Docket: 2010-2409(IT)I
BETWEEN:
DWAYNE N. FRANCK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on February 2, 2011, at Calgary, Alberta.
Before: The Honourable
Justice Robert J. Hogan
Appearances:
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For the Appellant:
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The
Appellant himself
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|
|
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Counsel for the Respondent:
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Adam Gotfried
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____________________________________________________________________
JUDGMENT
The appeal from the reassessment made under
the Income Tax Act with respect to the Appellant’s 2008 taxation year is
allowed, without costs, and the reassessment is vacated in accordance with the
reasons for judgment attached hereto.
Signed at Ottawa, Canada, this 24th day of March 2011.
"Robert J.
Hogan"
Citation: 2011 TCC 179
Date: 20110324
Docket: 2010-2409(IT)I
BETWEEN:
DWAYNE N. FRANCK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
[1]
This is an appeal by
Dwayne N. Franck (the “Appellant”) in respect of the assessment of a penalty
by the Minister of National Revenue (the “Minister”) pursuant to
subsection 163(1) of the Income Tax Act (the “Act”) for
failure to report employment income for more than one taxation year.
I. Factual
Background
[2]
The Respondent claims
that the Appellant failed to report income for both the 2007 and 2008 taxation
years. He was assessed a penalty of $7,000 in respect of unreported income for
2008; that penalty amount included both federal and provincial penalties. The
error in 2007 came about because the Appellant worked at four jobs that year
and he claims that he received only three T4 slips. H&R Block prepared his
tax return without the fourth T4. The Appellant testified that he honestly
believed that he was not required to track it down because the income was
reported by his employer to the tax authorities and all taxes on such income
had been paid through payroll deductions. In 2008 he filed his income tax
return himself. However, he only filled out the information section as he
believed that the Canada Revenue Agency (the “CRA”) would fill in the rest since
they had his T4 slips. Because subsection 163(1) of the Act requires
a failure to report in two of four consecutive years, a due diligence defence for
either year will nullify the penalty.
II. Analysis
[3]
Since subsection 163(1)
is a strict liability provision, there is a due diligence defence available with
respect to it. Due diligence can be found where there was a reasonable error of
fact, or where the taxpayer took reasonable precautions to comply with the Act. Both tests have
a subjective and an objective element. For mistake of fact, the Appellant must
subjectively have held a mistaken belief which, if true, would have rendered
his action innocent and, objectively, the belief must be reasonable. In terms
of reasonable precautions to comply, the steps the Appellant took must be those
of a reasonable person in the circumstances.
[4]
In considering a taxpayer’s
actions or belief, the case law has relied upon Bowman C.J.’s statement
regarding negligence in DeCosta v. The Queen. It reads as
follows:
11 In drawing the line between "ordinary"
negligence or neglect and "gross" negligence a number of factors have
to be considered. One of course is the magnitude of the omission in relation to
the income declared. Another is the opportunity the taxpayer had to detect the
error. Another is the taxpayer's education and apparent intelligence. No
single factor predominates. Each must be assigned its proper weight in the
context of the overall picture that emerges from the evidence.
[Emphasis added.]
[5]
Generally, the defence
of due diligence entails a high burden for taxpayers due to the self‑reporting
nature of Canada’s tax system. The following statement of
Woods J. to that effect is often quoted:
. . . Parliament has enacted subsection 163(1) to ensure the
integrity of Canada's self‑reporting
system. In my view, a Court should not lightly vacate the penalty provided for
in the legislation.
[6]
The due diligence defence
was accepted in Khalil v. The Queen,
a case in which the taxpayer failed to include in her return the earnings shown
on a T4 because she noticed tax had already been withheld on that amount. Her
mistaken belief was that she did not have to declare that income since it had
already been taxed. In the past she had been paid on a cash basis and had
always declared that income.
In light of her unfamiliarity with the Canadian tax system, Judge Mogan found that
there had been a reasonable mistake and went on to say:
13 I cannot conclude that a person has "failed to report
an amount" within the meaning of subsection 163(1) when the person
knows (i) that the amount was payable to her as income by a particular
payor; (ii) that the payor withheld a certain portion of the amount as
income tax to remit to Revenue Canada; (iii) that the payor actually paid
to the person only the balance remaining after deducting the tax withheld; and
(iv) that the payor was required to report to Revenue Canada on a form
prescribed by Revenue Canada the gross amount payable to the person and the
portion withheld and remitted as tax. Accordingly, I will allow the
appeal. If I should be correct in my interpretation of subsection 163(1),
there is no prior "failure to report" with respect to the interest of
$320.12 received from the Royal Bank of Canada.
