Federal Court of Appeal Decisions

Date: 20060616

Dockets: A-137-05

A-138-05

A-139-05

A-140-05

A-141-05

A-142-05

Citation: 2006 FCA 224

CORAM:        DESJARDINS J.A.

                        DÉCARY J.A.                        

                        NADON J.A.

Docket: A-137-05

BETWEEN:

LUCIANO PANINI

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-138-05

BETWEEN:

GUY RIENDEAU

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-139-05

BETWEEN:

ZACHARY KLAPKA

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-140-05

BETWEEN:

ROGER SOUTHIN

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-141-05

BETWEEN:

BERTRAM WHITZMAN

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-142-05

BETWEEN:

JACK RIORDAN

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Heard at Montreal, Quebec, on March 27, 2006.

Judgment delivered at Ottawa, Ontario, on June 16, 2006.

REASONS FOR JUDGMENT BY:                                                                                NADON J.A.

CONCURRED IN BY:                                                                                          DESJARDINS J.A.

DÉCARY J.A.

Date: 20060616

Dockets: A-137-05

A-138-05

A-139-05

A-140-05

A-141-05

A-142-05

Citation: 2006 FCA 224

CORAM:        DESJARDINS J.A.

                        DÉCARY J.A.                        

                        NADON J.A.

Docket: A-137-05

BETWEEN:

LUCIANO PANINI

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-138-05

BETWEEN:

GUY RIENDEAU

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-139-05

BETWEEN:

ZACHARY KLAPKA

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-140-05

BETWEEN:

ROGER SOUTHIN

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-141-05

BETWEEN:

BERTRAM WHITZMAN

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Docket: A-142-05

BETWEEN:

JACK RIORDAN

Appellant

and

HER MAJESTY THE QUEEN

Respondent

REASONS FOR JUDGMENT

NADON J.A.

[1]                These are consolidated appeals from decisions of McArthur J. of the Tax Court of Canada dated February 28, 2005 [2005 TCC 151 (Panini); 2005 TCC 153 (Riendeau); 2005 TCC 155 (Klapka); 2005 TCC 154 (Southin); 2005 TCC 152 (Whitzman); 2005 TCC 150 (Riordan)], which dismissed the appellants' appeals from reassessments made by the Minister under the Income Tax Act, R.S.C. 1985, c. 1 ( 5^th supplement), as amended (the Act).

[2]                At issue in the appeals is whether the Minister was entitled to impose penalties on the appellants, pursuant to subsection 163(2) of the Act, for their failure to include in their income tax returns for the years at issue the proceeds resulting from the exercise of stock options and the ensuing sale of shares. It will be useful to immediately reproduce the subsection:

[3]                The facts relevant to the appeals are straightforward and can be briefly summarized as follows.

[4]                The appellants, senior employees of Pfizer Canada (except for Bertram Whitzman, who was an employee of Pfizer USA, and Guy Riendeau, who was an employee of Pfizer North America), received from their employers options to acquire shares of Pfizer USA (the stock options).

[5]                During the course of taxation years 1993 to 1997, the appellants exercised their options and sold their shares in Pfizer U.S.A.The following table highlights the proceeds which resulted from the sale of the shares for each appellant and in respect of each specific tax year:

	1993	1994	1995	1996	1997	TOTAL
Klapka			$16,577	$19,971		$36,548
Panini	$9,083		$22,259		$148,572	$179,914
Riendeau				$41,233		$41,233
Riordan		$36,406	$86,877	$80,519	$858,955	$1,062,757
Southin				$63,788	$184,689	$248,477
Whitzman	$13,103	$22,244	$19,455		$120,563	$175,365

[6]                As the appellants did not report the benefits resulting from the exercise of their stock options in their income tax returns for the years at issue, the Minister issued reassessments against each one of them, imposing tax, interest and penalties. The only issue before us pertains to the imposition of penalties.

[7]                On February 25, 2002, the appellants filed appeals before the Tax Court of Canada against the Minister's reassessments and, on February 28, 2005, McArthur J. dismissed their appeals.

[8]                The appellants challenge the Tax Court decisions on a number of grounds. Specifically, they say that the Judge erred in the following respects:

1.                   He erred in respect of the burden of proof, in that he failed to recognize that it was incumbent upon the Minister to demonstrate that the appellants "had reason to question whether any fiscal consequences arising from the exercise of their stock options had been respected" (paragraph 61 of the appellants' factum).

2.                   He erred in misapplying the definition of gross negligence in reaching his conclusion not as a result of the evidence presented by the Minister, but on the alleged absence of a reasonable explanation on the part of the appellants.

3.                   He erred in his assessment of the evidence in finding that the appellants' explanations of their failure to report the proceeds resulting from the exercise of their stock options were not plausible.

4.                   He erred in distinguishing the facts of the present matter from those before the Tax Court in Hyndman v. The Queen, 2004 TCC 641.

[9]                For the reasons that follow, I would dismiss the appeals.

[10]            Before addressing the appellants' submissions, a brief review of McArthur J.'s decisions is in order. I should point out that except for a few introductory paragraphs which deal, inter alia, with the specific circumstances of each appellant, i.e. the amount of the penalties assessed by the Minister and the amount which the appellant failed to include in his income tax returns for the years at issue, the Judge's reasons in respect of each appeal are the same. They are the reasons which he gave in dismissing the appeal of Jack Riordan (A-142-05) and which he reproduced in the other appeals. Consequently, the references which I will be making to the Judge's reasons are to those found in A-142-05.

[11]            McArthur J. concluded that the appellants' conduct, in not reporting in their income tax returns the proceeds resulting from the exercise of their stock options "... amounted to gross negligence based upon wilful blindness" (paragraph 17 of reasons). Consequently, he dismissed all of the appeals.

[12]            After setting forth the issues before him, the Judge outlines, at paragraph 5 of his reasons, a number of relevant facts which are not in dispute:

[5]      The Appellant's Notice of Appeal includes the following accepted facts:

The Appellant does not hold any professional qualifications in the fields of accounting or taxation.

In the course of his employment, the Appellant received, from Pfizer Canada, options to acquire shares of Pfizer USA (the "Stock Options").

Pfizer Canada granted the Stock Options to a limited number of key employees at various levels of sales and management.

The Stock Options were granted as performance bonuses and were awarded on a case-by-case basis. There was no defined or published stock option plan policy.

The Stock Options were not widely available and were awarded in a very confidential manner.

Employees wishing to exercise their Stock Options contacted an employee of Pfizer USA out of Pfizer Canada's Montreal office, while Stock Option matters were handled out of the Pfizer USA head office in New York City.

Pfizer Canada did not report the benefits related to the exercise of the Stock Options on the Appellant's T4 slips.

... a total of 46 Pfizer Canada employees exercised Stock Options over the period 1993 to 1997. 23 individuals, including the Appellant, failed to report the benefits related to the exercise of their Stock Options.

[13]            At paragraph 6 of his reasons, the Judge finds that after informing Pfizer USA of their decision to exercise their stock options, the appellants received a cheque from the brokerage firm of Merrill Lynch. He also finds that each appellant completed a document entitled Option Exercise Form. The Judge's findings are as follows:

[6]      To exercise his options, the Appellant informed the Pfizer US office and he would receive a cheque from the US brokerage firm of Merrill Lynch. I have no doubt that he also completed a form titled "Pfizer Stock Option Exercise Form - Stock and Incentive Plan Sale of Option Shares through Merrill Lynch", which sets out the following:

FCA/CAF & FC/CFINSTRUCTIONS

FCA/CAF & FC/CFEnter Social Security Number, date, name and address in space provided: Indicate appropriate employment status. Complete all information in sections 1, 2, 3 and 4. Be sure to sign and date the form in both of the authorized blocks. Return all copies intact to the Payroll office from which you are paid. International employees return copies to International Personnel in the New York Office. All employees should consult a tax/financial advisor when considering the sale of shares from a Company stock option. [Emphasis added by Judge in his reasons]

[14]            The Judge then sets out the submissions made by the appellants and the respondent in support of their respective positions, which submissions are very similar to those made before us in these appeals. For the appellants, it was argued that the penalty should be cancelled for the following reasons. Firstly, because section 7 of the Act which deals with employee stock options, is a complicated provision and, hence, it would be unfair to penalize them for not properly understanding the tax consequences flowing from it. Secondly, as the income which they received had not been included in a T4 issued by their employer, they honestly believed that the income resulting from the exercise of their stock options did not have to be reported in their income tax returns. Thirdly, there was no intention on their part not to include income which they believed ought to have been reported, nor did their conduct amount to gross negligence.

[15]            For the respondent, it was firstly argued that although the appellants had no special knowledge with respect to tax or accounting matters, they were all intelligent individuals. Secondly, section 7 of the Act was not as difficult as suggested by the appellants and, in any event, the appellants had a duty to consult a tax professional. Thirdly, the respondent argued that except for Mr. Riordan who, in a limited way, had consulted his former accountant, none of the appellants had consulted a tax professional for advice in respect of the benefits which they had received from the receipt and exercise of their stock options. Lastly, the respondent submitted that the amounts received by the appellants were substantial, considering that they exceeded their declared incomes for the years at issue by 20% to 1300%.

[16]            The Judge then disposes of the issues before him. Firstly, he distinguishes the Tax Court's decision in Hyndman, supra, where Anger J. concluded with respect to the Minister's imposition of penalties upon Mr. Hyndman, another employee of Pfizer who was given and exercised stock options in Pfizer USA shares, that the evidence did not support the Minister's view that in failing to report the benefits resulting from the exercise of his stock options, Mr. Hyndman had either intentionally omitted to report his income or that his conduct amounted to gross negligence.

