Date: 20010926
Dockets: 1999-611-IT-G,
1999-612-IT-G
BETWEEN:
DEBORAH BRENT,MARINA PAUL
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Rip, J.
[1] The issues in the appeal by Deborah Brent and Marina Paul from tax assessments for the 1989 taxation year are:
(i) whether the Minister of National Revenue (the "Minister") was entitled to reassess the appellants for the 1989 taxation year beyond the normal reassessment period for that year, pursuant to subparagraph 152(4)(a)(i) of the Income Tax Act, ("Act") as amended; and
(ii) whether the Minister was entitled to assess a penalty against the appellants for the 1989 taxation year, pursuant to subsection 163(2) of the Act.
[2] The appeals were heard on common evidence. The litigants agreed as to the following facts:
1. The Minister assessed Ms. Brent for the 1989 taxation year by Notices of Assessment dated July 12, 1990. The assessment did not include in the computation of Ms. Brent's income for the 1989 taxation year any income allocated to Ms. Brent by the Partnership.
2. The normal reassessment period, as defined in subsection 152(3.1) of the Act, of Ms. Brent's 1989 taxation year commenced on July 12, 1990 being the date of the assessment, and ended on July 12, 1993, being the date which is three years after the date of mailing of the assessment.
3. The Minister reassessed Ms. Brent for the 1989 taxation year by Notices of Reassessment dated May 9, 1996. In this reassessment, the Minister made the following changes:
(a) the Minister added gross income from the Partnership in the amount of $67,688 to Ms. Brent's income;
(b) the Minister allowed a deduction for additional carrying charges in the amount of $28,241 with respect to the Partnership income;
(c) the Minister allowed a deduction for exploration and development expenses in the amount of $8,731 with respect to the Partnership income; and
(d) the Minister assessed penalties pursuant to subsection 163(2) of the Act for the failure to report the Partnership income.
4. The Minister assessed Ms. Paul for the 1989 taxation year by Notices of Assessment dated September 6, 1990. The assessment did not include in the computation of Ms. Paul's income for the 1989 taxation year any income allocated to Ms. Paul by the Partnership.
5. The normal reassessment period, as defined in subsection 152(3.1), of the Act, of Ms. Paul's 1989 taxation year commenced on September 6, 1993, being the date of the assessment, and ended on July 12, 1993, being the date which is three years after the date of mailing of the assessment.
6. The Minister reassessed Ms. Paul for the 1989 taxation year by Notices of Reassessment dated May 7, 1997. In this reassessment, the Minister made the following changes:
(a) the Minister added gross income from the Partnership in the amount of $67,688 to Ms. Paul's income;
(b) the Minister allowed a deduction for additional carrying charges in the amount of $28,241 with respect to the Partnership income;
(c) the Minister allowed a deduction for exploration and development expenses in the amount of $8,731 with respect to the Partnership income; and
(d) the Minister assessed penalties pursuant to subsection 163(2) of the Act for the failure to report the Partnership income.
7. Forms T7W-C issued by the Minister of National Revenue to Ms. Brent and Ms. Paul with respect to the reassessments are reproduced at tabs 3 and 4 respectively of the Joint Book of Documents.
8. No waiver in respect of the normal reassessment period of the Appellants' 1989 taxation year was executed or filed by the Appellants.
Deborah Brent
9. Ms. Brent has a law degree from the University of Western Ontario and was called to the bar in Ontario in 1977.
10. Ms. Brent practised law for a short period of time in the late 1980s in the area of corporate governance and charitable foundation work. She had no professional exposure to tax law or to complex financial transactions.
11. Ms. Brent signed her T1 return for the 1989 taxation year on April 30, 1990. Ms. Brent's 1989 T1 return is reproduced at tab 1 of the Joint Book of Documents.
