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While I avoided detailed case commentaries on my blog to date, the recent Tax Court of Canada's decision in Hansen is too interesting to miss.

In this case commentary, we will discuss:

- when (how far back) the CRA has a right to reassess a taxpayer;

- what facts the courts may consider when determining a taxpayer's intention when buying real estate;

- when bad professional advice is better than no professional advice; and

- how the CRA can discredit your testimony by calling your neighbours/real estate agents/buyers as witnesses to testify against you at Tax Court.

Mr. Hansen, bought and sold five houses over the period of six years (2007-2012) and claimed principal residence exemption on the gain from the sale of each house (total of almost $1,000,000). The Court ruled that the more recent sales of two houses in 2011 and 2012 resulted in business income. However, the Minister (the CRA) was out of time to reassess the taxpayer's earlier three sales, which took place in 2007, 2008 and 2009. The Court also waived all subsection 163(2) penalties.

FACTS: A Quest for Perfect Family House

Mr. Hansen operated a concrete pouring and a foundation repair businesses. In 2006, he and his wife were new parents of twin baby girls looking for a perfect house to raise a family. The quest turned out to be quite difficult and the couple bought and sold five properties in six years before they finally settled in their current family residence, the sixth house, in 2012.

The couple testified that they bought each of the five properties with the intention to live there as a family. Evidence showed that the Hansens personalized each property to their liking and added upgrades. However, shortly after moving into the houses, the spouses found deficiencies that, in their mind, were serious enough to force them to sell each of the houses within months. More specifically:

House #1. The couple purchased House #1 in 2006, but decided to sell it in 2007, after 5 months of living there. The Hansens decided to sell House#1 because of the noise from the trucks passing to a nearby industrial site, and because the location of the babies' bedroom and the basement staircase was not convenient. The gain from the sale of House#1 was $69,801.

House #2. The couple purchased a lot and built House #2 in 2007 but decided to sell it in 2008, after 7 months of living there. The Hansens decided to sell House#2 because of a "coyote invasion" in the area and the associated safety concerns. The gain from the sale of House#2 was $273,434.

House #3. The couple purchased a lot and built House #3 in 2008, but reluctantly agreed to sell it in 2009, after 7 months of living there. The Hansens decided to sell House#3 because they received an attractive unsolicited offer from very persistent purchasers. The Hansens regretted the decision to sell and tried to rescind the deal, but failed. The gain from the sale of House#3 was $403,776.

House #4. The couple purchased a newly built townhouse, House #4, in 2009 but decided to sell it in 2011, after 5 months of living there. The Hansens decided to sell House#4 because there was no place to park Mr. Hansen's truck and because the neighbours complained about the Hansens' loud social gatherings. The gain from the sale of House#4 was $54,913.

House #5. The couple purchased newly built House #5 in 2010, moved there in 2011 and lived there for 19 months before selling in 2012. They sold House #5 because the construction for their custom built House #6 was completed. The gain from the sale of House#5 was $187,574.

House #6. The couple purchased a lot for the construction of House #6 in 2009, while they still lived in House#3. The construction completed in 2012. The Hansens still reside in House #6 now.

The spouses financed each new purchase/construction with a home equity line of credit, as opposed to a traditional mortgage.

Following the advice of his accountant, when filing his tax returns, Mr. Hansen took the position that all 5 properties were his family's capital properties and principal residences. As such, any gain from the sale of the properties was exempt.

The CRA reassessed Mr. Hansen's 2007, 2008, 2009, 2011 and 2012 taxation years on the assumption that he was in the business of buying and selling real estate. As such, the gain from the sale of all 5 properties represented his business income. The CRA also assessed the taxpayer with subsection 163(2) penalties equal to 50% of the tax he allegedly tried to evade.

Mr. Hansen appealed to the Tax Court.


House#1, #2 and #3 - When is it Too Late for the CRA to Reassess You?

Perhaps, the most interesting aspect of Justice Joanne D'Auray's decision is her analysis of whether or not the Minister had a right to reassess Mr. Hansen's 2007, 2008 and 2009 taxation years beyond the so-called 3 year "normal reassessment period."

First, a little background on the rules.

In most cases involving individual taxpayers, the Minister (the CRA) has 3 years from the date of the Notice of Assessment to reassess a taxpayer.

If we are using an individual's 2007 taxation year as an example, she would file her tax return for the 2007 taxation year on April 30, 2008. The CRA would take several weeks or months to issue her a Notice of Assessment. Once the Notice of Assessment is issued, for example, on August 1, 2008, the three year normal reassessment period clock starts running. Three years later, on August 1, 2011, the normal reassessment period ends, and the taxpayer's 2007 taxation year becomes "statute-barred".

