Citation: 2012 TCC 118
Date: 20120416
Docket: 2011-2546(IT)I
BETWEEN:
MARTINO KNIGHT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
When are 10% civil
penalties for omitting income greater than 50% civil penalties for omitting the
same amount either wilfully or in circumstances amounting to gross negligence?
[2]
When there are matching
omission and gross negligence penalties under both the federal and the
provincial income tax acts the omission penalty will very frequently exceed the
gross negligence penalty. In British
Columbia, where this appeal
arises, if one considers both the federal and provincial penalties, when the
individual’s “total income” is under $100,000
the omission penalties will exceed the gross negligence penalties; if the total
income is above $100,000 the omission penalty will be 91.5% or more of the
gross negligence penalty.
[3]
In Alberta, the omission penalties will always exceed
the gross negligence penalties.
[4]
I will review how
this comes about shortly.
[5]
The appellant, who
resides in British Columbia, appeals from the assessment of a 10%
civil penalty for omitting income in his 2009 taxation year.
[6]
For the reasons set out
below, I am satisfied that, on the facts before me and given the law, the
penalty has been validly assessed.
[7]
The existence of a
penalty for repeated omissions is understandable. That a taxpayer would be
subject to some penalty in the circumstances of this case is also understandable.
[8]
But the severity of the
penalty in this case is inappropriate and appears to be unforeseen. When one
looks at the operation of the omission penalty and the scheme of the federal
and provincial acts, it becomes clear that there are likely to be a great many
cases where the severity of the penalty would appear to be both inappropriate
and unforeseen.
The operation of subsection 163(1) of the federal
Income Tax Act and section 38 of the Income Tax Act of British Columbia
[9]
Subsection 163(1) of the federal Act
creates a civil penalty where:
i)
a person fails to
include an amount of income in a return for a tax year and;
ii)
where a person
previously failed to report an amount of income in one of the three preceding
tax years.
[10]
The burden of proving
these facts is on the Minister of National Revenue. A due diligence defence is
available to the taxpayer.
[11]
If the relevant facts
are proven and the taxpayer is unable to show due diligence then the individual
is liable to a penalty of 10% of the omitted amount of income.
[12]
Subsection 163(1)
also provides that the penalty cannot be applied where the penalty under
subsection 163(2), the “gross negligence penalty”, applies.
[13]
Section 38 of the Income
Tax Act of British Columbia (BC Act) imposes an identical 10%
penalty. It also gives the federal Minister the power i) to refrain from
levying the provincial penalty
or ii) to reduce the
provincial penalty where the taxpayer is liable to the federal penalty.
[14]
Thus, in British
Columbia, when there is an omission under subsection 163(1) there will
potentially be a combined 20% penalty under the federal Act and the BC Act.
[15]
Subsection (2) of
section 163 of the federal Act creates what is known as the “gross
negligence” penalty. This penalty applies when someone “knowingly, or under circumstances amounting to gross negligence” makes “a
false statement or omission in a return”. The penalty under subsection (2)
is 50% of the amount of tax on the omitted amount of income.
[16]
Section 38 of the
BC Act also incorporates subsection 163(2) by reference.
[17]
Under the criminal tax
evasion offence in section 239 of the federal Act on prosecution by
summary conviction there is a minimum 50%, and a maximum 200%, penalty of the
amount of tax that was sought to be evaded together with the possibility of
imprisonment for a period not exceeding two years; on prosecution by indictment
the penalty is a minimum of 100% and a maximum of 200% together with the
possibility of imprisonment for a period not exceeding five years.
[18]
In general, one sees in
the scheme of the federal Act a continuum of civil penalties and
criminal penalties depending on the circumstances and the seriousness of the
matter. The civil gross negligence penalty of 50% is the same as the minimum
level of criminal penalty for tax evasion.
[19]
The civil penalty in
subsection 163(2), where an omission or false statement must be done
knowingly or in circumstances amounting to gross negligence, is clearly
intended to deal with a greater degree of culpability than the civil penalty in
subsection 163(1) which is simply based on the existence of two omissions
within a four year period and an absence of due diligence.
[20]
It is instructive to
compare the penalty payable on a given omitted amount depending on whether it
is subject to the omission penalty or the gross negligence penalty.