[17]            In the Judge's view, Hyndman, supra, was distinguishable, inter alia, from the cases before him because two documents relied upon by Anger J. in reaching his ultimate conclusion, namely Form 8200-20A (the Stock Option Exercise Form) and a document entitled Points of Interest: About Your 1995 Key Employee Stock Option Grant (Appeal Book, Vol. 2, Tab 13), were not adduced in the appeals before him.

[18]            At paragraph 11 of his reasons, McArthur J. then categorically rejects the appellants' evidence that they believed that tax had been deducted at the source. In support of his position, the Judge declares himself satisfied that Merrill Lynch had provided the appellants with a "... clear and accurate accounting" and notes that for the years at issue, the stock option benefits received by the appellants were substantial.

[19]            The Judge then concludes that the Minister has met his burden of proving that the appellants' conduct amounts to gross negligence, adding that had counsel for the Minister not conceded at trial that the appellants' conduct was not intentional, he might have found their conduct to be intentional.

[20]            I should point out that the transcript of the evidence does not appear to support the Judge's understanding of what counsel for the Minister said. At page 15 of the transcript of the evidence given by Jack Riordan (2005 TCC 150) on November 22, 2004 (page 174 of Vol. II of the Appeal Book), counsel for the Minister said to McArthur J.:

If I may, My Lord, excuse me, confrere. There is no intention on the part of the Respondent to either try to establish or to allege that there was intent in the non-declaration of these amounts. And that goes for all the Appellants.

[21]            I understand counsel to be saying that he is not contending that the appellants' conduct was intentional, and that he will not be adducing evidence to that effect. I do not, however, understand him to be conceding that the appellants' conduct was not intentional. Be that as it may, that is not an issue in this appeal and I will not pursue it any further.

[22]            In concluding as he did, there can be no doubt that the Judge was aware that the burden of proving that the appellants' conduct constituted gross negligence rested upon the Minister. Firstly, at paragraph 17 of his reasons, the Judge clearly states that he is satisfied that the Minister has met his burden. Secondly, at paragraph 18 of his reasons, he states in unequivocal terms that evidence adduced by the Minister to demonstrate that a taxpayer's conduct amounts to gross negligence must be rigorously scrutinized by the trier of facts. In support of that proposition, he refers to the decision of Bowman A.C.J.'s (as he then was) in Farm Business Consultants Inc. v. Canada, [1994] TCJ 760 (Q.L.), where the learned Judge made the following comments:

[28]      A court must be extremely cautious in sanctioning the imposition of the penalties under subsection 163(2). Conduct that warrants reopening a statute-barred year does not automatically justify a penalty and the routine imposition of penalties by the Minister is to be discouraged. Conduct of the type contemplated in paragraph 152(4)(a)(i) may in some circumstances also be used as the basis of a penalty under subsection 163(2), which involves the penalizing of conduct that requires a higher degree of reprehensibility. In such a case a court must, even in applying a civil standard of proof, scrutinize the evidence with great care and look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established. Moreover, where a penalty is imposed under subsection 163(2) although a civil standard of proof is required, if a taxpayer's conduct is consistent with two viable and reasonable hypotheses, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted. I think that in this case the required degree of probability has been established by the respondent, and that no hypothesis that is inconsistent with that advanced by the respondent is sustainable on the basis of the evidence adduced.    

[Emphasis added]

[23]            Following his review of the decision in Farm Business Consultants, supra, McArthur J. concludes that the Minister has met the standard of high degree of probability suggested by Bowman A.C.J. In McArthur J.'s view, the appellants did not advance any hypothesis inconsistent with the one put forward by the Minister.

[24]            The Judge then sets out his rationale for concluding that the appellants' conduct amounts to gross negligence:

[19]    In conclusion, I find that (i) not having received T4 slips is insufficient reason to not inform himself, professional assistance was readily available to him; (ii) while section 7 of the Act is complex, the appellant made no effort to inform himself as to whether it applied to him; (iii) the omissions of the appellant were errors that an average taxpayer would not make; (iv) his lack of disclosure was not simply a failure to use reasonable care but was an indifference as to whether the law was complied with; (v) the Appellant had a duty to at least seek the advice of an informed financial advisor; (vi) it is incomprehensible that the Appellant could ignore amounts in excess of his annual employment income; and (vii) the standard of care of the Appellant is greater than for a taxpayer of marginal intelligence.

Analysis

[25]            I now turn to the submissions which the appellants make in seeking to set aside the decisions of the Tax Court. I have already set out, at paragraph 8 of these reasons, the four grounds in respect of which the appellants submit the Judge erred. I will deal with the first three grounds as one, since, notwithstanding the way in which the appellants have characterized the Judge's errors, their submissions, in reality, raise only one issue, i.e. that the Judge did not properly assess the evidence before him.

[26]            My understanding of the appellants' submissions is the following. Firstly, they argue that the explanations which they have put forward with respect to their failure to report their stock option benefits are reasonable explanations which the Judge ought to have accepted. On that premise, they submit that the Minister was obliged to adduce evidence to the effect that the appellants ought to have ascertained, by the means available to them, whether any tax consequences flowed from the exercise of their stock options. In other words, it was incumbent upon the Minister to satisfy the Court that the appellants' conduct was consistent with one hypothesis only, i.e. that they knowingly, or in circumstances amounting to gross negligence, failed to report their stock option benefits.

