BETWEEN:
and
____________________________________________________________________
Appeal heard on September 19, 2005, at Calgary, Alberta
Before: The Honourable Justice Michael J. Bonner
Appearances:
|
|
|
____________________________________________________________________
JUDGMENT
The appeal from the assessments under the Income Tax Act for the 1995, 1996 and 1997 taxation years is allowed and the assessments are referred back to the Minister of National Revenue for reassessment in accordance with the Reasons for Judgment.
Signed at Toronto, Ontario, this 12th day of December 2005.
BETWEEN:
SAHADEVAN E. RAJAH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant appeals from assessments of tax, interest and penalties under subsection 163(2) of the Income Tax Act (the "Act") for his 1995, 1996 and 1997 taxation years.
[2] The main events leading up to the appeal in sequence are:
a) During 1995, 1996 and 1997, the Appellant bought and sold a considerable number of securities. The transactions were effected through dealers in securities.
b) The Appellant failed to file income tax returns for the three years within the time limits set out in section 150 of the Income Tax Act (the "Act").
c) The dealers in securities reported the Appellant's sales to the Minister of National Revenue (the "Minister").
d) The Minister wrote to the Appellant requesting that he file tax returns for the three years.
e) The Appellant personally prepared, signed and filed a return for 1995 on February 22, 1999 and returns for 1996 and 1997 on May 30, 1999. The returns, which the Appellant certified in writing to be correct and complete, did not disclose any of the Appellant's dealings in securities.
f) In May of 1999 Revenue Canada wrote to the Appellant. The letter read in part:
Information obtained by the Department shows the following total security dispositions in your name:
1995: $66,766
1996: $1,991,811
1997: $228,682
For the audit period January 1, 1994 to December 31, 1997, please provide the following:
1) Schedule 3 - Summary of Dispositions of Capital Property; provide supporting monthly brokerage statements, trading slips and the calculations of the adjusted cost base (ACB) and weighted average cost, where applicable, for each disposition. For your convenience, Schedule 3 is enclosed so that you may follow that format.
g) Upon receipt of the letter the Appellant contacted an accountant, gave him several boxes of documents and asked him to contact Revenue Canada. It is not clear what the accountant did or what he was asked to do.
h) On July 29, 1999 Revenue wrote to the Appellant noting that it had received no documentation, that the Appellant had not complied with subsection 150(1) of the Act and advised that it proposed to assess as follows:
1995 1996 1997
Total Security Dispositions $66,766 $1,991,811 $22,682
Adjusted Cost Base (ACB) $0 $0 $0_____
[sic]
Total Security Gains $66,766 $1,991,811 $228,682
Total Reported
Security Gains $0 $0 $0______
Total Unreported
Security Gains * $66,766 *$1,991,811 *$228,682
And Net Increase to
Taxable Income ________ __________ _________
I digress to note that the assessor's description of the bottom line amounts as gains was disingenuous. It must have been obvious to the author of the letter that the Appellant had not obtained the securities sold at no cost. Even a novice assessor must know that subsection 9(1) of the Act provides:
(1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.
Yet, Revenue made no effort to determine cost or allow for it except by way of demand to the Appellant for documented proof. If this was an attempt to mete out an extra-legal penalty it can hardly be justified.
i) The accountant terminated the engagement in October 1999.
j) On October 17, 1999, the Appellant wrote to the Director of Taxation asking that he "waive the audit" and allow the Appellant to re-file his 1996 and 1997 returns.
k) A few months passed during which no further information was furnished by the Appellant to Revenue Canada and, so far as I can tell, no attempt was made by Revenue Canada to approach the securities dealers for information as to cost.
l) On December 7, 1999, the request to re-file was refused.
m) On January 21, 2000 Revenue wrote to the Appellant advising that assessments would be issued as set out in h) supra with one change which reduced the 1996 "gains" by $432,665 in order to eliminate a duplication. The Appellant was also told that s. 163(2) penalties would be applied. The first set of assessments for the three years was then made.
n) The Appellant objected to the assessments in April of 2000. He retained a new accountant, Mr. Mahal, to represent him in his dealings with Revenue. Mr. Mahal furnished Revenue with brokerage slips establishing the cost of some but not all of the securities sold.
o) On June 7, 2001, the appeals officer wrote to the Appellant setting out proposed adjustments to the assessments. Those adjustments reflected costs to the extent established by brokerage slips produced by Mr. Mahal but not otherwise. The individual sales and attendant costs were identified on a schedule attached to the letter.
p) On October 12, 2001, the Minister reassessed to allow the deduction of the following costs:
1995 $30,959
1996 $972, 263
1998 $119,200
Penalties were reduced accordingly.
