Citation: 2007TCC293
Date: 20070522
Docket: 2005-3159(IT)G
BETWEEN:
JACK HOUGASSIAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The Appellant was
reassessed to include in his income for the year 2000 additional interest
income of $275,435 and to impose a penalty under subsection 163(2) of the Income
Tax Act (“Act”) in relation to this unreported interest income.
There was also a separate reassessment for other unreported income for 2000 and
a penalty under subsection 163(2) of the Act on that amount for 2000 but
these other amounts are not included in this appeal. The only matter that was
appealed to this Court was the imposition of the penalty under subsection
163(2) of the Act on the unreported interest income of $275,435 for
2000.
[2] The actual amount
of interest income reported by the Appellant on his 2000 income tax return was
$985. Since the amount of unreported interest income (which is not in dispute)
was $275,435, the total amount of interest income of the Appellant for 2000 was
$276,420. The Appellant therefore reported less than 0.36% of his actual
interest on his tax return.
[3] Linda Death, the
Private Banking representative of the Bank of Montreal who was responsible for
the bank accounts of the Appellant, testified that the Appellant had negotiated
a special rate of interest for his accounts that was higher than the normal
rate of interest. This was confirmed by the Appellant who testified that the
special rate of interest was a factor in moving the accounts to the Bank of
Montreal.
[4] Because the
accounts had a special rate of interest, every year there would be two T5s
generated – one by the Bank of Montreal computer system that would calculate
interest at the standard rate and a second amended T5 that would replace the
computer generated one. This second T5 was prepared manually by Linda Death and
she would arrange to have it delivered to or picked up by Mrs. Hougassian,
the Appellant’s spouse.
[5] The interest in
question related to a particular joint bank account in the names of the
Appellant and his spouse. The amount in this bank account ranged from a low of
approximately $3.4 million to a high of over $6.1 million. From the evidence
presented it would appear that the T5 generated by the Bank of Montreal
computer for this account showed interest of $7,807. However the passbook for
the account shows that the amount of interest for the months of January and
February (which are the two months during which the account balance was the
lowest) were $13,869 and $13,796 respectively.
[6] For each year
(including 2000) the Appellant simply took the T5s and other tax information
that his wife had sorted into folders and delivered these to their accountant
who prepared their personal tax returns. The same accountant had been preparing
their personal tax returns for several years. The Appellant was not a detail
person and did not look at his tax return after it had been prepared by the
accountant other than to determine whether he owed money or was entitled to a
refund and to sign it. He testified that if he would have looked at the amount
reported for interest income he would immediately have known that the amount of
$985 was incorrect.
[7] His total income
for the year 2000 was $3,154,851 and counsel for the Respondent argued that the
unreported interest income was a small percentage of the total income of the
Appellant for 2000 and therefore by only looking at the total income the
missing interest would not be noticed. However, the total income of the
Appellant was comprised of five items – Employment Income ($2,000,000), Dividends
($3,022), Interest ($985), Partnership Income ($31,038) and Taxable Capital
Gains ($1,119,806), based on the reconstructed tax return of the Appellant for
2000. The amount of interest is a separate line item on the tax return and it
is blatantly obvious that the amount reported was too low. Someone had to
insert the amount of $985 as interest income on the Appellant’s tax return. In
the previous year the amount of interest paid on this account was $124,403.
With interest of over $100,000 in the previous year and employment income of
$2,000,000 and taxable capital gains of over $1 million in the 2000 year, the
insertion of only $985 as interest for 2000 was more than simple carelessness.
The accountant who prepared the tax return was not called as a witness. The
Appellant stated that the accountant is now about 83 years old and unable to
recall many details.
[8] The Appellant is a
very successful and intelligent businessman who clearly knew that he had
maintained significant amounts of cash in this bank account in 2000 and who
knew that he was entitled to a greater rate of interest than the standard rate
paid by the Bank of Montreal. The Appellant testified that the computer
generated T5 of $7,807 for 2000 had to be too low based on the amounts that he
maintained in that account in 2000. Obviously if $7,807 is too low, then $985
is clearly a significant understatement of the interest earned.
[9] As noted above the
only issue in this case is whether the assessment of a penalty pursuant to
subsection 163(2) of the Act in relation to the unreported interest
income is valid.
[10] In Venne v. The Queen, [1984] C.T.C. 223, 84 DTC
6247, Strayer J. of the F.C.T.D. made the following comments on the meaning of
gross negligence for the purposes of penalties imposed under subsection 163(2)
of the Act:
“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.
(emphasis added)
[11] As noted above, the
insertion of only $985 as interest for 2000 in this case was more than simple
carelessness. It showed an indifference as to whether the Act was
complied with or not. In this case the Appellant testified that his tax return
was prepared by his accountant with very little input from the Appellant. The
Appellant testified that he had only a very brief discussion with the
accountant when he dropped off the information and then simply picked up his return
when it was ready, glanced at his return, signed it and filed it. The question
is then whether the Appellant can absolve himself from the imposition of the
penalty under subsection 163(2) of the Act on the basis that he did not
complete the tax return (and therefore he did not insert the amount of $985 as
interest) and he did not review the return in any detail.
