Citation: 2009 TCC 177
Date: 20090327
Docket: 2008-1500(IT)I
BETWEEN:
DAVID J. DUNLOP,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench on February 26, 2009, in London,
Ontario
and modified for clarity and accuracy.)
Boyle J.
[1]
The only issue in this
case involves a section 163 penalty for a repeated failure to report
employment income.
I. Applicable law
[2]
Subsection 163(1)
provides that a person who has failed to report an amount required to be
included in income and who had failed to report such an amount in any of the
three preceding years, is liable to a penalty of 10% of the current year’s unreported
amount.
[3]
Subsection 163(3)
provides that the onus is on the Minister to substantiate the penalty. In this
case, the unreported income for the year and for the preceding year is admitted
to the extent described below.
[4]
While the
subsection 163(1) penalty is drafted as an automatic or strict liability
penalty, the taxpayer will not be penalized if he can demonstrate he exercised
a requisite degree of due diligence. See Justice Wood’s decision in Saunders
v. Her Majesty The Queen, 2006 DTC 2267.
[5]
The subsection 163(1)
penalty is 10% of the unreported amount. This is so even with respect to
employment income where tax has been withheld. This can lead to harsh results
where the penalty greatly exceeds the tax payable on the unreported income. For
taxpayers in Ontario, like Mr. Dunlop, CRA also assesses Ontario’s
corresponding 10% provincial penalty. While the results may be harsh, the federal
and provincial parliaments can and have enacted a penalty régime in a manner
that does not distinguish between T4 employment income and other income. In the
words of Justice Woods in Saunders:
. . . Parliament has enacted subsection 163(1) to ensure the
integrity of Canada’s
self-reporting system.
Justice Woods goes on:
In my view, a Court should not lightly vacate the penalty provided
for in the legislation.
II. Facts
[6]
In 2005 and 2006,
David Dunlop was a university student. He held part-time jobs. When he
graduated in 2006, he started full-time employment. He attended university in a
different city than his parents’ home. His full-time employment was in yet
another city. In addition to the taxpayer having a different temporary address
while at school than his parents’ permanent address, his parents moved homes in
2007 before the missing 2006 T4 was received.
[7]
In 2005, David Dunlop
did not report his part-time employment income from Bulk Barn. Apparently, he
had not received his copy of the T4. CRA had received its copy and the taxpayer
was assessed or reassessed on the additional T4 income and tax was paid in the ordinary
course.
[8]
In 2006, David Dunlop
again did not receive his copy of the T4 slip from Bulk Barn. Before the end of
April, he went into his Bulk Barn location to seek a copy. His employer is a
franchised store. Its owner lived in another city. He had still not received
his copy of the T4 by April 30.
[9]
David’s father and
counsel in this appeal, James Dunlop, prepared David’s 2006 tax return at the
end of April 2007 for David’s signature. In preparing the return, David estimated
for his father the amount of his employment income from Bulk Barn to be about
$5,250. The written estimation of this amount from April 2007 was put into
evidence.
[10]
In completing the
return as signed and filed, the Bulk Barn employment and missing T4 was
disclosed as follows above "Line 101 – Employment income": "T4
missing from Bulk Barn – will amend when received."
[11]
The return included David’s
other T4 and T3 amounts. There was tax owing which was paid.
[12]
CRA’s Notice of Assessment
was dated May 2007. That initial assessment assessed David’s tax liability
as filed, that is not accounting for any Bulk Barn income. CRA reassessed the
taxpayer on October 4, 2007 and included $6,463 of additional Bulk
Barn income as shown on the T4 filed by Bulk Barn with CRA. Additional tax
payable was assessed thereon in the amount of approximately $750. Of that, $554
of tax had already been withheld and remitted to CRA by Bulk Barn. In addition,
the reassessment assessed the 10% federal penalty of $646 and a similar
provincial penalty.
[13]
Either the day before
or the day after this reassessment was received in October 2007, David
Dunlop’s copy of the Bulk Barn 2006 T4 arrived in the mail. The T4 shows employment
income of $6,464 and employee deductions totalling $938. This means David’s take
home was $5,526. David’s estimate of $5,250 was within 5 % of that actual
amount.
III. Analysis
[14]
The question to be decided
in this case is whether the taxpayer’s disclosure of the missing T4 in his
return showed he was duly diligent in attempting to ensure that the amount of
his Bulk Barn income did not go unreported by him to CRA.
[15]
Both parties in this
case were well represented by able and thoroughly prepared counsel. I was
referred to several cases where similar penalties were upheld in circumstances where
there was no disclosure whatsoever in the return of the amounts reflected in
missing information slips. That was the case in Saunders, as well as in Paul
v. Her Majesty The Queen, 2008 DTC 3060. The taxpayers were
unsuccessful in both of those cases.
[16]
That was also the case
in Justice Wood’s decision earlier this month In Raboud v. Her Majesty The
Queen, [2009] T.C.J. No. 71. In Raboud, Justice Woods vacated
the penalty in circumstances where the amounts on the missing information slips
were not reported in the return, but were mailed in by the taxpayer the
following month when they were received, seemingly without a cover letter or a
T1 Adjustment Request form.