[3] This appeal was commenced on January 18, 2002.
[4] The Notice of Appeal alleges:
"Canada Customs and Revenue Agency (CCRA) received year end Statements of Dispositions from certain brokerage houses regarding securities sold by the appellant during the years 1995, 1996 and 1997. CCRA selected the appellant for an audit in 1999. The appellant requested to re-file the taxes for the years 1995, 1996 and 1997 but was declined by CCRA. The appellant could not secure proper accounting advice and could not provide CCRA with a statement of acquisitions and dispositions for the years 1995, 1996 and 1997. CCRA deemed the adjusted cost base [sic] of the acquisitions to be zero and assessed the Income Taxes [sic] for the years 1995, 1996 and 1997 accordingly in January 2000. The appellant filed a Notice of objection in April 2000 and subsequently found an accountant to conduct the reassessment. The reassessment was summarized on June 7 2001 by CCRA Appeals Division in a letter to the appellant's accountant. The appellant was overseas at the time and did not return to Canada till July 2001. CCRA did not accept certain acquisition costs provided by the Appellant's accountant and deemed them to be zero in purposes of computing gains from the sale of securities in the years 1995, 1996 and 1997. Also CCRA received inaccurate information from the brokerage houses regarding stock dispositions, which did not consider double counting, stock splits, stock rollbacks, delisting of stocks, mergers and acquisitions of stocks. This inaccuracy was reflected in the assessment and reassessment for the taxation years 1995, 1996 and 1997."
[5] The Appellant pleads that the issues are as follows:
"The issues to be decided are:
1. The accuracy of the information for the acquisition and dispositions of securities for the taxation years 1995, 1996 and 1997 as obtained and computed by CCRA.
2. The responsibility of CCRA in obtaining accurate information from the brokerage houses regarding the acquisition and disposition of securities in order to conduct their audit, assessment and reassessment for the taxation years 1995, 1996 and 1997.
3. Information provided by the appellant with regards to the acquisition and disposition of securities to CCRA be accepted as accurate and used in computation for the taxation years 1995, 1996 and 1997.
4. Finalizing the acquisition and disposition of securities matters for the taxation years 1995, 1996 and 1997 and computing a final figure based on the relevant Tax Acts.
5. Any other matters deemed relevant by the Tax Court."
[6] At the beginning of the hearing of the appeal, counsel for the Respondent filed a twelve page document listing additional adjustments to the cost of securities sold which, the Respondent conceded, should be allowed. The total amounts are:
1995 $24,345
1996 $212,063
1997 $107,854
[7] It was common ground that the Appellant's security transactions were on current account.
[8] Evidence was given at the hearing by the Appellant and by Janet Bourne, the appeals officer responsible for dealing with the Appellant's Notice of Objection and his appeal.
[9] At no time during evidence did the Appellant identify or establish that inaccurate information relating to the sales of securities had been provided by security dealers to Revenue as pleaded. Moreover he did not identify or prove acquisition costs beyond those allowed on assessment plus those conceded as set out in paragraph 7, supra. I note that the Appellant does not appear to have produced a comprehensive list of sales of securities and costs pertaining to them at any time.
[10] In his testimony at the hearing, the Appellant attempted to explain his delay in filing returns. He said that he was engaged in a dispute with one of the securities dealers; that there was a possibility that some transactions might be reversed; that in November 1998, he called a Revenue Canada 1-800 number and spoke to a person who advised him to defer filing his returns because of the possibility that trades might be reversed when the dispute was eventually resolved.
