Citation: 2011 TCC 531
Date: 20111222
Dockets: 2010-271(IT)I
2010-270(IT)I
BETWEEN:
KENNETH S. GRIFFIN,
PATRICIA BAEUCKER,
appellants,
and
HER MAJESTY THE QUEEN,
respondent.
AMENDED REASONS FOR JUDGMENT
Jorré J.
[1]
The only issue in these
appeals is whether the Minister of National Revenue was justified in applying
gross negligence penalties pursuant to subsection 163(2) of the Income Tax
Act for the appellants’ 2002 taxation year.
[2]
These appeals were
heard together on common evidence.
[3]
Both appellants
testified as well as Pauline Burdett, an employee of the Canada Revenue Agency
who at the relevant time was in the office examination section, and Julie Gil,
an employee of the appellants’ agent.
[4]
The appellants are
common‑law spouses.
[5]
Both appellants are
self‑employed and are senior information technology consultants. At the
core of Mr. Griffin’s business he assists clients with software testing;
Ms. Baeucker provided training and consulting services related to testing automated
software.
[6]
Mr. Griffin
obtained a Computer Science diploma in 1983. He also has a Master of Business Administration
from the Richard Ivey School of Business at the University of Western Ontario.
Ms. Baeucker has a college diploma in Information Technology and a great
deal of experience in the quality assurance field.
[7]
In the 2002 taxation year
virtually all of the appellants’ income was generated from work done for one
company in the United States, XL Vianet.
[8]
XL Vianet wanted to deal with a
single person in terms of billing and paying for the services of the
appellants. Mr. Griffin took
care of these functions for the appellants.
[9]
XL Vianet paid the appellants
in US dollars.
[10]
In his return
Mr. Griffin reported gross business income of about $166,000 and net
income of about $47,000 from his business. Apart from his income from the
business the only other income he reported was about $2,000 in interest and
dividend income.
[11]
Although the Minister
initially disallowed a much greater quantum of expenses, after Mr. Griffin
objected, the Minister further reassessed and as a result the amount of
disallowed expenses became approximately $30,000. The Minister disallowed the expenses
on the basis they were personal.
[12]
The Minister also added
to Mr. Griffin’s gross revenues an amount of unreported income of $76,900.
[13]
The net result of all
of this was to increase Mr. Griffin’s business income from about $47,000
to about $154,000.
[14]
In the case of
Mr. Griffin, at one point during the audit Mr. Griffin explained that
certain amounts paid by XL Vianet did not belong in his income because he had
incorporated a company in the course of calendar 2002 and certain amounts paid
by XL Vianet belonged in the corporation’s income.
[15]
On
February 11, 2005 the Agency left Mr. Griffin a telephone
message asking for copies of the corporate returns indicating the business
number so that they could verify that the income had been accounted for by the
corporation.
[16]
Mr. Griffin
provided a fax of the corporate T2 return which was for the taxation year
ending on October 30, 2003. The corporate tax return was dated February 15, 2005,
after the telephone request was made, and was filed with the Agency on
February 25, 2005, long after due date for the corporate tax return.
[17]
In 2002,
Mr. Griffin made an RRSP contribution of about $10,000.
[18]
Gross negligence
penalties were imposed by the Minister in relation to the $76,900 in unreported
income. They were not imposed with respect to the expenses disallowed.
[19]
In the case of Ms. Baeucker,
she reported gross business income of about $127,000 and net business income of
about $35,000. Apart from her business income the only other income she
reported was about $1,000 in interest income.
[20]
Although the Minister
initially disallowed a greater quantum of expenses claimed, after Ms. Baeucker
objected, the Minister further reassessed and as a result the amount of
disallowed expenses became approximately $8,000. The Minister disallowed the expenses
on the basis they were personal.
[21]
The Minister also added
to Ms. Baeucker’s income gross unreported income of $79,352.
[22]
The net result of these
changes was to increase Ms. Baeucker’s net business income from about
$35,000 to about $122,000.
[23]
For 2002, Ms. Baeucker
made an RRSP deduction of about $6,000.
[24]
Gross negligence
penalties were imposed by the Minister in relation to the $79,352 in unreported
income. They were not imposed in relation to the disallowed expenses.
[25]
Among other things, Ms. Burdett
explained her reasoning for raising the gross negligence penalties. The penalty
reports for the appellants were put into evidence.
[26]
At the core of the penalty
decisions was the very large discrepancy between the actual income and the
reported income as well as the Agency’s belief that the income was relatively
low and inconsistent with certain expenditures.
[27]
The appellants’ position was that
they carefully recorded their incomes and when they filed their returns they
believed that they were reporting all their income; the error was caused by
what happened when a formatting change was made in a spreadsheet.
[28]
Mr. Griffin did his own
bookkeeping and prepared his own tax return using one of the tax preparation
software packages.
[29]
Mr. Griffin testified that he
kept an Excel spreadsheet for both appellants containing all the invoicing and
that this spreadsheet was the source of the gross revenues used in reporting both
appellants’ business income.
[30]
An enormous amount of
Mr. Griffin’s testimony was devoted to the consequences of his having made
a formatting change to that Excel spreadsheet. According to Mr. Griffin,
that formatting change resulted in both appellants reporting the wrong amount
of gross income.
[31]
His testimony was that after he
learned in the course of the audit that the wrong amount of gross income was
reported he tried to figure out the cause since he carefully kept his
spreadsheet in which he duly recorded all the amounts invoiced both in the
original US dollar amounts as well as in Canadian dollars.
[32]
Eventually, Mr. Griffin
concluded after some experimentation that the cause of the error was a
formatting change that he made removing a column in the spreadsheet.
[33]
The arrangement that the
appellants had with their client was that the client would pay them a fixed
allowance for travel based on certain rules. The client did not reimburse them
for their actual travel expenses.
[34]
The travel allowances were part of
gross business receipts and the actual travel expenses were part of the
expenses to be deducted.
[35]
On the spreadsheet there was a row
for each invoice and a number of columns including separate columns for the
travel allowance invoiced to XL
Vianet, for the fee invoiced to XL Vianet and for the total of the two amounts invoiced to XL Vianet.
[36]
There were also separate columns breaking
down the invoiced amounts between the two appellants. Thus, for Mr. Griffin
there were columns showing the travel allowance invoiced, the fee invoiced and
the total of the two amounts. There were three similar columns for Ms. Baeucker.
[37]
The three columns showing fees
invoiced
were immediately to the left of the three columns for the total amounts
invoiced.
[38]
Mr. Griffin’s testimony was
that before the formatting change there was a cell at the bottom of each of the
three fee columns in which the Excel software was instructed to put in the sum
of the fees in the column. I will refer to these as the “Three Cells”.
[39]
In his view, because of the way he
made the format change removing one column and shifting all the columns to the
right of the deleted column one column to the left, the Three Cells were left
underneath what had become the total amount invoiced columns rather than the fees
column.
[40]
Further, notwithstanding the fact
that they were now below a column containing different numbers than previously,
the Three Cells continued to show the sum of the rows containing the fees
invoiced rather than the sum of the total amounts invoiced, the column they
were now under.
[41]
As a result, when the appellants
took the total at the bottom of the total amounts invoiced to put in as their
gross revenues for the profit and loss statement of their tax returns, they
unknowingly took the wrong gross revenue.
[42]
Mr. Griffin also discovered that
the precise way in which the format change was carried out made a difference.
In some cases, the result was that the Three Cells would contain the sum of the
column to the immediate left whereas when the change was carried out in a
different way the Three Cells would contain the sum of the columns immediately
above the cells.
[43]
He also testified that he did not
review on a regular basis how the business was doing and in 2002 no financial
statements for the business were drawn up.
[44]
Ms. Baeucker testified that she prepared her tax return
with Mr. Griffin’s help and that she honestly believed that the tax return
was correct.
[45]
For her gross revenue she relied
on the Excel spreadsheet kept by Mr. Griffin but she reviewed every line
of the spreadsheet to make sure that the details were accurate.
[46]
Ms. Baeucker testified that she was not at home that much
during the relevant period. She was in the Greater Toronto Area, in Montréal,
in Wisconsin, in Connecticut and in Michigan.
[47]
Ms. Baeucker also testified that her income varied a great
deal from year to year and that she could survive on $27,000 a year.
Analysis
[48]
The classic statement
as to what constitutes gross negligence for the purposes of
subsection 163(2) is that of Strayer J. in Venne v. The Queen where he states:
. . . “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, an indifference as
to whether the law is complied with or not. . . .
[49]
In examining this issue
I must also consider whether the conduct of the appellants amounted to
wilful blindness. As stated by Nadon J.A. speaking for the Court in Panini
v. Canada:
. . . Consequently, the law will impute knowledge to
a taxpayer who, in circumstances that dictate or strongly suggest that an
inquiry should be made with respect to his or her tax situation, refuses or
fails to commence such an inquiry without proper justification.
[50]
First, I will analyze the Minister’s
evidence.
[51]
In round numbers Mr. Griffin
reported $166,000 in gross revenues and failed to report $77,000. The
unreported amount exceeds 30 percent of the total gross revenues and is about
45 percent of the gross revenues reported.
[52]
One consequence of this is that
instead of the reported net income of around $47,000 from business, the
appellant had, in fact, approximately $124,000 in income from the business. If
one adds in approximately $2,000 of other income reported by the appellant, one
sees that instead of, in round numbers, a $50,000 reported income the appellant
had a $125,000 income, a $75,000 difference.
[53]
Put another way, the income
available to the appellant, before tax, was two‑and-a-half times what
he reported.
[54]
In round numbers Ms. Baeucker reported $127,000 in gross revenues and failed to report $79,000. The
unreported amount exceeds 38 percent of the total gross revenues and is about 62
percent of the gross revenues reported.
[55]
One consequence of this is that
instead of the reported net income of around $35,000 from business, Ms. Baeucker had, in fact, approximately $114,000 in income from the business. If
one adds in the approximately $1,000 of other income reported by the appellant,
one sees that instead of, in round numbers, a $36,000 reported income, Ms. Baeucker had a $115,000 income, a $79,000 difference.
[56]
Put another way, the income
available to Ms. Baeucker, before tax, was more than three times what she
reported.
[57]
Viewed as a family, the appellants
reported about $86,000 in income when in fact their income was $240,000, more
than two-and-three-quarters times the amount reported.
[58]
Whether one examines each
appellant separately or whether one examines the two of them together, the Minister’s
evidence shows such a great discrepancy between what was reported in the actual
income as to make a conclusion of knowledge or willful blindness as described in
Panini inevitable in the absence of a compelling explanation.
[59]
Briefly, the evidence of the appellants’
is that they believed they were fully reporting their income and the error
resulted from the wrong total being at the bottom of the column showing the
total amount invoiced for each appellant as a result of an unforeseen
consequence of changing the formatting of the Excel spreadsheet in a particular
way.
[60]
There was also some evidence that
they were very busy in the year, traveling a lot and that they could live on
the relatively modest amount shown as their reported income.
[61]
I have no difficulty in accepting that
the Excel software may have behaved as the appellants described in certain circumstances.
Indeed, I note that the unreported amounts appear to correspond to the travel
allowance totals.
[62]
However, I do not accept
the appellants’ evidence as to the cause of the underreporting and I do not
accept their explanation, irrespective of what the Excel software may have done.
[63]
There is a world of difference
between living on $50,000 a year and living on $125,000 a year (Mr. Griffin),
between living on $36,000 a year and living on $115,000 a year (Ms. Baeucker)
and between living on $86,000 a year and living on $240,000 a year (the two as
a family).
[64]
If the appellants spent a good
deal more than their reported income, one would expect that to trigger serious
questions when they computed their net business income.
[65]
Alternatively, if, as suggested,
they lived on their reported income, then their assets would have been growing
rapidly or their debts shrinking rapidly ― or
some combination thereof. Again, one would expect questions to arise in their
minds.
[66]
Whatever the appellants’ level of
spending, when they reached the point of reviewing their profit and loss
statement in their return and their net business income figure one would expect
that to trigger serious questions in their mind as to the divergence between
their financial situation and their net income.
[67]
Both appellants struck me as quite
intelligent; they are Information Technology professionals and have been in
business for some time. Mr. Griffin has an MBA from Western.
[68]
The income discrepancy here does
not involve some complicated aspect of tax law; it simply involves recognition
that the business’s net income is dramatically higher, two-and-a-half to
three times higher than reported.
[69]
There is nothing in the evidence
that would explain the failure to notice such a big discrepancy.
[70]
The appellants were “. . . in circumstances that dictate or strongly
suggest that an inquiry should be made with respect to [the appellants’] tax
situation, . . . ”
Indeed, they were in circumstances where, upon reviewing their profit and loss
computation in their tax returns, alarm bells should have been going off,
causing them to re-examine their profit and loss statements.
[71]
In these circumstances,
I do not see how I can avoid concluding that there was gross
negligence.
[72]
Accordingly, the
appeals will be dismissed.
These amended reasons for judgment are
issued in substitution for the reasons for judgment signed on November 21,
2011.
Signed at Ottawa, Ontario, this 22nd day of December 2011.
“Gaston Jorré”
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