Citation: 2010TCC381
Date: 20100719
Docket: 2010-277(IT)I
BETWEEN:
CHRISTINA THOMPSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The issue in this appeal
is whether the Appellant can rely on a defence of due diligence in relation to
a penalty that was imposed pursuant to subsection 163(1) of the Income Tax
Act (the “Act”) in relation to certain investment income that the
Appellant failed to include in her tax return that she filed for 2007. This
subsection provides as follows:
163. (1) Every person who
(a) fails to report an amount required to be included in computing
the person's income in a return filed under section 150 for a taxation year,
and
(b) had failed to report an amount required to be so included in any
return filed under section 150 for any of the three preceding taxation years
is liable to a penalty equal to 10% of the amount described in
paragraph (a), except where the person is liable to a penalty under subsection
(2) in respect of that amount.
[2]
The penalty under
subsection 163(1) of the Act is imposed on a person who fails to report,
in that person’s tax return that was filed for a particular year, an amount of
income that should have been included in that person’s tax return and also
failed to report in a tax return that was filed for any one of the three
preceding taxation years an amount of income that should have been included in
that tax return. The Appellant acknowledged in her Notice of Appeal that she
had failed to report an amount of income in her 2006 income tax return. The
amount that she failed to include in reporting her income for 2006 was $868.
[3]
In the Reply it is
stated that the Appellant failed to include dividend income of $3,336 and
interest income of $17,043 in her tax return for 2007. Only the Appellant
testified during the hearing. Throughout her testimony the only amount that she
referred to as the amount that she failed to include in her tax return for 2007
was $17,043. The type of income was not identified. It was only established
that it was income that would be reported on a T5 slip. The Appellant stated
that she did not receive the T5 slip for this income and I accept her
testimony.
[4]
The Appellant did,
however, include with her book of documents, the Notice of Reassessment that
she received for 2007. This Notice of Reassessment indicates that the
additional income that was not reported in her tax return for 2007 was $20,829
(which is $450 more than the sum of $3,336 and $17,043). The type of income is
not identified in the Notice of Reassessment. Since I have concluded that the
Appellant has satisfied the due diligence defence, it is not necessary to
determine the exact amount that would be used to determine the amount of the
penalty.
[5]
After the Appellant had
been reassessed for failing to report investment income in 2006 the Appellant
wanted to ensure that the problem did not arise again. TD Waterhouse holds and
manages the Appellant’s investments. Her financial adviser at TD Waterhouse is
Paul Debanne and he has been her advisor for several years. When she met with
him in November 2007 she expressed her concern that she had not received the T3
slip for 2006. Her father had also not received a T3 slip for investment income
for 2006 and was also reassessed. The Appellant did not want to miss any tax
slips in filing her tax returns in the future. Paul Debanne suggested to her that
she contact his assistant in April 2008 to ensure that she had all of the
information slips for 2007 before she filed her tax return for 2007.
[6]
On April 7, 2008 the
Appellant sent an e-mail to Paul Debanne’s assistant (Tina Lucas) to confirm
that the Appellant had all of the necessary tax slips. She attached a schedule
which identified six T3 slips, two T4RIF slips and two T5 slips with the name
of the issuer, the type of income and the amount of income. The total amount
for all of the tax slips identified in the schedule was $51,237. Tina Lucas
confirmed by an e-mail (also sent on April 7, 2008) that the tax slips as
identified by the Appellant matched up to the amounts for her account.
[7]
The Appellant deferred
all of the investment decisions in her account to her financial advisor and
simply received a monthly amount of $3,500 (which would be $42,000 in total for
the year). While the Appellant noticed that her income as reported by her for
2007 (approximately $50,000) was less than her total income for 2006
(approximately $57,600), she stated that she had assumed that this was because
of a decrease in the market. Her reported total income for 2007 was
approximately 87% of her total income for 2006. While there was a decrease of
13%, her income was paid into her TD Waterhouse account and therefore she
did not directly receive the income. TD Waterhouse, who did receive the
income, had confirmed that she had all of the tax slips for 2007. By confirming
that she had all of her tax slips for 2007 TD Waterhouse would be confirming
that she would be reporting all of her investment income if she reported the
income on these tax slips. The missing income was not income that was included
in these tax slips.
[8]
In Saunders v. The
Queen, 2006 TCC 51, 2006 D.T.C. 2267, [2006] 2 C.T.C. 2255,
Justice Woods stated that:
12 The penalty in subsection 163(1) is one of strict liability,
although this Court has held that it can be vacated if the taxpayer can
establish due diligence.
[9]
Justice Boyle in Dunlop
v. The Queen, 2009 TCC 177, 2009 D.T.C. 650, [2009] 6 C.T.C. 2223
reiterated that the penalty will not apply if the taxpayer “can demonstrate he
exercised a requisite degree of due diligence”.
[10]
In the recent decision
of the Federal Court of Appeal in Les
Résidences Majeau Inc. v. The Queen, 2010 FCA 28, Justice Létourneau,
on behalf of the Federal Court of Appeal, stated as follows:
7 As far as
the penalty is concerned, we are satisfied that the judge did not make any
mistake in upholding it. To avoid this penalty, the appellant had to establish
that it was duly diligent.
8 According to
Corporation de l'école polytechnique v. Canada, 2004 FCA 127, a
defendant may rely on a defence of due diligence if either of the following can
be established: that the defendant made a reasonable mistake of fact, or that
the defendant took reasonable precautions to avoid the event leading to
imposition of the penalty.
9 A reasonable
mistake of fact requires a twofold test: subjective and objective. The
subjective test is met if the defendant establishes that he or she was mistaken
as to a factual situation which, if it had existed, would have made his or her
act or omission innocent. In addition, for this aspect of the defence to be
effective, the mistake must be reasonable, i.e. a mistake a reasonable person
in the same circumstances would have made. This is the objective test.
10 As already
stated, the second aspect of the defence requires that all reasonable
precautions or measures be taken to avoid the event leading to imposition of
the penalty.
[11]
Although the penalty in
issue is not identified in the decision of the Federal Court of Appeal, it
appears from the decision
which was appealed to the Federal Court of Appeal that the penalty in issue is
the penalty that was, prior to April 1, 2007, imposed under section 280 of the Excise
Tax Act. The imposition of this penalty was also subject to the due
diligence defence (see Pillar Oilfield Projects Ltd. v. The Queen,
[1993] G.S.T.C. 49).
[12]
It seems to me that the
Appellant has established that she was duly diligent. The Appellant was
mistaken with respect to the factual situation of whether she had received all
of the tax slips for her investments with TD Waterhouse. She believed that she
had all of the slips and therefore was reporting all of her investment income
when she reported the income that was on these tax slips. It was reasonable for
her to assume that she had all of her slips (and therefore all of her
investment income) as she checked with TD Waterhouse (who held her investments)
to confirm that she had all of her slips. They confirmed that she did. Her
mistake in failing to report the income as disclosed in the missing T5 slip was
innocent and a reasonable person in the same circumstances would have made the
same mistake.
[13]
It also seems to me
that the Appellant took all reasonable precautions to avoid any failure to
report any investment income. As noted she confirmed with TD Waterhouse that
she had all of the tax slips for her investment income in April 2008 before she
filed her tax return for 2007. Since all of her investments were held by TD
Waterhouse, TD Waterhouse is the person who would have received the investment
income and is the person who ought to know what investment income the Appellant
would have earned in 2007 and therefore what tax slips the Appellant should
have received for 2007.
[14]
As a result the appeal
is allowed and the matter is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the penalty imposed
pursuant to subsection 163(1) of the Income Tax Act in relation to the
income tax return that she filed for 2007 is deleted.
[15]
The Respondent shall
pay costs to the Appellant in the amount of $500.
Signed at Halifax, Nova Scotia, this 19th day of July 2010.
“Wyman W. Webb”
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