Date: 20000512
Docket: A-424-97
CORAM: STRAYER J.A.
ISAAC J.A.
SEXTON J.A.
BETWEEN:
IAN JOSEPH FINDLAY
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, Wednesday, May 10, 2000
and Friday, May 12, 2000.
Judgment delivered from the Bench at
Toronto, Ontario on Friday, May 12, 2000.
REASONS FOR JUDGMENT OF THE COURT BY: ISAAC J.A.
Date: 20000512
Docket: A-424-97
CORAM: STRAYER J.A.
ISAAC J.A.
SEXTON J.A.
BETWEEN:
IAN JOSEPH FINDLAY
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE COURT
(Delivered from the Bench at Toronto, Ontario
on Friday, May 12, 2000)
ISAAC J.A.
[1] This is an appeal from a judgment of a Judge of the Tax Court of Canada which dismissed the appellant"s appeal from an assessment made under the Income Tax Act (the "Act") for the taxation year 1991.
[2] The facts of the case are set out at great length in the reasons for judgment of the learned Tax Court Judge. They are reported in 97 D.T.C. 1149. We will therefore limit recitation of the facts here to bare essentials in order to provide factual context for analysis of the issues presented to us for resolution.
[3] Before 1991, the appellant operated three video stores in the province of Ontario as a sole proprietorship. In 1991, on the advice of his lawyer, he incorporated the business and rolled over the assets in the corporation. The rollover generated some capital gains.
[4] For some years prior to 1991, the appellant had hired Farm Business Consultants Inc. ("Farm Business") as bookkeeper to prepare both his books of account and his income tax returns. The Department of National Revenue ("the Department") found no fault with the income tax returns which the appellant filed either before or after 1991. The preparation of the appellant"s returns at Farm Business was usually done by Larry Oosterhout ("Oosterhout") but he was not available for the preparation of the appellant"s 1991 personal income tax return. The corporation"s income tax return for 1991 as well as the form T2057 election in respect of the rollover were also prepared by Farm Business.
[5] Because Oosterhout was unavailable, Richard Flewelling ("Flewelling"), another employee of Farm Business, prepared the appellant"s income tax return for the 1991 taxation year. In the course of preparing the income tax return, Flewelling met with the appellant and went to his place of business to obtain information.
[6] After he had prepared the income tax return, Flewelling sent it to the appellant who read, signed and filed it with the Department. The corporate income tax return and T2057 election, showing the transfer of the assets from the appellant as proprietor to the corporation had been filed with the Department thirty days earlier.
[7] In reviewing the appellant"s 19991 personal income tax return, the Department noticed that the sum of $135,000.00, identified as capital gains generated by the rollover, had not been reported at line 127 of the return.
[8] The Department notified the representative of Farm Business that the capital gain had not been reported. They proposed a penalty and allowed the appellant or his representative thirty days to review the matter and provide an explanation. The appellant did not reply within the specified time. Instead, his representative asked for an extension of time to reply. The Department refused the request and assessed the penalty on the basis that the appellant had omitted the capital gains as a result of his own gross negligence.
[9] The appellant objected to the re-assessment in the following terms:
| I OBJECT TO THE MINISTER REASSESSING MY 1991 T1 RETURN AND ADDING CAPITAL GAIN FROM THE SALE OF GOODWILL TO MY CORPORATION. |
| I ALSO OBJECT TO THE PENALTIES IMPOSED BY THE MINISTER AND ALSO OBJECT TO THE MINISTER NOT ALLOWING THE CAPITAL GAIN DEDUCTION THAT I AM ENTITLED TO.1 |
[10] The Minister responded by confirming the assessment. I reproduce his Notification of Confirmation in its entirety to show the extent of the penalty imposed:
| You knowingly or under circumstances amounting to gross negligence made an omission in your return of income in respect of the 1991 taxation year within the meaning of subsection 163(2) of the Act. As the tax payable under subparagraph 163(2)(a)(i) exceeds the tax that would have been payable if computed under subparagraph 163(2)(a)(ii) of the Act by an amount of $ 28,380.02 a penalty of $14,190.01 has been levied under the provisions of subsection 163(2) of the Act. |
| No amount may be claimed under subsection 110.6(3) in respect of the capital gain in computing your taxable income for the 1991 taxation year as you knowingly or under circumstances amounting to gross negligence failed to report the capital gain in your return of income for the year in accordance with subsection 110.6(6) of the Act.2 |
[11] Meetings were held between the appellant"s representative and the Appeals Section of the Department to discuss the appellant"s objection. The positions taken by the appellant"s representative and by the Department are described in a document entitled Report on Objection or Appeal, dated December 13, 1994. In it the respective positions of the various actors -- the appellant"s representative, the Department"s auditor and the Appeal"s Section of the Department -- are set out.