Marina Paul
12. Marina Paul formerly went by the name of Marina Andreis.
13. Ms. Paul has a Bachelor of Arts degree from York University, and has an associates degree in fashion merchandizing.
14. Ms. Paul owned and operated nine Beneton stores for the period from 1983 to 1991 or 1992.
15. As owner and operator of the Beneton stores, the Appellant was responsible for such functions as buying, taking care of the staff consisting of 85 employees, merchandizing, window displays, and was also responsible for the on-floor operations of the retail stores. She had no professional exposure to tax issues or complex financial transactions.
16. Ms. Paul signed her T1 return for the 1989 taxation year on April 30, 1990. Ms. Paul's 1989 T1 return is reproduced at tab 2 of the Joint Book of Documents.
17. Around the time that her 1989 tax return was prepared, the Appellant was experiencing marital difficulties.
Facts Common to Both Appellants
18. The Appellants each acquired a 33.333333% interest in a partnership known as TCS #7 Limited Partnership (the "Partnership"), from the estate of their mother, Dona A. Paul, in December of 1988.
19. The Appellants knew that their father had acquired interests in the Partnership, through the estate of their mother, from which the Appellants would eventually benefit.
20. For a number of years, annual financial statements, including the Partnership's Financial Statements for the year ending October 31, 1989, (the "1989 Financial Statements") were mailed, by the Partnership, to the office of the Appellants' father, Vincent Paul. The 1989 Financial Statements are reproduced at tab 5 of the Joint Book of Documents.
21. The Appellants did not have specific knowledge regarding receipt of the 1989 Financial Statements.
22. Statements from the Partnership, including the 1989 Financial Statements, were maintained in the offices of the Appellants' father.
23. The Appellants were never advised of correspondence or notices that were received in relation to their interests in the Partnership, nor did they make any enquiries in respect of such correspondence or notices.
24. The Appellants never received any payments from the Partnership but, as the owners of interests in the Partnership as of October 31, 1989, they were allocated their proportionate shares of the Partnership's income for the 1989 taxation year.
25. The Appellants failed to report their shares of the Partnership's income in their tax returns for the 1989 taxation year.
26. The Appellants' tax returns for the 1989 taxation year were prepared by Mr. Melvyn Chin, the controller for the family company. Mr. Chin did not include the amount allocated to the Appellants from the Partnership in the Appellants' 1989 income tax returns.
27. It was the Appellants' general practice each year to:
(a) Provide all receipts, tax slips, and other documentation in their possession relevant to preparing the tax return to the controller.
(b) To ensure that the controller would prepare the return on a timely basis.
(c) To meet with the controller once the return was prepared and to review the return. The controller would explain the tax return and the Appellants were given the opportunity to ask questions about items in the return, and often did request clarification.
28. The Appellants now acknowledge that their individual shares of the Partnership's income in the amount of $67,688.00, net of related deductions, should have been included in their respective income at the time that they filed their returns of income for the 1989 taxation year.
29. No taxpayer reported the Appellants' shares of the Partnership's 1989 income.
30. The Appellants' 1989 taxation year was the only year in which Partnership income was allocated to them. The Partnership interest was transferred to Peter Paul 1 Inc. in October of 1990. The fiscal year end of the Partnership is October 31. Thus, the Appellants were only allocated income by the Partnership in accordance with the terms of the Partnership Agreement for the period ending October 31, 1989.
31. On October 1, 1990, the Appellants executed an agreement among themselves as vendors, and the Corporation, pursuant to which the Appellants agreed to sell their interests in the Partnership to the Corporation for consideration totaling $900,000, or $450,000 for each Appellant's interest. This agreement is reproduced at tab 6 of the Joint Book of Documents.
32. On February 1, 1993, the Appellants each executed forms T2057 with respect to the transfers of their interests in the Partnership to the Corporation and filed the forms with the Minister of National Revenue (the "Minister") by April or May of 1993. The forms T2057 for Ms. Brent and Ms. Paul are reproduced at tabs 7 and 8 respectively of the Joint Book of Documents.
