Bennett v. The Queen, 96 DTC 1630, [1995] 2 CTC 2308 (TCC)

Lamarre Proulx J.T.C.C.:—This appeal is about a penalty imposed pursuant to subsection 162(2)[1] of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the ’’Act") for the year 1990.

The appellant has submitted in his notice of appeal that subsection 162(2) of the Act was not constitutional as it violated section 7 and paragraph 11(d) of the Charter of Rights and Freedoms (the "Charter"), by not allowing a defence of due diligence.[2] He also submitted that there were valid reasons for the late filing of his 1990 income tax return.

An agreed statement of facts was filed at the time of hearing:

1. The appellant filed his tax return for the 1990 taxation year on August 7, 1992. The tax return 1s attached as tab 1.

2. The appellant’s tax return was due to be filed no later than April 30, 1991. 3. The Minister of National Revenue had served the appellant with demands to file returns for the 1987 and 1990 taxation years on October 20, 1988 and

October 30, 1991 respectively.

4. The appellant had been assessed penalties pursuant to subsection 162(1) of the Act for failing to file returns on time with respect to his 1987 and 1988 taxation years.

5. On September 25, 1992, the Minister of National Revenue assessed, inter alia, a penalty in the amount of $3,030.19 pursuant to subsection 162(2) of the Act. The assessment is attached as tab 2.

6. The amount of the penalty was and had to be calculated as follows:

10% of unpaid tax for the year

Le.

7. On December 22, 1992, the appellant filed a notice of objection to the assessment. The notice of objection is attached as tab 3.

8. On February 24, 1993, the Minister of National Revenue confirmed the assessment. The notification of confirmation is attached as tab 4.

At the hearing, the reasons given by the appellant for not complying with subsection 150(1) of the Act was the complexity of his fiscal situation in these years, his moving from one city to another in order to study law and his being in a difficult financial situation.

The appellant was not aware at the time of hearing, of a decision rendered by this Court in Pillar Oilfield Projects Ltd. v. Canada, [1993] G.S.T.C. 49 (T.C.C.), where, regarding a penalty provision of the Excise Tax Act, the principles enunciated by the Supreme Court of Canada in The Queen v. Sault Ste. Marie, [1978] 2 S.C.R. 1299, 85 D.L.R. (3d) 161[3] were applied as it was found that there was a defence of due diligence against a penalty provision.

Since the appellant was not aware of the recent jurisprudential finding of this Court, applying these principles, I will, on this point, discuss this matter in considering the arguments raised by counsel for the respondent, who argued that there was no such defence of due diligence.

Counsel for the respondent stated, and this was his first point, that subsection 162(2) of the Act does not create an offence and, thus, according to him, the rule in Sault Ste. Marie, supra, has no application.

Counsel for the respondent’s second point was that even if the rule applied, this penalty provision should be characterized as an absolute liability provision.

I shall deal with the first point of counsel for the respondent as to whether subsection 162(2) of the Act creates an offence. Counsel for the respondent referred to the decision of the Supreme Court of Canada in R. v. Wigglesworth, [1987] 2 S.C.R. 541, 45 D.L.R. (4th) 235, where it was held and I quote from the summary at pages 542 and 543 (D.L.R. 236):

A matter could fall within section 11 [of the Charter] either because by its very nature it is a criminal proceeding or because a conviction in respect of the offence may lead to a true penal consequence. In cases where the two tests conflict the "by nature" test must give way to the "true penal consequence" test.

If a particular matter is of a public nature, intended to promote public order and welfare within a public sphere of activity, then that matter falls within section 11. This is to be distinguished from private, domestic or disciplinary matters which are regulatory, protective or corrective and which are primarily intended to maintain discipline, professional integrity and professional standards or to regulate conduct within a limited private sphere of activity.

The RCMP Code of Discipline is concerned with the maintenance of discipline and integrity within the Force and is designed to regulate conduct relevant to being a member of the RCMP. The proceedings before the Royal Canadian Mounted Police Service Court are accordingly neither criminal nor quasi-criminal proceedings. However, an officer charged and convicted under the Code of Discipline faces a true penal consequence since conviction can result in imprisonment for one year.

[Emphasis added.]

Counsel for the respondent states that subsection 162(2) of the Act does not create an offence that is protected by section 11 of the Charter because the penalty is not enforced by criminal procedure and does not have true penal consequences.