[21]
In 2009, the year in
issue, the marginal rates and starting thresholds for tax were:
Federal
15.00%: $0
22.00%: $40,726
26.00%: $81,452
29.00%: $126,264
BC
5.06%: $0
7.70%: $35,716
10.50%: $71,433
12.29%: $82,014
14.70%: $99,588
[22]
If an individual has
omitted an amount knowingly or in circumstances amounting to gross negligence
and the 50% subsection 163(2) penalty is assessed together with the
provincial equivalent, then the gross negligence penalty will always be half of
the federal and provincial marginal rate(s) of tax on the omitted
amount.
[23]
The federal
subsection 163(1) omission penalty of 10% and the provincial
equivalent of 10% total 20% and are applied on the omitted amount of income.
[24]
As a result, the
following tables show the rate of penalty as a percentage of the omitted
amount of income added, depending upon the marginal rate applicable in
2009, the year under appeal:
|
Threshold
|
Federal
Marginal
Rate
|
Omission
Penalty
|
Gross Negligence
Penalty
|
|
$0
|
15.00%
|
10%
|
7.5%
|
|
$40,726
|
22.00%
|
10%
|
11.0%
|
|
$81,452
|
26.00%
|
10%
|
13.0%
|
|
$126,264
|
29.00%
|
10%
|
14.5%
|
|
Threshold
|
BC Marginal
Rate
|
Omission
Penalty
|
Gross Negligence
Penalty
|
|
$0
|
5.06%
|
10%
|
2.530%
|
|
$35,716
|
7.70%
|
10%
|
3.350%
|
|
$71,433
|
10.50%
|
10%
|
5.250%
|
|
$82,014
|
12.29%
|
10%
|
6.145%
|
|
$99,588
|
14.70%
|
10%
|
7.350%
|
[25]
As can be seen from
these tables the federal omission penalty is greater than a federal gross
negligence penalty would be when the omitted amount together with the reported
amount results in a total income of less than $40,726.
[26]
In British Columbia, the BC omission penalty is always greater than a BC
gross negligence penalty on the same amount.
[27]
When both the federal
and the BC omission penalties are levied, they are greater than would be a
gross negligence penalty on the same amount whenever the taxpayer’s total
income is less than $99,588 after the reassessment.
[28]
Indeed, when taxable
income is below $35,716 the combined federal and BC omission penalty would be
close to 100% of the federal and BC tax on the omitted amount; a federal and BC
gross negligence penalty in respect of the same amount would be half as much.
[29]
For income at the top
marginal rate the combined federal and BC omission penalties together are about
91.5% of the combined federal and BC gross negligence penalties.
[30]
The consequence of all
this is that a penalty involving less blameworthy conduct frequently results in
a higher amount of penalty than a penalty requiring more blameworthy conduct. Even when that
is not the case the less blameworthy conduct still attracts a penalty almost as
high as the more blameworthy conduct.
[31]
In Alberta, if both the federal and provincial omission
penalties are levied, they will always be greater than would be a
federal and provincial gross negligence penalty on the same omitted amount.
[32]
Subsection 163(1)
makes no distinction between circumstances where the omitted amount was subject
to withholdings and circumstances where it was not. The existence of
withholdings, or not, has a significant practical effect in terms of the harm
to the treasury and in terms of the benefit to the taxpayer resulting from the
omission.
The particular consequences in the
appellant’s case
[33] In filing his 2009 return the appellant’s
reported approximately $44,000 in employment income. He failed to include
$40,878 in employment income.
[34]
The omitted amount of
about $40,000 was reported by the payer in a T4 slip and a T4A slip. With
respect to the omitted amounts, there were withholdings of $7,556.63 in federal
and provincial income tax, $1,244.26 in Canada Pension Plan contributions and
$461.25 in employment insurance contributions.
[35]
The following table
shows the amounts of the federal, British Columbia and
total income tax assessed in the initial assessment based on the returns as
filed and in the reassessment made to include the omitted amounts shown in the
T4 and T4A slips for the omitted amounts. The table also shows the increase in
the amounts assessed and 50% of those amounts. The federal and provincial omission
penalty assessed was $8,175.60.
|
|
Tax on initial
assessment
|
Tax on reassessment
|
Increase
|
50% of
increase
|
10% federal and 10% BC penalty
|
|
Federal
|
$4,626.18
|
$13,752.50
|
$9,126.32
|
$4,563.16
|
$4,087.80
|
|
BC
|
$1,852.48
|
$5,438.47
|
$3,585.99
|
$1,792.99
|
$4,087.80
|
|
Total
|
$6,478.66
|
$19,190.97
|
$12,712.31
|
$6,356.15
|
$8,175.60
|
[36]
In the appellant's case
we see that the federal omission penalty is about $475 less than the amount of
a federal gross negligence penalty on the same amount. However, the provincial
omission penalty is about $2,295 greater than a provincial gross negligence
penalty on the same amount. Overall, for both levels of government the omission
penalty is about $1,820 more than a gross negligence penalty on the same
amount.
