Citation: 2010TCC403
Date: 20100729
Docket: 2009-3193(IT)I
BETWEEN:
NICOLE COOPER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The issue in this
appeal is whether the penalty that was imposed pursuant to subsection 163(1) of
the Income Tax Act (the “Act”) in relation to certain income that
the Appellant failed to include in her tax return that she filed for 2007
should be upheld or deleted. This subsection provides as follows:
163. (1) 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.
[2]
Subsection 163(3) of
the Act provides that:
163. (3) Where,
in an appeal under this Act, a penalty assessed by the Minister under this
section or section 163.2 is in issue, the burden of establishing the facts
justifying the assessment of the penalty is on the Minister.
[3]
The penalty under
subsection 163(1) of the Act is imposed on a person who fails to report,
in that person’s tax return that was filed for a particular year, an amount that
is required to be included in computing that person’s income and also failed to
report in a tax return that was filed for any one of the three preceding
taxation years an amount that was required to be included in computing that
person’s income for such year. The Appellant acknowledged in her Notice of
Appeal that she had failed to report an amount of scholarship income in her 2004
income tax return. In 2004 the Province of British Columbia had paid a grant to a
school in Nanaimo in the amount of $7,482 on behalf of the
Appellant. The amount that should have been included in her income in relation
to this (but which was not so included) was $4,482.
[4]
In the Reply it is
stated that the Appellant was reassessed for 2007 to include the following
amounts of income:
(a)
$7,244 of employment
income from Vernon Ridge Holdings Ltd.;
(b)
$13,000 of employment
income from 626553 B.C. Ltd.; and
(c)
Taxable dividend income
of $40,000 paid by 626553 B.C. Ltd.
[5]
It appears that Vernon
Ridge Holdings Ltd. was a company that was owned by two holding companies –
626553 B.C. Ltd. and another company owned by the Appellant’s husband’s
business partner. It also appears that the Appellant and her husband owned the
shares of 626553 B.C. Ltd. since the dividend was paid by this company to the
Appellant. The Appellant is not contesting the inclusion of these amounts in
her income as she agrees that these amounts should have been included but she
is contesting the assessment of the penalty imposed pursuant to subsection
163(1) of the Act.
[6]
In the Reply the amount
in relation to the dividend is referred to as the “taxable dividend income”.
During the hearing counsel for the Respondent and the Appellant referred to the
amount as a dividend of $40,000. The T5 slip for the dividend was not
introduced into evidence. Therefore it is not clear whether the amount of the
dividend that was received was $40,000 or the taxable amount of the dividend
(which would be the amount of the dividend that was received plus the gross-up
amount prescribed by paragraph 82(1)(b) of the Act) was $40,000.
[7]
Subsection 82(1) of the
Act in 2007 provided in part as follows:
82. (1) In computing the income
of a taxpayer for a taxation year, there shall be included the total of the
following amounts:
(a) the amount, if any, by
which
(i) the total of all amounts, other than eligible
dividends and amounts described in paragraph (c), (d) or (e), received by the
taxpayer in the taxation year from corporations resident in Canada as, on
account of, in lieu of payment of or in satisfaction of, taxable dividends,
exceeds
(ii) if the taxpayer is an individual, the total of all
amounts paid by the taxpayer in the taxation year that are deemed by subsection
260(5) to have been received by another person as taxable dividends (other than
eligible dividends);
(a.1) the amount, if any, by
which
(i) the total of all amounts, other than amounts
included in computing the income of the taxpayer because of paragraph (c), (d) or (e),
received by the taxpayer in the taxation year from corporations resident in
Canada as, on account of, in lieu of payment of or in satisfaction of, eligible
dividends,
exceeds
(ii) if the taxpayer is an individual, the total of all
amounts paid by the taxpayer in the taxation year that are deemed by subsection
260(5) to have been received by another person as eligible dividends;
(b) if the taxpayer is an
individual, other than a trust that is a registered charity, the total of
(i) 25% of the amount determined under paragraph (a) in respect of the taxpayer for the taxation year, and
(ii) 45% of the amount determined under paragraph (a.1) in respect of the taxpayer for the taxation year;
[8]
Dividends received from
corporations resident in Canada were subject to either a gross-up amount
of 25% or 45%. In this case it was not established whether the dividend was an
eligible dividend. Since the gross-up amount for eligible dividends would be
45% this would result in a substantial difference between the amount of the dividend
that was received and a taxable dividend amount for eligible dividends. It
appears clear from the opening part of subsection 82(1) of the Act
that the amount that is required to be included in computing income is both the
amount of the dividend that was received and the additional amount (the
gross-up) which would be 45% of the amount of the dividend that was received if
the dividend was an eligible dividend. It therefore appears that since the penalty
imposed pursuant to subsection 163(1) of the Act is 10% of the amount
that is required to be included in computing income, that the penalty would be
imposed on the grossed-up amount.
[9]
This result appears to
be counterintuitive. It appears that the failure to include a dividend of
$10,000 that is received by a taxpayer, which, if it is an eligible dividend,
would require an additional 45%
to be included in income, or $14,500 in total, would result in a penalty under
subsection 163(1) of the Act of $1,450 but the failure to include
$10,000 of interest or employment income would result in a penalty of $1,000 when the tax
liability arising from a $10,000 eligible dividend (as a result of the dividend
tax credit) would be less than the tax liability arising from interest or
employment income of $10,000.
Therefore although the income taxes payable on eligible dividends received (or
other dividends that are to be grossed up) would be less than the income taxes
payable on the same amounts of interest or employment income, the failure to
include eligible dividends (or other dividends that are to be grossed up) would
result in larger penalties under subsection 163(1) of the Act than the
failure to include the same amount of interest or employment income. This is
because the penalty under subsection 163(1) of the Act is based on the
amount that was not included in computing income, not on the taxes that such
amount would have generated nor is it based on the amount that the taxpayer received.
[10]
In penalty cases it is
important that the Respondent establish the amount that the taxpayer failed to
include in income. In this case, counsel for the Respondent referred to both a
dividend of $40,000 and total unreported income of $60,000. The unreported
income amount is only $60,000 if the taxable dividend amount (including the
gross-up) is $40,000. The references to the dividend during the testimony of
the Appellant (who was the only witness) suggested that the amount of the dividend
that was received was $40,000. When dealing with dividend income it is very
important (especially with a possible gross-up amount of 45%) to distinguish
between the amount of the dividend that was received and the taxable amount of
the dividend.
[11]
This failure to
distinguish between the amount of the dividend that was received and the
taxable amount of the dividend does not mean that penalties could not be
imposed. The result is that the $40,000 amount will be considered to be the
taxable amount of the dividend.
[12]
In Saunders v. The
Queen, 2006 TCC 51, 2006 D.T.C. 2267, [2006] 2 C.T.C. 2255,
Justice Woods stated that:
12 The penalty in subsection 163(1) is one of strict liability,
although this Court has held that it can be vacated if the taxpayer can
establish due diligence.
[13]
Justice Boyle in Dunlop
v. The Queen, 2009 TCC 177, 2009 D.T.C. 650, [2009] 6 C.T.C. 2223
reiterated that the penalty will not apply if the taxpayer “can demonstrate he
exercised a requisite degree of due diligence”.
[14]
In the recent decision
of the Federal Court of Appeal in Les
Résidences Majeau Inc. v. The Queen, 2010 FCA 28, Justice Létourneau,
on behalf of the Federal Court of Appeal, stated as follows:
7 As far as
the penalty is concerned, we are satisfied that the judge did not make any
mistake in upholding it. To avoid this penalty, the appellant had to establish
that it was duly diligent.
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.
10 As already
stated, the second aspect of the defence requires that all reasonable
precautions or measures be taken to avoid the event leading to imposition of
the penalty.
[15]
Although the penalty in
issue is not identified in the decision of the Federal Court of Appeal, it
appears from the decision
which was appealed to the Federal Court of Appeal that the penalty in issue is
the penalty that was, prior to April 1, 2007, imposed under section 280 of the Excise
Tax Act. The imposition of this penalty was also subject to the due
diligence defence (see Pillar Oilfield Projects Ltd. v. The Queen,
[1993] G.S.T.C. 49).
