Citation: 2008TCC62
Date: 20080304
Docket: 2006-1911(IT)G
BETWEEN:
DANIEL SAVARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
AMENDED REASONS FOR
JUDGMENT
Tardif J.
[1] This is an
appeal for the 1998 and 1999 taxation years under the Income Tax Act (the
“Act”).
[2] The issues are
as follows:
[TRANSLATION]
11. Was
the Minister correct in issuing the notices of reassessment in issue after the
period ordinarily allowed for reassessments?
12. Did
the Appellant receive a benefit from Industries FDS Inc. when it paid the Appellant’s
professional fees in 1998 and 1999 in the amounts of $72,244 and $4,167,
respectively?
13. In
the alternative, do the professional fees paid for the benefit of the Appellant
have to be included in his income under subsection 56(2) or 246(1) of the Act?
14. Did
the Appellant knowingly or under circumstances amounting to gross negligence fail
to include the fees received in his income?
[3] In making and confirming the assessments
and penalties relating to the 1997, 1998 and 1999 taxation years, the Minister
of National Revenue (the “Minister”) relied on the following facts, as set out
in the Reply to the Notice of Appeal (the “Reply”):
[TRANSLATION]
9. ...
(a) On
March 20, 1998, Judge Morand of the Court of Québec (Criminal and Penal
Division) found the Appellant guilty on 15 counts of making false documents and
uttering forged documents, contrary to sections 366 and 368 of the Criminal
Code (R.S.C. 1985, c. C‑46).
(b) The
acts with which the Appellant was charged were committed between November 1985
and March 1988.
(c) At
that time, the Appellant was a shareholder and employee of Industries Savard
Inc.
(d) The
Appellant made false accounting documents and submitted them to financial
institutions on behalf of his company, Industries Savard Inc., to obtain
financing.
(e) Throughout
1998 and 1999, the Appellant was employed by Industries FDS Inc. (the “Company”).
(f) His
employment contract provided that professional fees incurred by him for legal
proceedings involving him personally would be paid by the Company.
(g) During
those years, the Company paid professional fees for services retained by the Appellant
for his own benefit.
(h) Those
professional fees included the fees and disbursements of counsel for the
following proceedings:
(i) Trial
for making false documents and uttering forged documents, attendance for
judgment and sentencing submissions in the Court of Québec (Criminal and Penal
Division);
(ii) Appeal
to the Quebec Court of Appeal from conviction and sentence;
(iii) Application
to the National Parole Board;
(iv) Application
to the Appeal Division of the National Parole Board;
(v) Application
to the Quebec Court of Appeal for review of the decisions of the authorities
referred to in subparagraphs (iii) and (iv);
(vi) Action
brought against the Appellant by Jean‑Jacques Verrerault in the Superior
Court;
(i) In
1998, those fees (legal and other) totalled $72,244, the breakdown being as
follows:
|
Persons
to whom fees were paid
|
Total amount
|
|
Lepage
Dinan, Advocates
|
$11,928
|
|
KPMG
|
$1,576
|
|
Michel
Aubin
|
$20,000
|
|
Jacques
Normandeau
|
$21,000
|
|
Josée
Ferrari
|
$9,953
|
|
Henri
A. Lafortune Inc.
|
$2,713
|
|
Jacques
St-Onge, Psychologist
|
$5,075
|
(j) In
1999, those fees totalled $4,167, the breakdown being as follows:
|
Persons
to whom fees were paid
|
Total amount
|
|
Lepage
Dinan, Advocates
|
$1,167
|
|
Jacques
Normandeau
|
$3,000
|
(k) The
Appellant did not include those fees in his income when he filed his income tax
returns for 1998 and 1999.
10. ...
(a) In 1998 and 1999, the Appellant retained
professional services, including the services of counsel to represent him in
the Court of Québec (Criminal Division), the Quebec Court of Appeal, the
National Parole Board and the Appeal Division of the National Parole Board.
(b) The
Company paid the professional fees for the services retained by the Appellant,
for the benefit of the Appellant.
(c) The
Appellant was a director and the president of the Company.
(d) The
Appellant knew that the Company was making payment directly to the persons who
supplied the professional services:
(i) He initialled
the statements of account for the fees.
