507582 B.C. LTD. v. The Queen

507582 B.C. LTD. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2008-05-20
Neutral citation
2008 TCC 220
File numbers
2006-2353(IT)G
Judges and Taxing Officers
Theodore E. Margeson
Subjects
Income Tax Act
Decision Content
Docket: 2006-2353(IT)G
BETWEEN:
507582 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
John Frank Krmpotic (2006-2354(IT)G) and
507582 B.C. Ltd. (2006-2355(GST)I)
on March 6, 2008 at Vancouver, British Columbia.
Before: The Honourable Justice T. E. Margeson
Appearances:
Counsel for the Appellant:
Alistair Campbell
Counsel for the Respondent:
Susan Wong
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the Appellant’s 2001 taxation year is allowed, and the assessment is vacated.
The Appellant is entitled to its costs of this action to be taxed.
Signed at Ottawa, Ontario, this 20th day of May 2008.
“T. E. Margeson”
Margeson J.
Docket: 2006-2354(IT)G
BETWEEN:
JOHN FRANK KRMPOTIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
507582 B.C. Ltd. (2006-2353(IT)G and 2006-2355(GST)I)
on March 6, 2008 at Vancouver, British Columbia.
Before: The Honourable Justice T. E. Margeson
Appearances:
Counsel for the Appellant:
Alistair Campbell
Counsel for the Respondent:
Susan Wong
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the Appellant’s 2000 taxation year is allowed, and the assessment is vacated.
The Appellant is entitled to his costs of this action to be taxed.
Signed at Ottawa, Ontario, this 20th day of May 2008.
“T. E. Margeson”
Margeson J.
Docket: 2006-2355(GST)I
BETWEEN:
507582 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
John Frank Krmpotic (2006-2354(IT)G) and
507582 B.C. Ltd. (2006-2353(IT)G
on March 6, 2008 at Vancouver, British Columbia.
Before: The Honourable Justice T. E. Margeson
Appearances:
Counsel for the Appellant:
Alistair Campbell
Counsel for the Respondent:
Susan Wong
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act, for the period from June 1, 1997 to May 31, 2002 dated March 21, 2006 and bears number 11GU0001881 is allowed and the assessment is vacated.
The Appellant is entitled to its costs of this action to be taxed.
Signed at Ottawa, Ontario, this 20th day of May 2008.
“T. E. Margeson”
Margeson J.
Citation: 2008TCC220
Date: 20080520
Docket: 2006-2353(IT)G
BETWEEN:
507582 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2006-2354(IT)G
AND BETWEEN:
JOHN FRANK KRMPOTIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2006-2355(GST)I
AND BETWEEN:
507582 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1] The parties agreed that all of these cases would be heard on common evidence.
[2] The parties agreed upon a Partial Agreed Statement of Facts as follows:
PARTIAL AGREED STATEMENT OF FACTS
For the purposes of these appeals, the parties agree to the facts in this partial statement of facts. The parties agree that other evidence may be introduced by either party, to the extent that such evidence is not inconsistent with the following facts:
1. The Appellant 507582 B.C. Ltd. (“507582”) is a company incorporated under the laws of British Columbia and is a Canadian-controlled private corporation as defined in subsection 125(7) of the Income Tax Act (the “Act”).
2. At all relevant times, 507582’s fiscal taxation year ended on May 31.
3. With respect to the Goods and Services Tax (“GST”);
(a) 507582 was registered under the Excise Tax Act effective June 1, 1996, and was assigned GST registration number 89419 1451;
(b) 507582 files GST returns and reported total GST collectible of nil and total input tax credits (“ITCs”) of nil, in respect of the period from June 1, 1997, to May 31, 2002 (the “Period”).
4. At all relevant times, the sole shareholder of 507582 was Kuna Enterprises Ltd. (“Kuna Enterprises”), a British Columbia company and a “taxable Canadian corporation” as defined in subsection 89(1) of the Act.
5. At all relevant times, the sole shareholder of Kuna Enterprises was Kuna Holdings Ltd. (“Kuna Holdings”), a British Columbia company and a “taxable Canadian corporation” as defined in subsection 89(1) of the Act.