[12] I reproduce hereunder the respective position of the appellant and the Appeals Section as described in the report3:
| TAXPAYER"S POSITION |
| The taxpayer objected to the capital gain being included in income, the penalties being levied and the capital gain deduction not being allowed. The representative, Farm Business Consultants was contacted to determine exactly what was their objection to the capital gain being included in income. Eventually, the file was discussed with Mr. Harold Schenk of the firm. He determined that the capital gain itself was not in dispute but rather the 163(2) penalty and subsequently the non allowance of the capital gain deduction. A letter was sent stating that as the T2057 had been filed as required the capital gain had been reported and the taxpayer was therefore not negligent. In addition, Mr. Schenk indicated that Mr. Findlay had hired a professional lawyer and tax preparer to handle the transaction, was under the impression it would be handled properly and paid for this service. He was also under the impression that very little tax would result. In the letter Mr. Schenk states that "due to the complexity of the T1 and T2 returns, it would not be unreasonable for an individual to overlook the fact that the capital gain was not declared on the T1 return because the tax owing was probably his major concern." Mr. Schenk does not think that the taxpayer was grossly negligent nor had he participated in anything that knowingly resulted in a false statement.4 |
| [Emphasis added.] |
| APPEALS POSITION |
| The main issue is the 163(2) penalty as the capital gain deduction is prohibited by the imposition of this section. Therefore, the penalty is the controlling issue. Reviewed the T2057 and related papers. The transfer of goodwill at fair market value and no adjusted cost base was clearly indicated. The T2057 was signed and mailed by the taxpayer on March 31/92 (An attachment to Mr. Schenk"s letter was a copy of their letter to the client advising to sign and forward the T2057 to Revenue Canada by March 31/92). Reviewed the T2 return. The goodwill is shown as an asset on the balance sheet. The return was signed and mailed by the taxpayer on March 31/92. In addition the T2 return shows that the books and records are maintained at the location of one of the video stores and the person to contact is the taxpayer himself. Reviewed the T1 return. The T1 return was signed and mailed by the taxpayer on April 28/92 less than one month after the filing of the T2057 and the T2 returns. There is no indication of the capital gain being reported on the original filing. In addition there is no indication that the T1 was prepared by other than the taxpayer except for a series of numbers on the top of each page. |
| Mr. Schenk was asked why neither Tp nor the rep had responded to the proposal. He indicated that their office manager had talked to the auditor. He said he would find out and get back to me. The rep was also asked how the T2057 and T2 could be field on March 31 reporting the transfers and less than one month later the T1 could be filed completely overlooking the disposition. Mr. Schenk did not respond. The Rep was asked if it was not true that a taxpayer was responsible for the contents of his own return. He said yes but in this case the taxpayer had relied on their services to ensure it was done correctly. The Rep was asked if they had in fact prepared Mr. Findlay"s return because Mr. Findlay had signed the return and their name did not appear anywhere on the return. He said they had prepared the return and was not aware that their name did not appear on it nor that the taxpayer had signed the return. The rep was asked if he was in fact admitting that they had in fact "screwed up". He said he "guessed". |
| .... |
