Citation: 2013 TCC 282
Date: 20130927
Dockets: 2010-1476(IT)G
2010-1393(GST)I
BETWEEN:
SANDOR BANDULA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
FURTHER AMENDED REASONS FOR JUDGMENT
Bocock J.
I.
Introduction
[a.] Sandor Bandula, the Appellant, has admitted to understating his
gross business income by approximately $72,073.80 and $40,077.38 in his tax
returns filed concurrently for the 2002 and 2003 taxation years. Corresponding
amounts of goods and services tax (“GST”) were also not included. During the
reassessment process, the Minister of National Revenue (the “Minister”) disallowed
certain claimed expenses, also for tax years 2002 and 2003. The Minister
assessed the taxpayer outside the normal reassessment period by alleging a
misrepresentation made by Mr. Bandula in the filing of his income tax returns. The
Minister also alleges Mr. Bandula was grossly negligent. Therefore negligence
penalties were imposed. Mr. Bandula appeals the disallowance of expenses and
related GST input tax credits, the reassessments outside the normal period and
the imposed penalties.
II. Issues Before The Court
a) Reassessment Outside Normal Period
[1]
The first issue before
the Court is whether the reassessments (the “Statute-Barred Reassessments”)
made outside the normal reassessment period are permitted pursuant to the
relevant provisions of the Income Tax Act (the “Act”) and the Excise
Tax Act (the “ETA”). The threshold needed to afford this statute
barred reassessment occurs when a taxpayer commits misrepresentations
attributable to neglect, carelessness or wilful default in filing the return
within the meaning of s. 152(4) the Act.
[2]
There is a secondary
issue in relation to the Statuted-Barred Reassessments. This issue relates to
whether the GST reassessment for the 2002 reporting period was outside the
normal reassessment period at all. The Appellant has conceded that the 2003
reassessment under the ETA was not outside the normal reassessment
period.
b) Disallowed Expenses
[3]
The second issue before
the Court relates to the issue of certain disallowed expenses in respect of the
Appellant’s business. The Appellant bears the onus of disproving the
assumptions made in this regard by the Minister.
c) Gross Negligence Penalty
[4]
The third and final issue
is the imposition by the Minister of gross negligence penalties under the
provisions of subsection 163(2) of the Act and section 285 of the ETA.
For the purposes of subsection 163(2) and section 285, it is
required that the Appellant knowingly or under circumstances amounting to gross
negligence made or participated in, assented to or acquiesced in the making of
a false statement or omission in his income tax return. In the present
appeal, both provisions are either identically applicable or not.
III. Relevant Facts Before The Court
a)
Nature of
Appellant’s Business
[5]
Mr. Bandula operated a drywall
construction business. This activity included framing, dry-walling, and the final
preparation (priming for painting) of demising walls in various construction
and renovation projects. Mr. Bandula was an immigrant from Hungary who came to Canada in 2000. He did not file tax returns in taxation years 2000 and 2001, but
shortly after he commenced the dry-wall business. The Appellant spoke little or
no English. Nonetheless, he entered into business utilizing the wiles of his
trade and experiences as a drywaller.
[6]
At the outset, he
rented various tools, utilized vehicles which were barely suitable for
construction of this type. He relied heavily for support upon his common-law life
partner, Ms. Racz. He worked long hours, utilized employees, sub-trades and
friends (some also immigrants from Hungary) and managed to build a business
which recruited and maintained a substantial stable of construction clients.
[7]
Ms. Racz, who also testified,
undertook most of the external business communications, preparation of
materials for tax returns, banking, payments and any other business activity
that required someone to speak better English than that of Mr. Bandula. It became
clear during the testimony of both that Ms. Racz speaks better English. In
order to operate this business, it was necessary for Mr. Bandula to have at his
disposal various tools of the trade: vehicles, storage space and to procure raw
materials generally, to purchase supplies and equipment: gas, work clothing,
cellular phones and otherwise to expend monies for the purposes of undertaking
this business.
