BETWEEN:
and
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Appeals heard on June 10, 2005 at St. Catharines, Ontario
Before: The Honourable Justice G. Sheridan
Appearances:
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JUDGMENT
In accordance with the attached Reasons for Judgment, the appeals from the reassessments made under the Income Tax Act for the 1995, 1996, 1997 taxation years are allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that Ms. Harris is not liable for the penalties assessed under subsection 163(2) of the Act and is not eligible under subsection 50(1) to claim the Bresea Resources Ltd. loss or the $15,000 paid to L.M. Supply International. The appeals from the reassessments made under the Income Tax Act for the 1998 and 1999 taxation years are dismissed, without costs.
Signed at Ottawa, Canada, this 10th day of August, 2005
BETWEEN:
BARBARA ANNE HARRIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant, Barbara Anne Harris, represented herself in the appeals of her 1995, 1996, 1997, 1998 and 1999 taxation years. The appeals for 1998 and 1999 were abandoned at the hearing and are dismissed. The appeals in respect of 1995, 1996 and 1997 are in regard to the imposition of penalties by the Minister of National Revenue under subsection 163(2) of the Income Tax Act and for 1997 only, in respect of the disallowance by the Minister of certain claimed losses.
I. Preliminary Matter - Issue Estoppel
[2] At the commencement of the hearing, counsel for the Respondent submitted that Ms. Harris was estopped from pleading that she did not "knowingly fail" to report income of $85,029 in that she had pleaded guilty in earlier criminal proceedings[1] to a charge of tax evasion in respect of that amount. I deferred consideration of this issue until after all the evidence was heard and have since concluded that the Crown's position is without merit. The guilty plea was the result of a joint submission with the Crown proceeding on only one of the six counts in the information against Ms. Harris and Ms. Harris pleading guilty after her lawyer estimated that defending the charges against her would cost as much as the fine likely to be levied. In the event, the Court sentenced Ms. Harris to a fine in the agreed-upon amount of $25,917.97, representing 100 per cent of her tax liability for that year. In all of the circumstances and especially where the guilty plea was the result of a joint submission[2] to the criminal Court (as opposed to a finding of guilt on the merits), the Crown ought not to be allowed to use to Ms. Harris' detriment in subsequent civil proceedings the fact of her having lived up to her part of their plea bargain.
II. Substantive Matters - 1995, 1996 and 1997
1. Claims of Loss - 1997 Only
[3] In respect of her 1997 taxation year only, Ms. Harris appealed the disallowance by the Minister of certain losses in respect of shares in Bresea Resources Ltd., and in respect of $15,000 "invested" in a business enterprise. To be eligible to claim either of these amounts as deductions, Ms. Harris must have complied with subsection 50(1) of the Income Tax Act which reads:
50.(1) Debts established to be bad debts and shares of bankrupt corporation. - For the purposes of this subdivision, where
(a) a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to the taxpayer in respect of the disposition of personal-use property) is established by the taxpayer to have become a bad debt in the year, or
(b) a share (other than a share received by a taxpayer as consideration in respect of the disposition of personal-use property) of the capital stock of a corporation is owned by the taxpayer at the end of a taxation year and
(i) the corporation has during the year become a bankrupt (within the meaning of subsection 128(3)),
(ii) the corporation is a corporation referred to in section 6 of the Winding-up Act that is insolvent (within the meaning of that Act) and in respect of which a winding-up order under that Act has been made in the year, or
(iii) at the end of the year,
(A) the corporation is insolvent,
(B) neither the corporation nor a corporation controlled by it carries on business,
(C) the fair market value of the share is nil, and
(D) it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business
and the taxpayer elects in the taxpayer's return of income for the year to have this subsection apply in respect of the debt or the share, as the case may be, the taxpayer shall be deemed to have disposed of the debt or the share, as the case may be, at the end of the year for proceeds equal to nil and to have reacquired it immediately after the end of the year at a cost equal to nil. [Emphasis added.]
[4] As Ms. Harris admitted that she did not make an election in 1997 as required under subsection 50(1) of the Act, she cannot succeed in her appeal of either claim. Although it does not affect the outcome under subsection 50(1), Ms. Harris' conduct in relation to these losses is instructive vis-à-vis the penalties issue: in the case of Bresea Resources Ltd., (one of the Bre-X group of companies) Ms. Harris was one of many hapless investors left holding the short end of the stick. The only evidence offered to show she might have avoided losing this particular deduction was an internal BMO Nesbitt Burns memo unearthed during the investigation stage and of which, in any case, Ms. Harris could not, at any time relevant to these appeals, have been expected to have knowledge. As for the $15,000, this was advanced to one Michael Schor, a fellow bridge player in whom Ms. Harris placed a now-regretted, and probably never-deserved, trust. Operating as L.M. Supply International, Mr. Schor dazzled her with promises of "tripling" her money in an export venture that proved to be more fantasy than fact. The only sure thing is that Ms. Harris' money is long gone. Both incidents reveal a certain lack of sophistication in financial matters and a tendency towards decisions which an objective observer would consider foolish.