| A subsequent conversation with Mr. Schenk revealed that his office manager had contacted the auditor and that the auditor had indicated that "he had to do what he had to do and that the Rep could deal with Appeals". Rep also mentioned that the problem was the result of a program glitch that didn"t match up the corporation information with the individual. |
| .... |
| Conclusion: |
| - After reviewing all the facts and arguments, it cannot be reasonably said that the taxpayer exercised proper care and judgment in the filing of his return. |
| - The fact that Mr. Findlay hired and paid for his return to be prepared (the same as thousands of others) does not relinquish his responsibility to file an accurate tax return. |
| - There is not sufficient evidence to warrant the cancelling of the penalty and thus the allowance of the capital gain deduction.5 |
| [Emphasis added.] |
[13] In his reasons for judgment the Tax Court Judge reviewed the evidence of the witnesses and the argument of counsel for the parties. He then posed for his consideration the following three questions:
| 1. Did the actions of the tax preparer in failing to include in the taxpayer"s individual tax return of 1991, the item of capital gain, at line 127 of his return, amount to "gross negligence" in the circumstances of this case? |
| 2. Did the taxpayer knowingly "participate in, assent to or acquiesce in", the actions of the tax preparer in failing to indicate this item in the return? |
| 3. Were the actions of the taxpayer on the facts of this case, of such a nature that the Court should conclude that the actions of the tax preparer should be attributed to the taxpayer, so as to enable the Court to conclude that the taxpayer could be said to have "participated in, assented to or acquiesced in", the actions of the tax preparer? |
[14] Before dealing with the answers that the Tax Court Judge gave to these questions, it would be useful to reproduce subsections 163(2) and (3) of the Income Tax Act ("the Act") under the authority of which the re-assessment was made and which prescribes who has the burden of proof of establishing facts to justify the assessment of the penalty. We will also examine the two cases which judicially considered the subsections. The subsections read:
| (2) False statements or omissions. Every person who, knowingly, or under the circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty ". |
| (3) Burden of proof in respect of penalties " Wherein in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.6 |
[15] The first case is Udell v. Minister of National Revenue7 which was decided under subsection 56(2), a predecessor of subsection163(2). The facts in Udell are instructive and are summarized here:
| The appellant was a farmer who reported his income on a cash basis. Although the appellant recorded his transactions meticulously in an account book, the professional accountant who prepared his tax returns made a number of errors and omissions in his working papers which resulted in substantial understatements of income in the appellant"s returns for 1962, 1963 and 1965. Since 1962 was a loos year, the errors made in the return for that year had the effect of understating the correct taxable income for 1961 and 1963 when parts of the excessive loss claimed were carried backward and forward. The Minister assessed additional tax for the 1961, 1963 and 1965 taxation years and also imposed penalties for those years on the grounds that the errors and omissions under the circumstances amounted to gross negligence made or acquiesced in by the appellant. The latter did not dispute the assessments for additional tax but did object to the penalties imposed. He claimed that all farm transactions were carefully and scrupulously recorded, that no attempt had been made to deny or hide any of the transactions, and that complete and accurate records were handed to a qualified professional accountant to prepare returns. |
[16] On these facts, the appellant contended, in that case, first, that he did not know of the accountant"s errors and, in any case, the gross negligence of this accountant was not attributable to him.