(ii) He signed the
cheques making payment of the fees.
(iii) His employment
contract provided for this.
(e) The
Appellant had previously been audited, for the 1991 to 1995 taxation years, and
an employee benefit had been included in his income for similar, substantial
professional fees incurred by him and paid by his employer.
(f) Moreover,
a penalty under subsection 163(2) of the Act had been imposed for each of those
years.
(g) The
Appellant did not include the $72,244 and $4,167 in his income in 1998 and
1999, respectively, representing the total professional fees paid on his behalf
by the Company.
(h) These
are substantial amounts, as compared to the income reported for those years,
and in particular 1998, when they represent 108% of the income reported.
[4] A number of the
facts alleged in the Notice of Appeal were admitted; they are as follows:
[TRANSLATION]
1. THE APPELLANT appeals from NOTICES OF
ASSESSMENT Nos. 7‑050906‑012130 and 7‑050906‑012437 issued
by the Canada Customs and Revenue Agency (the “Agency”) under the Income Tax
Act (R.S.C. 1985, 5th Supp.) (the “ITA”), dated September 15, 2005, in
which the Minister of National Revenue assessed the APPELLANT $38,392.24 and
$2,103,07, for the 1998 and 1999 taxation years, respectively.
2. During
the period preceding the 1998 taxation year, the APPELLANT committed acts that
resulted in criminal charges being laid against him.
...
4. At
that time, Industries FDS Inc. was a subsidiary of 2746‑8479 Québec
Inc.
5. At
that time, all of the issued and outstanding shares of 2746‑8479
Québec Inc. were held by the APPELLANT’s spouse, Anne Giguère.
6. On
March 19, 1998, the APPELLANT was convicted of the criminal charges laid
against him and he was sentenced on May 7, 1998.
7. During
the 1998 and 1999 taxation years, Industries FDS paid lawyers’ fees relating
directly and indirectly to the prosecutions against the APPELLANT.
...
9. On
May 3, 2002, following an audit, the Agency issued notices of reassessment to
Industries FDS Inc. for the 1996, 1997, 1998 and 1999 taxation years, in which
the Agency disallowed, among other things, the deduction of professional fees
in the following amounts:
|
Year
|
Amount
|
|
1996
|
$23,369
|
|
1997
|
$9,972
|
|
1998
|
$72,244
|
|
1999
|
$4,167
|
|
|
$109,752
|
10. On
May 3, 2002, Industries FDS Inc. filed notices of objection, in proper form, to
the notices of reassessment for 1996, 1997, 1998 and 1999 issued on May 3,
2002.
...
13. On
July 16, 2002, Anne Giguère filed notices of objection, in proper form, to the
notices of reassessment for the 1996, 1997, 1998 and 1999 taxation years issued
on May 3, 2002.
14. On
September 15, 2005, in reply to the notice of objection filed by Anne Giguère, the
Agency issued notices of reassessment to Anne Giguère for the 1996, 1997, 1998
and 1999 taxation years in which, among other things, the Agency removed from
Ms. Giguère’s income the taxable benefits relating to the payment of
professional fees in the following amounts:
|
Year
|
Amount
|
|
1996
|
$23,369
|
|
1997
|
$9,972
|
|
1998
|
$72,244
|
|
1999
|
$4,167
|
|
|
$109,752
|
15. On
September 15, 2005, the Agency issued the following to the APPELLANT:
a. a
notice of assessment in the amount of $38,392.24, No. 7‑050906‑012130,
for the 1998 taxation year. That notice of assessment added to the APPELLANT’s
income a taxable benefit in the amount of $72,244, relating to “Personal expenses
paid by ‘Les Industries FDS Inc.’ (lawyer’s fees)”, and levied duties in the
amount of $15,164.58, a $7,939.75 penalty and $15,288.41 in interest, and
b. a
notice of assessment in the amount of $2,103.07, No. 7‑050906-012437,
for the 1999 taxation year. That notice of assessment added to the APPELLANT’s
income a taxable benefit in the amount of $4,167, relating to “Personal
expenses paid by ‘Les Industries FDS Inc.’ (lawyer’s fees)”, and levied duties in
the amount of $904.94, a $495.95 penalty and $702.18 in interest.