[8]
While it is clear that
Mr. Bandula undertook all of the operational activities with respect to the dry
wall business, it is equally clear that he neither understood nor undertook
steps to keep anything approaching a logical or efficacious system for the
retention, tracking and filing of business receipts, business expenses or invoicing.
This job, not an enviable one given Mr. Bandula’s ignorance of its importance,
fell to Ms. Racz, who during her credible testimony demonstrated that she did her
best to try to track and record those receipts, invoices and expense vouchers
which were sporadically and sparingly provided to her by Mr. Bandula.
[9]
There was little or no
cross responsibility or accountability as between the operational duties undertaken
by Mr. Bandula and the business and administration activities undertaken by Ms.
Racz. The reasons for this will be dealt with in the analysis section below,
but one can only ascribe a goodly portion of the confusion to the relative
novelty of operating one’s business within a Canadian business structure and
tax system with which neither Mr. Bandula nor Ms. Racz were familiar.
[10]
In the course of
operating the dry-wall business, Mr. Bandula received payment by way of cheque
and deposited those cheques for such jobs into one of three bank accounts. In
some instances, he would render invoices for services provided and in other instances
he would not. In most instances where invoices were rendered by Mr. Bandula, they
were actually prepared by the more commercially oriented procurers of his
services. Even then, it appears they were provided to the Appellant in order to
create a paper invoice of the debt against which a construction company
retaining his services would then pay. This process is in contrast to the lack
of accounting records and organization related to Mr. Bandula’s own retainer and
payment of his own sub-trades for which there were usually neither cheques nor
invoices.
[11]
The logical consequence
of failing to maintain such records is the present inability to produce
invoices for various payments: sub-trades, expenses for the purposes of
procuring tools of the trade: work clothing, gas, parking receipts and the like.
The documentary evidence adduced relating to such items was not only incomplete,
but, at best, represented samplings or occasional examples of expenses rather
than actual vouchers and receipts cross-referenced to a list or ledger of
expenses claimed in the tax returns filed on behalf of Mr. Bandula. Similarly,
the ability to track his own sub-trade payments and the T-5018 (Statement of Contract Payments) was not present, since
such records were also incomplete.
[12]
The Canada Revenue
Agency (“CRA”), through its audit process, did allow certain expenses of Mr.
Bandula in the years of 2002 and 2003, representing amounts of approximately
$30,000.00 and $70,000.00, respectively. In doing so, the CRA did afford Mr.
Bandula deductions for expenses where invoices existed, but disallowed them where
neither invoices nor otherwise clear evidence existed of sums expended. However,
there were also instances of certain allowed deductions without the insistence
on the production of receipts or invoices provided the expenditure was
reasonably possible to impute.
[13]
With respect to the claimed
GST input tax credits relating to Mr. Bandula’s sub-trades, since no sub-trade invoices
were produced with respect to such claimed payments, the Minister did not allow
deductions for those input tax credits.
b) Preparation of Tax Returns
[14]
Much testimony at trial
was offered around the process involved by Mr. Bandula and Ms. Racz in the retainer
of, and services provided by, an accounting firm and, in particular, an
accountant, one Mr. Stubbington (the “Accountant”).
[15]
During that process,
the Court finds that Mr. Bandula, through Ms. Racz, provided what each thought
was the information that the Accountant required to complete the tax returns
concurrently for 2002 and 2003. The Accountant requested additional information
in the form of bank receipts and bank statements which were then provided. The
Accountant directed his mind to the fact that three different bank accounts,
some personal, were utilized for business purposes. There were both deposits and
withdrawals made from all of these bank accounts which did not accord with the
amount of the revenue and expense items which were supplied by the Appellant to
the Accountant.
[16]
When the Accountant raised
the irreconcilable amounts with Ms. Racz and Mr. Bandula, they indicated the
discrepancy was likely due to amounts of cash received from relatives in
Hungary and also attributable to an essentially cash business for which
receipts and invoices were not necessarily available. At this point the
Accountant rightfully directed Mr. Bandula and Ms. Racz to cease from the
practice of not keeping invoices and receipts. He recommended they undertake a
new approach which would require the retention of receipts, the production of
invoices, consolidation of business bank accounts and other efficacious
business operations. Thereafter, the Accountant appears to have nonetheless
completed the tax returns with the information he had, pointing out, as best he
could to Mr. Bandula and Ms. Racz, the error of their ways and submitting the tax
returns to the CRA both in respect of the income tax and the GST
returns for the relevant periods.
c) Reassessment of Unreported Income
[17]
The sequence of events
leading to the reassessment of the statue-barred years
took an uncommon and dramatic departure from the usually mundane proceedings. A
search warrant was executed at the Appellant’s house and at the Accountant’s
office. Mr. Bandula was charged with Income Tax evasion. This impeded any real dialogue
for a considerable period of time. In 2007, the Minister reassessed on the
basis of unreported income which was discerned from the missing T-5018s, contact
with other construction clients of Mr. Bandula’s and other similar
investigations. The summary of the assessments related to the unreported income
and disallowed business expenses and are presented below.
|
Tax
Year
|
Reported
Income
|
Reassessed
Unreported Income
|
Disallowed
Expenses (Additional Allowed)
|
Net Income
|
|
2002
|
$64,656.25
|
$51,673.62
|
$20,400.24
|
$78,960.29
|
|
2003
|
$63,091.39
|
$86,323.29
|
($46,245.71)
|
$67,767.85
|
d) Penalty Imposition
[18]
Penalties are not
reflected in the chart above. At trial, an issue surrounding the calculation of
penalties was raised. This issue is further discussed in the analysis section
below, but it should be noted that the Respondent in submissions conceded that
the penalties initially assessed were too high, and it was conceded these
should be reduced to a lesser amount.
e) Nature and List of Disallowed Business
Expenses
[19]
In relation to the
disallowed business expenses, the Appellant indicated that there were various
amounts expended on account of various costs: tools, various collateral job
materials, vehicles, gas, rental tools, rental of garage space, cellphones,
food for workers, work clothing, subcontractor invoices, garage rental,
business office expenses and parking. Mr. Bandula claims these were overlooked
by the Minster. At trial, there was direct evidence by the Appellant regarding examples
of these expenses, but there was no factual submission as to what the aggregate
of those disallowed business expenses might have been in relation to the
expenses allowed by the Minister on an item by item basis. A submission was not
possible as to the amount of expenses documented through adduced receipts and
vouchers nor was one possible to show what the difference may have been between
the calculated expenses claimed and the disallowed expenses. This occurred
because the invoices produced may have been accounted for by the Minister, but
the state of the Appellant’s records prevented the Appellant from marshalling
such an argument.
IV. Submissions Of The Parties
a) By the Appellant
[20]
The Appellant submitted
that the CRA, during discussions with the Appellant, had suggested that the
Minister was prepared to allow a greater deduction on account of business
expenses if the Appellant would consent to the Statute-Barred Reassessments. It
is also noted that the Appellant conceded that the amount of unreported gross
revenue of the Appellant was not in dispute, but the Minister’s right to
reassess for the Statute-Barred Reassessments remained so. Appellant’s counsel
admitted that the Appellant had not kept proper receipts and vouchers, but that
once the importance of doing so was raised by his accountant, the Appellant and
Ms. Racz effectively adjusted and now keep proper books and records.
[21]
With respect to the disallowed
input tax credits for the GST, the Appellant submitted that same was
inappropriate since all of the subcontractors were in fact registrants, but had
simply not filed their GST returns.
[22]
With respect to the
Statute-Barred Reassessments, Appellant’s counsel indicated that Mr. Bandula
had done everything that he could possibly be expected to do as an immigrant who
barely spoke English. He delegated certain work to his life partner, who was
responsible for the administrative books and records, retained the services of
an accountant for the purposes of preparing income tax returns and in fact
filed those income tax returns and paid tax on the basis of the income tax
and GST returns. He legitimately did not believe that those returns were
incorrect until the audit commenced with the execution of a search warrant at
his house and charges were laid. This, in turn, prevented any appropriate
understanding on his part of the usual process involved in a reassessment and
instead placed the matter before the criminal courts.