The reasoning of counsel for the respondent is that when an offence is not one that comes within the purview of section 11 of the Charter, the principles enunciated in Sault Ste. Marie do not apply because the offences described in that case were offences coming within the purview of section 11 of the Charter. It is true that section 162 of the Act is not a penalty provision that is "enforced as penal laws through the utilization of the machinery of the criminal law". (See The Queen v. Sault Ste. Marie, [1978] 2 S.C.R. 1299, 1302, 85 D.L.R. (3d) 161, 165.) The offences described in Sault Ste. Marie, supra, were such offences. Is it a penalty provision with true penal consequences? In Wigglesworth, supra, the offence was not enforced in criminal procedure but it was found to be an offence within the meaning of paragraph 11(d) of the Charter because of its penal consequences. A true penal consequence would be one that attract "imprisonment or a fine which by its magnitude would appear to be imposed for the purpose of redressing the wrong done to society at large rather than to the maintenance of internal discipline within the limited sphere of activity" (Wigglesworth, supra, page 561). Subsection 162(2) of the Act does not attract imprisonment. Does it attract a penalty of such a magnitude that its purpose would be to redress a tort done to society at large? There is surely, there, a matter for argument. There is also the matter, if we return to the Wigglesworth decision, as to whether the imposition of the said penalty should be characterized as a matter of a public nature, intended to promote public order within a public sphere of activity or whether it should be characterized as a private matter of a regulatory nature within a private sphere of activity?

Counsel for the respondent in this regard referred to Lavers v. Minister of Finance (B.C.), [1990] 1 C.T.C. 265, 90 D.T.C. 6017 (B.C.C.A.) and quoted the following passage at page 285 (D.T.C. 6019-20):

I have concluded that the assessments by the Minister and the imposition of penalties pursuant to subsections 163(1) and (2) of the Income Tax Act (Canada) and subsections 23(1) and (3) of the Income Tax Act (B.C.) are properly characterized as private matters of a regulatory nature-primarily intended to regulate the conduct of taxpayers with reference to their complying with the requirements of the respective Income Tax Acts. The penalties which may be imposed upon such assessment are designed to achieve that objective.

[Emphasis added.]

This decision found, at pages 6019, 6020 and 6021, that the said penalty clauses were properly characterized as private matters of a regulatory nature and were not offences within section 11 of the Charter.

Let us assume that the penalty provision is not an offence protected by section 11 of the Charter and that it is a matter of private law.

In private law, if we were in contractual matters, the law of contracts would permit an examination by the courts of the penalty clauses and though the courts will usually respect the freedom of contract, they will intervene where there is oppression.

In Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, 83 D.L.R. (3d) 1, the Supreme Court of Canada said:

It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression.[4]

Still these penalty clauses are clauses that have been negotiated by the parties. Here we have penalty provisions that are imposed by the legislator.

If, in criminal proceedings, for offences that are of a regulatory nature, in civil proceedings, in matters having true penal consequences and in private law, in contractual matter, courts have jurisdiction to review the fairness of the imposition of a punishment, I see no reason why, in a "private matter of a regulatory nature",[5] a punitive provision could not be reviewed for the same purpose. The law would have to be very clear by its text and its object, that the punishment is without any defence of due diligence.

This brings me to the second point of counsel for the respondent that even if the principles enunciated in Sault Ste. Marie apply, subsection 162(2) of the Act, is an absolute liability provision. He says that the test to be applied in determining whether an offence is one of strict or absolute liability was enunciated as follows in Sault Ste. Marie, supra, at page 1326 (D.L.R. 182):

The overall regulatory pattern adopted by the Legislature, the subject matter of the legislation, the importance of the penalty, and the precision of the language used will be primary considerations in determining whether the offence falls into the third category.

He also adds the following arguments to support his proposition and I quote from his outline of the respondent’s argument tendered at the beginning of his argumentation:

a) the penalty arises in the context of a self-reporting system for which it is critical that taxpayers understand and comply with the requirement that returns be filed promptly. Without some simple but meaningful incentive to file returns, the system would break down from the administrative burden of enforcing the filing requirements;

b) the ultimate purpose of the penalty is to promote timely filing of returns where taxes are owing by a taxpayer. It was enacted primarily to encourage compliance not to punish some aberrant or socially unacceptable behaviour;

c) the language used by Parliament clearly indicates that "guilt" would follow proof merely of the prescribed act. Contrast the language of the provision in Sault Ste. Marie (where strict liability was found) and the language of the provision in Re B.C. Motor Vehicle Act (1985), 2 S.C.R. 486 (where absolute liability was found).

Let us first examine the matter under the perspective of the wording of the penalty provision in question in comparison with other provisions.