16. On
October 31, 2005, the APPELLANT filed notices of objection, in proper form, to
the notices of assessment issued on September 15, 2005, Nos. 7‑050906‑012130
and 7‑050906-012437.
17. On
or about March 30, 2006, the Minister of National Revenue confirmed notices of
assessment Nos. 7‑050906-012130 and 7‑050906-012437 issued
to the APPELLANT on September 15, 2005. THE NOTICE OF CONFIRMATION BY THE
MINISTER CONTAINED THE FOLLOWING STATEMENT:
You
received taxable benefits in the course of your employment with Industries FDS Inc.
The value of those benefits, which totalled $72,244 in 1998 and $4,167 in
1999, constitutes income from an office or employment under paragraph 6(1)(a).
Reassessments were made under subparagraph
152(4)(a)(i) for the 1998 and 1999 taxation years based on a
misrepresentation attributable to neglect, carelessness or wilful default in
filing the returns.
You
knowingly or under circumstances amounting to gross negligence made an omission
in your income tax returns for the 1998 and 1999 taxation years, within the
meaning of subsection 163(2). Because the taxes and amounts payable under
paragraphs 163(2)(a) to (g) exceed the taxes and amounts that
would have been payable if they had been calculated under those paragraphs, you
are liable to penalties of $7,939 for 1998 and $495 for 1999,
calculated in accordance with subsection 163(2).
18. The
APPELLANT appealed from notices of assessment Nos. 7‑050906-012130 and 7‑050906-012437,
which were issued to the APPELLANT on September 15, 2005, by the
Agency.
...
[5] The following
paragraphs of the Reply were admitted:
[TRANSLATION]
9. ...
(a) On
March 20, 1998, Judge Morand of the Court of Québec (Criminal and Penal
Division) found the Appellant guilty on 15 counts of making false documents and
uttering forged documents, contrary to sections 366 and 368 of the Criminal
Code (R.S.C. 1985, c. C‑46).
(b) The
acts with which the Appellant was charged were committed between November 1985
and March 1988.
(c) At
that time, the Appellant was a shareholder and employee of Industries Savard
Inc.
(d) The
Appellant made false accounting documents and submitted them to financial
institutions on behalf of his company, Industries Savard Inc., to obtain
financing.
(e) Throughout
1998 and 1999, the Appellant was employed by Industries FDS Inc. (the “Company”).
(f) His
employment contract provided that professional fees incurred by him for legal
proceedings involving him personally would be paid by the Company.
(k) The
Appellant did not include those fees in his income when he filed his income tax
returns for 1998 and 1999.
10. ...
(c) The
Appellant was a director and the president of the Company.
(d) The
Appellant knew that the Company was making payment directly to the persons who
supplied the professional services:
(i) He initialled
the statements of account for the fees.
(ii) He signed the
cheques making payment of the fees.
(iii) His employment
contract provided for this.
(g) The
Appellant did not include the $72,244 and $4,167 in his income in 1998 and
1999, respectively, representing the total professional fees paid on his behalf
by the Company.
[6] The Appellant
was the only witness for his appeal. He acknowledged most of the facts.
However, he denied that he had received any benefit from the professional fees
paid to various lawyers by the company for which he worked, and in which all of
the shares were held by his spouse. The amounts of the fees in question were
not disputed.
[7] First, the
Appellant said that the fees were paid in accordance with his employment
contract. Second, he said that the services provided by the various lawyers and
professionals had primarily benefited Industries FDS Inc., which paid the
amounts referred to in the assessment.
[8] He explained
that during the years in question he was the head of the company, which
employed about 200 people; he said that at that time, he was the person on whom
depended both the success and the growth of the company, the shares in which
were owned by his spouse.
[9] He said that
the company was very profitable at that time and that most of its success was
attributable to him. In other words, the Appellant said that he was essential
to the company.
[10] In support of
that assertion, he showed that a number of important parties, including a bank,
had required that he manage the business, or otherwise they would terminate
their business relationship with the company.
[11] He explained
that after he was sentenced to several years in penitentiary, the fees were
paid to have his term of imprisonment reduced. His sentence was reduced from
seven years to two years less a day. The purpose for which the various
professional services were retained was to obtain less stringent conditions of
detention so that he would be closer to his place of work and would be in a
better situation to look after the company’s affairs, he being the president
and general manager of the company, and his spouse being, I would recall, the
sole shareholder.
[12] In support of
his assertion that he was an employee who was essential to the success of the
business, he said he had been visited several times by managers in the company
after he received approval from the prison authorities to have numerous
telephone conversations on a daily basis with various people who were handling
the management of the business, so that he could ensure that it was being run
properly. He also said he had had special permission, including supervised
leave, so that he could play the lead role in negotiating an important contract.
[13] The acts with
which the Appellant was charged, which led to his conviction, were committed
between November 1985 and March 1988, while he was employed by Industries
Savard Inc., a different company from the one that paid the fees that are the
subject of this appeal. He was charged with, among other things, making false
documents, including fictitious accounts receivable, to enhance the financial image
of the business.
[14] During 1998 and
1999, the Appellant was employed by Industries FDS Inc. (the “company”). His
employment contract provided that his employer would be responsible for paying
fees relating to criminal prosecutions for acts allegedly committed by him
during the time he was working for Industries Savard Inc.
[15] Essentially, the
Appellant did not deny that he benefited from the assistance of the various
professionals, and more specifically the services of several lawyers; he
hastened to add, however, that the company of which his spouse was the sole
shareholder, and of which he was president and general manager, was the legal person
that primarily benefited from the work for which the fees were paid.
[16] Although it was
proved on a balance of probabilities that the Appellant was essential to the
company that paid the fees, must we conclude that the company is the entity
that benefited most from the fees paid?
[17] The undeniable
fact is that had the Appellant not been employed by Industries FDS Inc. when
the proceedings were initiated, he would have had to pay the cost of the
professional fees for his defence personally.
[18] Payment of the
professional fees undeniably improved the Appellant’s economic situation; in
addition, payment of the professional fees was not intended to reimburse the
Appellant for any prejudice suffered by him as a result of his employment at
the time the acts charged were committed. Rather, this was a benefit granted in
connection with his employment with Industries FDS Inc., which was in fact
provided for in his employment contract.
[19] The Appellant
reviewed the company’s tax history as it related to the fees paid in connection
with his case. He explained that the company had been audited previously, as a
result of which the principal shareholder, his spouse, had been assessed in
connection with the shareholder benefit relating to the payments of the same
professional fees, which were owing and paid in connection with the criminal
charges against her spouse.
[20] After the notice
of objection was filed and discussions were held, the Minister vacated the
assessment relating to the spouse; he then agreed that the company would
declare the expense relating to the fees under the employment contract that the
Appellant had provided to him.
[21] After that
change of mind, the Appellant himself was reassessed on the ground that this
was a benefit from his employment. The assessment in question has never been
paid, since the Appellant has made an assignment of property.
[22] In September
2005, the Minister resumed his efforts and made another assessment, the facts
and basis of which were substantially the same. This time, the period covered
by the assessment corresponded to the 1998 and 1999 taxation years.
[23] Here again, the
assessment was made in the name of the principal shareholder, the Appellant’s spouse.
After a new objection was filed, once again, the assessment was again vacated
and a new one made against the Appellant. In other words, the Minister repeated
the same scenario.
[24] The Respondent
called David Kirk to testify; he essentially reiterated the facts established
by the Appellant’s evidence: that these two assessments were made, based on the
same facts, for what were, however, different periods.
[25] For both
periods, the first assessments were made against the Appellant’s spouse on the
ground that she had received a benefit as the principal shareholder. In
response to her submissions, in both cases, the assessments were vacated and
reassessments made against the Appellant on the ground that he had received a
benefit arising out of the work he performed, and in particular out of the
employment contract.
[26] The first
assessment was never paid, and was included in the Appellant’s liabilities when
he made an assignment of his property. This appeal relates to the period from
1998 to 1999, and the facts indicate that the assessment in question arises out
of the second audit.
[27] The Appellant
acknowledges that he received at least a portion of certain benefits, including
a much shorter period of incarceration, but also, according to his own
testimony, much more flexible conditions of detention that allowed him to look
after the affairs of the company that paid the lawyer’s fees.
