Citation: 2012 TCC 424
Date: 20121203
Dockets: 2010-3252(IT)G, 2012-115(GST)I
BETWEEN:
830480 ALBERTA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
[1]
The appellant, 830480
Alberta Inc., a land developer, has appealed assessments imposing late filing
penalties under the Income Tax Act (the “ITA”) (the “IT Late
Filing Penalties”) for its 2003 and 2006 taxation years and assessments imposing
late filing penalties under the Excise Tax Act (the “ETA”) (the
“GST Late Filing Penalties”) for the reporting periods ending July 31, 2005,
January 31, 2006, April 30, 2006, July 31, 2006, January 31, 2007, July 31,
2009, August 31, 2009, September 30, 2009 and October 31, 2009 (the “Reporting
Periods”).
[2]
In assessing the IT Late
Filing Penalties against the appellant, the Minister of National Revenue (the
“Minister”) relied on the following assumptions of fact set out in the Reply to
the Notice of Appeal:
10. In so assessing the Appellant in respect of the 2003 and
2006 taxation years, the Minister assumed the following facts:
a) the return of income of the Appellant for the 2003 taxation
year was required to be filed with the Respondent on or before April 30, 2004;
b)
a request to file a return of income for the
2003 taxation year was issued by the Respondent on October 26, 2004;
c)
the Appellant’s return of income for the 2003
taxation year was not received until November 04, 2004;
d)
by letter dated November 14, 2008, the
Appellant’s representative provided an amended return of income for the 2003
taxation year;
e)
by its amended return of income for the 2003
taxation year, the Appellant reported net income of $292,232;
f)
by its amended return of income for the 2003
taxation year, the Appellant reported it owed tax in the amount of $28,659.00;
g)
by its amended return of income, the Appellant
deducted the amount of $73,798 as non-capital losses from prior years in its
2003 taxation year;
h)
the Minister accepted the amended return of
income for the 2003 taxation year as filed;
i)
the Appellant did not pay the tax amount owing
of $28,659 upon filing the amended return of income for its 2003 taxation year;
j)
the Appellant was assessed a LFP in the amount
of $3,152.49, in respect of the 2003 taxation year, calculated as follows:
|
2003 tax unpaid
|
|
$28,659
|
|
Amount unpaid
|
x 5%
|
1432.95
|
|
Add to
|
|
|
|
Amount unpaid
|
x 1%
|
286.59
|
|
|
x 6
|
1719.54
|
|
Total penalty
|
|
$3,152.49
|
k)
the return of income for the 2006 taxation year
was required to be filed April 30, 2007;
l)
a request to file a return of income for the
2006 taxation year was issued by the Respondent on January 10, 2008;
m) the Appellant’s return of income for the 2006 taxation year was not
received until August 27, 2009;
n)
by its return of income for the 2006 taxation
year, the Appellant reported net income of $8,485,199;
o)
by its return of income for the 2006 taxation
year, the Appellant reported it owed tax in the amount of $1,409,036;
p)
the Minister applied losses from prior years in
the amount of $2,606,345 to reduce the Appellant’s income to $5,878,854 in the
2006 taxation year;
q)
the Minister determined that the Appellant’s tax
liability for the 2006 taxation year was $1,273,403;
r)
the Appellant did not pay the tax amount owing
of $1,273,403 upon filing its return of income for the 2006 taxation year;
s)
the Appellant was assessed a LFP in the amount
of $216,478.51, in respect of the 2006 taxation year, calculated as follows:
|
2006 tax unpaid
|
|
$1,273,403
|
|
Amount unpaid
|
x 5%
|
63,670.15
|
|
Add to
|
|
|
|
Amount unpaid
|
x 1%
|
12,734.03
|
|
|
x 12
|
152,808.36
|
|
Total penalty
|
|
$216,478.51
|
[3]
At the hearing, the appellant’s
counsel conceded that the assumptions of fact set out in subparagraphs (a),
(c), (d), (k) and (m) are accurate.
[4]
In assessing the GST
Late Filing Penalties against the appellant for the Reporting Periods, the
Minister relied on the following assumptions of fact:
15. In so assessing the Appellant, the Minister relied on the
following assumptions of fact:
a) the Appellant is a GST registrant;
b)
the Appellant was a corporation involved in the
business of land development and sales;
c)
during the material time, Riaz and Rukhsana
Choudhry were each 50% shareholders of the Appellant and were husband and wife;
d)
Mr. Choudhry was the principal of the
Appellant during the material time;
e)
the Appellant is required by the Act to file its
GST returns on a fiscal quarterly basis;
f)
for the reporting periods a [sic] at issue the
Appellant was required to file returns, and filed returns, as follows:
|
Reporting Period Ending
|
Return Due
|
Date return Filed
|
GST Reported
|
ITC Claimed
|
Net tax Reported
|
|
31-Jul-05
|
31-Aug-05
|
27-Aug-09
|
3169.6
|
-26048.51
|
-22878.91
|
|
|
|
|
|
|
|
|
31-Jan-06
|
28-Feb-06
|
27-Aug-09
|
90942.03
|
-135809.59
|
-44867.56
|
|
30-Apr-06
|
31-May-06
|
27-Aug-09
|
15235.15
|
-26777.4
|
-11542.25
|
|
31-Jul-06
|
31-Aug-06
|
27-Aug-09
|
0
|
-19289.59
|
-19289.59
|
|
|
|
|
|
|
|
|
31-Jan-07
|
28-Feb-07
|
27-Aug-09
|
22291.68
|
-29880.48
|
-7588.8
|
|
|
|
|
|
|
|
|
31-Jul-09
|
31-Aug-09
|
29-Jul-10
|
13650
|
-1931.92
|
11718.08
|
|
31-Aug-09
|
30-Sep-09
|
29-Jul-10
|
58900
|
-3377.13
|
55522.87
|
|
30-Sep-09
|
31-Oct-09
|
29-Jul-10
|
7400
|
-2279.16
|
5120.84
|
|
31-Oct-09
|
30-Nov-09
|
29-Jul-10
|
29825
|
-3965.31
|
25859.69
|
g)
for the reporting periods at issue the Appellant
was required to report and remit net tax by the due date of the returns as
follows:
|
Reporting Period Ending
|
Return and Remittance Due
date
|
Date return Filed
|
Net tax Assessed
|
|
|
|
|
|
|
31-Jul-05
|
31-Aug-05
|
27-Aug-09
|
34,014.74
|
|
|
|
|
|
|
31-Jan-06
|
28-Feb-06
|
27-Aug-09
|
37789.53
|
|
30-Apr-06
|
31-May-06
|
27-Aug-09
|
258,612.24
|
|
31-Jul-06
|
31-Aug-06
|
27-Aug-09
|
212,201.48
|
|
|
|
|
|
|
31-Jan-07
|
28-Feb-07
|
27-Aug-09
|
4,175.77
|
|
|
|
|
|
|
31-Jul-09
|
31-Aug-09
|
29-Jul-10
|
11,718.08
|
|
31-Aug-09
|
30-Sep-09
|
29-Jul-10
|
55,522.87
|
|
30-Sep-09
|
31-Oct-09
|
29-Jul-10
|
5,120.84
|
|
31-Oct-09
|
30-Nov-09
|
29-Jul-10
|
25,859.69
|
h)
for the reporting periods at issue the Appellant
failed to file and make remittances as required by the Act and the Minister
correctly assessed administrative penalties as follows:
|
Reporting Period ending
|
Date return Filed
|
Reassessment Date
|
Net tax Reported
|
Net tax Assessed
|
Late Remitting Penalty
|
Failure
to File Penalty
|
|
|
|
|
|
|
|
|
|
31-Jul-05
|
27-Aug-09
|
09-Sep-10
|
-22878.91
|
34,014.74
|
3,361.29
|
1,320.58
|
|
|
|
|
|
|
|
|
|
31-Jan-06
|
27-Aug-09
|
28-July-2010
|
-44867.56
|
37789.53
|
2,520.99
|
1,471.57
|
|
30-Apr-06
|
27-Aug-09
|
28-July-2010
|
-11542.25
|
258,612.24
|
13,398.81
|
10304.48
|
|
31-Jul-06
|
27-Aug-09
|
28-July-2010
|
-19289.59
|
212,201.48
|
7603.34
|
8,488.05
|
|
|
|
|
|
|
|
|
|
31-Jan-07
|
27-Aug-09
|
28-July-2010
|
-7588.8
|
4,175.77
|
21.36
|
167.02
|
|
|
|
|
|
|
|
|
|
31-Jul-09
|
29-Jul-10
|
20-Aug-2010
|
11718.08
|
11,718.08
|
|
410.13
|
|
31-Aug-09
|
29-Jul-10
|
20-Aug-2010
|
55522.87
|
55,522.87
|
|
1,804.48
|
|
30-Sep-09
|
29-Jul-10
|
20-Aug-2010
|
5120.84
|
5,120.84
|
|
153.61
|
|
31-Oct-09
|
29-Jul-10
|
20-Aug-2010
|
25859.69
|
25,859.69
|
|
711.13
|
[5]
At the hearing, the appellant’s
counsel conceded that paragraph (f) was accurate.
[6]
The appeals were heard
on common evidence.
