Citation: 2014 TCC 22
Date: 20140127
Docket: 2012-2210(IT)G
BETWEEN:
THE ESTATE OF THE LATE RAYMOND KRENBRINK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Graham J.
[1]
Raymond Krenbrink is
deceased. At the time of his death he was the annuitant under a Registered
Retirement Income Fund with a fair market value of $228,164. Mr. Krenbrink’s
daughter, Diana Brown, was the executor of his estate. When Ms. Brown filed a date
of death tax return for Mr. Krenbrink, she did not include the fair market
value of his RRIF in his income as required under subsection 146.3(6) of the Income
Tax Act (the “Act”). The Minister of National Revenue assessed Mr.
Krenbrink’s date of death tax return as filed. The Minister subsequently
reassessed Mr. Krenbrink to include the RRIF income. The reassessment was made
beyond the normal reassessment period.
[2]
The Appellant does not
dispute that the fair market value of the RRIF should have been included in Mr.
Krenbrink’s income. However, the Appellant states that the Minister is now
statute barred from doing so. The Respondent submits that the Appellant made a
misrepresentation attributable to carelessness or neglect in not reporting the
fair market value of the RRIF and thus that the period is not statute barred.
Witnesses
[3]
Ms. Brown and the Canada
Revenue Agency auditor, Rob McGregor, both testified. I found Mr. McGregor
to be a credible witness. Ms. Brown had a very poor recollection of events.
While her inability to recall key facts was noticeably convenient to her case,
I have nonetheless given her the benefit of the doubt that her poor
recollection arose from the passage of time rather than a desire to avoid
answering questions.
Facts
[4]
At some point prior to
2001, Mr. Krenbrink gave Ms. Brown a power of attorney over his affairs. Ms.
Brown testified that although the power of attorney gave her control over her
father’s affairs, in general she simply did what her father told her to do.
[5]
Mr. Krenbrink had a
Registered Retirement Savings Plan. In 2001, Mr. Krenbrink transferred his
RRSP assets to a RRIF managed by Talvest Fund Management. Ms. Brown was named
as a 50% beneficiary of the RRIF on Mr. Krenbrink’s death. Mr. Krenbrink
was required to sign an Application form to create the RRIF (Exhibit R-2). Both
Mr. Krenbrink and Ms. Brown signed the form. Ms. Brown testified that she knew that her
father had about $230,000 in his RRIF.
[6]
Mr. Krenbrink died on
July 3, 2004. On August 17, 2004, Ms. Brown signed a letter telling Talvest to
distribute her 50% share of the RRIF to an investment account in her name.
[7]
A law firm assisted Ms.
Brown with the administration of Mr. Krenbrink’s estate. Ms. Brown testified
that she did not hire the firm but there is no debate that the firm was
involved. The law firm instructed Ms. Brown to gather her father’s tax slips
and to have a professional prepare the date of death return. Ms. Brown was
angry about having to do this.
[8]
Ms. Brown collected all
of her father’s tax slips in a folder. She did not review them. One of those
slips was a T4RIF from Talvest (Exhibit R-3). The T4RIF listed three key
amounts. The first amount was in box 16 of the slip. That box is described as
“Taxable amounts”. The figure $6,058.92 was written in that box. The second
amount was in box 18 of the slip. That box is described as “Amounts deemed
received by the annuitant”. The figure $228,164.20 was written in that box. The
third amount was in box 28. That box is described as “Income tax deducted”. The
figure $58.92 was written in that box.
[9]
Ms. Brown testified
that once she had all of her father’s tax slips she left her house and drove
until she saw a sign for a business that prepared tax returns. She selected the
first business that she saw. The name of the business was “FAST TAX returns
done for u inc.” Ms. Brown gave all of the tax slips to the tax preparer. The
tax preparer then prepared the date of death tax return. Ms. Brown signed the
return. She cannot recall whether she reviewed the return before signing it or
not. She also cannot recall whether she had any conversations with the tax
preparer. After signing the return, Ms. Brown forwarded it to the estate’s
lawyers who presumably filed it with the CRA. She sent the return to the
lawyers instead of directly to the CRA because she was angry that she had to
have the return done and sending it to the lawyers was, in her words, her way
of saying “I did it. Do with it what you want.”
[10]
The tax preparer
clearly made an error in completing the tax return. Only two of the three
amounts from the T4RIF were reported on the tax return. The $6,058.92 amount
was included at line 115 and the $58.92 amount was included at line 482. The
$228,164.20 was not reported anywhere. As a result, the total income reported
on the return was only $20,056.10 (less than 10% of what the total should have
been).
Issues
[11]
The Appellant raised
numerous issues:
(a)
Did the Appellant make
a misrepresentation?
(b)
If the Appellant made a
misrepresentation, does subsection 152(9) permit the Respondent to argue that
the misrepresentation was attributable to either carelessness or neglect or is
the Respondent limited to arguing that the misrepresentation was attributable
to carelessness?
(c)
If subsection 152(9)
permits the Respondent to argue that the misrepresentation was attributable to
carelessness or neglect, is the Respondent prevented from doing so because the
Respondent failed to include subsection 152(9) in her list of statutory
provisions relied upon in the Reply?
(d)
If subsection 152(9)
permits the Respondent to argue that the misrepresentation was attributable to
carelessness or neglect and the Respondent is not prevented from doing so
because the Respondent failed to include subsection 152(9) in her list of
statutory provisions relied upon in the Reply:
(i)
what is the minimum
standard of care that the Minister must prove the Appellant failed to meet;
(ii)
is there a lower
standard of care required of executors; and
(iii)
did the Appellant meet
the applicable standard of care?
Misrepresentation
[12]
The Appellant did not
admit that a misrepresentation was made. However, the Appellant agrees that the
fair market value of the RRIF should have been included in income and did not
provide any evidence or argument that would suggest a misrepresentation was not
made. I conclude that the failure to include $228,164.20 was a
misrepresentation.
Subsection 152(9)
[13]
Subparagraph 152(4)(a)(i)
sets out the relevant circumstances in which the Minister can open up a statute
barred year:
The
Minister may at any time make an assessment, reassessment or additional
assessment of tax for a taxation 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
(a)
the taxpayer or person filing the return
(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 …
[14]
Under this
subparagraph, if the Minister wants to open up a statute barred year, she bears
the onus of proving that the taxpayer has made a misrepresentation attributable
to neglect, carelessness or wilful default.
[15]
The Minister reassessed
the Appellant on the basis that the Appellant had made a misrepresentation
attributable to carelessness. The Appellant submits that the Respondent is
prohibited from raising any new basis of assessment. The Appellant submits that,
in now arguing that the misrepresentation was attributable to carelessness or
neglect, the Respondent is raising a new basis of assessment.
[16]
Subsection 152(9) sets
out the circumstances in which the Minister can raise an alternative argument
in support of an assessment. Subsection 152(9) states:
Alternative basis for assessment. The
Minister may advance an alternative argument in support of an assessment at any
time after the normal reassessment period unless, on an appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer
able to adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court
to order that the evidence be adduced.
[17]
The Appellant submits
that subsection 152(9) permits the Minister to raise a new argument in support
of an assessment but not a new basis for assessment.
[18]
The distinction between
a new basis for assessment and a new argument in support of an assessment is
mere semantics. What matters is the underlying transaction and the amount of
tax assessed (Anchor Pointe Energy Ltd. v. The Queen, 2003 FCA
294).
[19]
The Federal Court of
Appeal set out the conditions that must be met for subsection 152(9) to apply
in Walsh v. The Queen, 2007 FCA 222. At paragraph 18, Chief
Justice Richard stated:
The following conditions apply when the Minister seeks to rely on
subsection 152(9) of the Act:
1) the Minister cannot include
transactions which did not form the basis of the taxpayer’s reassessment;
2) the right of the Minister to
present an alternative argument in support of an assessment is subject to
paragraphs 152(9)(a) and (b), which speak to the prejudice to the taxpayer; and
3) the Minister cannot use
subsection 152(9) to reassess outside the time limitations in subsection 152(4)
of the Act, or to collect tax exceeding the amount in the assessment under
appeal.
[20]
The Respondent submits
that she has not raised a new argument. It is not necessary for me to decide
whether the Respondent has raised a new argument because, even if the
Respondent had raised a new argument, the three conditions set out in Walsh
have been met.
(a)
The Minister reassessed
the Appellant in respect of a deemed income inclusion from an RRIF that
occurred upon death. That is the same “transaction” that the Minister continues
to pursue at appeal.
(b)
The Appellant provided
no indication of any prejudice of the type described in subsection 152(9). The
Appellant had notice of the Respondent’s position from the time the Reply was
filed. The Reply clearly stated that the Respondent was taking the position
that the Appellant’s misrepresentation was due to carelessness or neglect. I am
accordingly unaware of any evidence that the Appellant would not have been able
to introduce without leave from the Court.
(c)
Finally, the amount of
tax assessed has not changed as a result of the Minister’s position that the
misrepresentation was attributable to carelessness or neglect.
Statutory Provisions Relied Upon
[21]
The Appellant submits
that, even if subsection 152(9) allows the Respondent to add neglect as a
reason for the misrepresentation, the Respondent should be precluded from
relying on that subsection because, contrary to Rule 49(1)(g) of the Tax
Court of Canada Rules (General Procedure), the Reply did not list subsection 152(9)
as one of the statutory provisions upon which the Respondent was relying. The
Respondent submits that it was not necessary to list subsection 152(9)
because adding neglect as a reason for the misrepresentation did not amount to
a new argument. In the alternative, the Respondent submits that the Appellant
has not been prejudiced in any way by not having subsection 152(9) included.
[22]
Again, I do not need to
determine whether adding neglect as a reason for the misrepresentation amounted
to a new argument as I find that, even if it was a new argument, the Appellant
was not prejudiced by the failure to list subsection 152(9) in the Reply.
[23]
The Appellant relied on
the Tax Court decision in Bibby v. The Queen, 2009 TCC 588. In
that case, the Minister had confirmed a reassessment in reliance on subsection
15(1) of the Act and then, at trial, without having pled it, sought to
rely on section 6 of the Act. Justice Bowie prevented the Respondent
from doing so. At paragraph 23 he stated:
Subsection 49(1) of the General Procedure Rules requires that every
Reply shall state:
(a) the statutory provisions relied on; [and]
(b) the reasons the respondent intends to rely on
The purpose of these requirements is to ensure that the issues are
properly defined for the purposes of discovery and trial, and so that the
appellant will know what arguments he must meet, and so that he will be able to
marshal and lead his evidence accordingly. This is not a mere formality that
may be overlooked when it has not been complied with; it is a core component of
the trial process, and to ignore non-compliance would undermine the integrity
of that process: see R. v. Glisic (1987), [1988] 1 F.C. 731 (Fed. C.A.);
see also Fortino v. R. (1996), 97 D.T.C. 55 (T.C.C.); aff’d. (1999),
2000 D.T.C. 6060 (Fed. C.A.).
[24]
It is clear from the
above that in interpreting Rule 49(1)(g) Justice Bowie was concerned about maintaining
the fairness of the trial process. Subsection 15(1) taxes shareholders on
amounts appropriated from a company. By contrast, section 6 taxes employment
income. I can therefore see how Justice Bowie would have concluded that the
failure to plead section 6 would significantly prejudice an appellant who was
expecting to fight an appeal dealing with subsection 15(1).
[25]
By contrast, I have
difficulty seeing how the failure to plead subsection 152(9) could have
prejudiced the Appellant or in any way impacted the fairness of the trial
process. The Appellant knew what the issues would be at trial and what
arguments would have to be met. In the Reply, the Respondent identified the
charging provisions that she was relying on (section 146.3 and subsection
56(1)) and the provision that she was relying upon to permit the Minister to
reassess a statute barred year (subsection 152(4)). The Respondent also
identified that her position was that the Appellant’s misrepresentation was
attributable to neglect or carelessness. Furthermore, counsel for the Appellant
did not provide any explanation of how the addition of subsection 152(9) to the
list of statutory provisions relied upon would have caused the Appellant to
adduce any other evidence at trial. All that the addition of subsection 152(9)
would have done was to highlight for the Appellant the procedural means by
which the Respondent, to the extent that the addition of neglect amounted to a
new argument, was entitled to make that new argument. Since it was counsel for
the Appellant, not counsel for the Respondent, who raised subsection 152(9) in
argument, the potential application of the subsection was clearly not something
which the Appellant needed to have highlighted. [3]
[26]
In addition to the
above, I am mindful of the fact that the Appellant is, to an extent, arguing
out of both sides of its mouth. The Appellant argues that the Respondent cannot
take the position that the misrepresentation was attributable to neglect
because that position would amount to a new basis of assessment. Yet that issue
was not raised by the Appellant in its pleadings. Admittedly the Appellant was
not aware of the issue until it received the Reply. However, once the Appellant
read the Reply and realized that the Respondent intended to rely on neglect to
support the reassessment, the Appellant should, in fairness to the Respondent,
have filed an Amended Notice of Appeal raising the issue. The Appellant is, in
essence, arguing that it is unfair that the Respondent, who was unaware of the
issue the Appellant was going to be raising, did not plead subsection 152(9)
despite the fact that subsection 152(9) would not even have been the
Respondent’s primary defence of that unanticipated issue but rather her
alternative defence of the unanticipated issue.
[27]
Based on all of the
above, to the extent that it is even necessary for the Respondent to rely on
subsection 152(9), I am not prepared to prevent her from doing so.
Standard of Care for Executors
[28]
The parties agree that
to prove neglect, the Respondent must prove that the Appellant failed to
exercise reasonable care (Venne v. The Queen, [1984] CTC 223
(FCTD); Gebhart Estate v. The Queen, 2008 FCA 206). They also
agree that the standard by which a taxpayer is normally judged is that of a
wise and prudent person. However, the Appellant submits that the wise and
prudent person standard should not be applied to executors. The Appellant cites
the Supreme Court of Canada decision in Wohlleben v. Canada Permanent
Trust Company (1976), 70 DLR (3d) 257 as authority that the standard of
care for executors is that of a person of ordinary prudence managing his or her
own affairs, not that of a wise and prudent person.
[29]
I do not agree with the
Appellant’s position. In Wohlleben, the Supreme Court of Canada described
the standard of care that a trustee administering a trust owes to the
beneficiaries of the trust, not the standard of care that an executor filing
tax returns owes to the Minister. I see no reason why the standard of care that
an executor owes to the Minister would be any different than the standard of
care that other taxpayers owe. The Appellant did not direct me to any tax cases
that would support the application of the Wohlleben standard to tax
cases.
Neglect
[30]
The only issue that
remains is whether the Appellant’s misrepresentation in failing to report the
$228,164.20 in RRIF income was attributable to neglect. I find that it was.
[31]
Ms. Brown’s failure to
review the tax slips that she received for the estate (including the T4RIF) was
imprudent. An executor exercising reasonable care would have reviewed the
T4RIF, would have seen the $228,164.20 set out thereon and, having seen that
amount, at a bare minimum would have looked for it on the tax return. Upon not
seeing the amount on the tax return, an executor exercising reasonable care,
would then have made enquiries of the tax preparer. An executor exercising
reasonable care may even have looked at the back of the T4RIF, noted the
following description relating to Box 18 and made the appropriate enquiries:
Box
18 - This is the fair market value of all the property held by the RRIF at the
time of the annuitant’s death. For more information on how to report this
amount, get the guide called RRSPs and Other Registered Plans for Retirement.
[32]
It is important to
recognize that the T4RIF was not a relatively insignificant form relating to a
minor aspect of the estate. The RRIF represented more than 70% of all the
assets distributed to beneficiaries as a result of Mr. Krenbrink’s death. Ms. Brown was well aware of the
significance of the RRIF. She was a 50% beneficiary of the RRIF. While she
testified that she does not recall the amount of money that she received from
the RRIF, she does recall receiving money after her father’s death. I accept
that she may no longer recall the amount of money that she received, but I find
that she would have been aware of the amount at the time. All she would have
had to do to determine the value of the RRIF would have been to double the
amount she received. As a result, there is no doubt in my mind that Ms. Brown
would have been fully aware of the specific amount that she had received both
when she received it in 2004 and when she signed the date of death tax return
in 2005. Accordingly, she ought to have known the importance of reviewing the
T4RIF.
[33]
There is no evidence as
to whether Ms. Brown reviewed the date of death tax return or not. Ms. Brown
testified that while she has experience filing her own tax returns, she has no
experience either as an executor or in filing tax returns for deceased people.
As a result, she stated that if she had reviewed the return she would not have
known whether it was right or wrong. However, the simple fact is that, having
not looked at the T4RIF, Ms. Brown would not have been in a position to
identify errors or make further enquiries even if she had reviewed the return.
Her decision not to look at the T4RIF in the first place was imprudent.
[34]
Ms. Brown testified
that she expected that she would have to pay tax on the RRIF funds personally
when she filed her personal tax return. She did not offer any explanation as to
how she came to that belief. She simply described it as “an assumption on [her]
part”. She did not seek any advice on this point. Ms. Brown testified that she prepares
and files her own tax returns. Ms. Brown’s 2004 tax return was not entered as
an exhibit. I draw an adverse inference from that fact. I conclude that had her
return been filed as an exhibit it would not have shown that Ms. Brown
attempted to report the missing RRIF income. Based on this adverse inference, I
conclude that Ms. Brown was indifferent as to whether the RRIF amount was
properly reported on any return, be it her personal return or the date of death
return of Mr. Krenbrink.
[35]
I note that, in
reaching my conclusion that Ms. Brown was negligent, I have given some minor
weight to what could be described as Ms. Brown’s negative attitude about
getting the return prepared as evidenced by her anger with the estate’s lawyers
for making her get the return prepared, the method by which she chose the tax
preparer and her decision to send the tax return back to the lawyers instead of
to the CRA. While none of these actions is individually troubling, when viewed
collectively and in combination with her decision not to review any tax slips,
they are indicative of an overall desire to put as little effort into the
preparation of the tax return as possible.
Carelessness
[36]
The Appellant asserts
that there is a difference between neglect and carelessness and that the
standard of care necessary for carelessness is higher than that of neglect.
Given my conclusions above, it is unnecessary for me to consider this issue.
Summary
[37]
Based on all of the
foregoing, the appeal is dismissed with costs.
Signed at Ottawa, Canada,
this 27th day of January 2014.
“David E. Graham”
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