2013 QCCQ 665, 2013 QCCQ 665

Beaudoin Cormier c. Agence du revenu du Québec 2013 QCCQ 665 COURT OF QUEBEC "Administrative and appeal division" CANADA PROVINCE OF QUEBEC DISTRICT OF TERREBONNE LOCALITY OF ST-JÉRÔME “Civil Division” No.: 700-80-005176-117 DATE: January 28, 2013 ______________________________________________________________________ THE HONOURABLE GEORGES MASSOL, J.C.Q., PRESIDING ______________________________________________________________________ Normand Beaudoin Cormier Plaintiff v.

Agence du revenu du Québec Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] The plaintiff appeals from a notice of assessment issued on June 17, 2010, establishing a taxable capital gain of $29,525. [ 2 ] An objection was filed but the said decision of the Agence du revenu du Québec (the "Agency") was upheld in a decision rendered on March 10, 2011. [ 3 ] The taxpayer appealed from this latest decision in a motion dated June 7, 2011. [ 4 ] The originally contested notice of assessment bore number MU503232C01 (for taxation year 2006).

The factual framework [ 5 ] The evidence reveals that the plaintiff met his spouse, Ms. Simard, in 1981. She had two children from a prior relationship, Nadine and Louis, who were, respectively, 1 and 2 years old. [ 6 ] The couple moved in together, and in 1985, they had a child, Jimmy. [ 7 ] The couple lived with Jimmy and Nadine, while Louis lived with his biological father. [ 8 ] In 1998, the family, looking for a bigger home, rented a house at 20 Avenue A in Saint-Sauveur, which is one of the houses at issue in this case.

It is a semi-detached, single-storey house, attached to another house bearing street number 18. Both houses have one main floor and a basement. [ 9 ] On May 18, 2000, the plaintiff purchased the entire building (exhibit P-1). [ 10 ] It should be pointed out that the notarial act of sale concerned one immovable property on one lot, with a building erected thereon bearing civic numbers 18 and 20 [Avenue A]. [ 11 ] For the first year of their residence, Nadine and Jimmy had a room in the basement of 20 [Avenue A].

Louis intended to move in with his sister and half-brother in 2001. [ 12 ] The plaintiff therefore began renovations in the spring of 2001, primarily to finish the basement of number 18. An invoice dated April 23, 2001, shows that Mr. Beaudoin Cormier invested over $8000 in these renovations (exhibit P-12). [ 13 ] The family's plan was to set up the two boys in their own rooms in number 20, and to allow Nadine, who was going to school,

to be in a quieter room with more privacy in number 18. As for the newly renovated basement, it was to be used as a family room by the children. [ 14 ] At the hearing, both the plaintiff and his son Jimmy confirmed that, as of 2001, Nadine lived in number 18 and that the basement in that part was the family game room. The family was able to move freely through an opening from one part to the other without going outside. Regarding this opening, Mr.

Beaudoin Cormier states that it had existed even when he was renting. [ 15 ] In short, family meals were eaten in number 20, and the family members' cars were usually parked in front of that side. [ 16 ] It is worth pointing out that, prior to the renovations in 2001, the plaintiff asked the municipality for a permit, which was issued on April 26, 2001 (exhibit P-22). [ 17 ] In the box labelled "Nature" the following is written: [ translation ] "Juxtaposed two-family dwelling". [ 18 ] The situation remained unchanged until 2005, when the plaintiff wished to sell the building he had purchased. [ 19 ] Probably wishing to maximize his chances of selling his property, and certainly hoping to make a larger profit, he planned a subdivision so that each part of the building would be on a separate lot. [ 20 ] As noted above, the two addresses were on the same lot, as appears from the certificate of localization from that time (exhibit P- 2). [ 21 ] In September of 2005, however, the city consented to the subdivision of the original lot to create two lots (exhibit P-4), under certain conditions.

One such condition was to grant a water servitude in favour of number 20, since the municipal water supply was connected to number 18 only. [1] [ 22 ] At the time, a new certificate of localization was prepared for the new subdivision (exhibit P-5). [ 23 ] The plaintiff put the two buildings up for sale separately.

The building at 20 Avenue A (exhibit P-15) sold first, on January 25, 2006; the building at number 18 then sold on March 9, 2006 (exhibit P-14). [ 24 ] According to the testimony of Beaudoin Cormier, in the fall of 2005, the family moved out of 20 [Avenue A] and lived exclusively in number 18, after some renovations became necessary. [2] [ 25 ] It is not disputed that, in his 2006 income tax declaration, the plaintiff did not disclose that he sold the buildings at 18 and 20 [Avenue A] and that he did not declare the sold property as his principal residence so that he could benefit from the capital gain exemption in

section 274 of the Taxation Act . [3] [ 26 ] After reviewing the file, the Agency found that only the part at number 20 [Avenue A] could be considered to be the taxpayer's principal residence. The Agency therefore attributed a capital gain for the other part. [ 27 ] The taxpayer challenges this assertion, claiming that the building as a whole, which includes two street numbers, was his principal residence and was used for the purposes of his family.

Arguments of the defendant [ 28 ] In the explanatory notes justifying her decision, Tatiana Bosak, the Agency auditor, states that the taxpayer may not benefit from the exemption for both street numbers precisely because there is more than one street number. [ 29 ] Among other reasons considered were the facts that the two buildings had independent entrances and that they were sold separately through two notarial acts in 2006. [ 30 ] According to the Agency,

section 274 of the Taxation Act defines the expression "principal residence" as a house, apartment or duplex in an apartment building or condominium building. [ 31 ] The residence that was sold, however, consisted of two distinct housing units. [ 32 ] In her notes, Bosak writes that if each housing unit can be inhabited without requiring access to another housing unit (for example, each one contains a kitchen, bedroom, and bathroom, and each has a separate entrance), it can be difficult to consider the two housing units as a single self-contained domestic establishment within the meaning of the Act (exhibit P-11 en liasse , Bosak's working documents). [ 33 ] As another criterion, she adds the fact that the plaintiff divided the lot into two before selling both parts. [ 34 ] Regarding expenses claimed by the taxpayer, the auditor accepted 50% of the expenses incurred in 2001, but refused 100% of those incurred in 2005. [ 35 ] In the Memorandum on Objection used for the next stage (exhibit P-11, entitled "Memorandum on Objection"), Agent Yves Ouellette arrived at the same conclusion as Bosak.

Reiterating the same criteria as the auditor, he added that

section 274 of the Act states that the principal residence must be a housing unit, not a building. He refers to bulletins of

interpretation issued by the Department of Revenue to find that the term [ translation ] "housing unit" includes various situations but must always be interpreted in the singular. [ 36 ] On page 5 of his Memorandum, the objection agent lists five reasons the taxpayer's argument cannot be accepted:

[ translation ] 1. From the time of their acquisition with the notary in 2000, each housing unit had its own street number. 2. Each housing unit had its own personal entrance. 3. Each housing unit had a kitchen and bathroom. 4. According to the land surveyor's plans that were gathered, the two housing units were separated by a common wall. 5.

The sale took place in two distinct transactions [ 37 ] On two occasions, the objection agent indicated that the taxpayer wished to convert the immovables into condos. [ 38 ] Finally, he found that, despite the fact that the building appeared to be one personal residence, the audit showed that it constituted two distinct housing units (exhibit P-11, Memorandum on Objection at page 5). [ 39 ] At the hearing, counsel for the defendant added that it could only constitute a single housing unit. [ 40 ] According to the second paragraph of

section 274, the taxpayer has the option of designating a residence as his principal residence for a given year, whether occupied by himself, his spouse or his former spouse or his child. The use of the conjunction "or" instead of "and" suggests that the choice is left to the taxpayer if, for example, he purchases a building that is occupied by one of the persons mentioned in this paragraph and not by himself. [ 41 ] In this case, the taxpayer cannot claim the status of principal residence for a building occupied by himself and by another person, even if that person is listed in the second paragraph of

section 274 of the Taxation Act . Arguments of the taxpayer [ 42 ] The taxpayer claims that each of the criteria grounding the Agency's decision can be distinguished and set aside and that, as a result, the presumption against him in

section 1014 of the Taxation Act cannot hold, as the Agency has not met the burden of proof that has shifted to it. The burden of proof [ 43 ]

Section 1014 of the Taxation Act states: An assessment shall, subject to being varied or vacated on an objection, appeal or

summary appeal and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding relating thereto. However, where a court vacates an assessment on the ground that it has been issued beyond the period during which the Minister may reassess or make an additional assessment under paragraph a, a.0.1 or a.1 of subsection 2 of

section 1010, as the case may be, the assessment replaced by the assessment so vacated remains valid and binding, but any time prescribed by a fiscal law and applicable in regard thereto begins to run from the date of the judgment vacating the last assessment. [ 44 ] Thus, concerning taxable income, the burden of proof rests on the plaintiff's shoulders, given the presumption of the validity of the assessment set out in this provision. [ 45 ] The applicable principles have been reviewed by the Court of Appeal, [4] which recalled the guidelines set out by the Supreme Court in Hickman Motors Ltd. v.

Canada , [5] whereby the initial burden on the taxpayer is limited to "demolishing" the presumption in favour of the deputy minister. [ 46 ] These principles are stated as follows: - Tax assessments are presumed valid under

section 1014 of the Taxation Act , but the taxpayer may rebut this presumption. - The initial burden on the taxpayer is to "demolish" the accuracy of the presumption by making a prima facie c ase. - When a taxpayer presents such evidence, the burden of proof is shifted. - The tax authority must then rebut the prima facie case and prove the assessment that had been established by presumption. [6] [ 47 ] More recently, in another judgment, [7] the Court of Appeal added: [ translation ] As a general rule, a prima facie case can be defined as sufficient evidence to establish a fact until proof to the contrary. [ 48 ] The comment of Cain J. in Stewart v. M.R.N. is also worth noting:

A prima facie case is one supported by evidence which raises such a degree of probability in its favour that it must be accepted if believed by the Court unless it is rebutted or the contrary is proved. [8] [ 49 ] Let us recall that, in Hickman Motors Ltd. v.

Canada , the Supreme Court adds that the Minister must refute the prima facie case on a balance of probabilities and, where sufficient evidence is not brought, the taxpayer will prevail. the plaintiff’s case [ 50 ] The plaintiff begins by challenging the statement in the Memorandum on Objection whereby he intended to convert the units into condos. [ 51 ] Similarly, he notes that nothing in the evidence makes it possible to establish – or indeed even raises the possibility – that either of the units were put up for rent between 2000 and 2005. [ 52 ] With regard to the use of the entire building for family purposes, he reasserts the facts in his testimony, also referring to that of his son Jimmy. [ 53 ] Nadine, who did not attend the hearing, also confirms that she lived at number 18 [Avenue A] so that she could be in a quieter environment.

In an affidavit filed as exhibit P-7, she adds that an opening between the two units allowed her to move from one place to the other.

The defendant objected to this affidavit, but the undersigned admitted it because it is specifically referred to in the motion (paragraph 17) and the whole had been communicated to the defendant in a timely manner. [ 54 ] With regard to the existence of two street addresses, the plaintiff files the municipal tax accounts, on which the address of the unit assessed is recorded as 18-20 Avenue A (exhibit P-3) for all of the years at issue. [ 55 ] It should be noted, however, that the invoice was sent to 20 Avenue A. [ 56 ] The situation with regard to the school tax is different, since the invoice was sent to 20 [Avenue A] but the location of the property was described as number 18 (exhibit P-3 in fine). [ 57 ] A comparison of the taxable value for the purposes of the school tax with that considered for municipal taxes, however, quickly reveals that they both describe the same area. [ 58 ] The plaintiff adds that the fact that the two housing units are actually one is also confirmed by other documents such as the home insurance policy, which lists the address of the insured location as 18 and 20 [Avenue A] along with its description as [ translation ] "2 dwellings – principal residence occupied by the insured" (exhibit P-16). [ 59 ] As for the municipal authorities, aside from the renovation permit issued in 2001 (see exhibit P-22, which indicates the nature of the residence as a [ translation ] "juxtaposed two-family dwelling"), the plaintiff draws the Court's attention to the fact that, in the permits issued subsequent to the sales in 2006 by the Town of Saint-Sauveur, the town considered 18 and 20 Avenue A to be isolated single-family dwellings.

This information was made available following a subpoena sent by the defendant to the Town of Saint-Sauveur. [ 60 ] In addition to these documents, other evidence shows that the duties on the transfer of immovables, for which the plaintiff received an invoice when he purchased the building in 2000, were included in the act of sale (exhibit P-18, page 5).

Conclusions sought [ 61 ] The plaintiff asks that the two sales of the immovable be considered to relate to a single housing unit and that he therefore be exempted from the capital gain. [ 62 ] In the alternative, he asks that the cost of the materials used for maintenance and repair work in 2005 on number 18 [Avenue A], Saint-Sauveur, be accepted. Analysis and decision [ 63 ] Since the tax system is based on the principles of self-declaration and self-assessment, the plaintiff had a duty to declare the situation after the sale of the immovable in 2006.

He failed to do so. [ 64 ] The plaintiff has recognized this fact and has even added that, since then, he has proceeded with the sale of two immovables that he occupied as principal residences and has since declared the sales of his principal residences, even though this had no negative impact on him. [ 65 ] Underlying the Taxation Act is the principle whereby an individual's income is taxable, whether it originates from employment or property. [ 66 ] Exceptionally, the law will exempt the taxpayer from the capital gain arising from his principal residence, whether it is occupied by the taxpayer or a member of his or her immediate family. [ 67 ] It is worth pointing out at the outset that the fact that the plaintiff did not declare the situation in his 2006 tax declaration does not prevent him from obtaining such a status because subsequently, in 2010, the defendant itself agreed to consider one of the two units to be the plaintiff’s principal residence.

[ 68 ] The defendant emphasizes the definition of "housing unit" in the Dictionary of Canadian Law : [9] A unit that provides therein living, sleeping, eating, food preparation and sanitary facilities for one or more persons, with or without essential facilities shared with other housing units. [ 69 ] This type of definition, which has been cited in traditional case law, needs to be adapted to a modern context. [ 70 ] Indeed, given the recent phenomena of deinstitutionalization, the breakdown of the nuclear family, blended families, and multigenerational homes, a reconsideration of the definition of “housing unit” and “principal residence” may be in order. [ 71 ] At first glance, the most apparent facts giving rise to this case indicate that the Agency had good reason to consider the two units to be independent, as they have separate entrances and distinct street addresses, and were the subject of separate resale transactions.

These observations do not bar the taxpayer from trying to rebut the presumption against him, however. [ 72 ] In this respect, the plaintiff argues that each of the criteria relied upon by the Agency to find that his building was not a single housing unit can be contradicted. [ 73 ] Regarding the existence of two street addresses, he refers to a decision of the Tax Court of Canada. [10] In that case, the property at issue had two street addresses. The Court did not find that the existence of these two addresses ruled out the notion of a principal residence.

The action was dismissed but on other grounds, namely, because the evidence that the property had been inhabited by the taxpayer was not accepted. [ 74 ] In addition, although the statute does not contain a definition for multigenerational homes, the plaintiff submits that the treatment the Agency gives to this type of dwelling for other statutory purposes should be identical to the one at issue here. [ 75 ] He refers to an

interpretation by the defendant Agency of multigenerational homes from February 3, 2006 (tab 4 of the authorities cited by the plaintiff). [ 76 ] Although this

interpretation was given in the context of a tax credit for sheltering a parent, it contains a sentence used by the auditor Bosak in her notes in support of the notice of assessment. This sentence, which can also be found in the

interpretation bulletin referred to above, states: [ translation ] Therefore, if each dwelling can be inhabited without providing access to the other dwelling (for example, each dwelling has its own kitchen, bedroom and bathroom, and each has separate access), it may be difficult to consider the two dwellings as a single, self- contained domestic establishment within the meaning of the Act. [ 77 ] This sentence is copied word for word in Bosak's notes. In the

interpretation bulletin, however, the next sentence reads as follows: [ translation ] However , if the two living spaces are actually used as a single dwelling unit (no restricted access between the two living spaces), it is difficult to consider each of these two living spaces to be self-contained domestic establishments. [11] (Emphasis added.) [ 78 ] The bulletin goes on: [ translation ] In addition, an entrance and street number that are separate from the adjacent part are not of themselves conclusive and determinative facts establishing that this

part constitutes a self-contained domestic establishment... . The general arrangement of the premises is what should be considered to determine whether the adjacent

part constitutes a separate, self-contained domestic establishment or whether it forms an integral part of one. [12] [ 79 ] With regard to the other factor the Agency relied on so as not to consider numbers 18 and 20 of Avenue A as a single housing unit – namely, the existence of two notarial deeds – it bears repeating that, although the units were sold separately, they were acquired through a single notarial act. [ 80 ] Moreover, according to the case law, this is not an element that rules out a "principal residence". [ 81 ] In Gobeil v.

Quebec (Deputy Minister of Revenue) , [13] for example, there was a sale through two separate notarial deeds. Jacques Tremblay J. wrote the following: [ translation ] These notarial deeds do not constitute a recognition by the plaintiff that a part of his immovable is not necessary for the use and enjoyment of his residential property. [14] [ 82 ] In Grenier v. Minister of Revenue of Quebec , [15] the taxpayer wanted a building that included four contiguous lots to be considered his principal residence.

The Court dismissed this claim but only because the taxpayer had not met the test of necessity; in other words, he had not established that he needed all of these lots for his residence. [ 83 ] The fact that the two units can be autonomous in theory because they each contain a kitchen and a bathroom also should not prevent the whole from being considered a family residence.

[ 84 ] In an

article published in 1996, in the Canadian Tax Journal , [16] Anne-Marie Boucher considers the following question: Can the term [ translation ] "housing unit" include more than one establishment? [17] First, she refers to the term in English, as did counsel for the defendant during oral arguments, citing the Dictionary of Canadian Law , supra . The author states: [ translation ] A rather broad term, "housing unit" can include more than one establishment.