[28] He submits,
however, that the benefits were mainly received by the company, given that the
Appellant was then more available to the company, this being of considerable
importance for the proper management of the company in question.
[29] The Appellant
described himself as a very high-level employee, and even as an essential
person. He argued that this was the fundamental reason why the fees were paid
by the company, and in return the company had the benefit of his experience,
talents and expertise.
[30] He also said
that the professional fees were paid by the company under the employment
contract between him and the company.
[31] The Respondent
stressed that the criminal proceedings against the Appellant, which led to a
guilty verdict with a sentence of imprisonment, arose out of the criminal facts
and actions (making a number of false documents, including creating very
substantial and entirely fictitious accounts receivable) that dated back to a
period when he was not employed by the company that paid the fees.
[32] The company that
benefited artificially from the fraud was not the company that paid the fees incurred
in respect of the criminal proceedings. In other words, the criminal acts had
nothing to do with the company that paid the fees.
[33] The Respondent
therefore submits that Industries FDS Inc. received no benefit from the
payments it made. This was essentially money added to the salary paid to the
Appellant in relation to his employment, and this explains the assessment made
against the Appellant.
[34] However, if
things were as clear as the Respondent claims, why did she make the initial
assessment against the shareholder?
[35] The assessments
under appeal relate to the 1998 and 1999 taxation years, years in respect of
which the time allowed for reassessing has expired.
[36] In fact, the
Appellant submits that the assessment under appeal is statute-barred.
[37] The Appellant
further alleges that he committed no fraud, wilful default or misrepresentation
such as would justify making a reassessment or imposing a penalty, because the
time limit has expired.
[38] The Respondent
submits that the payments made by the company on behalf of the Appellant
provided him with a benefit in connection with his employment under subsection 6(1)
of the Act, and accordingly the payments form an integral part of his income
from employment.
[39] The Respondent
also argued that the misrepresentation of facts made as a result of neglect,
carelessness or wilful default authorizes the Respondent to assess the
Appellant even if the time limit has expired. In other words, the Respondent
contends that the limitation period does not apply.
Analysis
[40] Are the fees
paid by Industries FDS Inc. to various professionals for the services performed
for the Appellant a taxable benefit to the Appellant?
[41] The decision in Dionne,
[1996] T.C.J. No. 1691, 97 D.T.C. 265, cited by the Respondent,
is extremely clear as to the position to be taken in this case. In that decision,
Mr. Justice Archambault of the Tax Court of Canada stated the following:
To determine whether
a reimbursement constitutes a “benefit” under paragraph 6(1)(a), I
believe it must be asked whether the purpose of the reimbursement is rather to
remedy a harm suffered by the employee as a consequence of his employment. If
this is the case, it cannot rightly be argued that an employer is conferring a
benefit on an employee. In remedying the harm suffered by an employee, the
employer is merely restoring him to the position he was in before he suffered
the harm. In my opinion, when the question as to whether a reimbursement
constitutes a benefit is considered from this perspective, it is easier to
determine to what extent a reimbursement must be included in or, conversely,
excluded from a taxpayer’s income.
...
It should be added, while determining the
existence of prejudice caused by employment helps in distinguishing
reimbursements that constitute a benefit for the purposes of paragraph 6(1)(a)
from those that do not, the ultimate test is still whether a benefit is
conferred on an employee. …
...
This leads us to make one final remark:
Remark 4
The reimbursement of a personal expense
does not necessarily represent a benefit for the employee. What is conclusive
is the purpose of the payment and the effect achieved: is it intended to remedy
prejudice caused by his employment or to provide a benefit? Did the employee
enjoy a benefit?
[42] The Appellant
was prosecuted for crimes committed while he was employed by a different
business. Because he was the only person responsible, he obviously cannot claim
that the facts and acts with which he was charged are connected with his
employment at Industries FDS Inc. because those facts and acts date back to a
period prior to when he started working for Industries FDS Inc.
[43] Because he was a
key person in the business, obviously a prosecution for making false accounts receivable
could have had an impact on the company’s image.