[27]            The appellants submit that not only did the Minister fail to meet his burden, but that they, to the contrary, offered reasonable explanations for their omission to report their stock option benefits. They state that, at the very least, their explanations have created a reasonable doubt and that, hence, the Tax Court Judge ought to have cancelled the penalties imposed by the Minister.

[28]            In their written submissions (see paragraphs 66 to 74 of the appellants' Memorandum of Fact and Law), the appellants set out in detail the evidence which, they say, constitutes their reasonable explanation. Specifically, they submit that the Tax Court Judge should not have ignored or disregarded the fact that they believed that the relevant taxes had been withheld by their employer, that they relied on the T4 slips issued by Pfizer Canada, that it was Pfizer Canada's obligation to withhold the relevant taxes and report the same in a T4 slip and, finally, that they had received no information nor assistance from Pfizer Canada regarding the tax consequences resulting from the exercise of their stock options.

[29]            This leads the appellants to submit that McArthur J. erred in applying the relevant legal principles. More particularly, they state that the Judge erred in setting aside their explanations and in refusing to accept their evidence regarding their lack of knowledge with respect to their failure to report their stock option benefits.

[30]            Paragraph 65 of the appellants' Memorandum of Fact and Law provides the essence of the appellants' submissions, and I therefore reproduce it:

65.    As indicated in a recent judgment of the Tax Court of Canada in the case of Harris v. The Queen, [2005] Carswell Nat 2201, [2005] TCC 5001 (QL), the Minister must satisfy the Court that the appellants' conduct is reasonably consistent with only one hypothesis: that they knowingly or in circumstances amounting to gross negligence, failed to report their Stock Option benefits. Not only has the Minister failed to make any such proof, but the appellants have, to the contrary, clearly established reasonable explanations for their failure to report their Stock Option benefit, creating at least a reasonable doubt.

[31]            I have no hesitation in stating that it cannot be seriously argued that in concluding as he did, the Judge misunderstood the relevant principles. It is clear from his reasons that he fully understood that the burden of proving that the appellants' conduct constituted gross negligence fell upon the Minister and that caution was to be exercised with regard to the evidence before concluding that in failing to report their stock option benefits, the appellants had been grossly negligent.

[32]            What is therefore before us is either a question of mixed fact and law, i.e. whether the Judge erred in applying the legal principles to the facts of the case, or a question of fact, i.e. whether the Judge's findings can be supported by the record. In either case, the appellants can only succeed if they are able to satisfy us that the Judge made a palpable and overriding error (See Housen v. Nikolaisen, [2002] 2 S.C.R. 235 at paragraphs 8 to 36).

[33]            To be more specific, what is truly before us is the Tax Court Judge's assessment of the evidence. There can be no doubt that it is as a result of his assessment of the evidence that the Judge could not accept the explanations offered by the appellants in justification of their failure to report their stock option benefits and that he found that the Minister had met his burden of proving that the appellants' conduct amounted to gross negligence. Consequently, in the end, what the appellants are saying is that the Judge ought to have assessed the evidence in a light more favourable to them. Perhaps, but unless the appellants are able to show that the Judge's conclusions and findings cannot be supported by the record, they must fail.

[34]            These findings, in my view, cannot be overturned absent palpable and overriding error. At paragraph 36 of their reasons for the majority in Housen, supra, Iacobucci and Major JJ. summarize their reasoning concerning questions of mixed fact and law:

36.                  To summarize, a finding of negligence by a trial judge involves applying a legal standard to a set of facts, and thus is a question of mixed fact and law. Matters of mixed fact and law lie along a spectrum. Where, for instance, an error with respect to a finding of negligence can be attributed to the application of an incorrect standard, a failure to consider a required element of a legal test, or similar error in principle, such an error can be characterized as an error of law, subject to a standard of correctness. Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of "mixed law and fact". Where the legal principle is not readily extricable, then the matter is one of "mixed law and fact" and is subject to a more stringent standard. The general rule, as stated in Jaegli Enterprises, supra, is that, where the issue on appeal involves the trial judge's interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error.

[Emphasis Added]

[35]            In my view, the appellants have not succeeded in meeting that standard.

[36]            As I have already indicated, the appellants' submissions are to the effect that the Judge erred in not accepting the reasons which they gave for not reporting their stock option benefits. It will therefore be useful to review why the Judge could not accept those reasons and examine the record to determine whether his findings can be supported.

[37]            Firstly, he dismissed out of hand the appellants' submission that they believed that taxes had been deducted at the source, declaring himself satisfied that Merrill Lynch had given them a clear and accurate accounting of the benefits which they had received. Hence, he dismissed the suggestion put forward by the appellants that they were entitled to assume that there were no tax implications to the exercise of their stock options because their employer had not provided them with a T4 slip.

