[1] Gabor L. Zsoldos and Ilona Zsoldos are husband and wife and seek judicial review of two judgments rendered by Judge D.W. Beaubier on August 21, 2001 relating to taxation years 1992 to 1997 for Ms. Zsoldos, (Court file A-60-03) and 1995 to 1997 for Mr. Zsoldos (Court file A-556-01). These judgments are founded on written reasons for judgment reported as Zsoldos v. Canada, [2001] 4 C.T.C. 2671, 2003 D.T.C. 904 (T.C.C.).

[2] Before Judge Beaubier, both applicants had appealed separate reassessments and penalties imposed against them under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), (the Act) by the Minister of National Revenue (the Minister). The appeals were heard together pursuant to the Tax Court's informal procedure and based on common evidence.

[3] A collateral application involves a further order made by Judge Terrence O'Connor against Mrs. Zsoldos dated April 25, 2003 (unreported) relating to further appeals filed for 1992 and 1993 (Court file A-237-03) in respect of reassessments made pursuant to the judgments of Judge Beaubier for those years.

Issue

[4] The principal issue for this Court is whether Judge Beaubier was correct in his decision to uphold the reassessments and penalties imposed by the Minister against the applicants.

Background Facts

[5] In 1993, Mr. Zsoldos was a licensed Ontario architect practising as a sole practitioner while Mrs. Zsoldos was a full time salaried employee in the food industry. In April of that year the Zsoldos sought the assistance of a chartered accountant, John Morgan, in the preparation of their 1992 income tax returns. Mr. Morgan gave evidence that since Mrs. Zsoldos was supporting the family unit and was in fact underwriting her husband's business through her employment income, he suggested that Mrs. Zsoldos start a new business that she alone would own, to be called "G & I Management Services" (G & I). This business would carry on at least part of the activities that previously were part of Mr. Zsoldos' architectural services business, which in 1992 was running at a loss. The object of the proposal was, in effect, to move some of the losses to Mrs. Zsoldos, who had employment income.

[6] Mr. Morgan's testimony was accepted by Judge Beaubier who found that while the Zsoldos' wished to accept this advice and purported to act on it, they did not in fact change anything, except on paper. In essence, Mr. Zsoldos continued to operate his architectural services business and there was never a second business run by Mrs. Zsoldos.

[7] The Judge also accepted Mr. Morgan's evidence that the Zsoldos' 1993 and 1994 tax returns were filled out on the same basis as the 1992 tax returns where he accepted all of Mr. Zsoldos' statements and calculations for G & I. From 1994, the Zsoldos did their own calculations and filled out their tax returns without any assistance from Mr. Morgan.

[8] In the course of his reasons, the Judge attacked the honesty and credibility of Mr. Zsoldos on six occasions, leading to his ultimate finding that their vehicle claim for the years in dispute, which included all their personal and business expenses, was incredible. "It confirms the lack of credibility contained in the entire testimony of Gabor and Ilona in this case." (See paragraph 20 of Judge Beaubier's reasons.) Judge Beaubier then concluded that there was no factual or legal basis on which he could overturn any of the Minister's reassessments for the years in dispute.

[9] With respect to the gross negligence penalties, Judge Beaubier found that the activities of the Zsoldos' indicated that they had both knowingly and willfully deceived Mr. Morgan respecting their 1992 and 1993 tax returns. He also found that Mr. Zsoldos had included income and expenses associated with his architectural practice in G & I's annual statements even though the accountant had advised against it. Judge Beaubier therefore concluded that the entire testimony of Mr. Zsoldos lacked credibility, that his actions constituted intentional misconduct and that the Minister had properly assessed penalties against both Mr. and Mrs. Zsoldos pursuant to subsection 163(2). Collectively, the actions of both Zsoldos' were found to constitute "wilful default" and based on the totality of the evidence, the Judge determined that the Minister properly re-opened the Zsoldos' statute barred taxation years to reassessment pursuant to subsection 152(4).

Applications for Judicial Review

[10] Gabor L. Zsoldos and Ilona Zsoldos now seek judicial review of the judgments below. Neither were represented by counsel in this Court.

Standard of Review

[11] In Jastrebski v. Canada, [1994] 3 F.C. 466, this Court held that there was no reason to review errors of law made under the informal procedure any differently than errors made under the general procedure. Although Jastrebski left open whether questions of fact would be subject to a different standard, this Court has subsequently reviewed them on a palpable and overriding error standard, based on the test in Housen v. Nikolaisen, [2002] 2 S.C.R. 235. (See Deptuck v. Canada, 2003 FCA 177; and Servais v. Canada, 2003 FCA 329.)

[12] According to Housen, questions of law are reviewed on a correctness standard while questions of fact, inferences of fact and mixed law and fact are to be reviewed on a standard of palpable and overriding error. Now that informal procedure decisions are subject to appeal under subsections 27(1.2) to (1.4) of the amended Federal Courts Act, R.S.C. 1985, c. F-7, any possible rationale for applying different standards of review has disappeared.

Analysis

Applications A-60-03 and A-556-01

[13] The Zsoldos' applications revolve around two main points:

1) The Judge failed to observe a principle of natural justice, as they describe it, by adopting the testimony of David Browne, the Canada Customs and Revenue Agency auditor who is said to be biased against architects while he ignored the testimony of their accountant Mr. Morgan.

2) The Judge ignored case law to the effect that clients of a chartered accountant are not to be held responsible for the actions of their tax preparer. Here the Zsoldos relied on Mr. Morgan's advice and format and did not make any intentional or deliberate misrepresentations.

[14] At the outset, it should be noted that there is no general provision or scheme against income splitting in Canada. Each situation must be assessed on its own facts. Justice Iacobucci states in Neuman v. Canada (Minister of National Revenue), [1998] 1 S.C.R. 770 at paragraph 39, that:

Taxpayers can arrange their affairs in a particular way for the sole purpose of deliberately availing themselves of tax reduction devices in the ITA.

[15] There is no specific provision in the Income Tax Act that would have precluded the plan proposed by Mr. Morgan. In theory, it is open to the spouse of a person who has a professional practice to set up a separate business to perform certain functions that are part of the professional practice, or that are simply related or ancillary to the professional practice, and to achieve a kind of income splitting. However, anyone undertaking such a plan must ensure that the evidence of the arrangement clearly establishes that the parties have in fact followed through with the plan. Here, the Zsoldos' were given a plan and some instructions, but their actual conduct of the business after purporting to put the plan into effect was found to be substantially the same as their conduct before. They were unable to adduce evidence to satisfy Judge Beaubier that they had in fact done what they had been advised to do.

[16] The question for this panel is whether Judge Beaubier erred in law or committed any palpable and overriding errors in his factual determinations. In my analysis, there is simply no basis on which this Court could overturn the Judge's findings that what the parties represented as the separate business of G & I was anything other than the existing architectural business of Mr. Zsoldos.

[17] Nor have any legal errors been demonstrated that would warrant the intervention of this Court. Judge Beaubier clearly understood the concept of income splitting, but concluded that when the G & I name was registered in April 1993 it was a fiction. He did not reject G & I because it was set up to minimize the Zsoldos' tax burden through income splitting or, as Mr. Zsoldos seemed to believe, because he thought that some of the purported activities of G & I would have breached the rules governing the practice of an architect. Rather, Judge Beaubier rejected G & I as a legitimate sole proprietorship owned by Mrs. Zsoldos because the facts indicated that the income and expenses claimed on behalf of G & I were either with respect to Mr. Zsoldos' business as an architect or personal household expenses.

Statute Barred Year and Gross Negligence Penalties

[18] Under subsection 152(4) the Minister may assess a taxation year that is otherwise statue barred if the taxpayer filing his return has made any misrepresentation that is attributable to neglect, carelessness or willful default or had committed a fraud in filing the return.

[19] Subsection 152(4) of the Act reads in part as follows:

152(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer 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 year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if

152(4) Le ministre peut établir une cotisation, une nouvelle cotisation ou une cotisation supplémentaire concernant l'impôt pour une année d'imposition, ainsi que les intérêts ou les pénalités, qui sont payables par un contribuable en vertu de la présente partie ou donner avis par écrit qu'aucun impôt n'est payable pour l'année à toute personne qui a produit une déclaration de revenu pour une année d'imposition. Pareille cotisation ne peut être établie après l'expiration de la période normale de nouvelle cotisation applicable au contribuable pour l'année que dans les cas suivants :

(a) the taxpayer or person filing the return

a) le contribuable ou la personne produisant la déclaration :

(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, ...

(i) soit a fait une présentation erronée des faits, par négligence, inattention ou omission volontaire, ou a commis quelque fraude en produisant la déclaration ou en fournissant quelque renseignement sous le régime de la présente loi, ...

[20] Subsection 163(2) of the Act is also relevant:

163(2) Every person who, knowingly, or under circumstances amounting to gross negligence, 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 for the purposes of this Act, is liable to a penalty ...

163(2) Toute personne qui, sciemment ou dans des circonstances équivalant à faute lourde, fait un faux énoncé ou une omission dans une déclaration, un formulaire, un certificat, un état ou une réponse (appelé "déclaration" au présent article) rempli, produit ou présenté, selon le cas, pour une année d'imposition pour l'application de la présente loi, ou y participe, y consent ou y acquiesce est passible d'une pénalité égale, ...

[21] It is clear under subsection 163(2) that the Minister has the onus of proving on a balance of probabilities that Mrs. Zsoldos knowingly, or in circumstances amounting to gross negligence, participated in, assented to or acquiesced in the making of a false statement or omission in filing her returns. In assessing the penalties for gross negligence, the Minister must prove a high degree of negligence, one that is tantamount to intentional acting or an indifference as to whether the law is complied with or not. (See Venne v. Her Majesty The Queen (1984), 84 D.T.C. 6247 at 6256 (F.C.T.D.).) A taxpayer may avoid these penalty provisions where he or she has relied on the erroneous advice of a tax advisor and has not knowingly failed to report income or a capital gain. (See Findlay v. Her Majesty the Queen, 2000 D.T.C. 6345 (FCA).) However, that is not our case.

