Taxpayer’s Lack of Credibility Sinks Appeal
This is a case about a taxpayer lacking credibility and the Tax Court Judge not accepting his evidence as a result.
A real estate agent / developer disposed of three homes and a plot of vacant land without reporting any of the transactions on his tax returns. The Minister reassessed the Appellant on the basis that the sales home sales yielded business income and imposed gross negligence penalties. The Court agreed with the reassessments and penalties. This case is a reminder that not being entirely truthful when testifying will destroy your chances of success in Court.
Mr. Wall was a lifelong real estate agent and had significant experience developing real estate, both on his own and in conjunction with others. Historically, the Appellant reported very little income for tax purposes from either business activity, including in the taxation years under appeal.
In 2006, 2008 and 2010, the Appellant sold four properties (3 homes and a parcel of land) in B.C. for aggregate sale proceeds of $5,784,000.00. He bought old homes, demolished them and built new homes to be sold. He did not report any income or gains from these sales in his 2006, 2008 and 2010 taxation years, and did not collect, remit or report any GST/HST on the sales. His argument was that each home was his principal residence.
Except for the vacant lot, the properties disposed of by the Appellant were each held for less than 2 years.
The Minister reassessed his 2006, 2008 and 2010 taxation years to include $810,693, $772,403 and $651,323, respectively, of unreported net business income in respect of the subject sales. The Minister also assessed gross negligence penalties in respect of this unreported income.
The main issue was whether Mr. Wall sold the homes on account of income or on account of capital. A secondary issue was whether the Minister properly assessed gross negligence penalties pursuant to subsection 163(2) of the Income Tax Act.
Decision & Analysis
The Appellant’s position was that he purchased and developed each of the homes with the intention of living in each one as his principal residence, which he argued he did, but that changes in his circumstances forced him to sell each of the homes after he had lived in each of them for a period of time. Because his intention was to live in the homes, his argument was that he purchased each home on account of capital and that he qualified for the principal residence exemption.
The Crown argued that the evidence clearly indicated the Appellant’s intention was to purchase the properties, tear down the houses, rebuild the houses, and then sell the properties for profit.
The legal test required the Court to consider the nature of the property sold, the length of period of ownership, the frequency or number of other similar transactions by the taxpayer, work expended on the property, the circumstances that were responsible for the sale of the property and the Appellant’s motive.
The Appellant was considered by the Court to be a sophisticated property developer who had the skills to quickly develop and sell properties for significant returns. In the Court’s view, the Appellant was in the business of developing properties and he developed the homes as part of this business. The Court also found the Minister had properly assessed gross negligence penalties. The Appellant’s conduct was found to be consistent with both willful blindness and the general definition of gross negligence. Furthermore, the sheer size of the Appellant’s unreported profits from his development business in comparison to his reported income favoured the imposition of penalties.
The critical aspect of this decision was the Court’s view that the Appellant lacked credibility. He was reporting about $20,000 a year in income for over 20 years, and yet was involved in many real estate development activities. Furthermore, he was advising mortgagees that his annual income was approximately $200,000/year at the time he was allegedly earning approximately $20,000/year. He did not report the property sales on his tax returns, despite understanding how real estate transactions work for tax purposes. At some points during the years at issue, the Appellant paid mortgage interest that exceeded his reported annual income fourfold without explanation. The mailing addresses were inconsistent with where the Appellant allegedly lived during the material times. In fact, the Court found that only gas bills and an insurance form were sent to the homes in question. The Court found that the Appellant likely did not live in any of the three homes.
The Appellant called three witnesses, and the Court found the testimony of all three to lack credibility. Each witness who testified on behalf of the Appellant was dismissed for providing selective, vague, incomplete or self-serving evidence.
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