[23]
As to the gross
negligence penalty, Appellant’s counsel noted that the Appellant was as
deficient in the keeping of expense receipts as he was in the keeping of
records of cheques from payors and invoices from his own subcontractors. This
occurred because the business was operating effectively within a cash economy.
Similarly, when the Accountant provided the Appellant with the express need for
additional information, the Appellant delivered it. When questions were again
raised, answers were provided. It is offered that the critical element
preventing the assessment of penalties is the clear evidence that neither the
Appellant nor his life partner knew of any error based upon their knowledge and
experience. The Appellant was of the reasonable belief that he had reasonably
complied with requirements under the Act by retaining the Accountant,
completing the tax returns and paying the calculated tax.
b) By the Respondent
[24]
The Respondent stated that
the Appellant had entirely failed to keep cogent records, statements from
customers, cheques and invoices received and failed to maintain any consistency
regarding deposits, credit card payments or other payment of expenses.
Moreover, the use of the Accountant for the purposes of preparing tax returns
cannot camouflage the fact that the materials provided to the Accountant were entirely
insufficient for that Accountant to accurately ascertain the Appellant’s income
taxes and GST. Additional material was requested and when it, in turn, was insufficient,
an alternative explanation regarding the source of revenue as family gifts was
offered to the Accountant. According to those instructions, the Accountant prepared,
completed and filed the tax returns. Moreover, no evidence was offered with
respect to the source of that infused money nor the actual transactions transferring
same to the Appellant.
[25]
With respect to the alleged
2002 Statute-Barred Reassessment on GST, the Respondent has indicated that
there is no defence since section 298 allows the
reassessment on GST for a period of four years from the
date which is the later of filing or the due date under the
section 238 of the ETA. Since the later date was June 15, 2003, the
2007 reassessment was made within the normal reassessment period and is
therefore not statue-barred in the first instance.
[26]
With respect to the
issue of business expenses, the Respondent submits that the evidence of the
Appellant and his life partner was incomplete at best. There was no attempt to
quantify the expenses, but merely an attempt to calculate those expenses by
using alternative methods and logic in relation to the business which amounted to
asking the Court to guess. Moreover, some expenses were not deductible at all since
they represented expenses of a personal nature. The suggestion that the amount
of the expenses allowed by the Minister was insufficient belied the generous
treatment provided by the CRA auditors who allowed more than they ought to
have. This generosity of the Minister constitutes a potential windfall received
by the Appellant without any reliable evidence for such expenses to have been
considered. In relation to such business expenses, it must be remembered that the
burden of proof is on the Appellant.
[27]
As to the Respondent’s
submission on gross negligence penalty, the negligence of the Accountant even
if it existed, was not proved and is inadmissible since this issue was not put
in evidence nor submitted to the Accountant during testimony. Moreover, the
admitted fact of the magnitude of the discrepancy in reporting gross business
income, the loss of invoices and statements by the Appellant and the lack of
bookkeeping efficacy all stand for the proposition that the Appellant was
grossly negligent in the calculation and the operation of his accounting
affairs and calculation of his tax.
c) Onus Regarding Quantum of Penalty
[28]
At the close of reply
submissions, Appellant’s counsel raised before the Court a challenge that the
penalty under subsection 163(2) of the Act should
fail. The basis of that challenge is the procedural omission by the Respondent of
providing or leading evidence regarding the quantum and calculation of such
penalty. The Court requested written submissions after the final hearing date on
this issue. The parties provided submissions on both the procedural ability of
the Appellant to raise this matter in final reply submissions and, more substantively,
whether there was an undischarged onus on the Respondent to lead evidence
regarding the quantum of the subsection 163(2) penalty.