[37]
What was the harm done
to the treasury and the benefit to the appellant? If this were a case of
unreported income which had not been subject to withholdings the harm to the
federal and provincial treasury would have been $12,712.31 plus interest. Here,
because there were withholdings the federal and provincial treasury were, at
the time of the reassessment, out‑of‑pocket $3,874.72 including
interest; most of the money that the treasury was out‑of‑pocket was
the result of a $3,361.15 refund on the initial assessment of June 1,
2010; the balance consisted of the shortfall in withholdings, an amount of
$215.95, interest of $286.82 and a late
filing penalty of less than $11.
[38]
As a result in this
case the federal and provincial treasury were short $3,874.72 from the 1st
of June until the 1st of November; the penalty for this is
$8,175.60 or about 211%
of the shortfall for a few months.
The Facts
[39] The appellant had been in the labour force
about eight years in 2009, the year in issue. He had completed a two‑year
college program in marketing and sales.
[40]
The appellant included
in his tax return employment earnings of $44,362; this amount was the total
shown on a T4 from Business Objects Company/SAP Canada and a T4 from FINCAD
Corporation.
[41]
The appellant failed to
include about $40,878 of salary and severance pay in his return, close to half
his income. These amounts were the subject of two T slips, a T4 and a T4A,
prepared by the Business Objects Company and SAP, respectively.
[42]
When reassessing the
appellant to include the omitted amounts, the Minister assessed an “omission”
penalty pursuant to subsection 163(1) of the Income Tax Act as well
as pursuant to section 38(1) of the Income Tax Act of British Columbia.
[43]
This appeal was heard
under the informal procedure.
[44]
The appellant testified
and the respondent filed certain evidence by affidavit; the appellant did not
seek to cross‑examine the affiant.
[45]
In 2009 he worked for
two different companies: the Business Objects Company, which was bought out by
SAP, and, later in the year, FINCAD.
[46]
He received a severance
package from Business Objects Company/SAP Canada and assumed that all the taxes
were deducted. Substantial withholdings were made on the severance payments.
[47]
There seem to have been
some delays by the company in sending him payment of the severance package.
[48]
He did not receive the
two T slips totalling $40,878 prior to filing of his 2009 income tax return.
[49]
There was some evidence
by the appellant that he tried to obtain the missing T slips. This evidence was
confusing.
[50]
The appellant filed
Exhibit A‑1 which is a chain of three e-mails; the respondent filed
Exhibit R‑1 which is a different chain of e-mails.
[51]
Both, however, contain
an almost identical e-mail to the appellant from SAP in Pennsylvania entitled “T4 Request Form” with the following text:
“Please note that the original T4’s were returned back to the
payroll department so I will forward you the original.
Please provide me with your current address and I will mail
these out to you today.”
[52]
There is one very
significant difference between the “T4 Request Form” in A‑1 and the same
e-mail in R‑1. The first shows a sending date of 8 April 2010,
before the appellant’s filing due date, and the second shows a sending date of
8 August 2010.
[53]
The appellant also
testified that he had made numerous efforts to call SAP and follow up. However,
in cross‑examination it became apparent that his prime focus was on
getting timely payment of his severance; this is also apparent in the e‑mails
on pages 2 and 3 of Exhibit R‑1.
[54]
In filing, he did not
indicate in any way on his tax return that there were substantial amounts of
the earnings that were not reported on his return.
[55]
The appellant did not
remember when he received the missing T slips although it was prior to the
reassessment. He did not send the missing slips to revenue prior to the
reassessment.
[56]
The appellant was
surprised that the T4s had been mailed to the wrong address given that his
address had not changed for five years. He suspects that this may have in
some way been related to the transition resulting from the takeover of Business
Objects Company by SAP.