[38]            In making these findings, the Judge no doubt had in mind that part of the Stock Option Exercise Form which provides that employees "... should consult a tax/financial adviser when considering the sale of shares of a company stock option". It is of interest to note that the appellants did not produce their respective Stock Option Exercise Forms, nor did they produce the accounting from Merrill Lynch which the Judge found had been provided to them.

[39]            The Judge then took the view that although section 7 of the Act was not an easy provision to understand, the appellants ought to have consulted a tax professional. In his view, their failure to do so was an error which the average taxpayer would not have made. Further, he opined that the appellants' failure to consult a tax professional was incomprehensible, considering, inter alia, that the benefits received greatly exceeded their annual employment income. The Judge also considered as relevant the fact that the appellants, all senior employees with Pfizer, were intelligent individuals.

[40]            I should add that it is clear from the Judge's reasons that he was not impressed with the appellants' explanations for not reporting their stock option benefits. As I indicated earlier, the Judge made it clear that had it not been for the Minister's concession (i.e. at least as he understood it) regarding the appellants' intention in omitting to report their stock option benefits, he might have found that the appellants had "knowingly" omitted to make a proper return.

[41]            The Judge found that the appellants' conduct "amounted to gross negligence based upon wilful blindness". Although the Judge did not explain what he meant by "wilful blindness", the record, when considered in the light of the relevant case law, is supportive of his conclusion. First of all, there can be no doubt that the concept of "wilful blindness" is applicable to tax cases. In Canada v. Villeneuve, 2004 FCA 20, Létourneau J.A., writing for the Court, stated at paragraph 6 of his reasons:

[6]          With respect, I think the judge failed to consider the concept of gross negligence that may result from the wrongdoer's willful blindness. Even a wrongful intent, which often takes the form of knowledge of one or more of the ingredients of the alleged act, may be established through proof of willful blindness. In such cases the wrongdoer, while he may not have actual knowledge of the alleged ingredient, will be deemed to have that knowledge.

[42]            In R. v. Hinchey, [1996] 3 S.C.R. 1128, Cory J. discussed the concept of "wilful blindness" in the context of criminal law. At paragraphs 112 to 115 of that decision, he wrote the following:

112.       The mental requirement of the crime may also be satisfied by applying the concept of wilful blindness. Glanville Williams in his textbook Criminal Law: The General Part (2nd ed. 1961), at pp. 157-58, explained the wilful blindness approach in these words:

... the rule is that if a party has his suspicion aroused but then deliberately omits to make further enquiries, because he wishes to remain in ignorance, he is deemed to have knowledge. ...

In other words, there is a suspicion which the defendant deliberately omits to turn into certain knowledge. This is frequently expressed by saying that he "shut his eyes" to the fact, or that he was "wilfully blind."

He observed that Lord Hewart C.J. expressed it by saying that:

... the respondent deliberately refrained from making inquiries the result of which he might not care to have.

113.       In R. v. Jorgensen, [1995] 4 S.C.R. 55, at p. 111, Sopinka J. noted that a finding of wilful blindness involves an affirmative answer to the question: "Did the accused shut his eyes because he knew or strongly suspected that looking would fix him with knowledge?" He went on to state: "The determination must be made in light of all the circumstances."

114.       In Sansregret, supra, this Court held that the circumstances were not restricted to those immediately surrounding a particular offence but could be more broadly defined to include past events. McIntyre J. distinguished wilful blindness from recklessness and quoted with approval a passage from Glanville Williams with regard to its application (at pp. 584 and 586):

       Wilful blindness is distinct from recklessness because, while recklessness involves knowledge of a danger or risk and persistence in a course of conduct which creates a risk that the prohibited result will occur, wilful blindness arises where a person who has become aware of the need for some inquiry declines to make the inquiry because he does not wish to know the truth. He would prefer to remain ignorant. The culpability in recklessness is justified by consciousness of the risk and by proceeding in the face of it, while in wilful blindness it is justified by the accused's fault in deliberately failing to inquire when he knows there is reason for inquiry.

...

       The rule that wilful blindness is equivalent to knowledge is essential, and is found throughout the criminal law. It is, at the same time, an unstable rule, because judges are apt to forget its very limited scope. A court can properly find wilful blindness only where it can almost be said that the defendant actually knew. He suspected the fact; he realized its probability; but he refrained from obtaining the final confirmation because he wanted in the event to be able to deny knowledge. This, and this alone, is wilful blindness. It requires in effect a finding that the defendant intended to cheat the administration of justice. Any wider definition would make the doctrine of wilful blindness indistinguishable from the civil doctrine of negligence in not obtaining knowledge.

115.       Although this would seem to be a rather narrow approach to wilful blindness it certainly can and should be applied in appropriate cases. As Professor Don Stuart points out in Canadian Criminal Law, supra, there is no reason to absolve those who are deliberately ignorant since a person who is deliberately ignorant of a likely risk is sufficiently culpable. At p. 212 he writes:

The saga of Sansregret does not make one sanguine about the doctrine of wilful blindness. However, if we are careful to maintain the subjective test, the extension to wilful blindness seems to be a sensible widening of the net. We should not absolve those who are deliberately ignorant. This could be applied as well to the concept of foresight or knowledge of consequences. One who is deliberately ignorant about a likely risk is sufficiently culpable.