33. The Appellants made no attempt to report their share of the Partnership's income after filing their returns of income for the 1989 taxation year.
[3] Mr. Chin was called as a witness by the Crown. The appellants and Mr. Brent also testified.
[4] Mr. Chin acknowledged that during the five years he worked as controller for the Paul family corporations and he prepared income tax returns for members of the Paul family for no additional pay. In preparing tax returns for individuals he would gather information impacting on the individuals, for example, dividends, salaries and interest.
[5] The Partnership's financial statements, according to Mr. Chin, were sent to Mr. Vincent Paul, the appellant's father, or Phillip Brent, husband of Ms. Brent, notwithstanding the appellants had an interest in the Partnership. Mr. Paul and Mr. Brent were trustees of Mrs. Paul's Estate.
[6] Mr. Chin could not recall if he ever received copy of the Partnership's financial statements for the period ending October 31, 1989, the year in issue. If he had reviewed the statements, he testified, he would have observed and confirmed the change of ownership from the late Mrs. Paul's Estate ("Estate") to the appellants; page 8 of the statements identifies the various partners and the amount of income to be included in each partner's income for 1989. But no appellant included the Partnership income in her tax return and no appellant deducted interest expenses relating to the Partnership. Mr. Chin said he was not advised of any change of ownership of interests in the Partnership in favour of the appellants. [Mr. Chin did not prepare the financial statements of the Partnership, although he knew of the existence of the Partnership.]
[7] The only people in the Paul family to have had knowledge of the transfer of interests in the Partnership, according to Mr. Chin, would be Mr. Paul and Mr. Brent.
[8] On discovery, Ms. Paul acknowledged that she knew of the existence of various family corporations, that her father managed them and also managed her interest in her mother's Estate; she believed the Partnership interest was held in her mother's Estate. She admitted nobody ever questioned her father's administration or management of the Estate or other interests held for her benefit, except on a casual basis. Ms. Paul never made any inquiries concerning these investments nor did she ever review, or ask to review, any Partnership statements sent to her father on her behalf, although she guessed that if she had asked to see the statements, her father would have shown them to her.
[9] Phillip Brent is a solicitor. He also worked with Mr. Paul. Mr. Paul was a chartered accountant who, in the 1980s, had a successful land development and property management business and asked Mr. Brent to help him in the business. Mr. Brent described Mr. Paul as a "self-made man" who was a "benevolent dictator". Mr. Paul's business was for his children, the appellants, and "he relied on their good graces to manage the business". He was, according to Mr. Brent, "a domineering person" who, "if you questioned him, he did not like it". Mr. Paul was "not forthcoming and was difficult to work with". Mr. Brent said that he personally also does not volunteer information, which has been "a source of disagreements with his wife over the years".
[10] In 1978, the Estate of Mrs. Paul sold shares of a public corporation for a large profit and deferred tax by investing in the Partnership, a gas exploration partnership. The investment was heavily leveraged. All income from the Partnership went to the bank to pay interest and other costs. Because Mr. Paul wanted to wind up his wife's Estate, in 1988 he planned to cause the Estate to transfer its Partnership interest to the appellants and then have the appellants transfer (or "rollover") their Partnership interests to Peter Paul 1 Inc. Since the intention on the transfer was to defer any tax, elections would be made under section 85 of the Act. (Mr. Brent stated he was privy to the plans to wind up the Estate; he prepared the one page agreement of transfer from the late Mrs. Paul's Estate to the appellants). The Partnership interests were transferred to the appellants in 1989. However, because consents of other partners in the Partnership were required to transfer the Partnership interests to the corporation, the transfer to the corporation was delayed some 15 months, to October 31, 1990. (The Partnership's fiscal period ends on October 31.) In the interim the appellants were the beneficiaries of the Partnership interests although they had no knowledge they were the owners. Neither Mr. Paul nor Mr. Brent discussed the transaction with the appellants at the time.
[11] Mr. Brent said he would usually discuss business matters at home with his wife. He would discuss business matters with Ms. Paul at his office.