There is an important exception from the 3-year rule. The Minister has a right to reassess a taxpayer beyond the normal reassessment period, if the Minister can prove that the taxpayer made a "misrepresentation that is attributable to neglect, carelessness or wilful default" (subparagraph 152(4)(a)(i) of the Income Tax Act). In very simple terms, a taxpayer who made a careless mistake in their tax return, can be reassessed beyond the three years period. As careless mistakes happen to the best of us, so do CRA reassessments beyond the normal three year periods.

At the same time, the courts have consistently held that there can be no misrepresentation or "careless mistake" contemplated by subparagraph 152(4)(a)(i) where a taxpayer "thoughtfully, deliberately and carefully assesses the situation and files on what he or she believes bona fide to be the proper method" or, in other words, where "a taxpayer has been reasonable in the manner that he or she has reported his or her income" (Paragraphs 76-81).

Simply because a taxpayer has adopted a position that contradicts the Minister's position does not in itself mean a taxpayer has made a misrepresentation that would allow the Minister to reassess after the normal period (Paragraph 81).

Was Mr. Hansen reasonable in the manner in which he reported his income in 2007, 2008 and 2009 years?

The Court noted that "there is no hard and fast rule" to determine whether or not principle residence exemption is available when an individual engages in the successive sale of several residences. Some court decisions found that the exemption was available, while others did not. The final determination is based on each taxpayer' individual facts. In the case of Mr. Hansen whose family personalized and lived in each of the properties, the "correct" tax filing position was not obvious.

As there wasn't a "hard and fast rule", Mr. Hansen did what any reasonably person would have done - consulted a professional accountant and followed his advice. The Court found that Mr. Hansen honestly and reasonably believed that the principal exemption was available to him:

[87]Here, Mr. Hansen had a bona fide belief that the sale of the houses qualified for the principal residence exemption. The Hansens lived in each house and personalized each to their likings and taste. In addition, Mr. Hansen sought advice from his long-standing accountant, Mr. Marsh, who confirmed that the houses qualified for the principal residence exemption. The accountant confirmed this after seeking information from Mr. Hansen as to why they bought and sold each residence. The respondent did not introduce any evidence to rebut the accountant’s account of the events.

The Court found that Mr. Hansen made no misrepresentation contemplated in subparagraph 152(4)(a)(i). Accordingly, the reassessments of 2007, 2008 and 2009 were vacated as statute-barred.

Had Mr. Hansen not consulted his accountant, the result would likely be different. Even if Mr. Hansen honestly believed that principal residence exemption was available to him in 2007-2009 years, a reasonable person would have confirmed the accuracy of such position with a professional. This is particularly true in light of the fact that Mr. Hansen was in construction business and bought and sold three houses in three years at the time.

House#4 and House#5 - Intention to Resell at a Profit

The Court then turned to determine whether Mr. Hansen was entitled to the principle residence exemption on the sale of House#4 in 2011 and House#5 in 2012.

To recap, the Hansens lived in House#4 for 5 months before selling it due to problems with parking and due to a conflict with neighbours. They lived in House#5 for 19 months before selling it because the construction on their current residence, House#6 was completed.

In very general terms, principal residence exemption is available on a sale of an individual's capital property if the individual taxpayer (or certain members of the taxpayer's family) habitually inhabited the property. In our previous post, we briefly discussed the underlying rules and common misconceptions.

While the Court accepted the the Hansens lived in both properties and accepted the couple's reasons for buying and selling each property, it concluded that the principal residence exemption was not available on the sale of House#4 and House#5.

The Court found that the primary (and, if not primary, then certainly secondary) intention at the time of purchase of both houses was to resell them at a profit. Accordingly, Mr. Hansen earned business income from selling the houses and had to pay tax at full rate.

If I were to discuss a similar case's scenario with a client, this a point where many of them would interrupt me and ask:

"What do you mean by "intention"?

" How does the Court or the CRA know what my intention was? "

" Yes, I had the intention to eventually resell the property. Isn't true for all capital investments we purchase in our lifetime?"

While it is true that we buy investments with the intention to eventually resell them at a profit, the Court will look at how much the potential for a quick profit influenced your decision to purchase the property. Paragraphs 100-106 of the decision provide a useful illustration of the facts the Court may consider.

The evidence showed that the couple did not plan to stay in either House#4 or House#5 for too long. For some time, the couple planned the construction of House#6, their current family residence. They purchased a lot for House#6 in 2009, before moving into House#4 in the same year and before buying House#5 in 2010. The couple obtained building permit for House#6 in 2010, only 4 months after moving into House#5. Both spouses testified that they always meant to move to House#6, as soon as construction was completed.