[29]
The Court is satisfied that
the Respondent would satisfy its onus in this regard, provided the Reply
specifies the nature of the penalty and that the penalty is readily
ascertainable from the Reply and the information contained in it. On this
basis, the Court is satisfied that the Minster sufficiently pleaded the
subsection 163(2) penalties and indicated how and why same would apply. Further,
any deficiency in those pleadings or failure to lead evidence ought not to have
been reserved by the Appellant until reply submissions: subsection 135(3) of
the Court’s General Procedure Rules. Most importantly, the substantive issue of
whether the Appellant was grossly negligent or was properly the subject of such
penalties in the first instance will be assessed below.
V. Analysis
a) Reassessment Outside Normal Period
[30]
In reviewing the
approach taken by the Appellant and his life partner in the conduct of this
business for the period of 2002 and 2003, the Court finds factually that there
was:
a) a failure to retain invoices,
expense vouchers and receipts,
b) an inconsistency
regarding the deposit of business proceeds and the withdrawal of business
expenditures from a business bank account (multiple bank accounts were used);
and
c) a failure to
comprehend the differences between business and personal expenses and the
general lack of business acumen and skill deployed for the purposes of
operating this business.
[31]
As such, these omissions
resulted in a number of instances of neglect and carelessness in the filing of
the return. For the reasons following, the Court easily concludes that an assessment
outside the normal reassessment period is justifiable in this case and the
Minister has met the burden. Factually, there is no contest or dispute before
the Court regarding the quantitatively large difference between the amounts of gross
income reported and the amount of gross income accurately reassessed and
admitted by the Appellant. By any standard, this falls within the category of
misrepresentation caused by negligence or carelessness and meets the threshold.
[32]
Quite apart from the
gross business income issue, on the basis of the factual matters admitted by
the Appellant and his life partner in testimony, there was no attempt (largely through
ignorance) to keep material receipts in relation to any of the documents generated
in the day-to-day operation of the business overseen by Mr. Bandula. This insouciance
as to the importance of these documents demonstrated neglect and manifest carelessness
in the financial accounts of the business. Such carelessness and neglect directly
impacted and effected the misrepresentation on the income tax and
GST returns. The Minister has discharged the onus in relation to the
requirement of establishing that there have been factual misrepresentations as
to income (conceded by the Appellant in testimony) and expenses (which were
clearly evident before the Court) in relation to the filing of the returns.
b)
Disallowed
Expenses
i) Business Expenses
[33]
The contention by the
Respondent that the Minister has generously allowed the deduction of expenses (which
in the absence of receipts of invoices and vouchers would otherwise not be allowed)
is a compelling argument in light of the evidence adduced at trial. It would be
a compelling argument if there were an onus on the Respondent to establish such
but the onus to demolish the assumptions with respect to the disallowed business
expenses is and remains with the Appellant. The Appellant has failed factually
to discharge that onus with respect to any isolated business item by providing a
clear business purpose and/or actual receipt in relation to a specific expense item
not otherwise allowed by the Minister. As an example of business expenses, namely
motor vehicle expenses, no combination of actual receipts submitted at trial by
the Appellant surpassed or equalled the allowed expenses that the Minister
afforded the Appellant in respect of that expense item. This is similar to
expenses for professional fees. In fact, the Minister in this particular
category afforded the Appellant additional amounts above those claimed by Mr.
Bandula in both 2002 and 2003.
[34]
Moreover, the evidence presented
by the Appellant did not enable random or methodical cross-referencing of any
heading of expenditure to that of invoices submitted and proved. A number of invoices
submitted at trial in relation to motor vehicles, clothing, and other similar
expenditures clearly included personal expense items related to either Ms. Racz
or Mr. Bandula. Certain of these expenses offered as evidence were, in some
cases, acknowledged to be personal in nature by the Appellant and Ms. Racz
during testimony.
[35]
A simple review of the
pleadings on the issue of expenditures speaks volumes. The expenditures as
filed by the Appellant in 2002 were $67,769.82 and were reassessed by the
Minister at $37,369.58 for a difference of $20,400.24. In the subsequent
assessment of expenditures for the 2003 taxation year, the Appellant claimed $32,412.00.
These expenses were reassessed upward by the Minister to $79,646.83, being an actual
increase of $46,245.71 in expenditures allowed in the 2003 taxation year.