2. Gross Negligence Penalties
[5] Turning to the imposition of penalties under subsection 163(2) of the Income Tax Act, the relevant portion of that provision reads:
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 filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to penalty of ...
According to Counsel for the Respondent, Ms. Harris "knowingly, or under circumstances amounting to gross negligence ... made ... an omission in [her] return..." by failing to report taxable capital gains in 1995, 1996 and 1997 for which she is liable for penalties as prescribed by the Act.
[6] During those years, Ms. Harris held an administrative position with the local school board, earning approximately $50,000 per year. She was trading on the stock market, in 1995 and 1996, through a broker at Nesbitt Burns; early in 1997, Ms. Harris was persuaded by yet another beguiling scoundrel known only as "Arvind", to transfer her funds from the management of Nesbitt Burns to an on-line account. After extracting some sort of sign-up fee from her, Arvind promptly disappeared leaving her to do her own trades on the computer. From time to time between 1995 and 1997, Ms. Harris contributed $2,000 to the Nesbitt Burns account and withdrew approximately $88,000 (CDN) and $50,000 (US). She admitted that she did not report any capital gains in respect of these transactions, but denied that her failure to do so was a willful attempt to avoid paying taxes.
[7] The onus of proving that Ms. Harris' actions amounted to gross negligence under subsection 163(2) rests with the Minister. This evidentiary burden is a heavy one and because the provision is penal in nature, any doubt must be resolved in favour of the taxpayer. In Farm Business Consultants Inc. v. The Queen[3], Bowman, J., as he then was, reviewed the jurisprudence on the imposition of penalties and concluded:
A court must be extremely cautious in sanctioning the imposition of penalties under subsection 163(2). ... 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.
[8] Applying this approach, I am unable to conclude that Ms. Harris' conduct amounted to gross negligence so as to render her liable for penalties under subsection 163(2). Ms. Harris described her conduct generally as "pretty stupid" and deeply regrets her inattention to her obligations under the Act as well as the disastrous impact it has had on her life. In addition to having to satisfy her full tax liability, Ms. Harris lost whatever gains she had made in the stock market. I accept her evidence that although she had been involved with the stock market in one form or another since 1984, it would be an overstatement to describe her investment knowledge as "extensive", as assumed by the Minister. Continued involvement in an activity does not necessarily result in improved understanding. In 1993, Ms. Harris was reassessed for a small amount of unreported capital gains (not related to these appeals) together with ordinary penalties, all of which she paid. What Ms. Harris took away from this was not that she ought to keep track of capital gains and report them on a timely basis but rather, that if she missed reporting amounts owing, the Minister would do her homework for her and, in due course, send her a bill which she would then pay.
[9] Ms. Harris completed her own income tax returns. Her practice, borne out by a review of the income tax returns put in evidence, was to include in her returns only those amounts for which she had received a "slip", that is to say, the prescribed form generated by CCRA. For example, her 1995 employment income was reported based on the figure set out in the school board's T-4[4]; certain capital gains in 1996 were taken from a T-5[5] showing "GT Global Fund Inc." as the payor. In his evidence, Mr. Higgins admitted that at the investigation stage, he was under the erroneous impression that Ms. Harris had received T5008's from Nesbitt Burns in respect of her unreported stock market gains. In fact, such information (as well as certain losses she would have been entitled to claim) appeared in the monthly statements, most of which Ms. Harris foolishly left unread.
[10] While I do not for one moment condone such a lackadaisical approach to her obligations under the Act, it points to the conclusion that during the period in question, Ms. Harris lacked the fiscal sophistication and organizational finesse to hatch and employ a deliberate strategy to avoid reporting taxable capital gains. Although she had a general awareness that her successes on the stock market might, at some point, generate capital gains and that tax would be payable, she did not turn her mind to when or how such liability might arise. The Minister failed to satisfy me that Ms. Harris' conduct is reasonably consistent with only one hypothesis: that she knowingly, or in circumstances amounting to gross negligence, failed to report taxable capital gains. In my view, her actions are equally consistent with the conclusion that Ms. Harris was careless, inattentive, perhaps even silly, but such conduct falls short of the mark required to trigger penalties under subsection 163(2). Accordingly, any doubt I may have, I resolve in favour of Ms. Harris. The appeals in respect of the 1995, 1996 and 1997 taxation years are allowed, without costs, and the reassessments referred back to the Minister for reconsideration and reassessment on the basis that Ms. Harris is not liable for the penalties assessed under subsection 163(2) of the Act and is not eligible to claim losses under subsection 50(1) in respect of Bresea Resources Ltd. or the $15,000 paid to L.M. Supply International. The appeals for 1998 and 1999 are dismissed, without costs.
Signed at Ottawa, Canada, this 10th day of August, 2005.
"G. Sheridan"
Sheridan, J.
COURT FILE NO.: 2003-1407(IT)G
STYLE OF CAUSE: Barbara Anne Harris v. H.M.Q.
PLACE OF HEARING: St. Catharines, Ontario
DATE OF HEARING: June 10, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice G. Sheridan
DATE OF JUDGMENT: August 10, 2005
APPEARANCES:
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For the Appellant: |
The Appellant herself |
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Counsel for the Respondent: |
Charles M. Camirand |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada