Citation: 2012 TCC 288
Date: 20120731
Docket: 2011-2745(IT)I
BETWEEN:
ANDREW TACILAUSKAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
When Andrew Tacilauskas failed to report dividend income
in two successive years, he was assessed federal and provincial penalties, each
in the amount of $13,050. The question is whether the federal penalty should be
vacated on grounds of due diligence.
[2]
The appeal was heard under the
informal procedure and the appellant agreed to limit the relief on the penalty
to $12,000.
[3]
Mr. Tacilauskas is an electrical
contractor who has been in business with partners in Whistler, British Columbia since 2003. The businesses were operated by two corporations, West Systems
Inc. and Alpine Electric Ltd.
[4]
In his 2008 income tax return, Mr.
Tacilauskas reported total income of $269,338, which included taxable dividends
in the amount of $169,420 from Alpine Electric Ltd. The return failed to
include taxable dividends from West Systems Inc. in the amount of $31,250.
[5]
In his 2009 income tax return, Mr.
Tacilauskas reported total income of $184,537 which was comprised entirely of
employment income. The return failed to include taxable dividends in the amount
of $130,500 from Alpine Electric Ltd.
Analysis
[6]
Subsection 163(1) of the Income
Tax Act imposes a penalty if a taxpayer has failed to accurately
report income in any two tax returns within a four year period. The penalty is
10 percent of the amount of the second omission. The penalty in this case is
$13,050.
[7]
Subsection 163(1) provides:
163. (1)
Repeated failures. Every person who
(a) fails to report an
amount required to be included in computing the person’s income in a return
filed under section 150 for a taxation year, and
(b) had failed to report
an amount required to be so included in any return filed under section 150 for
any of the three preceding taxation years
is
liable to a penalty equal to 10% of the amount described in paragraph (a), except where the person
is liable to a penalty under subsection (2) in respect of that amount.
[8]
Although s. 163(1) does not specifically
provide for a defence based on due diligence, the defence has been recognized
by this Court. In general, if a taxpayer has taken all reasonable measures to
accurately report his income, the penalty should not be imposed. This usually
requires the taxpayer to take positive steps to avoid the reporting failure.
[9]
The question in this case is
whether Mr. Tacilauskas took all reasonable measures to prevent these
omissions. I have concluded that he did not.
[10]
The root of the problem
was that Mr. Tacilauskas’s personal tax
returns were prepared by a different accountant than the accountant who acted
for West Systems Inc. and Alpine Electric Ltd.
[11]
In reference to the 2008 personal tax return, Mr. Tacilauskas assumed
that the accountant had included all the dividends that were received. It turns
out that this was incorrect and that a dividend from West Systems Inc. was
missed. The dividend was $25,000 and the amount of the omission was the
grossed-up taxable dividend in the amount of $31,250.
[12]
In reference to the 2009 income
tax return, Mr. Tacilauskas reported only employment income and did not
report a dividend received from Alpine Electric Ltd. in the amount of $90,000.
The amount of income that was omitted was the grossed-up taxable dividend in
the amount of $130,500.
[13]
Mr. Tacilauskas testified
that in anticipation of the tax payable for 2009, he had arranged for Alpine
Electric Ltd. to make additional source deductions every two weeks in the
amount of $1,000.
[14]
Mr. Tacilauskas stated
that the problem was that the accountant
for Alpine Electric Ltd. had not done the paperwork for the dividend by the
time that the 2009 personal tax return was filed. Mr. Tacilauskas
mistakenly thought that the accountant would take care of whatever filings were
necessary.
[15]
In my view, Mr. Tacilauskas did
not take sufficient care in either the 2008 or 2009 tax returns to prevent the
omissions from income. The dividends were large amounts, and Mr. Tacilauskas
had a responsibility to take appropriate steps to ensure that they were
reported. It was not enough to assume that an accountant would take care of it.
[16]
The focus of the penalty in s.
163(1) is the failure to accurately report all income on the returns. Neither
the payment of the tax nor the issuance of T5 slips relieves taxpayers from
this obligation. The steps that were taken were not sufficiently proactive
steps to ensure that all income from West Systems Inc. and Alpine Electric Ltd.
was reported on the returns.
[17]
I have some sympathy for Mr. Tacilauskas
in these circumstances. The amount of the federal and provincial penalties is
very high. I suspect that the aggregate penalty (20 percent) may be similar to the
tax that is payable on the dividend after taking the dividend tax credit into
account. The harshness of these penalties was recently commented on by Justice
Jorre in Knight v The Queen, 2012 TCC 118.
[18]
Although the amount
of the penalties is harsh, this is not a basis to provide relief. It is the
prerogative of Parliament and provincial legislatures to impose such penalties
as they see fit. The only question is whether Mr. Tacilauskas took reasonable
measures to prevent the failures to report his income. I find that he did not.
[19]
The assessment of the federal
penalty will be upheld and the appeal will be dismissed.
Signed at Toronto, Ontario this 31st day of July
2012.
“J. M. Woods”
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