[44] Nonetheless, the
evidence established that the Appellant’s presence within the business was
desired and desirable, on the part of the persons and entities that would
normally have wanted him to be dismissed. The fact that they supported the
Appellant says a great deal about his professional skills.
[45] While the
Appellant was incarcerated, he was allowed to receive visits from and to make telephone
calls to his managers and other company employees; he even obtained permission
to negotiate a major contract outside the prison.
[46] Despite being
incarcerated, the Appellant was able to perform duties associated with his
employment and manage the business.
[47] In my opinion,
the evidence has established that the Appellant played an essential role in the
company that paid the fees; on the other hand, it is equally obvious that the
Appellant received a real benefit. In fact, the fact that the payment was
stipulated in his employment contract shows that this was an indirect form of
remuneration.
[48] Had the
Appellant not been employed by FDS at the time of the prosecution, he would
have had to pay the cost of the professional fees personally, to defend himself
or pay for the various consultations that were needed. Payment of the
professional fees undeniably improved his economic situation. There is
therefore no doubt that payment of the professional fees was not intended as
reimbursement for a prejudice suffered by the Appellant as a result of his
employment. Rather, it was a benefit conferred by reason of his employment with
Industries FDS Inc.
Limitation Period in Respect of
the Notice of Assessment
[49] Subparagraph 152(4)(a)(i) of the Act, which governs time
limits for assessments, reads as follows:
(4) Assessment and reassessment [time limit] -- The Minister may at any time make an
assessment, reassessment or additional assessment of tax for a taxation year,
interest or penalties, if any, payable under this Part by a taxpayer or notify
in writing any person by whom a return of income for a taxation year has been
filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer’s normal
reassessment period in respect of the year only if
(a) the taxpayer or person filing
the return
(i)
has made any
misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud in filing the return or in supplying any
information under this Act, ...
[50] The Federal
Court of Appeal clarified the expression “misrepresentation” in Boucher,
2004 FCA 46, 2004 CarswellNat 954, 2004 D.T.C. 6084,
[2004] 2 C.T.C. 179 (QL), in which the Court said that there must be
not only misrepresentation in order for the Minister to be able to assess after
the expiry of the time allowed. The Court said that there must be, in addition
to a misrepresentation, a finding that the misrepresentation is attributable to
neglect, carelessness or wilful default on the part of the taxpayer.
[51] It should be
noted that the burden of proving that an assessment made after the prescribed
time is well-founded in law rests on the Department, under
subparagraph 152(4)(a)(i) of the Act (see Bigayan v. R.,
[2000] 1 C.T.C. 2229).
[52] Mr. Justice
Cardin of the Tax Review Board interpreted the words “neglect” and
“carelessness” in subparagraph 152(4)(a)(i) of the Act as having
the same meaning as their ordinary meaning. In Froese v. M.N.R.,
[1981] C.T.C. 2282, Cardin J. said the following:
I do
not believe that in this context any inference other than their generally
accepted meaning can or should be given to the words “neglect” or
“carelessness” which is the contrary of the reasonable care that is ordinarily,
usually, or normally given by a wise and prudent person in any given
circumstances.
[53] The expression
“neglect” was defined by Mr. Justice Strayer of the Federal Court of
Appeal in Venne v. R, [1984] C.T.C. 223, [1984] F.C.J. No. 314 (QL). Strayer J.A.
wrote the following:
I am satisfied
that it is sufficient for the Minister, in order to invoke the power under sub‑paragraph
152(4)(a)(i) of the Act to show that, with respect to any one or more
aspects of his income tax return for a given year, a taxpayer has been
negligent. Such negligence is established if it is shown that the taxpayer has
not exercised reasonable care.
[54] The Court
therefore concluded that the taxpayer had been negligent because he did not
read the tax returns filled out by his accountant before sending them. In
addition, the Court found that the errors were so gross that even a person with
a limited education should have noticed them.
[55] In this case,
the Respondent bases her argument regarding the limitation period in respect of
the assessment on Nesbitt v. Canada, [1996] F.C.J. No. 1470, a decision
of the Federal Court of Appeal.
[56] In that case,
the Appellant had admitted making an error in his return, and admitted that it
was his fault and had been committed out of carelessness. The Court said that
in order for there to be a misrepresentation, there had to be an incorrect statement
on the return form.