6. At all relevant times, the sole shareholder of Kuna Holdings was the Appellant John Frank Krmpotic, an individual resident in Canada for the purposes of the Act.
7. At all relevant times, John Frank Krmpotic was one of two officers and directors of 507582. The other officer and director was his father, John Ivan Krmpotic.
8. At all relevant times, John Frank Krmpotic was one of two directors of Kuna Holdings. The other director was John Ivan Krmpotic.
9. At all relevant times, John Frank Krmpotic was one of two officers and directors of Kuna Enterprises. The other officer and director was John Ivan Krmpotic.
10. Mrs. Betty Krmpotic is an individual resident in Canada for the purposes of the Act. Mrs. Krmpotic is the mother of John Frank Krmpotic.
11. At all relevant times, 507582 carried on the business of residential real estate development, construction and sales.
12. In 1996, 507582 purchased real property in Whistler, British Columbia having the civic address of 4405 Blackcomb Way, Whistler, B.C. In 1996 and 1997, 507582 constructed a condominium/townhouse development on this property called Granite Court (the “Development”).
13. In approximately July 1997, 507582 began settling units of the Development.
14. 507582 reported sales of all the units of the Development other than the Property in its tax returns for the taxation years in which the units were sold.
15. 507582 did not include the cost of the Property on its balance sheet at the end of its 2000 taxation year or on its opening balance sheet for its 2001 taxation year.
16. In preparing 507582’s financial statements and corporate income tax returns for the taxation year ended May 31, 2000, 507582’s external accountants deducted the cost of the Property from 507582’s income as cost of sales. The amount deducted as cost of sales was $224,361.
17. In 2001, the British Columbia Assessment Authority valued the Property at $442,000.00.
18. 507582 ceased to file annual reports with the British Columbia Corporate and Personal Property Registries after November 2001 and was dissolved for failure to file.
19. On April 21, 2005, the Minister of National Revenue (the “Minister”) reassessed John Frank Krmpotic’s 2000 taxation year to add the amount of $442,000.00 to his income as a benefit with respect to the transfer of the Property, and to levy a gross negligence penalty under subsection 163(2) of the Act.
20. The “normal reassessment period” in respect of John Frank Krmpotic’s 2000 taxation year ended on June 7, 2004. He did not file a waiver in prescribed form within the normal reassessment period in respect of that year.
21. On July 19, 2005, the Minister reassessed 507582’s 2001 taxation year to include proceeds of disposition in the amount of $442,000.00 with respect to the transfer of the Property, and to levy a gross negligence penalty under subsection 163(2) of the Act.
22. On March 21, 2006, the Minister assessed 507582 for net GST in the amount of $30,940.00, penalties in the amount of $18,121.76, and interest in the amount of $4,516.30 with respect to the transfer of the Property during the Period. The penalty amount included a gross negligence penalty of $7,735.00 assessed under section 285 of Part IX of the Excise Tax Act.
23. The Appellants filed Notices of Objection to the above assessments, which were subsequently confirmed by the Minister.
DATED at the City of Vancouver, the Province of British Columbia, this 5th day of March, 2008.
This Partial Agreed Statement of Facts sets out the assessments appealed from.
[3] In addition to the Partial Agreed Statement of Facts, evidence was given on behalf of the Appellant by John Frank Krmpotic. He testified that he was the sole shareholder of Kuna Holdings Ltd. (“Kuna Holdings”) and he was one of two officers and directors of 507582 B.C. Ltd. (the “Company”). He indicated that all relevant times, the Company carried on the business of residential real estate development, construction and sales. Between 1996 and 2000, the Company built 38 town homes at Whistler, British Columbia, commonly referred to as Granite Court (the “development”). The civic address was 4405 Blackcomb Way, Whistler, British Columbia (the “property”). He had a background in building and construction.
[4] In 1996, he saw opportunities at Whistler, viewed the property and purchased it, it was zoned and developed. He identified the auditor’s working paper found in Exhibit R-1 at Tab 1 which is with respect to 2001 taxation year. He referred to this as the sales record on this complex.