For example, can a bungalow on the same lot as the residence occupied by the taxpayer and used as accommodations for the domestic servants, janitor, and gardener – employees who maintain the taxpayer's residence and land – be part of the taxpayer's housing unit? [18] [ 85 ] Mtre Boucher notes that, at the time she wrote her article, Canadian courts had yet to analyze the question. She refers, however, to two decisions of the English courts, [19] which may provide an answer. [ 86 ] On the next page of her article, after discussing Markey (HMIT) v. Sanders , she writes: [ translation ] In Batey v.

Wakefield , the facts were similar, except the taxpayer's residence and the employees' bungalow were on a considerably smaller lot, and the distance between the two was no bigger than a tennis court. The Court of Appeal concluded that the bungalow could reasonably be considered part of the taxpayer's dwelling.

Thus, the expression "dwelling-house" can include the dwelling of another person if the structure is sufficiently close to the taxpayer's residence and the dwelling is used for the maintenance staff of the taxpayer's residence. [20] (Emphasis added.) [ 87 ] The author adds: [ translation ] If a parallel can be established between the expression "housing unit" used in the Act and the English term "dwelling-house", the English decision may be used to interpret the scope of the term "housing unit".

These two cases support the conclusion that the taxpayer's housing unit may include more than one structure if, when taken as a whole, the different structures may be considered to be a single residence. It is a question of fact that should be left up to the assessment of the courts. [21] [ 88 ] In 1988, in Yuile v. Quebec (Deputy Minister of Revenue) , [22] the Provincial Court of Quebec applied the principle in Batey (HMIT) v.

Wakefield and found that the residence of the domestic help should be considered with the residence of the owners as forming a whole. [23] [ 89 ] It is immediately apparent that it would be altogether incongruous to give such treatment to domestic help but not to the members of a blended family. [ 90 ] Of the five criteria listed in the Memorandum on Objection as constituting the basis of the Agency's decision, the issue of the separating wall remains. [ 91 ] The plaintiff, his son Jimmy, and his step-daughter Nadine confirmed the existence of an opening in the separating wall to allow the members of the family to move from one side to another. [ 92 ] The defendant did not bring any evidence to the contrary.

In such a case, credible testimonial evidence from the taxpayer is sufficient when no question as to the taxpayer's credibility is raised. [24] [ 93 ] Based on all of the above, it must be found that the plaintiff has "demolished" the presumption in

section 1014 of the Taxation Act . The Court finds that the defendant has not proved the contrary on a balance of probabilities. [ 94 ] The defendant does, however, cite a 1978 Federal Court decision [25] overturning a trial judgment [26] that had found that two housing units should be considered to be a single unit. Originally, the house had been divided by a partition so that one

part could be occupied by the taxpayer and his family and the other by his parents. When the parents died, their part was rented until the entire building was sold. [ 95 ] On appeal, the Federal Court found that it was two distinct housing units. An attentive reading of the decision demonstrates that the fact that one unit was rented and occupied by tenants more than ten years before the sale was a crucial element. [27] [ 96 ] The evidence as a whole in this case demonstrates that while this situation is not unique, it is rare, and must be considered on its own merits.

The details provided in this case fit well together and leave no doubt as to the credibility of the version of the plaintiff and his family members. [ 97 ] The documents relating to the situation and the version of the main parties concerned clearly show that there are more elements in favour of the plaintiff's theory than against. [ 98 ] In the circumstances, it is clear that the plaintiff has rebutted the presumption in

section 1014 of the Taxation Act . [ 99 ] There is also no doubt that the Agency has failed to demonstrate the accuracy of its claims on a balance of probabilities. [ 100 ] Thus, there are specific cases where taxpayers have successfully demonstrated that they are within their rights, despite the existence of certain facts contradicting their claims. Such is the case in the file now before the Court. [ 101 ] Having disposed of the main issue, it is not necessary to rule on the outcome of the plaintiff's alternative claim for expenses.

For these reasons, the Court: Allows the motion; Vacates the notice of assessment bearing number MU503232C01 and dated June 17, 2010, which added a taxable capital gain of twenty-nine thousand, five hundred and twenty-five dollars ( $29,525 ) and which was upheld by the decision rendered on March 10, 2011; The whole, with costs . __________________________________ Georges Massol , J.C.Q. Mtre Desneiges Simard For the plaintiff Mtre Philippe Gilliard Larivière, Meunier For the defendant Date of hearing: November 26, 2012