[7]
This reasoning was
relied upon by the Tax Court of Canada in Iszcenko v. The Queen and Alcala v.
The Queen
in ruling in favour of the taxpayers. In Iszcenko, the taxpayer believed
she did not have to report the income because it was a return of capital
dividend and had been informed by her father‑in‑law to that effect. In Alcala,
the taxpayer relied on her accountant’s statement that she was not required to
do anything in respect of a late T4 since the CRA would automatically correct
through matching.
In both cases the taxpayers were relatively inexperienced with the Canadian tax
system. Iszcenko dealt with a more complex income scenario while Alcala
was factually similar to Khalil.
[8]
The following are some
examples of facts which have not been considered as supporting a defence of due
diligence. Where a taxpayer was unable to get a T4 because her employer went
out of business and her accountant failed to estimate her income using her
record of employment, there was no due diligence since the taxpayer had failed
to review her tax return before filing.
Similarly, where a taxpayer who had failed to give his T4 to his accountant believed
that the CRA would correct the omission and where that taxpayer failed to
verify the return before filing, there was no exercise of due diligence. Finally, where
the T4s were given by a taxpayer to her mother, who prepared her tax return, and
where the taxpayer did not review the final product, there was no due diligence.
[9]
What distinguishes
these lines of cases from one another is the taxpayer’s familiarity with the
tax system. Khalil and Alcala involved inexperience while in Iszcenko
there was a more complex income scenario. Woods J., in Sounders, highlighted
the inexperience aspect of Khalil before declining to extend Khalil
to Ms. Saunders’ situation.
Similarly in Paul, Sheridan J. noted the fact that the taxpayer was
a long-time member of the workforce as showing the unreasonableness of his
belief. Porter did not involve a mistaken belief; rather, what was
involved was simply a reliance on the tax return preparer to include the
amounts from all T4s.
[10]
The evidence shows that
the facts in this case are closer to the facts considered by Judge Mogan in Khalil.
The Appellant testified that he joined the workforce as a cook after completing
high school. His demeanour and testimony allow me to conclude that he had a
very limited understanding of the workings of our tax system. He honestly
believed that he had no obligation to inquire about the missing T4 and that, in
any event, the CRA would be aware of the information that would have appeared
on the T4 because of the prescribed forms filed by the employer following the
payroll deductions and remittances.
[11]
The Appellant’s
demeanour suggested that he was a hard-working young man experiencing some
difficulty transitioning from high school to the workforce. His work as a short‑order
cook in four different establishments in the taxation year under review
certainly did not allow him to gain insight into the workings of our tax-reporting
system. Further, he did show good judgment in taking his tax information to H&R
Block so that they could ensure that he complied with his tax‑reporting
obligations for in 2007. There is no evidence to suggest that they advised him
of the necessity of obtaining the T4 that had gone astray. Finally, while this
is not a factor that should be given any weight in my decision, I note
that the combined federal and provincial penalty exceeds the amount of tax that
he was required to pay on his income. That tax was fully paid in advance
through proper payroll deductions.
[12]
For these reasons, the
appeal is allowed without costs and the reassessment is vacated.
Signed at Ottawa, Canada, this 24th
day of March 2011.
"Robert J. Hogan"
CITATION: 2011 TCC 179
COURT FILE NO.: 2010-2409(IT)I
STYLE OF CAUSE: DWAYNE N. FRANCK v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Calgary,
Alberta
DATE OF HEARING: February 2, 2011
REASONS FOR JUDGMENT BY: The
Honourable Justice Robert J. Hogan
DATE OF JUDGMENT: March 24, 2011
APPEARANCES:
|
For the
Appellant:
|
The Appellant himself
|
|
|
|
|
Counsel for the
Respondent:
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Adam Gotfried
|
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent: Myles J. Kirvan
Deputy
Attorney General of Canada
Ottawa,
Canada
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