[5] In 1997, they had reached their pre-sales requirements for this complex. They took it off of the market as people were flipping them. As they reached the end, they put them back on the market. The second last unit was sold for $299,000 as shown at Tab 1. They had one unit left and they wanted to keep it as an investment for later on. It helped with the financing. Unit 102 was a second and third floor unit. It was used as a show room so that it contained furniture.
[6] He identified Tab 27 of Exhibit R-1 which was the Freehold Transfer document for unit 102. It was indicated on the document that it was executed on September 1, 1999 but the witness said that he executed this document in advance. The document was registered on December 1, 2000.
[7] The property was transferred to his mother Betty Krmpotic who was described as a business woman in Burnaby, British Columbia.
[8] He wanted to dissolve the Company because he did not want to pay for annual reports and other expenses if the Company continued in operation. He also cut down on his liability. By transferring the property to his mother he would still have an asset. If he dissolved the Company any property that it owned would be forfeited to the Crown. He had 10 years to revive the company. It was dissolved in November 2001.
[9] He identified the trust document found at Exhibit R‑1, Tab 14 as a true copy of the original trust document executed by Betty Krmpotic in favour of the Company with respect to unit 102, 4405 Blackcomb Way, Whistler, British Columbia. This trust document declared that Betty Krmpotic was holding the property in trust for the Company. It further declared that she had no interest whatsoever in the said unit and would transfer it to the Company for $1 when requested to do so.
[10] This document was created by this witness on December 1, 2000 and it was signed by his mother. He had received no legal advice with respect to the document.
[11] He explained the document to his mother who acted as the secretary of the Company. She was familiar with the Granite project. She understood it.
[12] The document was in error in that it referred to 4450 Blackcomb Way, whereas it should have read 4405 Blackcomb Way. The Company never owned 4450 Blackcomb Way. The property had never been used or rented. No one in the Company used it for personal purposes.
[13] He identified the T-2 return and schedule information found at Exhibit R‑1, Tab 15 for the period ending May 31, 2000. Likewise he identified the T-2 return and schedule information found at Exhibit R-1, Tab 16 as at May 31, 2000. This document showed zero inventory of land and work in progress. Further, this was an error as the Company still held property in trust. He was not in the country at the time these documents were prepared by the Company’s accountants.
[14] He did not sign the T-2 return and financial documents at Exhibit R-1, Tab 15 because he was not in the country. He was in Croatia.
[15] He admitted that the total cost of inventory was deducted in spite of the fact that they continued to hold the property in question in his inventory. This was a mistake by the accountants.
[16] In cross-examination, he was referred to Exhibit R-1, Tab 27 which was the Freehold Transfer under the Land Title Act and he said that when he was given a batch of documents on September 1, 1999 to sign and there may have Strata documents and other documents.
[17] He was questioned about his answers given on examination for discovery and he said that his answer to question 61 was not complete and he also should have indicated that one of the reasons why he wanted to wind up the Company was because of liability. He also said that he did not indicate that there was a concern that the Crown might be able to take the property over because they never got into that matter. Consequently, his answer to question 61 and questions 64 to 74 were not complete. He had 10 years to accomplish his purposes.
[18] He was referred to the trust document and he said that it was drawn up in 2000 but it was not submitted to Canada Revenue Agency (“CRA”) until 2006, after the Objection was filed. He did not know why this was so. He was in and out of the country because he finished working in Croatia in the year 2001. Mr. Desai was doing the accounting but he did not have the trust document. This witness did not provide it to anyone to give to CRA. He did not know why the corporation did not sign the trust document as well as his mother.
[19] He referred to the document in Exhibit R-1, Tab 16 and he said that he did not sign the T-2 return for the year 1999. He was not in the country as far as he could remember. When he was in the country he would sign documents. The reason that he did not sign the documentation for the other years was because he would be out of the country, and probably in Croatia. He did not advise Mr. Desai, his accountant, that the corporation was going to hold on to unit 102. Mr. Desai still does the Company’s returns and his own return.
[20] He was asked again why he wanted to hold on to unit 102. He said that it was one of the larger units, it was in the right position and it was near a helicopter pad. He decided to hold onto unit 102 when he sold the second last unit. The mortgage was paid off and the Company was in good shape.