[17] The principles to apply in order to determine whether a penalty is properly imposed in a case such as this were articulated by Cattanach J. I quote from his reasons below:
| Whether the appellant has been properly assessed to penalties is, therefore, dependent upon the interpretation of section 56(2). Does that section contemplate that a taxpayer shall be personally responsible for the gross negligence of his agent in the making of a statement or omission in a return? The language of the section is clear that the penalty is to be imposed, if the circumstances contemplated by the section are present, on the taxpayer and not upon a person who made the statement or omission on the taxpayer"s behalf. The person, who is liable to penalty, is the person by whom the tax is payable. Therefore, in the present case, the person who may be liable to penalty is the appellant, not his agent, the accountant . . . . |
| There is no doubt that section 56(2) is a penal section. In construing a penal section there is the unimpeachable authority of Lord Esher [citation omitted], to the effect that if the words of a penal section are capable of an interpretation that would, and one that would not, inflict the penalty, the latter must prevail. He said: |
| We must be very careful in construing that section because it imposes a penalty. If there is a reasonable interpretation which will avoid the penalty in any particular case, we must adopt that construction. |
| At this point it is convenient to reproduce the relevant language of section 56(2). It is that "every person" (which means the taxpayer) "who knowingly" (I have found that the appellant did not have knowledge of the errors and omissions made by his accountant) "or under circumstances amounting to gross negligence . . . has made or has participated in, assented to or acquiesced in the making of a statement or omission . . . is liable to a penalty . . .". |
| The circumstances of this case, as I have found them to be, do not constitute personal gross negligence on the part of the appellant for the reasons I have previously outlined.8 |
[18] Having concluded that the appellant"s conduct did not amount to gross negligence, the learned Judge went on to consider the question whether the gross negligence of the accountant could be attributed to the appellant. On that question, this is what he said:
| Accordingly there remains the question of whether or not section 56(2) contemplates that the gross negligence of the appellant"s agent, the professional accountant, can be attributed to the appellant. Each of the verbs in the language "participated in, assented to or acquiesced in" connotes an element of knowledge on the part of the principal and that there must be concurrence of the principal"s will to the act or omission of his agent, . . . The other verb used in section 56(2) is "has made". The question, therefore, is whether the ordinary principles of agency would apply, that is, that what one does by an agent, one does by himself, and the principal is liable for the actions of his agent purporting to act in the scope of his authority even though no express command or privity of the principal be proved. |
| In my view the use of the verb "made" in the context in which it is used also involves a deliberate and intentional consciousness on the part of the principal to the act done which on the facts of this case was lacking in the appellant. He was not privy to the gross negligence of his accountant. This is most certainly a reasonable interpretation. |
| I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.9 |
[19] The next significant decision, in my opinion, is Lucien Venne v. Her Majesty The Queen10.
[20] In Venne, the taxpayer"s returns for the taxation year in issue were prepared by his bookkeeper and sent to him. The taxpayer signed and filed the returns without having read them. The Department reviewed the returns and found that the appellant had not declared certain business income that he had received. As a result, the Minister imposed subsection 163(2) penalties on the basis that the failure to disclose this evidence was the result of gross negligence on the taxpayer"s part. Strayer J., as he then was, found that although the taxpayer had been negligent in not having read his returns before signing them and in not supervising his bookkeeper, nevertheless the Minister had not discharged the burden imposed upon him of demonstrating that the taxpayer had been grossly negligent.
[21] In Venne, the learned Trial Judge defined "gross negligence" as follows:
| With respect to the possibility of gross negligence, I have with some difficulty come to the conclusion that this has not been established either. "Gross negligence"must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. I do not find that high degree of negligence in connection with the misstatements of business income. To he [sic] sure, the plaintiff did not exercise the care of a reasonable man and, as I have noted earlier, should have at least reviewed his tax returns before signing them. A reasonable man in doing so, having regard to other information available to him, would have been led to believe that something was amiss and would have pursued the matter further with his bookkeeper. |
| With respect to business income, I can more readily recognize that effective surveillance would have been difficult for the plaintiff and would have involved him making and reviewing numerous computations of revenues, expenditures, assets and liabilities. In other words the errors in business income, small in some years but very substantial in others, would not necessarily have "sprung out" at a person of the taxpayer"s background and abilities. While it may have been naive for him to trust his bookkeeper as knowing more about such matters than he did, I do not think it was gross negligence for him to fail to challenge the bookkeeper with respect to the business computations. However egregious the errors committed by the bookkeeper in this respect, it is quite conceivable that they were not in fact noticed by the plaintiff and his neglect in not noticing them fell short of constituting gross negligence.11 |
| [Emphasis added.] |
[22] This definition is consistent with the jurisprudence on the subject and we adopt it.
[23] The Tax Court Judge considered the second question, first. He answered it in the negative. He concluded that the respondent had not met the burden of establishing either by direct or circumstantial evidence that the appellant did knowingly "participate in, assent to or acquiesce in" the actions of the tax preparer in failing to indicate this item in the return.