In Reference Re s. 94(2) of the Motor Vehicle Act the provision in question read as follows:

94(1) A person who drives a motor vehicle on a highway or industrial road

while

(a) he is prohibited from driving a motor vehicle under section 90, 91, 92 or 92.1, or

(b) his driver’s license or his right to apply for or obtain a driver’s license is suspended under section 82 or 92 as it was before its repeal and replacement came into force pursuant to the Motor Vehicle Amendment Act, 1982,

commits an offence and is liable,

(c) on a first conviction, to a fine of not less than $300 and not more than $2,000 and to imprisonment for not less than 7 days and not more than 6 months, and

(d) on a subsequent conviction, regardless of when the contravention occurred, to a fine of not less than $300 and not more than $2,000 and to imprisonment for not less than 14 days and not more than one year

(2) Subsection (1) creates an absolute liability offence in which guilt is established by proof of driving, whether or not the defendant knew of the prohibition or suspension.

[Emphasis added. I

In Sault Ste. Marie the provision in question read as follows:

32(1) Every municipality or person that discharges or deposits or causes or permits the discharge or deposit of any material of any kind into or in any well, lake, river, pond, spring, stream, reservoir or other water or watercourse or on any shore or bank thereof or into or in any place that may impair the quality of the water of any well, lake, river, pond, spring, stream, reservoir or other water or watercourse is guilty of an offence and on summary conviction is liable on first conviction to a fine or not more than $5,000 and on each subsequent conviction to a fine of not more than $10,000 or to imprisonment for a term of not more than one year, or to both such fine and imprisonment.

[Emphasis added. I

In my view, the wording of subsection 162(2) of the Act does not have the clarity necessary to make it an absolute liability provision. The expression "is liable" does not at all per se entail absolute liability.

The other considerations of counsel for the respondent, previously cited, as to why the provision in question is of absolute liability may be summarized as saying that penalties of absolute liability are necessary to obtain compliance with the Act in a context of self-reporting system.[6] I believe however that the rule in Sault Ste. Marie is to the effect that in matter of punishment, the intent of the legislator has to be clear in the statute itself that the punishment will take place whether there is fault or not. Otherwise the legislative provision will be interpreted as one that allows a defence of due diligence on the principle that punishment should in general not be inflicted on those without fault. Similarly to what was found by this Court in Pillar Oilfield, supra, I thus find that the wording of subsection 162(2) of the Act allows a defence of due diligence.

I am of the view however that, in order for this Act to accomplish its public purpose, the taxpayer should be expected to comply with the requirements of the Act with a high degree of diligence.

Has there been due diligence? I have to conclude that there was not due diligence. Complexity of the fiscal situation, moving and one’s own financial situation are not elements of excuse for not filing on time an income tax return. Moreover, I have to take into account the agreed statement of facts which shows some lack of care in the appellant’s history of conduct in fulfilling his statutory duties.

As an appendix to this case,[7] at the beginning of the hearing a matter arose, about the reassessment which was the subject of the appeal. It had been replaced by a more recent one which notice bore the date of May 30, 1994, allowing carry back of capital loss incurred in the year 1992. Counsel for the respondent was not aware of this new reassessment. The object of the appeal remained the same that is the amount of penalties.

I allowed an amendment to the pleadings so that the appeal was from the most recent assessment. The following case law and paragraph 165(7)(b) of the Act seem to suggest that I was right in doing so.

In Abrahams [No. 1] v. M.N.R., [1966] C.T.C. 690, 66 D.T.C. 5451, (Ex. Ct.) Jackett P. of the Exchequer Court was of the view that the Minister of National Revenue had the power to reassess even though an appeal had been initiated. Here is what he says at page 692 (D.T.C. 5452):

I am of opinion that the power conferred by subsection 46(4) may be exercised from time to time as circumstances may require. If this were not so, the Minister would not be able to make a second or third reassessment for the purpose of reducing a taxpayer’s liability when circumstances reveal that the taxpayer has been overtaxed...: The fact that an appeal has been initiated should not make any difference in the application of the provision.

He also stated that the previous assessment is replaced by the most recent one and cease to exist. This would not apply though if the recent assessment was an additional one. In this case both would stand:

Assuming that the second reassessment is valid, it follows, in my view, that the first reassessment is displaced and becomes a nullity. The taxpayer cannot be liable on an original assessment as well as on a reassessment. It would be different if one assessment for a year were followed by an "additional" assessment for that year. Where, however, the reassessment purports to fix the taxpayer’s total tax for the year, and not merely an amount of tax in addition to that which has already been assessed, the previous assessment must automatically become null.