[21] Mr. Desai had been doing the Company’s returns and financial documents since the Company was incorporated. He had been doing his personal returns before that. He also did the statements and returns for Kuna Enterprises Ltd.
[22] The witness had a grade 12 education and had taken courses in construction, surveying and planning. He had been involved in 8 to 9 different real estate and construction projects. He had no accounting background.
[23] When asked why he did not get legal advice for the drafting of the trust document, he said that he felt safe doing it himself with his mother.
[24] In redirect, he said that he incorporated the Company because it was an easier way of doing the project. He also wanted to avoid liability.
[25] Betty Krmpotic testified that she was the mother of John Krmpotic. She was familiar with the Company in question. It was owned by her son and he had developed condos at Whistler. She is not an officer the Company. She does filing, delivers papers to the accountant, does bank transfers and has signing authority for the Company. She had no involvement with the Granite Court project. She was aware of it, had received invoices for and paid bills for it while the project was being completed.
[26] With respect to unit 102, she had been in it one or two times. It was a showroom. The title was registered in her name, in trust, to hold for the Company until they decided what to do with it. She signed the trust document after John brought it to her. She had discussed it with him beforehand. She was holding the property for the Company. She never signed such a document before. She signed it in her own home. She never had personal use of the unit. She does not own it.
[27] In cross-examination, she reaffirmed that she held the property in trust and believed that her son had a lot of reasons for transferring the property to her in trust until he did something with it. It was just a matter of signing the trust document as far as she was concerned.
[28] She delivered all of the cancelled cheques, stubs, transfers and banking documents to Mr. Desai on behalf of the Company. She gave no instructions about preparing the Company documents. She did not keep a copy of the trust document for herself.
[29] Manoharlal Desai testified that he was a chartered accountant. He was the accountant for both Appellants since 1990. He provides accounting services to small clients, including personal and corporate services.
[30] Between 1996 and 2001, his office prepared monthly statements, GST returns and any returns required to be presented to CRA on behalf of the Company. He had access to sales information, bank statements, cheque stubs, deposit books, statements of assessments for various properties, was familiar with the net amount of receipts and disbursement of funds for the Appellant. This information comes from Mrs. Betty Krmpotic. The information is entered into their software programs and into the general ledger. He was familiar with the project at Whistler.
[31] He was questioned with respect to the various financial statements prepared by his office with respect to the Company touching upon the present matter. He was very familiar with these documents and he had access to statements of adjustments for the various properties when each unit was sold.
[32] He identified Exhibit A-1, which was a copy of the general ledger trial balance for the Company dated November 30, 1999. He confirmed the statement of facts set out in paragraphs 15 and 16 of the Partial Agreed Statement of Facts and explained that he had thought that the sale of the last lot had taken place and it had not. There was still one unit which was left after the year end and that was the property in question.
[33] He was referred to Exhibit R-1, Tab 15, which is a T‑2 return and schedule information for the Company for the taxation year ending May 31, 2000. The balance sheet indicated that there were no units left and the inventory was listed as zero. He also identified Exhibit A-2, which was an excerpt from the general ledger for the year ending May 31, 2000. He said that the general ledger summarizes all transactions of the Company for that period of time. He was referred to page 3 of the document which showed the cost of purchases of $224,361.45. With respect to the unit in question, he agreed that the Company had understated income because the total cost of the last unit was written‑off when it should not have been.
[34] He confirmed that he had not received the statement of adjustments with respect to the property in question and he believed that all units had been sold. He was referred to Exhibit R-1, Tabs 12 and 13 which were the Company’s returns for the periods ending May 31, 2001 and May 31, 2002. He said that if there is no inventory then they do not prepare financial statements. In the return dated May 31, 2001, the only income was for mortgages that the Company owned. With respect to the period of May 31, 2002, there were no financial statements because there was no income or expenses and the only assets were shown as cash of $3,310. None of these documents were signed by John Krmpotic but Mr. Desai still filed the returns.
[35] In cross-examination, he said that his office employed three chartered accountants and a staff of 10 people. The staff prepared the statements and they were reviewed by the accountants. Most of the time, if he was in the office when the materials were brought in, he would meet with the person who delivered them. The Company normally does not sign its returns.