[36]
The invoices which were
proffered as evidence of a sampling of expenditures by the Appellant were
deficient. The Court cannot postulate, extrapolate or envisage what other reasonable
quantum of business expenses might be deductible from income other than that
allowed by the Minister, when that onus remains on the Appellant. That onus has
simply not been met and the Minister’s assumptions have not been demolished as
to deductible business expenses.
ii) GST Input Tax Credits
[37]
As with business
expenses, there are simply no invoices rendered in respect of sub-trades which
reflect GST paid by Mr. Bandula to his sub-trades. In the absence of invoices, conforming
cheque stubs or receipts from payees, there is no evidence upon which the Court
may factually base a finding that payments to sub-trades included GST. As such,
Mr. Bandula cannot be entitled to the GST input tax credits. This is the
unfortunate price paid for conducting a cash-based, invoice-void and
ledger-less business in a formalistic, rule-based and record-intensive age. The
existence of the T-5018s (Statement of Contract Payments) and GST registrations
numbers for certain of Mr. Bandula’s sub-trades may prove several things, but such
evidence does not factually prove that Mr. Bandula calculated and paid GST to a
third party in a sum certain in respect of a particular job or contract. Therefore,
input tax credits are not quantifiable and cannot be allowed.
c) Gross Negligence Penalty
[38]
On this particular issue,
the Court finds this case factually unique. It involves the first filings of
personal tax returns in respect of a business by a new immigrant within the
Canadian tax system. The Court takes notice that not all new immigrants have
the business initiative of Mr. Bandula and do not immediately undertake a business
on one’s own to earn a living in one’s own enterprise and thereby employ other
Canadians in doing so. This laudatory goal stands juxtaposition to a clear
failure to appreciate (factually in the Court’s view through ignorance), the
nature and the requirements of the system in providing one’s accountant with sufficient
and suitable information for the filing of one’s tax returns.
[39]
In fact, Mr. Bandula, together
with Ms. Racz, credibly indicated that they intended to assimilate into the
Canadian business milieu. The Court believes this; it is as well an admirable
goal. Curiously, by attempting to do this very thing, Mr. Bandula admittedly
did not retain the services of an accountant who spoke his native tongue, but
rather went to an accountant and a firm otherwise notable in the community. He
retained those services in order to put his best foot forward and attempt to
comply with the domestic tax system to which he now belonged.
[40]
Legally, the finding of
misrepresentation in respect of the Statute-Barred Reassessments is a different
test and must be separated from the issue of gross negligence. Factually the
Court finds that the language challenges of the Appellant and his spouse played
a perhaps greater role in the determination of the assessment of the gross
negligence penalty than that which might otherwise be readily apparent: in terms
of the Accountant’s communications with both the Appellant and Ms. Racz and in
terms of the solid belief of the CRA that both parties (specifically the
Appellant) spoke and understood English. These circumstances are in contrast to
the observation of the Court (where both Mr. Bandula and Ms. Racz testified) of
their ability to purport and connote understanding of a posed question and their
reactive willingness to provide an answer prior to completely appreciating the
full breadth of the question. This fact leaves the Court with a lack of
conviction regarding actions which might otherwise amount to the requisite, critical
intention regarding gross-negligence in this matter.
[41]
The actions (or
omissions) of a taxpayer giving rise to a subsection 152(4)
reassessment outside the normal reassessment period do not necessarily meet the
threshold for the imposition of gross negligence penalties. Venne v The
Queen, (1984), 84 DTC 6247 (FCTD) at pages 6256 – 6249 lays out the
specific need to find a high degree of negligence and indifference to legal
compliance.
[42]
In applying this clear
distinction, Courts have always referenced the functional ability of the
taxpayer in a novel situation to appreciate the nuance and substance of a potentially
complicated business environment. This is evident in the case of Sandia
Mountain Holdings Inc. v Canada, 2006 TCC 348, 2007 DTC 51, where Justice
Hershfield states at paragraph 54:
54 The
basis of such finding also supports a finding of gross negligence which is the
threshold test for imposing penalties under 163(2). That subsection imposes the
penalties assessed on 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 filed or made in respect of a taxation year.