[11] I am far from convinced that this rather improbable story is true or, at a minimum, complete. I note that the alleged dispute was with Yorkton, only one of many dealers through whom the Appellant conducted his trades. There is no suggestion that the Appellant made any attempt to call any employee or former employee of Yorkton to give evidence. It is unlikely that any Revenue official to whom the Appellant spoke told the Appellant to omit reference to all transactions when only some of them were in dispute. Moreover, I observe that even if the Appellant encountered problems in fully accounting for all of his securities transactions at the time of preparation of the returns, he made no effort either in those returns or otherwise to draw to the Minister's attention the fact that he had engaged in any trading in securities at all. Finally on this point I note that the Appellant did not offer the name of the official to whom he said he spoke. Thus his story could not be verified.
[12] I am far from satisfied that the Appellant could not secure proper accounting advice and was unable to provide Revenue with a statement of acquisitions and dispositions as he alleges. Initially he was represented by an accountant, Mr. Hine. On October 14, 1999, Mr. Hine wrote to the Appellant stating, "Based on your decision regarding the request by Revenue Canada, I have concluded that I can no longer act as your accountant". I am not prepared to conclude that Mr. Hine could not or would not assist the Appellant without first hearing evidence from Mr. Hine. He, I note, was not called as a witness.
[13] The first two issues raised by the Notice of Appeal relate to the manner in which Revenue officials performed their duties. The evidence suggests that the assessor was quite prepared to treat gross revenues from sales as profits. Clearly she was not prepared to make any enquiries whatever regarding cost or to recognize cost save to the extent that the Appellant established cost by the production of documentary evidence. Although it is clear that the Appellant did little to help himself, I cannot approve of the assessor's intransigence. However, in the end, it does not affect the validity of the assessments under appeal.
[14] The essential question which must be addressed in an appeal from an assessment of tax is whether the assessment is too high. In the context of the present case, the answer depends on whether the Minister's computation of the income on which tax was levied is correct. That, in turn, depends on the question whether the full cost of the securities sold was allowed on assessment. The onus is on the Appellant to establish on the balance of probabilities that he incurred costs in excess of those allowed by the October 12, 2001 reassessments. To some extent he has succeeded. I refer to the costs conceded by counsel for the Respondent. At the hearing, the Appellant did not even attempt to adduce evidence as to any other costs related to transactions effected through dealers in securities.
[15] The penalties imposed by the assessments under appeal were based on subsection 163(2) of the Act. That provision authorizes the Minister to impose a penalty on a taxpayer who has either "knowingly" or "under circumstances amounting to gross negligence" made a false statement or omission in a return. The amount of the penalty varies with the size of the omission. By virtue of s. 163(3) of the Act the burden of establishing the facts justifying the assessment of the penalty rests on the Minister.
[16] The returns of income prepared, signed and filed by the Appellant did not disclose any income from the sale of securities. Was the omission of any reference to the securities transactions made under circumstances amounting to gross negligence? Gross negligence involves "...a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not[1]." As already indicated I do not believe the Appellant's improbable and unsubstantiated explanation that he acted on advice given to him in a telephone conversation with an unnamed Revenue employee. The failure to refer to the transactions when made by a person with the Appellant's education and experience in the business world can only have been made in circumstances amounting to gross negligence.
[17] In addition to the pleaded issues the Appellant asserted that he was entitled to a deduction in respect of a loss which he says he incurred on the release of his rights under an agreement which gave him the option to purchase shares of Leader Mining International Ltd. The option appears to have been granted as compensation for his services as a director of Leader. It is not clear to me that this transaction, which does not appear to have been effected through a dealer in securities, was considered or taken into account in making the assessments. In any event, the answer to the Appellant's claim for this deduction is that there is no proof that he incurred any cost at all in acquiring the option.
[18] In the result the appeal will be allowed and the reassessments referred back to the Minister of National Revenue for reassessment of tax to reflect the additional costs conceded by the Respondent and set out in the schedule marked R-1 and also to reduce penalties to reflect those additional costs. Success was divided. There will be no award of costs.
Signed at Toronto, Ontario, this 12th day of December 2005.
"Michael J. Bonner"
Bonner J.
STYLE OF CAUSE: Sahadevan E. Rajah and Her Majesty the Queen
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: September 19, 2005
REASONS FOR JUDGEMENT BY: The Honourable Justice Michael J. Bonner
DATE OF JUDGMENT: December 12, 2005
APPEARANCES:
|
For the Appellant: |
The Appellant himself
|
|
Counsel for the Respondent: |
Julie Rogers-Glabush |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario