The Queen v. Pongratz, 82 DTC 6200, [1982] CTC 259 (FCA)

Heald, J:—This is an appeal from a decision of the Trial Division allowing the respondent’s appeal with respect to his 1977 taxation year from a reassessment of penalty made pursuant to subsection 163(1) of the Income Tax Act, RSC 1952, chapter 148 as enacted by SC 1970-71-72, c 63, section 1 (the Act)*. These reasons will also deal with the cross-appeal by the respondent herein from that portion of the Trial Division judgment which awarded costs to the appellant herein.

THE APPEAL

The ratio of the judgment of the Trial Division insofar as it relates to the appeal reads as follows:

On the evidence on this appeal, which consisted only of a partial Agreed Statement of Facts and the evidence of the plaintiff, the Minister has not established the facts justifying the assessment of the penalty.

Accordingly the appeal is allowed and the matter is referred back for reassessment.

The following factual situation emerges from the Agreed Statement of Facts filed at trial: The respondent is a public accountant currently practising as a sole proprietor, having carried on business in this manner for approximately 34 years. A portion of this practice involves tax planning and the preparation of income tax returns for both individual and corporate clients. He has prepared and filed his own tax return for all of those 34 years and knew that the Act required the filing of his return and the payment of any tax owing on or before April 30th in the year next following. He also knew that payments of tax were required to be made periodically during each taxation year. The respondent’s record in respect of the taxation years 1972 through 1977 may be summarized as follows:

The only viva voce testimony at trial was given by the respondent and he testified, inter alia, to the following effect: Before 1972 he did not, at all times, file his returns on a timely basis. With respect to his 1978 return, he filed it on June 9, 1979, approximately 70 days late and made no instalment payments on account of the 1978 tax payable by him. He consistently failed to file his returns when required by the Act because this was the busiest time of the year in his practice and because of lack of funds with which to pay the tax. Accordingly, he postponed the preparation and filing of his own return to a time of the year when it was more convenient to prepare it. He admitted, nevertheless, that he could have prepared his own return on time since it was not complex. He also admitted that he deliberately chose to use available funds for a farming operation in which he was engaged, in preference to payment of his income tax. He also agreed that he had not attempted to borrow funds to pay the tax owing. He denied, however, any intention not to pay his income tax and he denied the existence of any plan or

*Subsection 163(1) reads as follows:

Wilful failure to File Return

Every person who wilfully attempts to evade payment of the tax payable by him under this Part by failing to file a return of income as and when required by subsection 150(1) is liable to a penalty of 50% of the amount of the tax sought to be evaded.

scheme which would result in his not paying tax. He said that during the past 34 years the correctness or the accuracy of his returns had never been challenged by the department. Likewise, no criminal charge under the Income Tax Act had ever been laid against him. During the taxation years 1972 through 1977, he was assessed and had paid the late filing penalty prescribed by subsection 162(1) of the Act* which he accepted as a natural consequence of not filing his returns when they became due. He also had paid the amount of tax due when he filed his returns.

The initial submission by counsel for the appellant in his Memorandum of Fact and Law was to the effect that penalties are properly payable under subsection 163(1) where, as in this case, there has been an intentional failure to file a tax return as and when required by the Act since such intentional failure, in itself, constitutes a wilful attempt to evade payment of tax. I do not agree with this submission. Subsection 163(1) imposes civil penalties for wilfully attempting to evade the payment of tax. The companion section of the Act which imposes criminal penalties is paragraph 239(1 )(d) which provides that:

239.(1) Every person who has

(d) wilfully, in any manner, evaded or attempted to evade, compliance with this

Act or payment of taxes imposed by this Act . . . is guilty of an offence . . .

Although the language used in the two subsections is not identical, it is, in my view, substantially the same and the word “evade” is used in both subsections. Accordingly, I have found persuasive the comments of Bayda, JA of the Saskatchewan Court of Appeal (as he then was) in the case of The Queen v Paveley, [1976] CTC 477; 76 DTC 6415, where he stated:

It is plain, therefore, that upon proof of a “wilful refusal” to file an income tax return — the “manner” in which it is alleged the offence under section 239(1 )(d) of the Income Tax Act is committed — the Court may, not must, infer that the accused committed the act, with the intent to evade payment of taxes. If on the whole evidence the Court reaches the conclusion that it is proper to draw that inference, then it may do so. If it reaches the conclusion that it is not proper to do SO, Or is left in reasonable doubt, then it should not draw the inference.

To the same effect is the view of Harradence, JA as expressed in the case of Medicine Hat Greenhouses and German v The Queen, [1981] CTC 141; 81 DTC 5101:

. . . Section 239(1 )(d) does not make it an offence per se to contravene a provision of the Income Tax Act. Such a contravention may be an ingredient to be established in a charge under that section but to do so without more falls far short of proving a charge of wilful evasion under that section. The contravention may or may not be wilful.

As was pointed out by counsel for the respondent, if this submission by counsel for the appellant were to prevail, the result would be that if a taxpayer filed his tax return on May 1st in a given year and such late filing was intentional, then that taxpayer would be subject to the same basic penalty of 50% of the unpaid tax as a taxpayer who deliberately files his return one or two years late. It is conceded that the Minister would not likely proceed

‘Subsection 162(1), at all relevant times, read as follows:

Penalties

162(1) Every person who had failed to make a return as and when required by subsection 150(1) is liable to a penalty of (a) an amount equal to 5% of the tax that was unpaid when the return was required to be filed, if the tax payable under this Part that was unpaid at that time was less than $10,000 and (b) $500. if at the time the return was required to be filed tax payable under this Part equal to $10,000 or more was unpaid.

under subsection 163(1) against the taxpayer who filed a day late but the result of this interpretation would be to produce arbitrary rulings by departmental officials as to what constitutes sufficient delay to warrant the imposition of the very substantial penalty required by subsection 163(1). I do not believe that it was the intention of the legislators that subsection 163(1) apply, automatically, to every late filing taxpayer.

As was also pointed out by the respondent’s counsel, Parliament has recently substantially increased the penalty for late filing by amending subsection 162(1) so as to remove the former ceiling of $500 on the 5% penalty and by increasing that penalty by adding thereto an amount equal to 1% of the unpaid tax for each month the return is late, to a maximum of 12 months. Parliament has, by this amendment, increased the late filing penalty so that, once more, it would appear to be an effective deterrent. This is a further indication of Parliament’s ability and willingness to deal with any problem relating to late-filing taxpayers outside of and apart from the serious penalties imposed in subsection 163(1) for attempted wilful evasion. Accordingly and for all the above reasons, I would reject this initial submission.

In the alternative to the initial submission dealt with supra, the appellant submitted that, on this record, the Trial Judge could and should have inferred from the evidence and respondent’s course of conduct that respondent’s wilful late filing in 1977 amounted to a wilful attempt to evade payment of tax so as to justify the imposition of the penalty specified in subsection 163(1). In this regard, the appellant relies on the respondent’s repeated deliberate failures to file timely tax returns in respect of prior as well as subsequent years. The problem with this submission is that it does not take into account the totality of the evidence before the Trial Judge. The uncontradicted evidence of the respondent at trial detailed the following circumstances which, in my view, would entitle the trier of fact to draw an inference in favour of the respondent and against a finding of wilful attempt to evade payment of tax: the respondent filed his 1972, 1973 and 1978 returns without the necessity for a demand being issued; in respect of the returns for 1974, 1975, 1976 and 1977, the respondent complied with the Minister’s demand to file a return — the return being filed in each of those years within two months of receipt by the respondent of the demand; all of the respondent’s returns for the years 1972 through 1978 were filed within one year or less of the prescribed date and the tax payable together with the late filing penalty was paid by the respondent when the returns were filed; the respondent specifically denied any intention not to pay his tax and he also denied the existence of a scheme which would result in his not paying tax; during the past 34 years, the correctness or accuracy of his returns had never been challenged by the Department nor had any criminal charges under the Income Tax Act ever been laid against him. While the reasons of the trial judge are very short, his statement to the effect that: . . . on the evidence . . . the Minister has not established the facts justifying the assessment of this penalty” is an indication that he did draw that contrary inference on the evidence adduced. That being so, i am not persuaded that the inference which he drew from the total evidence was improper or not reasonably open to him. For these reasons, I would reject the alternative initial submission made by the appellant.

I come now to what I perceived to be the principal submission made by counsel for the appellant in his oral argument before us. This submission was to the effect that the trial judge erred in law in respect of the nature of the test which he applied to the factual circumstances of this case. In the view of appellant’s counsel, the attempt to evade payment of tax envisaged in subsection 163(1) encompasses an evasion or avoidance of tax for a temporary period of time and it is not necessary that the attempt to evade embody the concept of avoiding the payment of tax for all time. In support of this view, counsel refers to a comment by Brownridge, JA in the Paveley case supra where he said (page 6417): “Likewise, ! am not persuaded that there is no such thing as a temporary evasion/’ I would observe, initially, that the above comment was dicta because of the factual situation in that case. The respondent had been charged under paragraph 239(1)(d) of the Act on the basis of his failure to file returns for three taxation years, notwithstanding formal demands to do so — that is, Paveley was a case of nonfiling whereas the present case is one of filing but filing late. My other comment would be that the above statement does not appear to express a concluded opinion. For these reasons I find the statement to have little persuasive value here since the factual situation in the case at bar is quite different to that in the Paveley case (supra).

in making this submission, appellant’s counsel contended that the word “evade” as used in subsection 163(1) is synonymous with the word “avoid”. This submission is, in my view, contrary to the jurisprudence which makes a distinction between avoidance and evasion when related to the law of taxation*. It is also central to this submission that subsection 163(1) be interpreted as though it contained after the word “evade” therein, the words “for a time” or “temporarily”or other words of similar import. This would necessitate adding words to the subsection that are not there. In the case of Magor and St. Mellons Rural District Council v Newport Corporation, [1952] AC 189, the House of Lords held that in the construction of a statute the duty of the Court is limited to interpreting the words used by the legislature and it has no power to fill in any gaps disclosed and that to do so would be to usurp the function of the legislature. In dealing with this matter Lord Simonds said at page 191:

The duty of the Court ts to interpret the words that the legislature has used: those words may be ambiguous, but, even if they are, the power and duty of the Court to travel outside them on a voyage of discovery are strictly limited . _.

Lord Simonds goes on to express disapproval of the view of Denning, LJ in the Court of Appeal to the effect that the Court, having discovered the intention of Parliament and Ministers, must proceed to fill in the gaps. Also on page 191, Lord Simonds said of this view:

lt appears to me to be a naked usurpation of the legislative function under thin disguise of interpretation. And it is the less justifiable when it is guesswork with what material the legislature would, if it had discovered the gap, have filled it in. If a gap is disclosed, the remedy lies in an amending Act.

I have accordingly concluded that this submission by the appellant must also fail and that the trial judge did not err in respect of the nature of the test to be applied.

As above stated, it is my view that the wording of subsection 163(1) is clear and cannot be interpreted in the manner suggested by the appellant. If, however, it could be said that the interpretation advanced by the appellant is a reasonable one, the appellant would still not succeed by reason of the fact that since subsection 163(1) imposes penalties, it is to be construed Strictly against the taxing authority. As was stated by Lord Esher MR in the case of Tuck & Sons v Priester (1887), QBD 629.

lf there is a reasonable interpretation which will avoid the penalty in any particular case, we must adopt that construction. If there are two reasonable constructions we must give the more lenient one.

‘See for example: The Queen v Regeher, [1968] 3 CCC 72, Samuel Ciglen v The Queen, [1970] SCR 804 at 812.

For all of the above reasons, it is my opinion that the appeal should be dismissed and the reassessment of penalty pursuant to subsection 163(1) in respect of the respondent’s 1977 taxation year should be vacated.

THE CROSS-APPEAL

The learned trial judge awarded costs in the Trial Division against this respondent notwithstanding the fact that the respondent enjoyed complete success in that Court in so far as the merits were concerned. The reasons given by the trial judge for this disposition concerning costs read as follows:

In view of all the circumstances as detailed in evidence and the conduct of the plaintiff, this is a proper case for awarding costs against the plaintiff. Therefore the defendant shall have judgment against the plaintiff and be entitled to recover costs of this appeal from the plaintiff.

With respect, l am unable to find any proper basis for the exercise of the discretion to award costs in favour of this unsuccessful appellant against this successful respondent. Federal Court Rule 344(1) provides that:

The costs of and incidental to all proceedings in the Court shall be in the discretion of the Court and shall follow the event unless otherwise ordered.

The various other subsections of Rule 344 detail circumstances under which costs may be disallowed or awarded against the successful party. However, those circumstances, without exception, relate to the conduct of the lawsuit, not to conduct which occurred prior to the commencement of the litigation. In this case, there is no evidence of any conduct by the respondent in the action itself which could possibly justify an award of costs against him. The respondent co-operated completely in the conduct of the action, agreed to a statement of facts filed at trial and testified at trial notwithstanding that the burden of proof was on the Minister throughout. It is clear from the statement of the trial judge (supra) that the conduct he was punishing through the award of costs was the course of conduct of the appellant in late-filing over the years, which course of conduct the Trial Judge had previously found did not contravene subsection 163(1). The effect of the award of costs in this case was to impose a different kind of penalty upon the respondent, a penalty not authorized by the Income Tax Act nor by the Rules of this Court.

I would therefore allow the cross-appeal with costs and set aside the award of costs to the appellant against the respondent in the Trial Division. I would also award costs to the respondent against the appellant both here and in the Trial Division.