[36] He was referred to the trust document and he said that he just saw it recently. He had not seen it when he prepared the 2000 and 2001 returns. When the auditor made the enquiries, Mr. Krmpotic showed him the documents. His office did not give the Company or Mr. Krmpotic any advice or information with respect to the trust arrangement. His office did not contact the Company before completing the financial statements which give rise to the present actions. He never had a statement of adjustments with respect to unit 102 and he never went back and tracked the units but assumed that they were all sold.
[37] He identified Exhibit A-3 which was a BC Company Summary for the Company showing its reactivation with an expiry date of October 4, 2009.
[38] Jason Brown was an auditor for CRA. He has 10 years experience. He issued the income tax reassessment in this case. The GST reassessments were issued under another name that flowed from his reassessment.
[39] He was referred to his working paper contained at Exhibit R-1, Tab 1. He said that his work came about as a result of another audit that he had been working on. He decided that the Appellant Company and John Krmpotic were related shareholders of the Company under audit. He looked up the company and found it to be involved in the construction business. He looked through their data base for transfers of property out of the Company and noticed a property transfer from the Company to Mrs. Krmpotic for $1. He contacted the accountant for the company in November 2004. The accountant told him that all sales are properly recorded by the Company. He asked for related documents to confirm the returns. When there was no response he contacted them again and there was no response.
[40] In January 2005, he contacted the accountant and asked for the Company’s documentation for 1998, 1999, 2000 and 2001. He gave them one to two weeks. By the end of January he still had no documents from the corporation. He told them that he needed the vendor’s statement of adjustments with respect to unit 102. He did not receive it by the end of January. He created his working paper from what had been recorded for tax purposes. He was trying to reconcile what had been reported for sales.
[41] He found that in the year 2000 there was one transfer, which was for the property in question, for the consideration of $1. He found out that Mrs. Krmpotic was still the registered owner of the property in question.
[42] He was referred to Exhibit R-1, Tab 6 which is the Title Search printout with respect to the property in question. It showed the registered owner as Betty Krmpotic. He presumed that the entire inventory had been disposed of and recorded even though unit 102 was still held.
[43] He wrote to their real estate appraisers and was told that the assessed figure would suffice for a value of the property of unit 102. He compared it to three other properties that the Company sold most recently and unit 102 was the highest. He also obtained the corporate information that he needed to determine who controlled the corporation.
[44] He concluded that the property was transferred to a non-arm’s length party for inadequate consideration and that it should have been included in income. He received the trust document after the reassessment. He received no documentation from the corporation for the audit. The Company filed an Objection and that was when the trust document was filed.
[45] The reassessment was confirmed. The reason was that the bare trust agreement was not accepted by CRA. According to him it was not signed, it was not witnessed and the Company had not signed it. Also, the claimed beneficial owner had zero inventory as of 2001 according to the Company’s files with CRA.
[46] He was asked for reasons for the penalties levied and he said that the amount in question was one of the reasons. This was the only property sold in 2001 at a value of $442,000. He considered Mr. Krmpotic’s history in the business and in other companies. He also knew that the Company had been audited for GST in the late 1990s, Kuna Enterprises had been audited also and Mr. Krmpotic was reviewed at that time. He believed that Mr. Krmpotic and the Company should have been aware of what was going on. Further, he never received any information from the accountant for the Company and so he concluded that the records might not support the filings.
[47] He was referred to Exhibit R-1, Tab 7, which was the letter dated January 31, 2005 that he wrote to the Company through its accountant, Manu Desai. This was referred to as a proposal letter. He indicated that he proposed to revise the taxable income by adding $441,911 to the income. He asked if there was any other information that the Company might have to support another amount.
[48] He talked to Mr. Nick Smith, a lawyer, and asked him to respond to the proposed letter. By April he had received no response so he advised the Company that he was going to make the adjustment for the Company and Mr. Krmpotic and that they could appeal the assessment.
[49] Again, with respect to penalties, he said that they were confirmed at the objection stage for the same reasons. He added that the bare trust agreement was given to the appeals division and not to the auditor. He concluded that the property was transferred through Mr. Krmpotic’s direction. The reasons were the same for rendering penalties against Mr. Krmpotic and the Company.