[7]
Mr. Riaz Choudhry,
the sole shareholder of the appellant, was the only witness to appear for the appellant.
[8]
Prior to 1999, Mr. Choudhry
had worked as a civil engineer for the City of Edmonton. The evidence shows
that Mr. Choudhry has a Master’s degree in engineering.
[9]
In or around 1999, Mr. Choudhry
caused the appellant to be incorporated to engage in land development projects
in Alberta.
[10]
Mr. Choudhry testified
that the appellant’s first project was in the city of Beaumont. The appellant
acquired approximately 60 acres of land in the city of Beaumont in 1999
and 2000. That land development project was known as the Four Seasons
Estates.
[11]
The appellant spent the
2000 taxation year developing plans for the project and obtaining zoning
changes. According to Mr. Choudhry, the appellant incurred significant expenses
leading to a non-capital loss carry-forward for that year.
[12]
Phase I of the Four
Seasons Estates project commenced in 2001. To sell the lots in Phase I, the appellant
had to construct all of the above and below ground utilities including access roads,
sewage and rainwater systems, and gas, phone and electrical lines. At the end
of Phase I, the appellant had completed construction for approximately 30 lots.
Mr. Choudhry testified that only nine lots were sold in 2001 and that the appellant
incurred a loss that was attributable to the significant development expenses
incurred in that year and which gave rise to a loss carry‑over.
[13]
Development work on Phase
II of the Four Seasons Estates project commenced in 2002. Work also continued on
Phase I in that year. According to Mr. Choudhry, the appellant sold approximately
31 lots that year and incurred a loss giving rise to a carry-forward because its
expenses continued to exceed its revenue.
[14]
Mr. Choudhry testified
that the appellant commenced Phase III of the Four Seasons Estates project in
2003. It sold approximately 30 building lots in that year. In the fall of 2003,
the appellant acquired approximately 80 acres of land on Ellerslie Road and 66th Street in the city of Edmonton. This project became known as the
Sunset Valley Estates project. Development work on the Sunset Valley project began in late 2003. No lots in that project were sold that year.
[15]
Mr. Choudhry
testified that he was not in a hurry to prepare and file the appellant’s 2003
return because he believed the appellant had incurred losses in that year.
Moreover, he was aware that the appellant had unused non-capital losses from
prior years to offset any income that it may have realized.
[16]
The appellant was finally
sent a request from the Minister to file its return for the 2003 taxation year
on October 26, 2004. The appellant waited until November 4, 2004 to
file its 2003 return. No tax payable was shown on the tax return filed at that
time. On November 14, 2008, the appellant filed an amended return for the
2003 taxation year which showed that it had earned net income of $292,232 and
still had tax payable of $28,659 after application of a loss carry‑forward
from prior years of $73,798.
[17]
Mr. Choudhry claimed
that he had failed to take into account that certain so‑called “soft
costs” were not deductible when he filed the first return for 2003.
[18]
His accountant prepared
the amended return and properly capitalized expenses that were not immediately
deductible.
[19]
Development work on the
two projects continued in 2005 and 2006. According to Mr. Choudhry, the appellant
continued to incur losses.
[20]
Mr. Choudhry
explained that he was in no rush to prepare the appellant’s 2006 tax return
because he believed that the corporation’s loss carry‑forward of $2,606,345
from prior years was sufficient to offset any income earned in that year, which
he estimated to be approximately $2 million. In the return that was eventually
filed for the 2006 taxation year, the appellant disclosed that its net income
was at least $5.8 million greater than its loss carry‑over from
prior years. Mr. Choudhry offered no explanation as to how he had underestimated
the appellant’s income by more than $5.8 million for that year.
[21]
Regarding the late
filing of the appellant’s GST returns for the Reporting Periods, Mr. Choudhry
offered an explanation similar to that given with respect to the late filing of
the appellant’s income tax returns. According to Mr. Choudhry, he was not
in a rush to file the returns because he believed that the appellant’s overall input
tax credits for the Reporting Periods would exceed its net tax owing for these
periods, resulting in a GST refund to the corporation when the returns were
eventually filed.
[22]
The issue in this
appeal is whether the appellant has successfully established that it exercised
the requisite level of due diligence in relation to its failure to file within
the times required by the ITA and ETA respectively income tax
returns for the 2003 and 2006 taxation years and GST returns for the Reporting
Periods. In the present case, the appellant would need to establish that it
made a reasonable mistake of fact in order for the due diligence defence to be
successful.
[23]
The appellant’s counsel
conceded that the appellant did not identify any circumstances that would have
prevented it from filing its income tax and GST returns on time. Nonetheless,
counsel insisted that the late filing penalties assessed against the appellant
should be vacated because Mr. Choudhry had reasonable grounds for believing
that the appellant did not owe any taxes for the periods for which the returns
were filed late.