Applying the test for what constitutes gross negligence as set out in Venne
v. The Queen warrants finding that there has been gross negligence in this
case. The test there sets out 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 or indifference as
to whether the law is complied with or not. […]
[43]
Justice Boyle of this
Court in Altamimi v Canada, 2007 TCC 553, [2008] 2 CTC 2001, provided
further clarification around the issue of language comprehension and relative
newness to the tax system in a business context at paragraph 45 [emphasis
added]:
45 […]It is the Crown’s position for the
purposes of subsection 163(2) that the taxpayer, at least under circumstances
that amounted to gross negligence, assented to the omissions in his return
which resulted from his providing estimates of gross income and net income. I
am satisfied on the evidence that the taxpayer participated in or assented to
such an omission. I am also satisfied that under-reporting income earned from a
business in these circumstances is also a false statement for purposes of
subsection 163(2). However, the important question is whether the Crown has,
through the evidence, proven on a balance of probability that the omission or
false statement was made knowingly or under circumstances amounting to gross
negligence in each of the years 2001 and 2002. [...].
[...] In my
view, it was not clearly unreasonable for Mr. Altamimi to rely on that
advice for 2001, being the first year he was asked to provide an estimate of
income from a business he was identifying and reporting in his return. I
conclude that for 2002 it no longer remained reasonable for him to credibly
rely on that advice, especially since the estimate he provided for 2002 was
identical to the gross revenue estimated by him in his prior year. That
confirms to me that for 2002 his estimate could not likely have been made with
any reasonable degree of accuracy intended. For that reason, I am upholding the
assessment of penalties for the 2002 taxation year. [...]
[44]
Based upon these
authorities, it is the Court’s determination that the imposition of the gross
negligence penalties in this particular case is not warranted for the following
reasons:
a)
The extent to which ignorance
of the system influenced decisions made by Mr. Bandula in the first two years
of operating the dry-wall business given that he did not have the experience,
knowledge, or insight to do so as regards appropriate record keeping,
importance of ascertaining details regarding payments, vouchers, GST numbers
and the like;
b)
Additionally, the consequences
related to the difference between operating within a cash system, his former
experience, versus a general Canadian recorded payment system, differences which
do not excuse him from the need to properly reflect the transactions, but offer
some mitigation as to the presence of any deliberate act of conceit or omission;
c)
The determination by the
Accountant that it was not necessary in the case of Mr. Bandula and Ms. Racz to
push move aggressively and further on the issue of ascertaining from them,
given their novel situation, the nature and reasons as to why they did not have
invoices, vouchers and receipts and records for the sub-trade payments and to
connect those reasons with the ultimate compilation and preparation of the income
tax returns and the GST returns; and,
d)
Lastly, the fact that the
penalty assessment process followed by the CRA clearly assumed on its face that
the Appellant read, understood and functioned in the English language.
[45]
If this Court were
dealing with 2004 or subsequent taxation years (which followed in time the
instructions and direction of the Accountant regarding the need for Mr. Bandula
to revise his business practices) this Court would find that the Appellant was
grossly negligent. Furthermore, in light of the factual circumstances and bona
fides of both the taxpayer and his life partner that they have undertaken a
strategy to amend and rectify their errors, which the Court finds were borne of
ignorance and not male fides or intentional act, the Court is prepared
in this instance to abide by its view that a penalty is not warranted because
the finding of gross negligence cannot be substantiated nor comfortably fit
within the facts before the Court. Therefore the penalties are vacated.
[46]
On the issue of costs,
there shall be no order, given the mixed results in the cause.
These Further Amended Reasons for Judgment are issued in
substitution of the Reasons for Judgment dated September 12, 2013 in order to
correct the minor typographical errors and stylistic changes underscored on
pages 1, 5, 7, 8, 9, 10 and 13 hereof and the inadvertent omission of reference to the ETA
double underscored on page 2 hereof.
Signed at Ottawa, Canada, this 27th
day of September 2013.
“R.S. Bocock”
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