Vine Estate v. R. – TCC: Failure to report recapture permitted Minister to reassess statute-barred year

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Vine Estate v. The Queen[1] (February 28, 2014) involved the terminal return of a deceased taxpayer.  While the facts are somewhat convoluted, in essence the taxpayer’s accountants failed to report recapture ($1,995,367) on a property owned by the taxpayer as a tenant in common.  When this was discovered the Minister reassessed outside the normal reassessment period.  The question before the court was whether the failure to report the recapture was negligent.

[37]        What I must instead decide is whether the executors, who were the persons responsible for filing the Original Return of the deceased, failed to exercise reasonable care which would then allow the Minister to reassess beyond the normal period. The caselaw is divided as to whether a taxpayer may successfully argue that, because his accountant was negligent, he is not liable for the misrepresentation. Justice Hogan in Aridi reviewed a number of decisions in this regard and rightly concluded that even where courts have recognized an accountant’s negligence, in those cases, where the taxpayers were not given the benefit of subparagraph 152(4)(a)(i), it was because their conduct was also found to be negligent. Was the conduct of the Glowinskys [the two executors of the estate] negligent, as in this group of cases, or was their conduct one of reasonable care in filing the return? Mr. Glowinsky testified that, since he had no knowledge of accounting and since he anticipated complexities when dealing with a number of properties belonging to the deceased, he engaged Mintz, which had been involved with doing accounting work for the family since the late 1980s, to complete the return because “…we had faith in and we trusted; they had been there for a long time…” (Transcript, Volume 1, p. 26) and “…[t]hey were just continuing to do what they had been doing for years… They were familiar with the estate, I trusted them…” (Transcript, Volume 1, p. 27). He stated that neither he nor his wife were involved with the preparation of the return. He further admitted that he did no type of review whatsoever of the return. “… I might have just looked through it, but I didn’t review it. It wouldn’t have meant very much to me. I didn’t appreciate all the nuances involved in a complicated tax return.” (Transcript, Volume 1, p. 28). When asked if he formed any view as to the accuracy of the return, he stated that “… They were just numbers. It meant nothing to me.” (Transcript, Volume 1, p. 28). When asked about his involvement and review of the Amended Return, he stated:

A.        No, for the same reason I didn’t review the first one. I mean, it wouldn’t have meant very much to me, and I was assuming that Mintz & Partners who had been engaged for many years knew what they were doing. I had complete confidence in them.

(Transcript, Volume 1, p. 29)

[38]        The care that he exercised in dealing with the return consisted of quickly flipping through it, if in fact he looked at it at all (Transcript, Volume 1, p. 34). He did not review it, as it meant very little to him. There was no evidence that he tried to understand it, asked any questions about its content or reviewed the properties that would be included in such a return. He was the President of the property management company that looked after 10 to 13 properties within the Toronto area owned by his deceased father-in-law. While he may have been unaware of the technical tax details in the return, he did have first-hand knowledge of the properties owned by the deceased at his death that had to be dealt with in a terminal return.

The court concluded that the conduct of the executors was negligent under the circumstances:

[46]        In the present appeal, the matter of recapture with respect to the property is not a controversial item. It is standard reporting procedure in a terminal return that this property would be treated as a deemed disposition with consequent recapture to be declared depending upon the nature of the legal title to the property. Because the title to the property was held as a tenancy-in-common and not a partnership, there had to be recapture declared. Mintz had been the deceased’s accounting firm for many years prior to his death. The firm was not new to the taxpayer’s portfolio of assets and how title was held. It would have been in their records. Mr. Glowinsky had been the President of the property management company for the deceased’s real estate holdings. He was a businessman who was aware of what the assets were in the deceased’s estate and, at minimum, should have questioned why Victoria Park was not listed. I believe that he would have done so had he bothered to read the return or if he had given even a slight perusal to it. In all likelihood, he would not have specifically picked up on the omission of declared recapture but, being familiar with the properties owned by the deceased, as a reasonably prudent individual, he should have recognized that Victoria Park did not appear to him to be included in the return. This was not, as the Appellant suggests, an honest mistake or honestly-held mistaken belief. I make this conclusion while acknowledging that, in these particular facts before me, the line between honest mistake and neglect/carelessness is blurred and that the distinction is almost ‘too close to call’. There appears to be a common thread in the jurisprudence in this area. First, where the court has found that taxpayers committed an honest mistake in filing a return, that honest, although mistaken, belief was established as a fact, based on the evidence before the court, whether in the application of a provision or a mistaken belief as to their own actions (for example, that they had remitted the tax). In the case before me, Mr. Glowinsky provided no evidence that he held any such belief except for the trust placed in the accountants. Second, in a number of the cases, the taxpayers have shown that some reasonable steps were taken to ensure the correctness of the return. Again, Mr. Glowinsky testified that he felt he would not have understood the return so he did not bother to review it. Such indifference is irreconcilable with the caselaw concerning honest mistake. While the conclusion that I have reached on this issue bears all the hallmarks of being unfair, I refer to the comments of Justice Robertson in The Queen v Nassau Walnut Investments Inc. (1996), 97 DTC 5051 (FCA) at page 5057:

     It cannot be doubted that the refusal of the Minister to accede to Nassau’s request seems antithetical to elemental concepts of fairness. Conversely, the doctrine of honest mistake is appealing because its application is intended to bring about a result that is in harmony with basic ideas of fairness. But the difficulty with the doctrine lies in delimiting its boundaries. To paraphrase Judge Learned Hand, I do not think it desirable for this Court to embrace the opportunity of anticipating a doctrine which may be in the womb of time but whose birth is somewhat distant: see Spector Motor Service, Inc., v. Walsh, 139 F. 2d 809 at 823. The doctrine of honest mistake may serve as a starting point for analysis but cannot supplant a contextual and purposive approach to the interpretation of tax legislation. In other words, legal conclusions cannot rest upon the premise of unfairness without a corresponding examination of the legislative framework relevant to the issue at hand.

[47]        In summary, the Minister will be permitted to reassess after the normal reassessment period to include in the taxpayer’s income the recaptured capital cost allowance from the deemed disposition of 3000 Victoria Park.

A second item at issue in this appeal was the valuation of the shares of a company, Leadway, owned by the deceased taxpayer at the date of his death.  That valuation was factually based on the value of a parcel of real estate [the Wilson property] owned by Leadway.  The taxpayer’s expert valued the property at $8.6 million while the Minister’s expert valued it at $12.832.

The court rejected the Minister’s expert report completely and accepted the taxpayer’s valuation:

[52]        According to Mr. Walsh’s testimony [the Minister’s expert], one of the methods he used, the DCF method, is based on the principle of “anticipation”, that being, in this appeal, the future rental revenue which it is anticipated will be derived from the property. Mr. Walsh agreed with the Appellant’s suggestion that an anticipated projection of future revenue must be “likely” in a given market as opposed to merely “possible”. Mr. Walsh also agreed with comments taken from the Canadian Uniform Standards of Professional Appraisal Practice (“CUSPAP”) that, when this analysis is undertaken it must be checked for errors and reasonableness due to the compounding effects that can be produced by inputting even minor errors. Mr. Walsh assumed a theoretical Years 3 and 4 income, an approach based on dramatic increments to rental revenue after the effective date. Mr. Atlin [the taxpayer’s expert] disagreed with the use of the DCF analysis for Wilson because he felt that it was more commonly employed for valuing commercial properties such as shopping malls or office buildings where there is long-term contractual lease certainty and predictability as opposed to multi-unit residential apartment complexes.

[53]        At this point, I make three observations in respect to Mr. Walsh’s Report and testimony:

(a)     first, the Report contained too many significant errors and unwarranted assumptions that would allow me to place any reliance on it;

(b)     second, both Mr. Walsh’s credibility and impartiality as a witness and an expert were compromised during his testimony; and

(c)      third, as a consequence, I gave this report no weight.

[54]        Although Mr. Atlin’s Report could have benefited from an analysis of the property’s demographic makeup, which Mr. Walsh did not address either, and contained a few minor errors, it is far more accurate than Mr. Walsh’s Report and his testimony was straightforward and credible.

As success was divided, the court made no order as to costs.

[1] 2014 TCC 64.