October 07, 2011

Timothy R. Pedwell (Appellant) v. Her Majesty the Queen (Respondent)

2000 DTC 6405
Federal Court of Appeal
June 12, 2000

(Court File No. A-703-98.)

Inclusions in income — Shareholder’s appropriations — On reassessment, Minister including in the taxpayer’s income, as a shareholder appropriation, a certain amount, but agreeing to remove from his income another amount previously included — On appeal, the Tax Court of Canada removing from taxpayer’s income the amount included by the Minister, but including therein the amount removed by the Minister — Whether Tax Court judge having erred by finding the taxpayer liable for tax on a basis different from the one in the Minister’s reassessment — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 6(1)(a), 15(1) and 56(2).

The taxpayer was a lawyer, and a shareholder and directing mind of O Inc. On October 31, 1988, O Inc. acquired 84 acres of land for a purchase price of $183,593. On July 4, 1989, one of the lots in the 84-acre parcel was sold to the Eulers for $135,000. Of the net proceeds of $125,360, $100,000 was paid into the trust account of Pedwell & Pedwell (the taxpayer’s law firm), and $25,360 was paid to the taxpayer himself. In 1989, L Inc. purchased 16 lots in the 84-acre parcel, and paid a deposit of $22,500 into Pedwell & Pedwell’s trust account. On October 31, 1994, the Minister reassessed the taxpayer for 1989, adding to his income $183,593 (in respect of the inventory of lots taken from O Inc.), and $106,974 (the profit on the Eulers sale). Following negotiations, in a second reassessment for 1989 (dated April 4, 1996), the Minister removed from the taxpayer’s income the $106,974 respecting the unreported profit on the Eulers sale, but left the $183,593 undisturbed. In allowing the taxpayer’s appeal in part (99 DTC 63), the Tax Court of Canada concluded, inter alia, that the $183,593 should be deleted from the taxpayer’s income for 1989, but that the $125,630 from the Eulers sale and the deposit of $22,500 from L Inc. should be included in his income as having been appropriated by him. The taxpayer appealed to the Federal Court of Appeal, alleging that the Eulers and L Inc. transactions were not the basis of the Minister’s reassessment, so that the Tax Court judge had erred in finding the taxpayer liable on a basis not contained in the reassessment or in the pleadings at the Tax Court level.

Held: The taxpayer’s appeal was allowed. The decision of the Supreme Court of Canada in The Queen v. Continental Bank (98 DTC 6501) made it clear that the Minister was bound by his basis of assessment. This principle also applied to a judicial determination made on a basis different from that in the notice of reassessment. The Tax Court judge had thus erred in finding the taxpayer liable for tax on a basis different from the one in the April 4, 1996 reassessment which was before the him. And the taxpayer had had no opportunity to address this change. The Tax Court judge also erred in finding, without evidence, that the L Inc. deposit had been paid to the taxpayer. The Minister’s had also argued that all tax appeals (like this one) involve only one issue, viz. whether the tax is too high. In addition, he had alleged that all of what transpired (i.e., the purchase by O Inc. the Euler sale, and the L Inc. deposit) was simply one inseparable transaction for tax purposes. Both of these arguments were untenable. As a result of all of the foregoing, the Minister’s reassessment of April 4, 1996 was quashed.