[50] The penalties were confirmed by the appeals division.
[51] In cross-examination he said that he did not know why Mr. Desai had not provided the information he requested. Both letters were sent to Mr. Desai as that was the Company’s address provided on their data base.
[52] He indicated that he had done the title search and found the registered owner to be Betty Krmpotic. He was referred to paragraph 10(o) of the Reply and was asked what was the basis for concluding that the beneficial and legal ownership was transferred to Mrs. Krmpotic. He replied that the accountant had said that all of the sales were reported and he assumed that total ownership had passed to Mrs. Krmpotic. The bare trustee agreement was not accepted by the appeals division.
[53] When asked why they had applied gross negligence penalties he replied:
1. Materiality of the amount ($442,000.).
2. Mr. Krmpotic’s background in business and related construction business.
3. The Company had been audited in the past (that was all that he knew about it).
4. Kunar Enterprises had been audited for income tax (that was all he knew about it).
5. Information requested from the Company had not been provided.
[54] With respect to Mr. Krmpotic’s personal gross negligence penalties, he said that he should have assessed himself and added it to his income.
[55] In redirect he identified Exhibit R-3 as a Memo to File T2020, with respect to his conversation with the Company and its representatives.
ARGUMENT ON BEHALF OF THE APPELLANT
[56] Counsel for the Appellant stated that the facts disclosed that the declaration of trust was executed on December 1, 2000 by Mrs. Betty Krmpotic in the presence of John Krmpotic. This declaration of trust evidenced a legally effective bare trust relationship by which Mrs. Krmpotic held legal title to the property in trust for the Company. However, the corporation remained the beneficial owner of the property. This was confirmed by the evidence of John Krmpotic and Betty Krmpotic.
[57] There was no evidence whatsoever that the declaration of trust was a sham or a fraud or that it was created or executed at some other date than December 1, 2000. These facts were established by the testimony of John Krmpotic and Betty Krmpotic.
[58] On December 1, 2000, they transferred title of the property to Mrs. Krmpotic. This document was registered in the British Columbia Land Title Office as confirmed by the testimony of John Krmpotic. A copy of the Land Title Act Form A is contained in Exhibit R-1, Tab 27.
[59] From December 1, 2000 onwards, Mrs. Betty Krmpotic held legal title to the property although the Company remained the beneficial owner of the property at all times. This was confirmed by the testimony of John Krmpotic and Betty Krmpotic as well as the trust document itself found in Exhibit R-1, Tab 14.
[60] The consideration for the transfer of the property was $1. The Company considered itself to be the beneficial owner of the property all of the time.
[61] Both John Krmpotic and Manu Desai confirmed information contained in the financial documents filed with CRA, including the financial statements. In preparing the financial statements Mr. Desai reflected the costs of the development, including the costs of the land, permits, surveys, construction costs, et cetera in the balance sheet in the line item “inventory of the land and work in progress.”
[62] When the Company sold units of the development, Mr. Desai wrote down the cost of the “inventory of the land and work in progress” in the corporation’s financial statements to reflect the disposition of those units. This was confirmed by the testimony of Manu Desai and the financial statements.
[63] In determining the net income or loss to the corporation for each fiscal period, Mr. Desai reflected the cost of the units sold as “cost of sales” in the statement of earnings and deficit for the Company.
[64] Mr. Desai testified that on or about October 20, 1999, the Company sold a unit in the development having the address 310 – 4405 Blackcomb Way, Whistler, B.C. This was the last sale of any units in the development.
[65] On September 19, 2000, Mr. Desai completed the financial statements for the taxation year ending May 31, 2000 of the Company. At that time, Mr. Desai mistakenly believed that the unit sold on October 20, 1999 was the last remaining unit in the development that was held by the Company. Mr. Desai believed that the development had been completed and all units sold to purchasers.
[66] This was confirmed in the financial statements found at Tab 15 and in Mr. Desai’s oral testimony.