In Walkem v. M.N.R., [1971] C.T.C. 513, 71 D.T.C. 5288, Walsh J. of the Federal Court of Appeal, Trial Division, at pages C.T.C. 518-20, D.T.C. 5291-5292, discussed a similar question and referred to Andrulionis v. M.N.R., [1967] Tax A.B.C. 1135, 68 D.T.C. 76, decision of W.O. Davis of the Tax Appeal Board, and Elgin Cooper Realties Ltd. v. M.N.R., 1969] C.T.C. 426, 69 D.T.C. 5276, a decision of Jackett P. of the then Exchequer Court. as follows:

Andrulionis case

The Andrulionis case, supra, dealt with a situation where a reassessment was made by adding additional amounts as income previously unreported by the taxpayer and by levying a penalty. This was appealed from and the Minister then made a reassessment, reducing the amount of tax and penalty imposed by granting allowances for two dependent children of the taxpayer which he had not claimed in his original income tax return. This second reassessment was also appealed from and the Minister sought to have the appeal quashed on procedural grounds. In this case Mr. Davis of the Tax Appeal Board permitted an amendment of the original notice of appeal so as to refer to the later reassessment made subsequent to the notice of objection and, as the appeal on the first reassessment was a valid and subsisting one, held that the Board had jurisdiction to hear it. While the facts in this case differ from those in the Abrahams judgment in that the second reassessment instead of adding an additional amount merely gave credit to the taxpayer for allowances which he had neglected to claim, while still maintaining the claim for tax on the additional unreported income it thereby fixed the taxpayer’s total tax for the year, in effect annulling the previous reassessment, the joinder of the two appeals by permitting the amendment of the notice of appeal against the first reassessment so as to refer to the later reassessment appears to be a reasonable and practical way of dealing with the procedural problem.

Elgin Cooper Realties case

The later finding of Jackett P. as he then was in the Elgin Cooper Realties Ltd. case, supra, is in line with this. Although the question is not dealt with in the reasons for judgment, it is discussed in the practice note of Mr. Dubrule who represented the Minister at the trial, which note was approved by Mr. Stikeman who represented the taxpayer. In that case there was an appeal before the Court against an assessment of income tax which was followed by a notice of reassessment adding an additional sum to the appellant’s income for the year in question, to which the appellant filed a notice of objection which, in turn, was followed by a notice of reassessment which reduced appellant’s income (to an extent substantially less than the sum added by the first reassessment) by applying business losses in the preceding and subsequent taxation years. appellant’s counsel submitted that the appellant had followed all steps required by the Income Tax Act in connection with its appeal against the original assessment which was properly before the Court for adjudication. The practice note goes on to say, at page 599:

When asked for his comments by the court on the submission by counsel for the appellant, counsel for the respondent agreed with the position taken by counsel for the appellant but did mention to the court its decision in the case of Abrahams v. M.N.R. (1966), [1966] C.T.C. 690, 66 D.T.C. 5451.

The Court proceeded to hear the appeal of the appellant and on June 20, 1969 gave its reasons for judgment allowing the appeal.

In this case, as in the Andrulionis case, supra, the second reassessment did not add to but actually reduced the appellant’s tax liability while leaving before the Court the main issues on which the appeal against the original assessment and notice of objection to the first reassessment had been based. While it could be argued that the second reassessment had absorbed the first and that therefore there was no issue before the Court on the original assessment and first reassessment, counsel for respondent had agreed with the position taken by counsel for the appellant, and the reasonable course was to allow the appeal to proceed.

Walsh J. expressed the view at page 5293 that where there is no significant change in the most recent assessment it is preferable to amend the proceedings so that the matter may be disposed of on the merits.

It would appear that subsection 165(7) of the Act gives statutory sanction to this way of thinking:

165(7) Where a taxpayer has served in accordance with this section a notice of objection to an assessment and thereafter the Minister reassesses the tax, interest, penalties or other amount in respect of which the notice of objection was served or makes an additional assessment in respect thereof and sends to the taxpayer a notice of the reassessment or of the additional assessment, as the case may be, the taxpayer may, without serving a notice of objection to the reassessment or additional assessment,

(b) amend any appeal to the Tax Court of Canada that has been instituted with respect to the assessment by joining thereto an appeal in respect of the reassessment or the additional assessment in such manner and on such

terms, if any, as the Tax Court of Canada directs.

Therefore the present appeal is a valid appeal and it is an appeal from the recent assessment dated May 1994 reassessment, as the pleadings were amended accordingly as directed by me at the beginning of the hearing.

Having found that the appellant had not exercised due diligence respecting the requirements of subsection 150(1) of the Act, he is liable to the penalty provided for by subsection 162(2) of the Act and has been in consequence correctly assessed by the Minister.

The appeal is dismissed with costs.

Appeal dismissed with costs.