I agree with these comments. The requisite mens rea for the crime can thus be established by demonstrating that the accused had the requisite intent or was reckless or wilfully blind.

[Emphasis added]

[43]            Although Cory J.'s comments were made in the context of a criminal law case, they are nonetheless, in my view, entirely apposite to the facts of the present case. Consequently, the law will impute knowledge to a taxpayer who, in circumstances that dictate or strongly suggest that an inquiry should be made with respect to his or her tax situation, refuses or fails to commence such an inquiry without proper justification.

[44]            As I understand the Tax Court Judge's reasons, it is his view that it is incomprehensible that the appellants would not have raised the issue of their stock option benefits with their respective accountants so as to determine what, if any, tax implications arose from the exercise of those options. Further, I understand the Judge to be saying that there can only be one explanation for the appellants' failure to discuss the matter with their accountants, namely, that they did not want to know whether taxes were payable on their stock option benefits.

[45]            I have carefully reviewed the record before the Judge, including the viva voce evidence given by the appellants. In my view, the record clearly supports the conclusions reached by the Judge and, as a result, I see no basis on which we could interfere.

[46]            More particularly, the record clearly supports the Judge's conclusion of wilful blindness on the part of the appellants. Their submissions that the Judge was wrong not to accept their explanations that they had not reported their stock option benefits for the years at issue because they believed that taxes had been deducted at the source or that taxes were not payable upon these benefits, are simply not tenable. A brief review of their viva voce evidence will suffice to make my point.

[47]            I begin with the evidence of Mr. Riordan. At pages 20 and 21 of the transcript of his evidence given on November 22, 2004 (Appeal Book, Vol. II, p. 179-180), Mr. Riordan is asked a question with respect to the cheques that he received from Merrill Lynch and the following exchange then takes place between him and counsel for the respondent:

Q.       When you received ... when you exercised, in all those years, you testified to the effect that you sent a document to New York, I take it that you received a cheque some time afterwards?

A.       Yes.

Q.       Who sent you the cheque?

A.       I think it was the brokerage.

Q.       Which would be Merrill Lynch?

A.       Merrill Lynch.

Q.       So the cheque was from Merrill Lynch and not from Pfizer U.S.A.?

A.       As I remember, it was from Merrill Lynch, it had some figures on it, but they didn't pertained [sic] to my interest. And all it was, was the gross amount, or the net amount, pardon me.

Q.       So, a cheque from the broker. And, along with the cheque, was there a stub with some information on it or was there just a cheque?

A.       No, I think there was [sic] stub with some information on it.

Q.      And do you recall what information was on this stub?

A.      It was how many options you exercised and what was the prevailing price at the time, what your option price was, and then the amount of the cheque, less Merrill Lynch's brokerage fee.

Q.      Was there any indication as to taxes that would have been withheld?

A.      No, but there was no information that the taxes weren't withheld either. They took off their commission and everything else that was supposed to be paid.

[Emphasis added]

[48]            That evidence confirms the Judge's finding that Merrill Lynch had provided the appellants with a breakdown of the funds which were remitted. The transcript also makes clear that the documentation received by the appellants from Merrill Lynch did not indicate that taxes had been withheld.

[49]            I now turn to the evidence given by Mr. Panini, also on November 22, 2004. At pages 52 through 55 of the transcript of the evidence (Appeal Book, Vol. II, pages 212-215), Mr. Panini is asked a number of questions regarding the cheques that he received from Merrill Lynch and what he did insofar as his tax situation was concerned:

Q.      And in '97, did you remember the $148,000?

A.      The one hundred and forty-eight (148), I remember but as I said, my assumption was that it was a net cheque of any taxes that needed to be withheld.

Q.      Was there a cheque stub or a stub along with the cheque that you received from Merrill Lynch with the cheques, since we're dealing with different years? Was there a stub along with the cheques that you would have received?

A.      There was a cheque stub. It just said that amounts for options exercised.

Q.      Was there any indication, and we see in A-3 I'll show you (inaudible) to see this document. We see on A-3 that, for example, for '97, that you exercised some options, at least on six (6) different occasions through the course of the year so I take it that you would have received six different cheques from Merrill Lynch through the course of the year?

A.      No, I think they were all exercised all at the same time, which is different option dates.

Q.      O.K. but the amount of $148,000 is correct?

A.      The amount is correct.

Q.      And whether it was one or more than one cheque through the course of the year, was there any indication on that stub that there was some time of tax that would have been withheld?

A.      There was very little on the stub.

Q.      Did you communicate with anyone at Pfizer Canada in order to find out if there was, since your assumption was that it was net of taxes, did you contact anybody at Pfizer Canadain order to find out if it was net or gross?

A.      No I did not.

Q.      Did you contact anybody at Pfizer U.S.A.?

A.      No, I did not.

Q.      Did you contact anybody at Merrill Lynch?

A.      No, I did not.

Q.      And did you bring up the issue of stock options or the exercise of stock options when you went to review your income tax returns with people at H. & R. Block?

A.      No, we just went through the stubs and everything that was included in the envelope and there was no ...

Q.      So you did not give them any type of indication that you would have received a certain amount upon the exercising of your stock options?

A.      No.

Q.      Did you ever ask yourself if there was some tax implication upon receiving those amounts?

A.      Well, I would assume that if there was any income, that it would be handed out by Pfizer, would be tax deducted.

Q.      Could you repeat that? You assumed that if there was any amount ...

A.      If there is any income coming from Pfizer, there would be either a T-4 or any kind of document that would indicate that.

Q.      It wasn't my question. My question was that did you ever ask yourself if there was a tax implication?

A.      Did I ask myself? No.

[Emphasis added]

[50]            Although I will shortly refer to other parts of the viva voce evidence given by the appellants, I need not reproduce further extracts from their testimonies. The above two examples provide, in my view, a very accurate picture of the appellants' conduct with regard to the benefits which they received from the exercise of their stock options: they simply were not interested in finding out what, if any, tax consequences arose from the exercise of their options.

[51]            The viva voce evidence given by the appellants provides strong support for what is clearly the Judge's main ground for holding that their conduct amounted to gross negligence, i.e. by reason of their failure to consult a tax professional.

[52]            The appellants do not dispute the fact that they failed to raise the issue of their stock options with their accountants. They simply say that they saw no need to do so because of the fact that they believed that taxes had already been deducted or that there were no tax implications with respect to the receipt and exercise of their stock options. The Judge, as I have already indicated, did not accept the appellants' rationale for not consulting their accountants. In my view, when one considers the totality of the evidence, it would have been surprising if the Judge had accepted the explanations given by the appellants.

[53]            The extract from Mr. Riordan's testimony, which I have reproduced above, shows that although there was nothing in the documents which he received from Merrill Lynch which would lead him to believe that taxes had been deducted from the proceeds of the sale of his shares, Mr. Riordan took the position that "... there was no information that the taxes weren't withheld either ...".

[54]            In the case of Mr. Panini, he testified that although he was not aware whether the amount he had received was a net amount or a gross amount, he took no steps to inquire with either Pfizer USA, Merrill Lynch, or his own employer to determine whether taxes had been deducted and whether there were any tax implications.

[55]            It cannot be said, in my view, that the Judge, on the record before him, was wrong in not accepting as reasonable the explanations given by the appellants for not consulting a tax professional. For example, Mr. Whitzman, when asked why he had not discussed his stock options with his accountant, answered that: "... I just didn't feel that they were considered as taxable income, in my innocence ..." (See p. 62 of the Transcript of the Evidence of Bertram Whitzman -- Appeal Book, Vol. II, p. 222).

[56]            The appellant Mr. Klapka prepared his own income tax returns for the years at issue. When asked by counsel for the respondent why he had not included the benefits received from his stock options, he answered that he assumed that the amounts he had received were net amounts, i.e. that taxes had been deducted (See p. 76 of the Transcript of the Evidence of Zachary Klapka - Appeal Book, Vol. II, p. 236).

[57]            With respect to the appellant Mr. Riendeau, he testified that he had not brought the matter of his stock options to the attention of his accountant because he assumed that if taxes were payable, they would have been reflected in a T-4 slip from his employer (See p. 92 of the Transcript of the evidence of Guy Riendeau - Appeal Book, Vol. II, p. 252).

[58]            In the case of the appellant Mr. Southin, he testified that he had not raised the issue of his stock options with his accountant because he had been told by "my boss" that if the proceeds of his stock options were invested offshore, he would only have to pay taxes upon the return of the funds to Canada. As a result, he did not raise that issue with his accountant during the years at issue (See pp. 33, 39 and 40 of the Transcript of the Evidence of Roger Southin - Appeal Book, Vol. II, pp. 193, 199 and 200).

[59]            The only appellant who consulted an accountant with respect to the tax implications of his stock option benefits was Mr. Riordan. He testified that Mrs. Shirley May, who was his accountant until 1991 or 1992, had informed him that if he did not receive a T-4 slip, he did not have to report his stock option benefits. When cross-examined, Mr. Riordan testified that for the years at issue, i.e. 1994 through 1997, his accountant was Mr. Lloyd MacPherson and that he had never raised the issue of his stock options with him (See pp. 14 through 18 of the Transcript of the Evidence of Jack Riordan - Appeal Book, Vol. II, pp. 173 to 177).

[60]            In the circumstances of these cases, one would have expected the appellants, at the very least, to have asked themselves whether there were any tax implications to the exercise of their stock options and, as a result, raise the matter with their accountants. In my view, the appellants could only have succeeded in their appeals before the Tax Court had they been able to convince the Judge that their explanations were reasonable in all of their circumstances and, hence, justified their failure to consult. Once the Judge concluded that their explanations were not reasonable, their fate was sealed.