[57] The Court
therefore concluded that the taxpayer had been negligent because he had not
read the tax returns filled out by his accountant before sending them. In
addition, the Court added that the errors were so gross that even a person with
a limited education should have noticed them.
[58] That is
obviously a very liberal interpretation of subparagraph 152(4)(a)(i)
in terms of the Minister’s right to assess after the normal period. The result
would be that the Minister would not have to comply with the time limit
whenever he could establish that there was an error in a taxpayer’s tax return.
That interpretation is contrary to the spirit of the provision and to the
judicial interpretations quoted earlier.
[59] I do not believe
that evidence of a single error resulting from the presence of an inaccurate
fact is sufficient to preclude the effect of the time limit in the Act. Rather,
I think that there needs to be evidence of a more serious wrongdoing than mere
error.
[60] The Respondent
also cited Demers v. Canada, [2002] T.C.J. No. 326, a decision of Chief
Judge Garon, as he then was, of the Tax Court of Canada. The facts in that case
cannot be compared to the facts in this case. The Court found that the Appellant
had not exercised reasonable care. He had deducted expenses relating to a
contract entered into by his company from his personal income, when the income
received in relation to the contract had been declared in the company’s tax
return. This was therefore a clear case of negligence on the part of the
taxpayer under subparagraph 152(4)(a)(i).
[61] The facts in
this case are very different. The Respondent assessed the Appellant’s spouse in
2002 based on a benefit to the shareholder for the 1998 and 1999 taxation
years. The Respondent then changed her mind and vacated the assessment after
receiving the notice of objection and disclosure of the employment contract.
[62] The Respondent
then assessed the Appellant, who subsequently made an assignment of property.
This case is based on the assessment made in 2005. Once again, the Department
assessed the Appellant’s spouse based on a benefit to the shareholder, before
changing her mind again and assessing the Appellant.
[63] It should be
noted that the Respondent’s witness, Martin Kirk, said at the hearing that the
question of whether the benefit related to the shareholder or the employee was
a complex one. He even added that this is the main problem the Respondent was
facing when she made the assessment (see the transcript, at pages 117 and 118).
[64] As noted in Venne,
supra, in order for a taxpayer to come under subparagraph 152(4)(a)(i),
it must be established that the taxpayer did not exercise reasonable care. In
this case, the Appellant did not make a “misrepresentation that is attributable
to neglect, carelessness or wilful default” or commit “any fraud in filing the
return”. The Appellant believed in good faith that the amounts in question did not
have to be included in his income.
[65] The fact that
the Minister twice assessed the taxpayer’s spouse shows just how complex the
situation was. It is clear that the taxpayer did nothing wrong when he failed
to include the amounts paid for the fees in his income.
[66] In fact, even
after being informed of the existence of the contract that provided that fees
of this nature were payable by his employer, the Respondent assessed not the
Appellant, but his spouse.
[67] The least that
can be said is that the situation was by no means clear. The history of the
case during the first period tells us quite a bit about the difficulties
involved in it.
[68] The concept of
neglect, within the meaning of subparagraph 153(4)(a)(i) of the Act,
must be compared to the degree of negligence required in civil liability
matters (see Venne, supra, note 5; the Court refers to a
less stringent standard of fault than the negligence standard in the “law of
tort”, that is, civil liability). In Jet Metals Product Limited, [1979]
C.T.C. 2738, the Tax Review Board established a scale for determining the
degree of fault required under subsections 152(4) and 163(2), that is, in
respect of the time limit for reassessment and for imposing penalties for
misrepresentation or omission.
34 Turning
to subsection 163(2) for a moment and its relationship to subsection 152(4), it
is noted that it contains no reference to “fraud”, requiring only that the
person acted “knowingly” or that the circumstances amounted to “gross
negligence”. In my view, misrepresentation is fundamentally a false statement
made, or a true statement omitted, and to whatever degree a scale of offences
can be seen in subsections 152(4) and 163(2), it might be shown as follows:
(a) (b) |
Misrepresentation Carelessness Negligence Gross negligence Wilful Default Knowingly Fraud |
152(4) 152(4) 163(2) 152(4) 163(2) 152(4) |
Using
this scale as a general guideline, it will be the basis of the conclusions
reached in this decision that to reach a level of “gross negligence”, something
greater than “carelessness” or “negligence” is required, and that “wilful
default” may be equated with “knowingly”.
