentially theoretical.
[82] It is clear from the above-noted