Date: 19980311
Docket: 95-3539-IT-G; 95-3541-IT-G
BETWEEN:
THE ESTATE OF THE LATE LUCIANO COLANGELO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
BETWEEN:
GIUSEPPINA COLANGELO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.T.C.C.
[1] These two appeals are concerned with the application of the penal provisions found in subsections 163(2) and 110.6(6) of the Income Tax Act (the Act). They arise out of the failure of the taxpayers to disclose on their income tax returns for the year 1989 the very substantial gain which they each realized from the sale by them in January 1989 of a building at 1022 Danforth Avenue in the city of Toronto (the building).
[2] The relevant parts of subsections 163(2) and 110.6(6) read:
163(2) Every person who, knowingly, or under 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 of ...
110.6(6) Notwithstanding subsections (2) and (2.1) and (3), where an individual has a capital gain for a taxation year from the disposition of a capital property and knowingly or under circumstances amounting to gross negligence
(a) fails to file a return of his income for the year within one year after the day on or before which he is required to file a return of his income for the year pursuant to section 150, or
(b) fails to report the capital gain in his return of income for the year required to be filed pursuant to section 150,
no amount may be deducted under this section in respect of the capital gain in computing his taxable income for that or any subsequent taxation year and the burden of establishing the facts justifying the denial of such amount under this section is on the Minister.
[3] The Appellants were husband and wife. The husband is deceased since the inception of these appeals. At the beginning of the trial I directed, pursuant to Rule 29, that his appeal proceed in the name of his estate.
[4] It is not in dispute that the Appellants each realized a taxable capital gain in the order of $169,000 as a result of the sale. Nor is it disputed that they did not disclose that in the returns that they filed for the 1989 taxation year. Since these appeals were begun, the tax and interest has been paid by them. What is in dispute, and all that is in dispute, is the application of the penalties, and the denial to them of the benefit of the capital gains exemption under subsection 110.6(6). What I must decide, therefore, is whether their omission of the capital gain from their returns was made “knowingly, or in circumstances amounting to gross negligence”.
[5] The Appellants both immigrated to Canada as children, and have lived and worked here ever since. Mr. Colangelo was a line worker in a bakery. His only schooling was received in Italy, and it did not extend beyond the grade two level. Mrs. Colangelo completed grade eight in Canada, and then went on to take a nine-month course in hairstyling. She worked for a hairstylist for about 18 months, and then opened her own hairstyling salon. She was then about 19. She ran this business for the next 25 years or so, employing part-time help to assist her. Counsel for the Respondent took the position in argument that this made her an experienced business person who should recognize a capital gain as something to be disclosed when reporting her income. In my view she has very limited understanding of business and financial matters. When she first began her business she took some advice from a person who prepared tax returns for her. She had a system whereby she kept the receipts for her expenditures in a folder which she took to the tax preparer once a month. At the same time she told that person what she had paid in wages, so that the appropriate amounts could be remitted for income tax withholdings, unemployment insurance premiums, and Canada Pension Plan contributions. She would have told her the amount of her gross sales as well. At the end of the year the tax preparer would complete a statement of her income for the year to attach to the income tax return. The person who did this for her changed occasionally throughout the years, but the basic methodology remained the same.
[6] Mrs. Colangelo’s business was located in the building on Danforth Avenue. In 1969, the building came up for sale, and she, her parents and her husband pooled their money and bought it. The parents contributed $8,000 to the down payment, and the Appellants $5,000. Mrs. Colangelo continued to operate her business there, and she paid the real estate taxes on the building, which were treated as rent for the shop by herself and her partners. Rent from the rest of the building was sufficient to make the mortgage payments. In 1985, Mrs. Colangelo’s parents decided to retire, and they transferred their interest in the building to their daughter and son-in-law, for no consideration. The building was then worth $185,000, but the deemed disposition was not reported by the parents. From that point forward the two Appellants owned the building equally, and Mrs. Colangelo continued to run her business there as before until January 1989, when they sold the building for $475,000. The transaction closed in early April, with net proceeds of almost $450,000 being paid in cash to the Appellants.
[7] As in the past, the Appellants had their tax returns for 1989 prepared by an individual who worked for a travel agency, and whose only qualification was having taken a course offered by H. & R. Block which purported to qualify her to prepare an income tax return. The fact of the sale, and the resulting capital gain, were, as I have said, not disclosed in the returns. Mrs. Colangelo said in her evidence that she and her husband did not know that they were required to report the proceeds of sale of a building. Their only other selling transaction in real estate was the sale of their residence some years before; they had not reported that, and nothing had happened to them as a result. Mrs. Colangelo testified that she did not understand this sale to have any different requirements attached to it for income tax purposes. She said that she looked at her return before she signed it, but I conclude that she did so rather cursorily, not out of carelessness, but because she really knew nothing about it, and put all her trust in the person who prepared it for her. It is significant, I think, that her 1989 return did disclose, for the first time ever, a very significant amount of investment income, some $23,650. If she had intended to hide the fact of the sale of the building, she must surely have known that the disclosure of this rental income would cause some questions to be asked about the source of it. I did not understand counsel for the Respondent to submit in argument that her evidence was not credible, and I accept it in its entirety. I find that the reason the Appellants did not make disclosure of the capital gain in their returns was that they were unaware that they were legally obliged to do so.