[69] It is therefore
clear, from the facts in this case and the case law, that the time for making
the assessment had expired and the Respondent could not rely on the exception
set out in subparagraph 152(4)(a)(i) of the Act.
[70] The Respondent
submits that the Appellant knew or should have known that these were taxable
amounts, and accordingly that he should have added the cost of the fees paid by
his employer to his income for the years in question, 1998 and 1999. Why, and
based on what? Because the Appellant had direct knowledge of the facts, first,
and second, because he was directly affected by how the first case had been dealt
with, the facts in that case being to all intents and purposes the same.
[71] When the first
audit was done, the assessment had first been made on the basis that this was a
benefit to the shareholder, who was related to the Appellant by the fact that she
was his spouse.
[72] After receiving
the notice of objection and disclosure of the employment contract, the
Respondent changed her mind, vacated the assessment and reassessed the
Appellant, who subsequently made an assignment of property.
[73] This case is
essentially a replay of the same scenario, with the Respondent concluding that
the Appellant should have included the amounts paid by his employer in his
income.
[74] This is in fact
a reasonable interpretation, and is justified by the facts. However, the
Appellant submits that all the facts, and in particular his employment
contract, were or should have been known to the Respondent. In spite of that,
the first assessment made was of his spouse. It is entirely reasonable to say
that he was not guilty of any wrongdoing or neglect. The Respondent had all of
the documents and information in hand, and essentially nothing was not known,
and yet an assessment was made regarding his spouse.
[75] The Respondent
says that the Appellant should have informed the Minister that the amounts in
issue were not part of his spouse’s income and included the amounts in his own
income. In the opinion of the Court, that is an unrealistic requirement.
[76] However, I do
not believe that the fact that the Appellant was not that wise, prudent and
vigilant can provide any basis that would justify making an assessment after
the time limit had expired.
[77] As well, I
believe that the very nature of the issue raised in the notice of objection,
but also in this appeal, tells us that the Respondent’s arguments were not as
crystal clear, in legal terms, as she would have had us believe.
[78] Does a person
have to include, when he or she fills out a tax return, everything that might
be income, based not on his or her own analysis but on speculation as to what
the Agency might want to attribute to him or her? I do not believe so. In this
case, there was enough information to justify the interpretation adopted by the
Appellant: that he had no obligation to declare the payments of fees by his
employer as taxable benefits. In fact, the debate as to who really benefited
from the services for which the fees were paid is clear evidence of how complex
the case was and how much confusion surrounded it.
[79] In the
Respondent’s submission, the Appellant’s deliberate decision to conceal
information arising out of his employment contract was sufficient to conclude
that there had been wrongdoing.
[80] In other words,
the Respondent would have wanted the Appellant to declare the amounts that his
employer had paid in professional fees as part of his income, under protest, in
advance. What duty did he have to do this?
[81] That argument
raises a very important question: if things were as clear as they are said to
have been, if the facts were so undeniable, why did the Minister, in the second
attempt, after investing time in the first tax case, first issue an assessment
against the Appellant’s spouse, as a benefit to a shareholder, and then change
his mind and issue a reassessment against the Appellant?
[82] This way of
doing things shows that things were not as clear as the Respondent argues today.
[83] I do not believe
that the evidence submitted justifies a finding that the requirements for
assessing the Appellant beyond the normal assessment period have been met.
[84] Having found
that there is no evidence that would permit assessment after the time allowed had
expired, and given that the requirements for doing so are less stringent and
rigid than the requirements for imposing penalties, there is no need to analyze
the evidence in respect of gross negligence under subsection 163(2) of the
Act relating to penalties.
[85] For all these
reasons, the appeal is allowed and the assessments are vacated on the ground
that there is no evidence to justify reassessment after the time limit had
expired, with costs to the Appellant.
Signed at Ottawa, Canada, this 4th day of March
2008.
“Alain Tardif”
Translation certified true
on this 11th day of June 2008.
Susan Deichert, Reviser
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