[24]
In the case of the 2003
income tax return, counsel pointed out that the first return filed by the appellant
reported nil net income. In the case of the 2006 income tax return, counsel noted
that Mr. Choudhry testified that he believed the appellant’s net income
would be equal to or less than its loss carry‑forward from prior years.
Finally, counsel observed that Mr. Choudhry testified that he believed
that the appellant’s input tax credits exceeded the amount of GST collected by it
for the Reporting Periods for which GST returns were filed late.
[25]
Counsel relied on the decision
of the Federal Court of Appeal (“FCA”) in Corporation de l’École
Polytechnique v. The Queen, 2004 FCA 127, as support for his submission
that a reasonable mistake of fact, such as that allegedly made by Mr. Choudhry,
can serve as the foundation of a proper due diligence defence to a late filing
penalty. Counsel quoted the following excerpts from that decision:
27 This
Court has held that there is no bar to the defence argument of due diligence,
which a person may rely on against charges involving strict liability, being
put forward in opposition to administrative penalties. In particular, it has
held that section 280 of the Excise Tax Act, by its wording and content,
gives rise to that defence: Canada (A.G.) v. Consolidated Canadian
Contractors Inc., [1999] 1 F.C. 209 (F.C.A.). It may be worth reviewing the
principles governing the defence of due diligence before applying them to the
facts of the case at bar.
28 The
due diligence defence allows a person to avoid the imposition of a penalty if
he or she presents evidence that he or she was not negligent. It involves
considering whether the person believed on reasonable grounds in a non-existent
state of facts which, if it had existed, would have made his or her act
or omission innocent, or whether he or she took all reasonable precautions
to avoid the event leading to imposition of the penalty. See The Queen v.
Sault Ste-Marie, [1978] 2 S.C.R. 1299; The Queen v. Chapin,
[1979] 2 S.C.R. 121. In other words, due diligence excuses either a
reasonable error of fact, or the taking of reasonable precautions to comply
with the Act.
30 A
person relying on a reasonable mistake of fact must meet a twofold test:
subjective and objective. It will not be sufficient to say that a reasonable
person would have made the same mistake in the circumstances. The person must
first establish that he or she was mistaken as to the factual situation: that
is the subjective test. Clearly, the defence fails if there is no evidence that
the person relying on it was in fact misled and that this mistake led to the
act committed. He or she must then establish that the mistake was reasonable in
the circumstances: that is the objective test.
31 As
soon as the defence of due diligence accepted for strict liability offences is
raised, the question arises of whether the defence of error of law could also
be relied on to avoid imposition of a penalty. That question does not arise
only in connection with strict liability offences, although with the growth in
regulations and the multiplication of statutory offences the field of strict
liability has proven to be the most fertile for the emergence of this defence.
[Emphasis added.]
[26]
I agree with counsel’s
submission that a taxpayer can avoid late filing penalties if the taxpayer can
show, on a balance of probabilities, that he or she had reasonable grounds to
believe that no taxes were owed in connection with the returns that were filed
late. If such were the case, it would make the late filing of the returns
innocent. To succeed with this defence, the taxpayer must show how the error
was made and demonstrate that he relied on the error in deciding to postpone
the filing of the returns beyond their due date. This is required in order to
satisfy the subjective test. To satisfy the objective test, the taxpayer must
then establish that a reasonable person would have made and relied on the same
error in deciding to postpone the filing of the returns.
[27]
Weighing the evidence
as a whole, I am of the opinion that the appellant’s evidence falls short on
both counts. Mr. Choudhry’s testimony was largely self‑serving. For
example, for the 2006 taxation year, he simply stated that he believed that the
appellant’s net income would be equal to or less than the loss carry‑forward.
[28]
In fact, when the
return was filed, the appellant reported net income of $8,485,199, which was at
least $5.8 million greater than its non-capital losses of
$2.6 million from prior years. Mr. Choudhry did not explain how he
came to significantly underestimate the appellant’s income for 2006. He offered
no evidence to suggest that he actually attempted to calculate the appellant’s
income tax liability for that year on or before the due date of the return.
Moreover, assuming an error was indeed made, Mr. Choudhry offered no
evidence to explain how the mistake could be considered objectively reasonable.
Similarly, Mr. Choudhry did not establish that he actually tried to
calculate the appellant’s GST liability for the Reporting Periods.
[29]
Weighing the evidence
as a whole, I conclude that Mr. Choudhry’s actions show that he simply did
not treat the appellant’s tax compliance obligations as a priority.
[30]
For these reasons, the
appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 3rd day of December 2012.
"Robert J. Hogan"
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