October 07, 2011

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

99 DTC 63
Tax Court of Canada
October 29, 1998

(Court File No. 96-2339(IT)G.)

Inclusions in income — Shareholder’s appropriations — Penalties — Taxpayer causing a corporation of which he was the directing mind to convey away property beneficially owned by it — Some of such property sold, and proceeds of sale not reaching the said corporation — Whether taxpayer having appropriated such proceeds of sale — Whether penalties justified — Whether Minister’s reassessment statute-barred — Income Tax Act, R.S.C. 1985 (5th Supp.), c.?1, as amended, ss.?9(1), 15(1), 57(2), 152(4)(a) and 163(2).

The taxpayer, a lawyer, was the sole shareholder, director and officer of T Ltd. He also held 50 per cent of the issued shares of O Inc., and was the directing mind behind both corporations. On August 12, 1988 T Ltd. agreed to purchase certain agricultural land (“the property”) from the Clarence E. Peacock estate (“the estate”) for $183,593. T Ltd. acquired the property for the benefit of O Inc., and the latter financed the purchase entirely through a loan from the taxpayer (who had borrowed the funds in part from T Ltd.). The Peacock family was interested in pursuing the matter of severing the property by will. Hence the property was reconveyed for a nominal consideration to Mrs. Peacock by deed registered on March 13, 1989. Mrs. Peacock then executed a will (prepared by the taxpayer) purporting to sever the property into some 32 separate parcels, plus one large parcel. Six of the 32 parcels (but not the house lot) were left to Mrs. Peacock’s three daughters. The remaining parcels were left to the taxpayer’s father, mother, brother, and secretary for their own use absolutely, without reference to any trust in favour of O Inc. Following Mrs. Peacock’s death on March 10, 1989, the trustees and executors of her estate executed deeds in favour of each of the said beneficiaries, without reference to any trusts, since the land title registry system allegedly did not permit registrations “in trust”. On July 4, 1989 the house lot was sold, and the proceeds of sale were paid in trust to the taxpayer’s law firm. None of the proceeds went to O Inc. Neither the taxpayer, O Inc., nor any other member of the taxpayer’s family reported the profit from such sale in a tax return for 1989 or for the period from 1989 to 1992. Also in 1989, L Inc. agreed to purchase 16 of the said 32 lots, but the deposit was retained by the taxpayer. However, it was later returned to L Inc., inasmuch as the transactions did not close. On this set of facts, the Minister reassessed the taxpayer (for 1989 to 1992) on the basis that he had appropriated the entire property from O Inc. when it was conveyed back to Mrs. Peacock. Penalties were also imposed. The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was allowed in part. O Inc. continued to hold beneficial ownership of the property before and after the conveyance to Mrs. Peacock, as well as after her death when the lots were devised to the members of the taxpayer’s family and to his secretary. Hence both the proceeds of sale of the house lot, as well as the deposit paid by L Inc., constituted property belonging to O Inc. which the taxpayer had received. The taxpayer had also been grossly negligent in failing to report the funds which he had so appropriated from O Inc. in 1989. As a result the penalties in issue were justified, and the Minister’s 1989 reassessment was not statute-barred. In light of the foregoing, the Minister was ordered to reassess the taxpayer for 1989 on the basis: (a) that the proceeds of sale of the house lot and the deposit paid by L Inc. had been appropriated by him from O Inc.; (b) that the penalties for 1989 were to be adjusted accordingly; (c) that the 1990 reassessment was statute-barred; and (d) that the lot development costs added to the taxpayer’s income for 1991 and 1992 were to be deleted and the penalties referable thereto were to be cancelled, inasmuch as such lot development costs were properly those of O Inc. as the continuing beneficial owner of the lots in issue.