[67] In preparing the balance sheet for the taxation year ended May 31, 2000, Mr. Desai wrote down the cost of the “Inventory of land and work in progress” line item to nil to reflect the fact that the corporation no longer held any further interest in the development of the underlying property. This is confirmed in the financial statements at Tab 15 and in the testimony of Mr. Manu Desai.
[68] Further, Mr. Desai reflected the remaining cost of development in the “cost of sales” line item in the statement of earnings and deficit. As a result, the cost of the property was deducted in calculating the income of the Company for the taxation year ending May 31, 2000. These facts are indicated in the testimony of Mr. Manu Desai and in the financial statements at Tab 15.
[69] Mr. Desai wrote down the cost of the corporation’s “inventory of the land and work in progress” and deducted the cost of the development in the “cost\ of sales” based on his mistaken belief that the corporation had sold the last remaining unit in the development in the taxation year ending May 31, 2000. If Mr. Desai had known that the Company continued to hold the property after May 31, 2000, he would not have written down the cost of inventory and deducted the cost of the property in calculating the corporation’s income for the year.
[70] The testimony of Manu Desai confirms this position. Mr. Desai further testified that on October 3, 2007, the Company was restored to the corporate register as a corporation in good standing. This is confirmed by Appellant’s Exhibit A-3.
[71] Consequently, in accordance with the evidence adduced, on December 1, 2000, the Company transferred legal title to the property only to Mrs. Betty Krmpotic. Since that time, Mrs. Krmpotic has held title to the property as bare trustee only. At all relevant times the Company has remained the beneficial owner of the property.
[72] As a result, the fair market value of the property transferred by the Company to Mrs. Krmpotic on December 1, 2000 (that is, the legal title to the property) had a fair market value of no greater than $1.
[73] As a result, the Company realized proceeds of disposition of $1 in the transfer on December 1, 2000 and not proceeds of disposition of $442,000 as assessed by the Minister under the Income Tax Act (“Act”).
[74] Further, the Goods and Services Tax (“GST”) is payable on the $1 fair market value of the consideration payable by Mrs. Krmpotic in respect of the supply of legal title to the property and not of the deemed consideration of $442,000 as assessed by the Minister under the Excise Tax Act.
[75] Further, Mr. John Krmpotic did not confer any benefit to Mrs. Krmpotic under subsection 56(2) of the Act in respect of the transfer of legal title to the property by the Company to Mrs. Krmpotic in 2000 and so was not liable to any income tax in respect of that transfer.
[76] No penalties are applicable under the Act or the Excise Tax Act as there was no additional income tax or GST payable by the Company or John Krmpotic in respect of the transfer of legal title to the property by the Company to Mrs. Krmpotic in the year 2000.
[77] With respect to the bare trust that was created in favour of Mrs. Krmpotic, the usual accepted meaning of the term “bare trust” is a trust where the trustee holds property without any duty to perform except to convey it to the beneficiary or beneficiaries on demand. See D. Waters, The Law of Trusts in Canada (3rd Ed.), (Toronto: Carswell, 2005) at page 32.
[78] In British Columbia, legal title to real property may be registered in the name of the trustee or agent while the real property is beneficially owned by another party (the beneficiary). See Whistler Village and Assessor North Shore Squamish Valley, (1981) 121 D.L.R. (3d) 284 (B.C.S.C.) (at pages 285-287).
[79] The Land Title Act does not cause unregistered beneficiaries to be ineffective as against the parties to the instrument even where the instrument is not registered on title. Land Title Act, R.S.B.C. 1996, c.250, s.s. 20(1).
[80] The Land Title Act does not require that land that vests in a trustee or personal representative be registered on title. It provides that if land vests in a personal representative or trustee, that person’s title may be registered, but particulars of a trust created or declared in respect of that land must not be entered in the registry. The language of the legislation is permissive. It does not require all trust interests to be registered on title to property. The Land Title Act, R.S.B.C. 1996, c.250, s.s. 180(1).
[81] Accordingly, it was open to the Company to register the transfer of legal title of the property to Mrs. Krmpotic under the Land Title Act while the corporation continued to beneficially own the property. There was no requirement that the trust document executed by Mrs. Krmpotic be registered on title to the property.