[12] Mr. Brent testified that the appellants accepted at face value what their father told them. With respect to the section 85 election, they were told that the transfer was "tax neutral".
[13] According to Mr. Brent he attended to the family's legal matters and his father-in-law was concerned with accounting and financial matters. There was, he said, a strict division of responsibility. Mr. Brent, however, was aware of the Partnership's financial statements. He said the Estate reported the income that the respondent says the appellants ought to have included it in their incomes. Mr. Paul, he declared, was "very careful in filing tax returns". He described Mr. Chin as "fastidious" and "careful at what he did". Ms. Brent testified that in her 1989 return she reported an interest amount of $3.34.
[14] Mr. Brent estimated the value of the family assets in 1988 at $60,000,000; the value of each appellant's Partnership interest was about $450,000 in 1988.
[15] Ms. Brent recalled that in about 1978, her father informed her and her sister that he "did something" beneficial for her and Ms. Paul but that the benefit would be seen "far in the future".
[16] Mr. Brent's impression of Mr. Paul was corroborated by Ms. Brent: her father was "dynamic" and "controlling", "preoccupied with business", would give only "headlines" for information and was "defensive in giving information". Her father would "dismiss" her when she did work for a corporation and required information. In her mind the Partnership was an asset she knew about and that she would acquire in 20 or 30 years but in the meantime was "out of sight and out of mind".
[17] While Ms. Brent does not recall discussing the transfer of the Partnership interest to Peter Paul 1 Inc. with her father, she did recall discussing with her husband the transfer of the interest from the Estate to a corporation. She believed her husband would review with her what he had discussed with her father. She said she never saw the Partnership's financial statements and, in any event, would not understand them. She did not expect to own a Partnership interest, she never received income from the Partnership and "no red flag was raised".
[18] All tax information Ms. Brent possessed, she said, went to Mr. Chin to prepare tax returns. She reviewed the returns with Mr. Chin, "line by line", asking questions and seeking clarification, before signing. She did not discuss returns with her father or sister.
[19] Ms. Brent assumes that she first became aware in 1990 of the section 85 "rollover" from her husband but only learned, when assessed, of the fact that income from the Partnership was not included in her return for 1989. She said anything her husband may have told her was "usually not thorough" but she trusted him, as well as her father. Sometimes, she said, she does not understand the answers to questions she asks. While she does not understand financial statements, she acknowledged that if she had reviewed the 1989 financial statements of the Partnership, she would have realized that she was the owner of an interest in the Partnership and "supposes" she would recognize the amount of income to her. If she had asked her father for any information, he would have given it to her, but it was a "hassle" and "emotionally wearing" to confront him.
[20] Like her sister, Ms. Paul was told of her interest in the Partnership by her father. He told her that the Partnership would earn income for her in later years. Her description of her father coincided with that of her sister. Ms. Paul knew her father was "working behind the scenes" for her. She did not have the ability, she claims, to challenge financial statements. All documents were kept at her father's office and all tax returns were prepared by people at her father's office. Ms. Paul assumed her father and the accountant were directing her "appropriately". If she required information, she preferred to ask Mr. Brent. She never saw the Partnership's financial statements and never actually received money from the Partnership; if she had, then she would have realized she had income from the Partnership.
[21] Ms. Paul said she put all tax documents in an accordion file and gave them to Mr. Chin to prepare the tax returns. She also reviewed her tax returns with Mr. Chin "on a line by line basis". She did not discuss her 1989 tax return with her father, sister or brother-in-law. The Partnership income was not reported, she believed, because it was "not real to me". She knew of the Partnership's existence and "imagined" her father would have discussed any tax matter with Mr. Chin.
[22] Mr. Paul directed Mr. Brent to have his wife and her sister sign the section 85 election, Ms. Paul stated. This was in 1990. Her father told her "we're transferring shares". She declared she did not understand "the legal or financial thinking behind the transfer".
