DaCosta v. R. – TCC: Gross negligence penalties set aside for one of two taxpayers in property “flips”

DaCosta v. R. – TCC:  Gross negligence penalties set aside for one of two taxpayers in property “flips”


DaCosta v. The Queen (November 24, 2017 – 2017 TCC 235, Graham J.).

Précis:   In 2006 Cynthia DaCosta, a real estate agent, arranged to purchase two condos, one in her own name and one in the name of her 17 year old granddaughter.  The sales closed in 2010.  Cynthia sold her granddaughter’s condo one month later and her condo two months later, each at a profit of roughly $100,000.  Neither reported any income from the sales.  CRA assessed the sales as being on income account and imposed gross negligence penalties.  The Tax Court dismissed Cynthia’s appeal, with costs, but allowed her granddaughter’s appeal, without costs, to the extent of vacating the gross negligence penalties.

Decision:   The facts were rather stark:

[1]              Cynthia DaCosta is the paternal grandmother of Denise DaCosta.[1] In 2006, the Appellants each signed a contract of purchase and sale to acquire a condo in a building that was being constructed in Toronto. Denise’s contract was for Unit 5 and Cynthia’s contract was for Unit 6. Both purchases closed in June 2010. Unit 5 was sold that same month. Unit 6 was sold one month later.

[2]              Neither Appellant reported any income relating to the condos on her 2010 tax return. The Minister of National Revenue reassessed Denise’s 2010 tax year on the basis that Denise had failed to report business income of $106,025 on the sale of Unit 5. The Minister reassessed Cynthia’s 2010 tax year on the basis that Cynthia had failed to report business income of $103,206 on the sale of Unit 6. The Minister assessed gross negligence penalties against both Appellants. The Appellants have appealed the reassessments.

The Court found no merit in Cynthia’s appeal but found the granddaughter’s penalty appeal sympathetic:

[16]         By contrast, I find that Denise was not grossly negligent. She was only 17 years old when she signed the contract of purchase and sale. She did so under the direction of her grandmother and father, both of whom were real estate agents. Denise was 21 years old when the purchase closed and the subsequent sale occurred. Her grandmother and father were the listing agents on the sale. The sale was arranged and negotiated entirely by them. Again, Denise simply signed the documents that her grandmother and father asked her to sign. Denise did not receive any of the profit from the sale of Unit 5. All of that money was used by Cynthia to close the purchase of Unit 6.

[17]         Normally I would consider a taxpayer who blindly signed contracts for the purpose of flipping real estate and failed to inquire whether there were any tax consequences relating to those contracts to have been grossly negligent. However, in the circumstances, I am not prepared to do so in Denise’s case. The profits from the sale of Unit 5 went to Cynthia, not Denise. If tax was to be paid on that sale, the money would have had to have come from Cynthia. I conclude that, just as Cynthia did not want to pay that tax on the profit on her own condo, she similarly did not want to pay it on the profit on Denise’s condo. Because of this, I am not convinced that Cynthia told Denise that she had to report the income. It appears far more likely to me that Cynthia kept Denise in the dark than that she conspired with her to file false tax returns.

[18]         I think it is reasonable for a twenty-one-year-old whose tax experience consists of reporting relatively small amounts of T4 income on her tax return each year to rely on her own father and grandmother, both of whom are real estate agents intimately familiar with the details of a sale, to tell her if she needed to report income on her tax return. Had Denise received the proceeds of sale or had reason to distrust her family, I would likely have come to a different conclusion.

As a result Cynthia’s appeal was dismissed with costs.  The granddaughter’s appeal was allowed to vacate the gross negligence penalties.  The was no costs order on the granddaughter’s appeal as the Crown did not seek costs in that appeal.