[8] This conclusion is borne out by the fact that the Appellants, after they were contacted by an official of Revenue Canada in May 1993, and it was made apparent to them that they were going to be subject to the assessments of tax and penalties which resulted, went to both the tax preparer and the lawyer who had acted for them on the sale, and asked why they were now in this difficulty. Counsel for the Respondent did not call either of these people to testify, and so the only account I have before me is that of Mrs. Colangelo. She said that neither of them advised her of the tax consequences of the sale. I accept that evidence as being true, although it must have been obvious, at least to the lawyer, that a taxable capital gain was involved. His response to their inquiries seems to have been to the effect that they did not ask for tax advice, and so he did not give them any.
[9] Counsel for the Respondent takes the position that the Appellants were obliged by the law to report the gain, that ignorance of the law does not relieve them of its consequences, and that in any event, there was an obligation upon them, having come into such a large sum of money for the first time in their lives, to at least obtain advice as to whether or not there were tax consequences, and a need to report the gain. Failure to do so, he submits, is at least gross negligence, if not wilful blindness.
[10] Counsel for the Appellants points out that if they had known about the tax consequences of the sale of the property then Mrs. Colangelo’s parents and the Appellants would have delayed the conveyance of the parents’ interest to the Appellants; if they had deferred this until 1989, then the sale would have resulted in a capital gain which, split four ways, would have been $1,071 each. Therefore, he says, there was nothing to be accomplished by them failing to disclose which could not have been quite legitimately accomplished otherwise. This submission loses much of its force when it is remembered that the decision not to disclose, if there was one at all, was made not in 1985, but in 1989. The tax involved as a result of the 1989 sale is significant, so I do not think it can be said that there would have been no economic benefit to be obtained through concealment. However, as I have said above, I do not believe that there was any deliberate concealment in this case.
[11] It is trite, of course, that ignorance of a penal law does not excuse the breach of it. The mental element is directed to the doing of the act; it does not require knowledge of the law that is breached. Although the provisions in issue here are penal in their nature, I am not persuaded that Parliament intended them to apply in such a way that a person who fails to report a gain because of ignorance of the requirement in the Act to do so must in every case suffer the penal consequences. Counsel for the Appellants does not contest that liability for the tax cannot be avoided by pleading ignorance of the law, and the taxpayers have, consistent with this submission, paid the tax, and interest on it, although not until after they began these appeals and, for the first time, got competent legal advice. The consequences of failure to report a capital gain found in subsection 110.6(6) are written in absolute terms, and are potentially very severe indeed. If it were intended that they apply to someone in the position of these Appellants, I would have thought that Parliament would have provided for the exercise of some discretion where there was no intention to evade tax, but merely ignorance of its incidence. The purpose of the provision, after all, is to discourage larcenous evasion, not to require that unsophisticated individuals become familiar with the provisions of a statute whose bulk and complexity are notoriously intimidating to many lawyers.
[12] In my opinion, these provisions do not require an automatic imposition of the penal provisions in a case such as this one, but only that I consider whether or not it was grossly negligent, or wilfully blind, for the Appellants to file their returns without obtaining specific advice as to the tax consequences of their capital gain from someone qualified to give it. Otherwise, there would be no defence for a taxpayer who seeks advice, but is wrongly advised. This result accords with common sense. It is also consistent with the result in Lévesque Estate v. The Queen,[1] a judgment of Lamarre Proulx J, who held that failure to report the gain on a deemed disposition was not subject to the consequence in subsection 110.6(6), because the taxpayer was unaware of the deeming provision, and was not grossly negligent.
[13] The statement which is generally accepted as defining gross negligence, in the context of the Act, is that of Strayer J., as he then was, who said in Venne v. The Queen:[2]
“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.
[14] I agree with the submission of counsel for the Appellants that this test must be applied in a way that includes both subjective and objective elements. Counsel for the Respondent points to the very large amount of the gain, relative to the previous economic situation of the Appellants, and to the fact that Mrs. Colangelo has run a business for 25 years. I agree that the amount of the gain is large, and to many people it would have prompted them to get advice. I do not believe that it had that effect on these Appellants. If they asked for advice from either the tax preparer or the lawyer, then there would have been evidence of that. There was no suggestion that they were unavailable to testify, and the tax preparer was interviewed by one of the officers of Revenue Canada who testified.
[15] Counsel for the Respondent referred me to a number of authorities in support of the proposition that where the amount not reported is substantial, this tends to show that the taxpayer has been wilfully, or grossly negligent. Most of these cases deal with the failure to include in income amounts which clearly had an income character about them. Of these cases, Holley v. M.N.R.[3] is the only one where the circumstances resemble those here, but in that case the result was driven by Judge Kempo’s factual finding that “the Appellant was no neophyte in the business world of income and taxation”, on the basis of which she found him to have been wilfully blind, and so culpable. I find quite the opposite to be the case here.
[16] Were the Appellants indifferent as to whether or not they complied with the law? Their limited education, and the relatively simple, unsophisticated lives that they have led, lead me to conclude that they were not indifferent. I believe that it simply did not cross their minds that they should be concerned about the Income Tax Act in the context of this sale. Mrs. Colangelo has had her own business for most of her working life, but it was not a business that required her to deal with financial matters. She did not even have a bookkeeping system, but simply kept her receipts in an accordion folder until month end. She did not do any financial planning; she simply did hairstyling. Perhaps she was negligent not to give the matter any thought, but it was simple negligence, not wilful blindness, nor indifference to her responsibility, that led her to omit mention of the gain in her return. Mr. Colangelo had less education than his wife. He worked for wages all his life. I am satisfied that he would be even less likely than she to consider the tax implications of the transaction.
[17] The appeals are allowed, to the extent that the Appellants are not subject to the penalties imposed, nor to the provisions of subsection 110.6(6). The Appellants are entitled to one set of costs.
Signed at Ottawa, Canada, this 11th day of March, 1998,
"E.A Bowie"
J.T.C.C.