[61]            There remain for determination the appellants' submissions regarding the Hyndman, supra, decision. In my view, those submissions cannot help the appellants.

[62]            The appellants state that the Judge erred in distinguishing the circumstances of their cases from those found in Hyndman, supra. Specifically, they submit that the Judge was wrong in finding that form 8200-20A (the Stock Option Exercise Form) and the document entitled Points of Interest: About Your 1995 Key Employee Stock Options Grant, on which Anger J. relied in part for his decision in Hyndman, supra, were not before him. They say that not only were these documents before McArthur J., he expressly referred to the Stock Option Exercise form in paragraph 5 of his reasons, which I have reproduced in these reasons at paragraph 13.

[63]            It is undeniable that the documents in question were before McArthur J. As a result, it was wrong for him to distinguish Hyndman, supra, on that basis. However, this error does not lead to the conclusion which the appellants urge upon us, i.e. that the learned Tax Court Judge ought to have reached the same conclusion as the one reached by Anger J. in Hyndman, supra, i.e. that the failure to report the stock option benefits did not amount to gross negligence.

[64]            In Hyndman, supra, Anger J.'s assessment of the evidence before him led him to conclude that in not reporting his stock option benefits, Mr. Hyndman had not been grossly negligent. At paragraph 20 of his reasons, Anger J. explained why he came to that result:

Although the amount of money involved is quite substantial, I find that on a balance of probabilities, the Minister has failed to establish that the conduct of the appellant amounted to gross negligence. The appellant had completely forgotten the benefits he could derive from exercising those stock options. As mentioned earlier, that benefit would have been lost had he not been notified by a Pfizer official of the looming deadline. Such inaction could be considered to be gross negligence by some but it is not that conduct that needs to be assessed. It is his conduct when he filed his tax return that must be assessed. There is no evidence here to allow me to conclude that the appellant intentionally omitted to include that revenue in his income. The fact that he believed that the taxes on that amount had been withheld, and I accept his evidence on this point, is sufficient to establish that he was not completely indifferent as to whether the law had been complied with. He believed that the taxes had been withheld and although he failed to make inquiries and was careless in failing to report the income, that does not amount to an intentional omission or indifference tantamount to a high degree of negligence. There is no evidence as well that his conduct amounts to wilful blindness.

[Emphasis added]

[65]            McArthur J., contrary to Anger J. in Hyndman, supra, did not accept the appellants' evidence that they believed that taxes had been withheld by Merrill Lynch. In reaching that conclusion, he obviously did not place any weight on that part of the Stock Option Exercise Form which suggests that Merrill Lynch or Pfizer USA might withhold taxes. The Judge's rationale in placing no weight on that part of the Form stems no doubt from his view that Merrill Lynch had provided each of the appellants with a full accounting of the sum appearing on the cheques which they received. In those circumstances, the Judge could not see how the appellants could take the position that they believed that taxes had been withheld.

[66]            In the present matter, the issue is not whether McArthur J. was bound by Hyndman, supra, nor whether he was bound to reach a similar conclusion, but rather whether on the record before him and the applicable law, he made a reviewable error in concluding as he did. As I have already made clear, I am of the opinion that he made no such error.

[67]            For these reasons, I would dismiss the appeals. The respondent will be entitled to one set of costs plus disbursements in each appeal.

[68]            A copy of these reasons will be placed in files A-138-05, A-139-05, A-140-05, A-141-05 and A-142-05.

"M. Nadon"

"I concur.

            Alice Desjardins"

"I concur.

            Robert Décary J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

[APPEALS FROM DECISIONS OF McARTHUR J. OF THE TAX COURT OF CANADA, DATED FEBRUARY 28, 2005]

DOCKETS & STYLES OF CAUSE:                                     A-137-05 (Panini v. HMQ)

                                                                                                A-138-05 (Riendeau v. HMQ)

                                                                                                A-139-05 (Klapka v. HMQ)

                                                                                                A-140-05 (Southin v. HMQ)

                                                                                                A-141-05 (Whitzman v. HMQ)

                                                                                                A-142-05 (Riordan v. HMQ)

PLACE OF HEARING:                                                         Montreal, Quebec

DATE OF HEARING:                                                           March 27, 2006

REASONS FOR JUDGMENT BY:                                      NADON J.A.

CONCURRED IN BY :                                                         DESJARDINS J.A.

                                                                                                DÉCARY J.A.

DATED:                                                                                  June 16, 2006

APPEARANCES:

Denis A. Lapierre Me Konstantinos Voggas	FOR THE APPELLANTS
Alain Gareau	FOR THE RESPONDENT

SOLICITORS OF RECORD:

Sweibel Novek LLP Montreal, Quebec	FOR THE APPELLANTS
John H. Sims Q.C. Deputy Solicitor General of Canada Ottawa, Ontario	FOR THE RESPONDENT