Ganne v. The Queen, 95 DTC 363, [1994] 1 CTC 2124 (TCC)

Lamarre, J.T.C.C.:—These are appeals under the informal procedure against the penalty levied on the appellant under subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the taxation years 1988, 1989 and 1990. The appellant does not contest any facts relied upon by the Minister of National Revenue in paragraphs 4(a) to (g) of the reply to the notice of appeal. These facts will be an integral part of my judgment, and they read as follows:

(a) the appellant sold property in California in 1987 for the amount of $66,555;

(b) the proceeds from the sale of the property were payable in three equal instalments in the amount of $22,185 on the first day of each February of each year beginning on the first day of February, 1988 and continuing until paid;

(c) interest was payable from April 24, 1987 on the unpaid principal at the rate of ten per cent per annum payable annually with the principal payment;

(d) the terms of payment and the fact that interest was to be added were set out in the Note Secured By Deed Of Trust" document;

(e) the appellant received interest in respect of the sale proceeds in the amounts of $6,331.86 for 1988, $5,251.19 for 1989 and $2,634.25 for 1990;

(f) in reporting income for the years under appeal, the appellant did not report the interest income referred to in paragraph 4(e) above;

(g) the income of the appellant was understated by the amounts of $6,331.86 for 1988, $5,251.19 for 1989 and $2,634.25 for 1990;

At the hearing, the appellant testified that he sold a property in California in 1987. The property was for sale for quite a few years and he received an offer from his agent in 1987. At that time, he said the offer was quite lower than its real value. He therefore went to his accountants Deloitte & Touche to ask them for advice as to the taxability resulting from the sale of said property. The appellant testified that he might have refused the offer if he had to pay tax on a capital gain. The accountants advised him at that time that he would not have to pay tax on a capital gain.

The appellant finally accepted the offer and sold the property through an agent for $66,555 to Ruth Singer.

The sales contract was not provided to the Court as the appellant said he could not find it. However, the evidence disclosed that the seller and the buyer agreed on the purchase price being paid in three instalment payments payable every year. The balance of sale was guaranteed by a deed of trust which was filed as exhibit R-2 and yielded a ten per cent interest income. The appellant admitted that he earned interest income in the amount of $6,331.86 in 1988, $5,251.19 in 1989 and $2,634.25 in 1990. The appellant did not report the said interest income in his 1988, 1989 and 1990 tax returns. The appellant now agrees that these revenues should have been included, but disagrees with the penalty imposed on him by the Minister of National Revenue under subsection 163(2) of the Act.

The question therefore is to determine if the appellant knowingly, or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of false statements or omissions in the income tax returns filed for the 1988,1989 and 1990 taxation years.

Subsection 163(3) provides that the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

The term "gross negligence” has often been described by the Courts as meaning "very great negligence”. In the case of Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D.), Mr. Justice Strayer stated at page 234 (D.T.C. 6256) 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 law is complied with or not.

Counsel for the respondent argued that from the evidence, it has been shown that the appellant is a well-educated man having obtained in the past a law degree in international law from the United Nations in New York, in addition to a bachelor of arts degree. The appellant also had knowledge of business affairs since he operated two retail businesses with his mother and had followed classes in business administration in the past.

The evidence also disclosed that the appellant received payments of capital and interest from the sale of his property once a year. The first instalment payment was deposited in the appellant's bank account at the Royal Bank. The next year, the appellant deposited the second payment in another bank account in the Bank of Commerce. The appellant testified that he made the change for business reasons and also because of the higher interest rates. The third payment went directly into his business account and was treated as a shareholder's loan.

The appellant also testified that he received interest income from the amount deposited in the bank and reported this interest income in his tax returns. He explained that the reason he reported such interest income from the bank was that he received slips from the bank showing the exact amount of interest. He also indicated that he knew the interest income from the bank was taxable.

On the other hand, the appellant argued that he did not declare the interest income from the sale of his property because he did not receive any slips showing the exact amount of interest and also because he thought interest was part of the selling price. In fact, the appellant previously testified that at the time he received an offer for his property, the accountant advised him that the transaction would not attract any capital gains tax. The appellant admitted that he omitted to advise the accountant from Deloitte & Touche who fulfilled his tax return that the sale finally occurred. He also indicated that he knew he was receiving interest from the sale of his property over the three taxation years under issue but reiterated that he thought it was part of the selling price.

Undoubtedly, the appellant who was aware that he was receiving interest from the sale of his property, who declared his interest income from his deposits in the bank in his tax returns in said taxation years, should have studied his income tax returns and advised his accountant of the situation. In my opinion, not having done so constitutes negligence. However, I entertain a doubt as to the real intention of the appellant. Did he really want to hide an income or did he simply omit to declare an income he thought was part of the whole transaction which he believed was not taxable?

In Udell v. M.N.R., [1969] C.T.C. 704, 70 D.T.C. 6019 (Ex. Ct.), the Court stated at page 714 (D.T.C. 6026):

I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.

And in his decision in Morin v. M.N.R., [1988] 2 C.T.C. 2334, 88 D.T.C. 1596, Chief Justice Couture of this Court stated the following at page 2335 (D.T.C. 1597):

To escape the penalties provided in subsection 163(2) of the Act, it is necessary, in my opinion, that the taxpayer's attitude and general behaviour be such that no doubt can seriously be entertained as to his good faith and credibility throughout the entire period covered by the assessment. .. . .

Considering the whole of the evidence presented before me, and the authorities I have cited above, I conclude that the appellant's lack of care was not gross negligence and in my opinion, the respondent did not meet the burden of establishing facts justifying the assessment of penalties herein on the basis of gross negligence. Accordingly, the penalties assessed herein should not be applied.

The appeals are therefore allowed without costs.

Appeals allowed.