Sept 2018 Charity & NFP Law Update
On June 4, 2018, with amended reasons released on August 27, 2018, the Tax Court of Canada (“TCC”) released its decision in Mont-Bruno C.C. Inc. v The Queen. Without deciding on the merits of an exemption claimed by the appellant non-profit organization (“Mont-Bruno”), the TCC held that the CRA pleaded sufficient facts on the basis of which there could be a finding of “misrepresentation attributable to neglect, carelessness or wilful default,” under subparagraph 152(4)(a)(i) of ITA, for purposes of reassessments by the CRA after the normal reassessment period set out in subsection 152(3.1) of ITA.
In 2006, Mont-Bruno, which operates a golf course, realized a gain of $1,742,500 on the disposition of a vacant wooded area adjacent to its golf course (the “Parcel”). Mont-Bruno reported this disposition and gain on its 2006 T1044 Non-Profit Organization Information Return, on annexes to its T2 Corporation Income Tax Return, as well as on its audited financial statements. However, Mont-Bruno alleges that the gain was exempt from taxation because the Parcel was used exclusively and directly for “providing dining, recreational or sporting facilities” to its members in accordance with subparagraph 149(5)(e)(ii) of the ITA, and, accordingly, Mont-Bruno did not report the disposition on its T3 Trust Income Tax and Information Return.
On May 13, 2015, the CRA reassessed Mont-Bruno, claiming that failing to report the disposition and gain of the Parcel on its T3 was a misrepresentation attributable to neglect, carelessness or wilful default under subparagraph 152(4)(a)(i) of the ITA, which allows the CRA to reassess a taxpayer after the normal reassessment period set out in subsection 152(3.1) of the ITA.
Mont-Bruno challenged the CRA’s ability to reassess its 2006 tax filings after the normal reassessment period because the CRA had not met the conditions of subparagraph 152(4)(a)(i) of the ITA by failing to plead facts (as opposed to law or mixed fact and law) that Mont-Bruno would be required to refute. Mont-Bruno further alleged that it did not conceal the disposition of the Parcel, as it reported it as an exempt activity on its T1044, and that the proper characterization of disclosed facts should not be considered a misrepresentation. It argued that a misrepresentation under subparagraph 152(4)(a)(i) does not include a “misrepresentation of the interpretation of the law” and that taxpayers have a right to disagree with the Minister in their interpretation of the ITA without it necessarily being considered a misrepresentation.
However, relying on a number of precedents, the TCC held that “misrepresentations include […] an incorrect amount resulting from an erroneous calculation […] whether innocent or fraudulent […] or made in good faith” and that “even an innocent misrepresentation is attributable to neglect, and this can be the basis of a reassessment under subsection 152(4) of the ITA.”
In its amended pleadings, the CRA had stated that Mont-Bruno’s board of directors were “sophisticated and experienced business people with knowledge of tax matters” and that “[a]ccording to a resolution of [Mont-Bruno’s] board of directors dated April 7, 2005, it was agreed that a professional opinion concerning the potential tax liability from the sale of the [Parcel] should be obtained as soon as possible,” but that no such opinion was obtained. The CRA’s amended pleadings also claimed that the Parcel was not used exclusively for “providing dining, recreational or sporting facilities” to the members of Mont-Bruno, that Mont-Bruno did not organize any activities in the Parcel and that members did not access the Parcel in the course of club activities.
In this regard, the TCC held that the facts pleaded by the CRA regarding the business experience of Mont-Bruno’s directors, their failure to seek a professional opinion on the tax consequences of the disposition of the Parcel, as well as the use Mont-Bruno made of the Parcel, were facts on which the TCC could conclude that the misrepresentation was attributable to neglect.
This case serves as a reminder to charities and not-for-profits that tax reporting must be carefully reviewed before filing and that failing to obtain a professional opinion regarding a potential tax liability after the board has already deemed it to be necessary may give the CRA grounds to reassess the organization’s tax filings long past the normal reassessment period.