[24] On the first question, i.e., whether the actions of the "tax preparer in failing to include in the taxpayer"s individual tax return of 1991, the item of capital gain at line 127 of his return, amount to "gross negligence" in the circumstances in this case", he found that the tax preparer had not given a sufficient explanation. He concluded that the actions of the tax preparer considered in their totality, amounted to gross negligence.
[25] He answered in the affirmative the third question, namely, whether the gross negligence of the tax preparer could be attributed to the appellant, so as to enable the Court to conclude that the appellant could have been said to have participated to, assented to or acquiesced in the actions of the tax preparer. He put his answer on the basis that the appellant and the tax preparer must have discussed the matter before the return was filed. He concluded that neither the tax preparer nor the appellant had provided reasonable explanation for the omission.
[26] We are all of the view that the Tax Court Judge erred in law in concluding that the gross negligence of the tax preparer was attributable on the appellant in the following reasons.
[27] His answer to the third question is inconsistent with his answer to the second question. If the respondent did not, for the purpose of the second question, show on a balance of probabilities that the appellant had knowledge of the omission by the tax preparer and did nothing about it, then, in our respectful view, it is difficult to understand how it could be said that the gross negligence of the tax preparer could be attributed to the appellant. There was no evidence that the appellant was privy to the actions or omissions of the tax preparer. The Tax Court Judge referred to the decision of Cattanach J. in Udelle v. The Queen, but he misapplied the principles laid down in that case. Similarly, although referring the decision of Strayer J., as he then was, in Venne v. The Queen, he misapplied the definition of gross negligence laid down in that case. A failure to apply the correct test amounts to an error of law which warrants intervention by an appellate court12. Furthermore, contrary to subsection 163(2) of the Act, the learned Tax Court Judge appears to have shifted to the appellant the burden of showing that he was not liable for the gross negligence of the tax preparer. Subsection 163(2) imposes that burden on the Minister; but the Tax Court Judge based his conclusion as to liability not on a proof by the respondent of gross negligence on a balance of probabilities, but on the absence of a reasonable explanation by the appellant or the tax preparer. This is, as I have already said, contrary to the provisions of subsection 163(2) of the Act.
[28] For all these reasons, we will allow the appeal with costs here and in the Tax Court, set aside the judgment of the Tax Court pronounced on May 7, 1997, and remit this matter to the Minister for reassessment in accordance with these reasons.
"Julius A. Isaac"
J.A.
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
| DOCKET: A-424-97 |
| STYLE OF CAUSE: IAN JOSEPH FINDLAY |
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
DATE OF HEARING: WEDNESDAY, MAY 10, 2000 and
| FRIDAY, MAY 12, 2000 |
PLACE OF HEARING: TORONTO, ONTARIO
REASONS FOR JUDGMENT
| OF THE COURT BY: ISAAC J.A. |
Delivered at Toronto, Ontario on Friday, May 12, 2000
APPEARANCES: Mr. J. Richard Lockwood and
| Mr. S. Mitra Sanjeev |
| For the Appellant |
Mr. Roger Leblaire and
| Mr. Kevin Lunney |
| For the Respondent |
| SOLICITORS OF RECORD: Siskind, Cromarty, Ivey & Dowler |
| Barristers & Solicitors |
680 Waterloo Street
London, Ontario
N6A 3V8
| For the Appellant |
| Morris Rosenberg |
| Deputy Attorney General of Canada |
| For the Respondent |
FEDERAL COURT OF APPEAL
Date: 20000512
Docket: A-424-97
BETWEEN:
| IAN JOSEPH FINDLAY |
Appellant
- and -
| HER MAJESTY THE QUEEN |
Respondent
| REASONS FOR JUDGMENT |
| OF THE COURT |
__________________
6 R.S.C. 1985, c. 2 (5th Suppl.).
12 Canada Packers Inc. v. Minister of Agriculture (1988), 26 C.P.R. (3d) 407 at 417.