[23] The first time Ms. Paul realized she failed to report income from the Partnership was when she was assessed in 1996. She had never asked her father to see any documents, including documents relating to the Partnership. She said she had a "busy life", managing nine Beneton stores with 85 employees, a baby and "marriage problems" at the time. She believed that any Partnership income would come to her later in life and was "not on my mind".
[24] Subparagraph 152(4)(a)(i) provides that:
The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may
(a) at any time, if the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
[25] With respect to the first issue, therefore, I must determine if any of the appellants made a misrepresentation in their 1989 tax return that is attributable to neglect or carelessness. The evidence does not suggest any wilful default or fraud by either appellant. There was, of course, a misrepresentation by the appellants since they misrepresented their income in their 1989 tax returns.[1] On the basis of the misrepresentation, the Minister assessed. Once so assessed, the affected taxpayer has the onus to prove that the misrepresentation was not attributable to neglect, carelessness or wilful default or did not commit any fraud in filing the tax return.
[26] In Venne v. The Queen,[2] Strayer J., as he then was, determined that the Minister may assess beyond the years determined by the Statute if the taxpayer has not exercised reasonable care in filing a return. He stated:
I am satisfied that it is sufficient for the Minister, in order to invoke the power under subparagraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. This is surely what the words "misrepresentation that is attributable to neglect" must mean, particularly when combined with other grounds such as "carelessness" or "wilful default" which refer to a higher degree of negligence or to intentional misconduct. Unless these words are superfluous in the section, which I am not able to assume, the term "neglect" involves a lesser standard of deficiency akin to that used in other fields of law such as the law of tort.[3]
[27] The appellants claim they did not know the Partnership interests were transferred from their mother's Estate to them and they personally owned the Partnership entirely in 1989. I agree that is true.
[28] To exercise reasonable care in filing a tax return (or supplying information) a taxpayer must have knowledge of the information he or she must give on the return. If a taxpayer does not know he or she owns an income-producing asset and thus fails to report income from that asset on a tax return, one must examine the circumstances of the failure to determine if the Minister can assess a statute barred year.
[29] The circumstances in the appeals at bar are dominated by a pater familias who appears to have complete control and domination of the family's finances. Ms. Brent has a husband who does not like to volunteer too much information. While each of the appellants conceded that they probably could have convinced their father to provide information, including the Partnership's financial statements, it would not be an enjoyable pursuit. And, in any event, if they were not executors or trustees of their mother's Estate and if they did not have any knowledge that they actually owned interests in the Partnership, there would be no valid reason for them to seek out the Partnership's financial statements.
[30] This is not a situation where the taxpayers were wilfully blind to their state of affairs. In preparing and reviewing their income tax returns for 1989, they relied on Mr. Chin's knowledge of their affairs and his experience; in the past they had not been let down by him.
[31] Notwithstanding the prudent manner in which they reviewed their returns and queried Mr. Chin, and other knowledge of their state of affairs, there was nothing to suggest or suspect that there was something deficient in the income tax return that each was signing. The 1989 returns were consistent with previous tax returns. The error made by the appellants was an error that a normally wise and cautious taxpayer would have committed.[4] I cannot find that the appellants did not exercise reasonable care in preparing and filing their 1989 tax returns.
[32] I also cannot find any negligence on the part of Mr. Chin. The negligence leading to the omission in income appears to emanate in large part from the course of conduct of Mr. Paul and to a lesser degree from Mr. Brent's failure to inform his wife and sister-in-law.
[33] Subsection 163(2) of the Act provides, in part that:
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 the greater of $100 and 50% of the aggregate of ...
[34] I have found that the appellants did not make any misrepresentation that was attributable to neglect, carelessness or wilful default in filing their tax returns. In arriving at that conclusion, I gave great weight to the fact that the appellants did not know of the misrepresentation. I also held that the misrepresentation was not due to their negligence. To be liable for a penalty assessed under subsection 163(2), the circumstances of the false statement or omission in the return must be due to circumstances amounting to gross negligence. In Venne,[5] Strayer J. wrote that:
'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.