[57]
The appellant testified
that there had been certain income slips missing in the past and he had become
used to the Canada Revenue Agency simply sending him a reassessment adding the
amounts and either asking him to pay any balance or sending him a refund.
[58]
He expected the same to
happen again. He also testified that he did not expect there to be any
additional tax payable because there had been withholdings on the amounts for
which he did not have T slips.
[59]
The appellant did not
dispute the respondent's affidavit evidence that: i) he had been
reassessed with respect to the 2005 taxation year to include an unreported
amount of $1,054; ii) he had been reassessed with respect to the 2006
taxation year to add a lump‑sum payment of $2,896 that had not been
reported; and iii) he had been assessed an omission penalty in respect of
the unreported amount in the 2006 tax year.
Analysis
[60]
There was an omission
in the year under appeal as well as in the 2006 taxation year, within three
years of the year under appeal.
[61]
In Paquette v. The
Queen
Chief Justice Rip reviewed the requirements for a due diligence defence at
paragraph 9:
In Résidences Majeau Inc.
v. Canada and Corporation de l'école polytechnique v. Canada the
Federal Court of Appeal stated that a defendant may rely on a defence of due
diligence if either of the following can be established: that the defendant
made a reasonable mistake of fact, or that the defendant took reasonable precautions
to avoid the event leading to imposition of the penalty. In Résidences
Majeau, Justice Létourneau explained:
8 According to Corporation
de l’école polytechnique v. Canada, 2004 FCA 127, a defendant may rely on a defence
of due diligence if either of the following can be established: that the
defendant made a reasonable mistake of fact, or that the defendant took
reasonable precautions to avoid the event leading to imposition of the penalty.
9 A reasonable
mistake of fact requires a twofold test: subjective and objective. The
subjective test is met if the defendant establishes that he or she was mistaken
as to a factual situation which, if it had existed, would have made his or her
act or omission innocent. In addition, for this aspect of the defence to be
effective, the mistake must be reasonable, i.e. a mistake a reasonable person
in the same circumstances would have made. This is the objective test.
[Footnotes omitted].
[62]
There is nothing in the
appellant’s evidence which suggests due diligence by the appellant in respect
of either the 2006 and 2009 omission.
[63]
The appellant’s belief
that the Canada Revenue Agency would automatically reassess him and either send
him a refund, given the withholdings, or ask for the balance due with no
further consequence is not a mistake “. . . as to a
factual situation which, if it had existed, would have made his or her act or
omission innocent.” The mistake is a mistake as to the consequences of the
omission.
[64]
Nor did the appellant
take reasonable precautions. While the appellant may have made some kind of
inquiries in April 2010 regarding the missing T slips, he made no effort
to indicate on his return that close to half his income was missing. As well,
in the period after the initial assessment and prior to the reassessment in
issue,
the appellant made no effort to draw the missing T slips to the attention of
the CRA once he received them.
[65]
The jurisprudence cited
by the appellant involve quite different situations from that here and is not
applicable:
a.
In Paquette v. The
Queen
the appellant had difficulties with both language and mathematics and had
completed grade 12 in a program for persons with learning disabilities;
Mr. Paquette made what were reasonable efforts in his circumstances.
b.
In Dunlop v. The
Queen
the appellant estimated the amount of his income in respect of the missing T4
slip, an estimate that was fairly close to the actual amount.
c.
Both Franck v. The
Queen
and Alcala v. The Queen
are cases based on the appellants’ relative lack of knowledge of the system. Franck
was a young man who had just left high school and started working in the labour
force; he had worked in the year as short‑order cook in
four different establishments and had not received his T4 slip from one of
them. Alcala was a recent immigrant to Canada
who arrived from the Philippines in 2005 and omitted amounts in 2006 and
2007. These are both different situations from that of the appellant who had
been in the labour force for a number of years.
Conclusion
[66]
Accordingly, given that
the necessary requirements of the penalty are made out and no due diligence
defence has been shown, I must uphold the assessed penalties and dismiss
the appeal.
[67]
I hope the appellant
makes an application under the taxpayer relief provisions (also often referred
to as the fairness provisions).
[68]
If such an application
is made I hope that the Minister will seriously consider substantially
reducing the federal and provincial penalties to an amount very significantly
less than the $3,863.92 balance owing, apart from the penalties, at the time of
the reassessment adding the omitted amounts.
Signed at Ottawa, Ontario, this 16th day of April 2012.
“Gaston Jorré”
Email this Content