The deceased had a 50% co-ownership interest in a rental property ("Victoria Park"). His terminal return should have shown $1.07 million of capital gain and $2 million recapture of depreciation for Victoria Park. Instead, it did not report recapture and reported a capital gains total which included a $2.92 million capital gain from Victoria Park, but did not list this property or that gain in the Schedule of dispositions (i.e., the total capital gains reported on line 132 of the return was $2.92 million higher than the total of the property-specific listed capital gains).
Five months later, the accountants discovered the failure to report recapture of depreciation, and the executors filed an amended return which reported the $1.07 million capital gain and $2 million of additional rental income (i.e., arithmetically equal to the unreported recapture for Victoria Park), but failed to back out the $2.92 million capital gain, as they did not realize it had been included in the previously reported total. As the amended return was filed under s. 164(6)(e) to carry back a capital loss, and the covering letter did not draw CRA's attention to the missing recapture, CRA did not assess for the recapture. In connection with a subsequent audit, CRA obtained a waiver, but only respecting capital gains. After the normal reassessment period expired, the failure to back out the $2.92 million capital gain was discovered and reported by the accountants (but not the unassessed recapture). Two years later, CRA reassessed for the correct amount of capital gains and recapture respecting Victoria Park. The executors argued that the reassessed recapture amount was statute-barred as it was not covered by the waiver.
In rejecting an argument that the misrepresentation in the terminal return (the failure to report the recapture) was corrected by filing the amended return, Webb JA stated (at para. 32):
Even if, notwithstanding the wording of the covering letter, the Minister could have examined the amended return and discovered that the Victoria Park Recapture was now being included in Stanley Vine's final return, there was still a misrepresentation in the original final return for Stanley Vine that had been filed.
After noting that the trial Judge, in reliance on Aridi, had found that a misrepresentation had to be that of the taxpayer (the Estate) rather than of its accountants, Webb JA noted (at para. 44) that the words of s. 152(4)(a)(i) "could mean that the person filing the return must be the one who was negligent, careless or wilfully in default," but found (at para. 46) that it was not necessary to resolve this point as there was a sufficient basis for Campbell J's finding that the failure to report the recapture in the original return was a misrepresentation attributable to the Estate's neglect: any detailed review of the terminal return by the executor would have caused him to query the accountants as to why the Victoria Park property did not appear on the disposition Schedule – which, in turn, likely would have resulted in their identification of the recapture-reporting error (para. 50).
Webb JA also found that there was an onus on the Minister to establish both branches (misrepresentation, and neglect etc.) of the test in s. 152(4((a)(i). See summary under General Concepts – Onus.