Citation: 2009 TCC 229
Date: 20090427
Docket: 2008-2117(IT)I
BETWEEN:
ALANNA D. ISZCENKO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Introduction
[1]
This is an appeal by
Alanna D. Iszcenko (the “Appellant”) in respect of the assessment of a penalty
by the Minister of National Revenue (the “Minister”) pursuant to subsection
163(1) of the Income Tax Act (the “Act”) for failure to report
income in more than one taxation years.
[2]
Subsection 163(1)
applies if a taxpayer fails to report income for two taxation years within a
four-year period.
[3]
On December 24, 2007,
the Minister reassessed the Appellant as follows for the 2006 taxation year, the
notice of reassessment being issued on that same day (the “2006 Reassessment”):
(a)
to include income from
647230 Alberta Ltd. T5, Bell Aliant T3 and Altagas Income Trust T3; and
(b)
to assess a Federal
Income Tax penalty in the amount of $4,006.80, being 10% of the taxable dividend
income of $40,068.00 from 647230 Alberta Ltd that the Appellant failed to
report, pursuant to subsection 163(1) of the Income Tax Act, R.S.C. 1998 (5th
Supp.) c.1, (the “Act”), as amended, for the 2006 taxation year.
[4]
In so reassessing the
Appellant, the Minister made the following assumptions of fact:
(a)
the Appellant received
dividend income from 647230 Alberta Ltd in the actual amount of $32,055.08 in
the 2006 taxation year;
(b)
the dividend income
received from 647230 Alberta Ltd was required to be included in the Appellant’s
income as a taxable dividend of $40,068.00, for the 2006 taxation year;
(c)
the Appellant failed to
report the dividend income received from 647230 Alberta Ltd in computing her
income for the 2006 taxation year;
(d)
the Appellant received
interest and investment income of $73.00 and other income of $205.00 from Seg.
Fund Trust Marketfund MM Fund and GWL Aggressive Portfolio Fund (the “Funds”)
in the 2003 taxation year;
(e)
the income received
from the Funds was required to be included in the Appellant’s income for the
2003 taxation year;
(f)
the Appellant failed to
report the income received from the Funds in computing her income for the 2003
taxation year; and
(g)
the Minister reassessed
the Appellant for the 2003 taxation year to include the income received from
the Funds.
[5]
The facts that were
assumed by the Minister are not contested. In brief, the Appellant testified
that her husband had passed away. Following the Appellant’s husband’s death,
her father-in-law caused 647230 Alberta Ltd (“647230 Alberta”)
to sell the building it owned. This building was used as the premises of a
flower shop business operated by the company. Following the sale of the
building, the Appellant received a distribution of $32,055.08 from 647230 Alberta.
[6]
The Appellant alleges
that two things caused her to omit to report the dividend income. She had asked
her father-in-law whether there any documents or forms that she needed to give her
accountant in connection with the distribution received from 647230 Alberta. He responded no. She claims that the situation was
not an unusual one as she had in the past received a return of capital on her
shares. She was of the misguided belief that 647230 Alberta
had not made a profit on the sale of the building and that the shareholders
recovered only part of their initial investment. Her father-in-law reinforced
this belief by responding that there was nothing for the Appellant to report in
connection with this transaction.
[7]
The second reason
invoked by the Appellant was her state of mind following the death of her
husband, which appears to have been very sudden. She claims that she was
extremely depressed and had trouble coping with the void left by his death.
This caused her not to second-guess the advice received from her father-in-law,
who was responsible for the sale. Her father-in-law was also responsible for
dealing with the external auditors of the company and requiring them to prepare
the tax forms, if any, necessary for the purpose of reporting the transaction
at the corporate and shareholder levels.
[8]
The Appellant contacted
her father-in-law after she was audited and assessed for failure to report the
taxable dividend from 647230 Alberta. She testified that it was only then that
she learned that her father-in-law had failed to provide her with the tax forms
he had received from the outside accountant.
II.
Issues
[9]
The issues for me to
determine are:
(a)
whether the Appellant was properly
assessed a penalty pursuant to subsection 163(1) of the Act in the amount of
$4,006.80 for the 2006 taxation year; and
(b)
whether I can grant the relief
sought by the Appellant.
III. Analysis
[10]
Counsel for the Respondent argues
that subsection 163(1) is a provision of strict liability, that the Minister
must show that there were two failures to report income in two returns filed
for two separate taxation years within a 4-year period in order for the penalty
to apply, that this Court does not have authority to cancel the penalty when
the aforementioned conditions are met, and that only the Minister has the discretion
to waive or cancel the penalty under subsection 220(3.1). Counsel cited the
cases of Saunders
and Lestage Giguère
in support of the Minister’s position.
[11]
I agree with the Respondent’s
position that the Minister must show two repeated failures in order for
the provision to apply. This being stated, the Appellant’s actions must
nonetheless rise to the standard of a “failure”. In brief, the Appellant must
be the one that fails to report the income in both cases. The key question is
whether the Appellant’s actions, in the present case, constitute a failure on
her part, or whether the failure is due to the actions of another person, thus giving
rise to a due diligence defence. Such a defence was accepted by my colleague
Justice Mogan in the case of Khail,
where he decided as follows:
13 I
cannot conclude that a person has “failed to report an amount” within the
meaning of subsection 163(1) when the person knows (i) that the amount was
payable to her as income by a particular payor; (ii) that the payor withheld a
certain portion of the amount as income tax to remit to Revenue Canada; (iii)
that the payor actually paid to the person only the balance remaining after
deducting the tax withheld; and (iv) that the payor was required to report to
Revenue Canada on a form prescribed by Revenue Canada the gross amount payable
to the person and the portion withheld and remitted as tax. Accordingly, I will
allow the appeal. If I should be correct in my interpretation of subsection
163(1), there is no prior “failure to report” with respect to the interest of
$320.12 received from the Royal Bank of Canada.
14 If I
should be wrong in my interpretation of subsection 163(1), then I would
respectfully ask the Minister to consider exercising the discretion permitted
in subsection 220(3.1) of the Act to waive or cancel all or most of the
penalty imposed relating to the Symcor earnings.
[12]
I adopt both of Mogan J.’s
conclusions. In short, I cannot conclude that the Appellant failed to include in
income the amount of $40,068 as a taxable dividend received from 647230 Alberta
when she had asked her father-in-law whether there were any tax forms required in
order to report the transaction and he responded no and led her to believe that
the amount received was a non-taxable capital receipt.
[13]
In the event that my
interpretation of subsection 163(1) should be wrong, I would respectfully ask
the Minister to consider exercising the discretion permitted in subsection
220(3.1) of the Act in light of the troubled state that the Appellant
found herself in following the death of her husband. It is a known fact that people
suffering from depression have serious lapses of concentration that can prevent
them from accomplishing tasks that are simple for healthy individuals.
[14]
The appeal is allowed without
costs.
Signed at Ottawa, Canada, this 27th day of April 2009.
"Robert J. Hogan"
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