The Court found that Mr. Hansen dealt with House#4 and House#5 in a "business-like way": he selected newly built homes that would be easier to sell, leveraged his construction industry experience to make improvements that would attract future buyers and picked homes in desirable markets.

The Court noted that Mr. Hansen financed the purchases with a home equity line of credit, a method of financing that allowed him to take interest only loans and avoid penalties on early repayments.

Interestingly, the Court also noted the circumstances surrounding the purchase of House#5, a pre-construction home. Mr. Hansen testified that he happened to see a line of people waiting for hours for a chance to purchase one of the new pre-construction homes by a large developer. This prompted Mr. Hansen to contact the developer and to enquire whether any units were still available. Mr. Hansen then followed up until a developer's deal with a buyer fell through and one unit (House#5) became available. From this evidence, the Court inferred that knowing that there was a strong market for the houses in the development was an important consideration for Mr. Hansen when purchasing House#5.

Subsection 163(2) penalty: When Bad Professional Advice is Better than No Advice at All

Subsection 163(2) penalty applies where a taxpayer knowingly or in the circumstances amounting to gross negligence makes a false statement on their tax return. The penalty is equal to 50% of the tax the taxpayer tried to evade by making the false statement.

As the Court determined that the gain from the sale of House#4 and House#5 had to be declared as business income in 2011 and 2012, there was a false statement in Mr. Hansen's tax returns for the year. As such, the issue was whether Mr. Hansen made the false statement knowingly or negligently.

Again, the Court focused on the fact that Mr. Hansen sought professional advice from his accountant and provided him with relevant facts. Mr. Hansen's accountant was a witness at trial and confirmed his advice, namely that the gain from the sale of House#4 and House#5 was sheltered by the principal residence exemption.

Mr. Hansen trusted his accountant. Mr. Hansen had no reason to question the expertise of his accountant or his advice. As such, it cannot be said that Mr. Hansen made the false statements on his returns knowingly or negligently. The Court waived the penalties.

In an ideal world, professionals never make mistakes and only provide good advice. In the real world, mistakes happen. This is one of many situations when receiving bad advice from a professional was more beneficial to the taxpayer than receiving no advice at all.

Had Mr. Hansen not consulted his accountant, his 2007-2009 years would likely be reassessed beyond the normal reassessment period and he would have likely faced significant penalties on top of all the additional tax he had to pay.

Did you see any coyotes? The CRA May Call Neighbours or Previous/Subsequent Property Owners as Trial Witnesses to Discredit the Taxpayer's Testimony.

How excited would you be to find out that the CRA had called your neighbours to testify against you at trial in the Tax Court? It happened to Mr. Hansen.

While we do not see this in every case, the CRA spoke to the Hansons' neighbours and sellers/buyers of their properties and later called these individuals as witnesses to trial.

The first witness resided in House #1 before she sold it to the Hansens. Unlike the Hansens, she testified that there was never any issues with a noise from the trucks.

The same witness later moved closer to the Hansens' House #2 and became their neighbour. She testified that while she did hear the coyotes in the distance, it was not a regular occurrence and that the coyotes did not create any noise or safety issues in the area.

The Court accepted the witness' testimony but noted that people may react differently to the same problem. The same issues - the truck noise or the threat of coyotes - may not have bothered the witness who worked outside of home and did not have young kids, but they may have bothered Mr. Hansen's spouse who stayed at home and cared for the couple's young children.

The second witness was the purchaser of House#3 who testified that the Hansens had an acceptable sale price in mind during negotiations. As such, the Respondent argued, the couple's decision to sell House#3 was well thought through and not as "forced" as the Hansens wanted to Court to believe. Again, the Court accepted the witness' testimony but sided with Mr. Hansen in light of other evidence presented at trial.

The simple takeaway from the story is as follows: your neighbours/sellers/buyers/real estate agents can be called to testify against you as CRA's witnesses. Try to stay friendly with these people, keep private information private and, most importantly, never lie to the CRA.


Advotax Law has successfully represented a number of homeowners, real estate investors and builders who were reassessed after selling their properties. Contact our tax lawyer for a free no-obligation 20-minute assessment of your case.

Nothing in this article constitutes legal advice and no solicitor-client relationship is created. If you require legal advice pertaining to your specific situation, please contact our tax lawyer. Subscribe to our blog and our social media for important updates.

1 Comment

Adam Wandler
Adam Wandler
Aug 23, 2023

Filing house taxes can be overwhelming, but the Tax Consultant Prince George tackled it with precision. Their step-by-step guidance and patience made the entire process smooth and manageable.

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