[16]
In this case the
Appellant (prior to 2007) had her tax returns prepared by the same accounting
firm that did the accounting work for Vernon Ridge Holdings Ltd. and 626553
B.C. Ltd. In 2007 the Appellant’s daughter had been sick for approximately four
years. Her illness required her to be hospitalized from time to time. In 2007
the Appellant decided to have H & R Block prepare hers (and her husband’s)
income tax returns since they were closer than the accounting firm and her
husband was working away from home. She contacted the accounting firm for the
companies and asked them to fax the necessary tax information to H & R
Block. This was the day before the tax returns were signed and filed. The
accounting firm faxed this information to H & R Block but it appears that
for some unexplained reason, the income amounts referred to above were not
included by
H & R Block in her tax return.
[17]
The reasonable mistake
of fact that the Appellant has alleged is the mistake with respect to whether all
of the income that she had earned in 2007 was included by H & R Block in
her tax return. She has satisfied the subjective element of this test as
clearly she believed that following her phone call to the accounting firm and
the accounting firm faxing the information to H & R Block, that her tax
return then did include all of her income amounts for 2007.
[18]
However as noted by the
Federal Court of Appeal there is also an objective component to this test. Would
a reasonable person have made the same mistake? In this case in order to test
the reasonableness of the mistake, it would be important to review what income
she did report for 2007. Were there other amounts of employment income and
dividends that were reported that would make the failure to include these
amounts innocent? Would a reasonable person not notice that approximately
$20,000 of employment income and a $40,000 taxable dividend amount (which would
include the amount of the dividend that was received plus the appropriate
gross-up amount) had not been included?
[19]
Neither party
introduced a copy of the Appellant’s income tax return for 2007. It is not
clear whether the Appellant has a copy of her 2007 income tax return. It was
not established whether she has a copy or not. It is clear however that since
the Appellant filed her tax return for 2007 that the Respondent would have the income
tax return that was filed by the Appellant.
[20]
In the Law
of Evidence in Canada, third edition, by Justice Lederman, Justice Bryant
and Justice Fuerst of the Superior Court of Justice for Ontario, it is stated
at p. 377 that:
§6.449 In civil cases, an unfavourable inference can be drawn
when, in the absence of an explanation, a party litigant does not testify, or
fails to provide affidavit evidence on an application, or fails to call a
witness who would have knowledge of the facts and would be assumed to be
willing to assist that party. In the same vein, an adverse inference may be
drawn against a party who does not call a material witness over whom he or she
has exclusive control and does not explain it away. Such failure amounts to an
implied admission that the evidence of the absent witness would be contrary to
the party’s case, or at least would not support it.*
§6.450 An adverse inference should be drawn only after a prima
facie case has been established by the party bearing the burden of proof.*
(* denotes a footnote reference that is in the
original text but which has not been included.)
[21]
It seems to me that
this can also apply to a failure to produce a document that is within the exclusive
control of a party. In this case that document is the income tax return of the
Appellant. While the Appellant may have retained a copy, the original return
would have been filed with the Canada Revenue Agency and therefore the
Respondent would have exclusive control over the tax return that was filed by
the Appellant for 2007. No satisfactory explanation was provided for the
failure to introduce the Appellant’s income tax return for 2007.
[22]
In this case the
Respondent has the burden of establishing the facts justifying the assessment
of the penalty and the Appellant has the burden of establishing the facts that
would support a due diligence defence. In my opinion the Appellant did establish
a prima facie case for a due diligence defence. She established that she
had contacted the accounting firm for the companies before the tax returns were
filed and asked them to fax the necessary tax information to H & R Block
(which they did). She stated that she had reviewed her tax return before it was
filed but did not notice that her tax return did not contain the missing
income. She stated that she did not understand her tax return in any event and since
the end result of how much she had to pay or was to receive as a refund matched
what she was expecting, she did not think that anything was missing.
[23]
It should also be noted
that the Respondent was represented by counsel and the Appellant represented
herself. It seems to me that an unfavourable inference can be drawn from the
failure of the Respondent to introduce the income tax return that the Appellant
filed for 2007. The negative inference is that the return would have disclosed
such other employment income and dividend income that a reasonable person would
have made the same mistake as the Appellant did in these circumstances.
[24]
As a result the appeal
is allowed and the matter is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the penalty imposed
pursuant to subsection 163(1) of the Income Tax Act in relation to the
income tax return that she filed for 2007 is deleted.
[25]
The Respondent shall
pay costs to the Appellant in the amount of $500.
Signed at Halifax,
Nova Scotia, this 29th day of July 2010.
“Wyman W. Webb”
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