[82] With respect to the application of the Income Tax Act and the Excise Tax Act to a bare trust, counsel argued that these Acts rely on private and commercial law concepts to determine particular income tax consequences. One must first determine the nature of the relevant legal relationship before one can determine how the Act applies. The Queen v. Lagueux & Frères Inc., 74 DTC 6569 (F.C.T.D.); Dale v. The Queen, [1997] 2 C.T.C. 286 (F.C.A.); Sussex Square Apartments Ltd. v. The Queen, [2000] 4 C.T.C. 203 (F.C.A.) affirming [1999] 2 C.T.C. 2143 (T.C.C.).
[83] The Supreme Court of Canada has recognized the interrelation between general law or commercial law and the operation of the Act. See Continental Bank of Canada v. R, [1998] 2 S.C.R. 298 (S.C.C.). See also P. W. Hogg, J. E. Magee and T. Cook, Principles of Canadian Tax Law (3rd ed. 1999), at p. 2 where the authors note:
The Income Tax Act relies implicitly on the general law, especially the law of contract and property. … Whether a person is an employee, independent contractor, partner, agent, beneficiary of a trust or shareholder of a corporation they usually have an effect on tax liability and will turn on concepts contained in the general law, usually provincial law.
See Will-Kare Paving & Contracting Ltd. v. The Queen, [2000] 1 S.C.R. 915 at paragraph 31.
[84] Counsel argued that in the present appeal the tax liability of the Appellants turns on the legal effect of the transaction involving the transfer of the property on December 1, 2000. The evidence is clear that the legal title of the property was registered in the name of Mrs. Krmpotic on that date but the Company continued to be the beneficial owner of the property because Mrs. Krmpotic held title to the property as bare trustee only.
[85] Accordingly, the Company did not transfer anything of value to Mrs. Krmpotic on December 1, 2000 and so it cannot be deemed to have disposed of the property for its fair market value in order to realize proceeds of disposition of $442,000. Similarly, Mr. Krmpotic cannot be said to have conferred a benefit on Mrs. Krmpotic under subsection 56(2) of the Act because the registration of the title to the property in Mrs. Krmpotic’s name under the bare trust did not result in the conferral of any benefit to Mrs. Krmpotic.
[86] Further, subsection 104(1) of the Act excludes a bare trust from the concept of a “trust” for income tax purposes. Subsection 104(1) provides that “a trust is deemed not to include an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property”. He also takes the position that the Minister’s long standing administrative policy with respect to bare trusts is that where property is held by a bare trustee, the Minister will ignore the trust for income tax purposes and will consider the transferor/settlor to be the owner of the property for all purposes of the Act. The Minister has stated that it generally views a trust under common law to be a bare trust when:
a. the trustee has no significant powers or responsibilities, and can take no action without instructions from the settlor;
b. the trustee’s only function is to hold legal title to the property; and
c. the settlor is the sole beneficiary and can cause the property to revert to him or her at any time.
See Income Tax Technical News No. 7 (February 21, 1996). All of these criteria are present in the current situation. Mrs. Krmpotic had no significant power or responsibility and took no action with respect to the property. Mrs. Krmpotic’s only function was to hold title to the property. The Company was the sole beneficiary and could cause the property to revert to it at any time.
[87] Counsel argued that the Appellant has introduced unchallenged and uncontradicted evidence with respect to the trust document which “demolishes” the Minister’s assumptions in accordance with the facts set out in the Supreme Court of Canada in Hickman Motors Limited v. The Queen, [1998] 1 C.T.C. 213 (S.C.C.) at paragraphs 91 to 97. In these appeals, the Appellants have met the burden of proof by demolishing the Minister’s assumptions while the Minister has failed to adduce evidence to support its assumptions.
[88] The key assumptions of fact made by the Minister in the Reply at paragraphs 10(o), (p) and (v) have been demolished by the Appellants through the evidence adduced at the hearing of these appeals.
[89] Mr. Krmpotic’s understanding of the law of British Columbia regarding the dissolution of a corporation and the forfeiture of real property to the province was correct. See Business Corporations Act, S.B.C. 2002, c. 57, sections 422(1), 355 to 358 and 364 and the Escheat Act, R.S.B