[35] On the evidence it is abundantly clear that the appellants were not indifferent as to whether the law was complied with or not. They did not intend to or participate or make any false statement or omission in their returns. Had I found that the appellants' misrepresentations were attributable to neglect, carelessness or wilful default for purposes of subsection 152(4), I nevertheless would have held that they were not grossly negligent for purposes of subsection 163(2). I do not fault the Minister for assessing pursuant to subsection 152(4). If there is an obvious misrepresentation in a tax return the Minister has a duty to ensure it was not caused by neglect, carelessness or wilful default or fraud. A taxpayer who makes a misrepresentation should be obliged to prove that the misrepresentation was not attributable to neglect, carelessness or wilful default or that the taxpayer did not commit fraud in filing the returns.[6] The appellants succeeded in proving this. The assessments will be vacated.
[36] The appeals are allowed with one set of costs.
Signed at Ottawa, Canada this 26th day of September 2001.
"Gerald J. Rip"
J.T.C.C.
COURT FILE NO.: 1999-611(IT)G
1999-612(IT)G
STYLE OF CAUSE: Deborah Brent and Marina Paul
and Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: July 9, 2001
REASONS FOR JUDGMENT BY: The Hon. Judge Gerald J. Rip
DATE OF JUDGMENT: September 26, 2001
APPEARANCES:
Counsel for the appellant: Alan M. Schwartz
Patrick J. McCay
Counsel for the respondent: Franco Calabrese
COUNSEL OF RECORD:
For the appellant:
Name: Fasken Martineau DuMoulin LLP
Barristers & Solicitors
Firm: Toronto Dominion Bank Tower
Box 20, Suite 4200
Toronto-Dominion Centre
Toronto, Ontario M5K 1N6
For the respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-612(IT)G
BETWEEN:
MARINA PAUL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Deborah Brent, 1999-611(IT)G on July 9, 2001 at Toronto, Ontario, by
the Honourable Judge Gerald J. Rip
Appearances
Counsel for the appellant: Alan M. Schwartz
Patrick J. McCay
Counsel for the respondent: Franco Calabrese
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1989 taxation year is allowed, with one set of costs, and the assessment is vacated.
Signed at Ottawa, Canada, this 26th day of September 2001.
|
"Gerald J. Rip" |
J.T.C.C
1999-611(IT)G
BETWEEN:
DEBORAH BRENT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Marina Paul, 1999-612(IT)G on July 9, 2001 at Toronto, Ontario, by
the Honourable Judge Gerald J. Rip
Appearances
Counsel for the appellant: Alan M. Schwartz
Patrick J. McCay
Counsel for the respondent: Franco Calabrese
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1989 taxation year is allowed, with one set of costs, and the assessment is vacated.
Signed at Ottawa, Canada, this 26th day of September 2001.
|
"Gerald J. Rip" |
J.T.C.C.
[1] Misrepresentation may be innocent or fraudulent. See, for example, M.N.R. v. Taylor, 61 DTC 1139 (Ex.Ct.) 1144. The word "misrepresentation" is synonymous with the expression "incorrect": M.N.R. v. Foot, 64 DTC 5196 (Ex.Ct.) 5198; affirmed 66 DTC 5072 (S.C.C.) and Nesbitt v. The Queen, 96 DTC 6045 (F.C.T.D.) 6049; affirmed 96 DTC 6588 (F.C.A.).
[2] 84 DTC 6247 (F.C.T.D.).
[3] Ibid, p. 6251.
[4] See Fukushima v. R., 99 DTC 553 at 558 per Sarchuk, T.C.J.
[5] Supra, p. 5256. See also Findlay v. R., 2000 DTC 6345, (F.C.A.) p. 6349.
[6] The taxpayer may establish his or her bona fides at the objection stage; the matter need not require an appeal.