[17]
Both counsel tell me
they have been unable to find a decision considering whether or when some
disclosure in the return of a missing information slip will constitute due
diligence to avoid the amount of income going unreported. This is perhaps surprising,
but the result is that neither side can be faulted for pursuing this case as a reasonably
important principle to have considered by the Court.
[18]
It is the Crown’s
position that the disclosure made in the return does not rise to the threshold
of due diligence. The Crown points out that the language of subsection 163(1)
imposes the penalty if the taxpayer fails to report an amount of income. This
means disclosure of additional employment income for which a T4 should have
been issued without including an estimate of the amount in the return is insufficient.
According to the Crown, due diligence required the estimated amount to be
included in the return.
[19]
The Crown’s further position
is that the due diligence defence cannot be made out when the taxpayer did not
give his employer his new address, especially since it was the same problem
that appears to have caused the prior year’s Bulk Barn T4 not to have been
received.
[20]
A helpful consideration
to bear in mind in this analysis is the purpose of subsection 163(1), and
whether the taxpayer’s attempts to obtain his T4 and his disclosure in the
return were likely to help satisfy or frustrate that purpose. As set out in Saunders
above, the purpose of this penalty is to ensure the integrity of Canada’s self-reporting system.
[21]
Another helpful
consideration in deciding what is sufficient diligence to be due diligence
warranting the cancellation of the penalty, is what the tax authorities advise Canadian
taxpayers to do in such circumstances. After all, late and lost information
slips are not at all an uncommon occurrence. It is presumably for exactly these
reasons that each year the topic warrants its own sections in CRA’s Tax Guide.
[22]
The 2006 Tax Guide was
not put into evidence by either party in this appeal under the Court’s informal
procedures. It is readily available online at the CRA’s official website. I did
advise the parties in the course of the proceeding that I had consulted prior
years’ CRA tax guides and tabled my particular concerns with them.
[23]
There are three parts
of the 2006 Tax Guide that touched on this. Under the heading "Line 101 –
Employment income" is written:
Enter the total of amounts shown in box 14 of all your T4 slips. If you have not received your slip by
early April, or if you have any questions about an amount on a slip, contact
your employer. For more information see ‘What if you are missing information?’
Under the later heading "What if you are missing
information?", it is written:
If you have to file a return for 2006, as explained on page 7, make
sure you file it on time (see page 7) even if some slips or receipts are
missing. If you know that you will not be able to get a slip by the due date,
attach to your paper return a note stating the payer’s name and address, the type of income involved, and what you
are doing to get the slip. To calculate the income to report, and any related
deductions and credits you can claim, use any stubs you may have, and attach
them to your paper return. If you are filing electronically, keep all of your
documents in case we ask to see them.
Thirdly, under the heading "How do you change a
return?", it is written:
If you need to make a change to any return you have sent us, do
not file another return for that year. You should wait until you receive
your Notice of Assessment before requesting any change to a return that
has not been processed.
[24]
Notably, for 2006, CRA
was not advising taxpayers to put in a rough estimate of the employment income
earned for which one had not yet received a T4 slip. It was instructing to only
insert an amount if one had pay stubs that could be used to make the
calculation and to include copies of those pay stubs. It does not say to make a
best estimate in any other case.
[25]
CRA recommended
attaching a note to the paper return that identified the payer and the type of
income and what is being done to get the missing slip.
[26]
In this case,
David Dunlop’s notation in the return clearly identified additional
employment income was paid to him by Bulk Barn. While he did not say what he
was doing to get the missing slip, his notation in the return said he will
amend the return when the missing T4 is received.
[27]
By and large,
David Dunlop clearly signed and filed a return that did what the CRA Tax
Guide told him to do in the circumstances. While this alone does not mean that
as a matter of law he exercised sufficient due diligence to absolve him from
liability for a subsection 163(1) penalty, he did exercise the diligence CRA said
they expected him to in just the circumstances he found himself in.
[28]
In these circumstances,
I am satisfied that the taxpayer exercised sufficient diligence to ensure his
Bulk Barn income did not go unreported. He disclosed the source and the nature
of the income in his return. He undertook to amend his return when the T4 was
received. He tried to contact his employer at the place of employment. It was
reasonable in the circumstances for the Dunlops to assume it was only David’s
copy of the T4 that had gone astray and that CRA would have received its copy electronically
or otherwise, and that CRA would thus know exactly the amounts involved.
[29]
The approach taken by
the taxpayer could not reasonably be considered to have been an attempt to
frustrate or defeat the integrity of the self-reporting system. He was self-reporting
to the extent he could and largely as advised by the CRA Tax Guide in the circumstances.
[30]
A case such as this is materially
different than those cases I was referred to where no disclosure whatsoever was
made in
the tax return. This also appears to be a stronger case for the taxpayer than
in Raboud, where no disclosure was made in the return, but the taxpayer
sent the information slips in when he received them and before the return was
assessed.
[31]
In these particular circumstances,
I am allowing the taxpayer’s appeal and vacating the penalty assessed. This
does not mean that any mere disclosure of a source of income in a return will
be sufficient to avoid a penalty for not reporting.
[32]
Given this disposition
of the appeal, while this Court does not have any jurisdiction over the Ontario
penalty, it is administered by CRA on behalf of Ontario,
and I am recommending that CRA consider reversing that penalty as well.
Signed at Ottawa, Canada, this 27th day of March 2009.
"Patrick Boyle"
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