[22] In reviewing the penalties imposed by the Minister, Judge Beaubier made the following finding at paragraphs 24 and 25:

The next question is whether or not the penalties were properly imposed. ... Gabor and Ilona knew in April of 1993 that they were giving Mr. Morgan expense statements containing claims to deduct architectural fees and legal fees associated with Gabor's architectural practice. They also knew what they were claiming to deduct all of their vehicle expenses and, in addition, household expenses in order to claim a loss by Ilona so as to obtain a tax refund. Accepting Mr. Morgan's restrictions on what they were to claim, it is clear that Mr. Morgan advised them not to claim any architectural expenses or to include any architectural income in the G & I statement. Nonetheless, they did both at the time and continued to do so throughout all of the years in question. All of this amounted to intentional acting on their part and a careless disregard as to the kind of expenses claimed, who the expenses truly belonged to, and whether or not the Income Tax Act was complied with. They did the same thing in each year with respect to the interest claimed; ...

[23] Clearly the Judge was following the legal test and analysis prescribed in Venne, supra at paragraph 21 of these reasons, and I am unable to conclude that his factual determinations or indeed his legal analysis concerning the penalties contained errors that would warrant our intervention.

[24] For the above reasons, Applications A-60-03 and A-556-01 should be dismissed.

Application A-237-03 (Order of Justice O'Connor dated April 25, 2003)

[25] Following the judgments rendered by Judge Beaubier on August 21, 2001 the Minister reassessed Ilona Zsoldos' 1992, 1993, 1994, 1995, 1996 and 1997 tax returns issuing reassessment notices on October 9, 2001. With respect to the 1992 and 1993 reassessments, Mrs. Zsoldos filed a further notice of objection and a notice of appeal in the Tax Court on December 2, 2002. Her notice of appeal raises substantially the same arguments as were raised in the first appeal, but also an additional argument that, based on the findings of Judge Beaubier, all of the losses she claimed should be those of Mr. Zsoldos, which takes his income to such a level that she should be entitled to the spousal tax credit.

[26] The respondent brought a motion on February 25, 2003 to strike this notice of appeal, alleging that the notice of appeal raised matters already adjudicated upon by Judge Beaubier in this case and was therefore an abuse of process, as Mrs. Zsoldos was seeking to appeal a reassessment issued pursuant to Judge Beaubier's decision. Tax Court Judge O'Connor issued an order dated April 25, 2003 striking the notice of appeal without written reasons. Mrs. Zsoldos now seeks judicial review of that order.

[27] According to section 165(1.1) of the Act, the right of a taxpayer to object or appeal a reassessment made pursuant to a court order is limited to issues that were not conclusively determined in those prior proceedings. That is a sufficient ground for striking out Mrs. Zsoldos'

second appeals for 1992 and 1993, except for one point, which is that the appeal should have been allowed to stand in respect of the spousal tax credit claimed by Mrs. Zsoldos for 1992 and 1993. Indeed, counsel for the Crown properly conceded in this Court that her 1992 and 1993 returns should have been returned to the Minister for review on that point. Therefore, Mrs. Zsoldos' second appeal for 1992 and 1993 should be allowed, the judgment of the Tax Court with respect to that appeal should be set aside and replaced with a judgment allowing her appeal in part, and referring her 1992 and 1993 returns to the Minister for reconsideration of her claim to a spousal tax credit.

[28] These reasons for judgment shall dispose of applications for judicial review in files A-556-01, A-60-03 and A-237-03 and shall be filed in those respective files.

[29] The parties should bear their own costs in all three applications.

"Brian Malone"

J.A.

"I agree

Marshall Rothstein

J.A."

"I agree

K. Sharlow

J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKETS: A-556-01, A-60-03, A-237-03

STYLE OF CAUSE: A-556-01 GABOR L. ZSOLDOS v. THE ATTORNEY GENERAL OF CANADA

A-60-03 ILONA ZSOLDOS v. THE ATTORNEY

GENERAL OF CANADA

A-237-03 ILONA ZSOLDOS v. THE ATTORNEY GENERAL OF CANADA

PLACE OF HEARING: TORONTO, ONTARIO

DATE OF HEARING: SEPTEMBER 14, 2004

REASONS FOR JUDGMENT BY: MALONE J.A.

CONCURRED IN BY: ROTHSTEIN J.A.

SHARLOW J.A.

DATED: OCTOBER 8, 2004

APPEARANCES BY:

Mr. Gabor L. Zsoldos FOR THE APPLICANT (Self-Represented)

Mr. André LeBlanc FOR THE RESPONDENT

SOLICITORS OF RECORD:

Mr. Gabor L. Zsoldos

Toronto, Ontario FOR THE APPLICANT (Self-Represented)

Morris Rosenberg

Deputy Attorney General of Canada

Ottawa, Ontario FOR THE RESPONDENT

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Zsoldos v. Canada (Attorney General), 2004 FCA 338

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2004 FCA 338