[12] In Udell v.
M.N.R., 70 DTC 6019, Cattanach J. of the Exchequer Court of Canada found
that the gross negligence of the accountant could not be attributed to the appellant
in that case. However in the Udell case the appellant had kept complete
and accurate records of his income and all of these records were provided to
the accountant. In the present case there was no evidence that the amended T5
for the account in question was provided to the accountant. The amended T5 for
this account for 2000 was not produced and it is not clear whether this amended
T5 was misplaced or included in the files delivered to the accountant. Linda
Death testified that the amended T5 was produced every year and delivered to
Mrs. Hougassian. I accept her testimony and therefore the amended T5 would have
been prepared for 2000 and delivered to Mrs. Hougassian.
[13] In DeCock v.
M.N.R., 84 DTC 1523, Rip J. (as he then was) made the following comments:
34 The
appellant knows full well the consequences of filing an income tax return
containing — if that is the word — an omission of income. He had been convicted
previously of failing to report income and was fined and assessed a penalty.
And what he says his behaviour was when it came to sign the return is simply
not credible: while he says he “glanced” at the return to check his address he
was not even curious to find out his income for the year, or, what I find even
more difficult to accept, how much tax he had to pay for the year.
35 True
— if we accept the appellant's evidence — the appellant's accountant was
extremely negligent. But a taxpayer, in particular a businessman who knew
his various sources of income, cannot and does not exculpate himself from
liability by handing over his tax affairs to a professional and blindly,
without question, and in this case without even any interest, accepting what
the professional has done.
(emphasis
added)
[14] In the later case of
Foreman v. R., [2001] 1 C.T.C. 2342, Rip J. (as he then was) made
the following comments:
21 This
is not a case where any error is attributable only to the accountant, as in
Udell v. Minister of National Revenue. In Udell, the taxpayer kept meticulous
records in an account book and gave the book to his accountant to prepare his
tax return. Complete and accurate records were given to the accountant.
Certainly, this is not the situation at bar. Mr. Foreman was privy to any gross
negligence of Ms. Job. He knew - or was in a position to know - that the tax
return had errors. Mr. Foreman was indifferent as whether the Act was complied
with or not, so long as he got a refund.
[15] In the case of DeCosta v. R., 2005 DTC 1436,
Bowman C.J. dealt with the Udell case and the two decisions of Rip J. (as
he then was) referred to above and made the following comments:
9 I
have no difficulty in reconciling the decision of Cattanach J. with those of
Rip J. They each depend on a finding of fact by the court with respect to the
degree of involvement of the taxpayers. The question in every case is, leaving
aside the question of wilfulness, which is not suggested here,
(a) was
the taxpayer negligent in making a misstatement or omission in the return? and
(b) was
the negligence so great as to justify the use of the somewhat pejorative
epithet ‘gross’?
This is, I
believe, consistent with the principle enunciated by Strayer J. in Venne v. R.
(1984), 84 D.T.C. 6247 (Fed. T.D.).
. . .
11 In
drawing the line between “ordinary” negligence or neglect and “gross”
negligence a number of factors have to be considered. One of course is the
magnitude of the omission in relation to the income declared. Another is the
opportunity the taxpayer had to detect the error. Another is the taxpayer's
education and apparent intelligence. No single factor predominates. Each must
be assigned its proper weight in the context of the overall picture that
emerges from the evidence.
12 What
do we have here? A highly intelligent man who declares $30,000.00 in employment
income and fails to declare gross sales of about $134,000.00 and net profits of
$54,000.00. While of course his accountant must bear some responsibility
I do not think it can be said that the appellant can nonchalantly sign his
return and turn a blind eye to the omission of an amount that is almost twice
as much as that which he declared. So cavalier an attitude goes beyond simple
carelessness.
(emphasis
added)
[16] In this case the
error was significant. Only interest of $985 was reported. The total amount of
interest income of the Appellant for 2000 was $276,420. The Appellant therefore
reported less than 0.36% of his actual interest on his tax return. The
Appellant was the person who negotiated the higher rate of interest on his
account and he knew the balance in the account and the magnitude of interest
that the balance should have generated. Any quick review of the line items in
the tax return would have identified the fact that the interest was
understated. He had the opportunity to review his tax return but neither the
interest nor the desire to do so. The failure of the Appellant to detect the error
and to ensure that the correct amount of interest was reported in this case was
more than simple carelessness, it showed that the Appellant was indifferent
with respect to whether he complied with the Act.
[17] As a result the
appeal is dismissed, with costs.
Signed at Ottawa, Ontario, this 22nd day of May 2007.
"Wyman W. Webb"
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