Citation: 2012TCC121
Date: 20120413
Docket: 2011-1717(IT)I
BETWEEN:
BARBARA A. NORLOCK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
This is an appeal by
Barbara Norlock from the reassessment of her 2008 taxation year. The issue
raised in the appeal is in respect of a federal and provincial penalty imposed
for the repeated failure to report income.
[2]
This court does not
have jurisdiction with respect to the provincial penalty. However, the relevant
statutory provision for the federal penalty is subsection 163(1) of the Income
Tax Act (the “Act”) and it reads:
(1)
Repeated failures [to report income] -- 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.
[3]
A penalty pursuant to subsection
163(1) is applied when a taxpayer fails to report income in his tax return in
any two taxation years within a four year period. The amount of the penalty is
10% of the amount of income not reported. In this appeal the amount of
unreported interest income was $18,376
and the federal penalty was $1,837.60. There was an equal amount of provincial
penalty imposed.
[4]
The Appellant admits that she
failed to report interest
income of $876 in her 2006 income tax return. She also admits that in 2008 she
failed to report interest income of $14,274 which she received from TD
Waterhouse Canada and other income of $4,102 which she
received from TD Premium Money Market Fund.
[5]
The only issue in this
appeal is whether the Appellant exercised due diligence when she failed to
report income.
[6]
During the relevant
period, the Appellant worked in the software industry. There was no evidence
with respect to her actual duties or her education. However, in the years 2006
to 2008, her income was in excess of $100,000 annually and she stated that in
2002 or 2003 she earned in excess of $250,000.
[7]
It was the Appellant’s
evidence that in January 2007 she sold her home in Milton and moved to a rental
apartment in downtown Toronto. In spite of the fact that she paid the
post office to redirect her mail, she did not receive a T5 for the interest
income of $876 for her 2006 taxation year.
[8]
The Appellant stated
that when she was reassessed for the 2006 taxation year she did not question
the amount of interest income included in her income. She just paid the amount
of the reassessment. It was her evidence that she has never received a T5 for
the amount of $876 for her 2006 taxation year. She surmised that the source of
the interest income in 2006 was from an Amex savings account which she had. It
was the only savings account which she had in 2006. Her only other investments
in 2006 were RRSPs.
[9]
When she sold her home
in Milton, the proceeds from the sale were invested
in a Guaranteed Investment Certificate (“GIC”) and the Premium Money Market
Fund with the Toronto Dominion Bank (“TD”). Sixteen months later, the principal
and interest from her investments at the TD were applied directly to the
purchase price of her current residence. She stated that all of the unreported
income in 2008 was from this source. The interest income in 2008 was unusual
and she did not receive a T5 for it.
[10]
As stated earlier, the
only issue in this appeal is whether the Appellant exercised due diligence when
she failed to report income.
[11]
Counsel for the
Appellant relied on the decision in Symonds v. Canada, 2011 TCC 274 for
the principle that a due diligence defence is available for either the first or
second failure to report income. He stated that he thought that a due
diligence defence could not be made for the 2008 taxation year and his
submissions concentrated on the 2006 taxation year (the first failure to report
income).
[12]
He submitted that the Appellant’s
failure to report was a reasonable mistake of fact. The Appellant overlooked
the interest income because she was not in the habit of earning and reporting
interest income. On a subjective basis, her failure to report was innocent as
she was not aware of the $876 interest income which she earned in 2006. Viewed
objectively, the mistake was reasonable as the amount of unreported income in
2006 was less than 1% of the income which the Appellant reported.
Analysis
[13]
The penalty imposed pursuant to
subsection 163(1) is one of strict liability but it is open to a taxpayer to
defend against its imposition by establishing that he exercised due diligence.
In Saunders v. The Queen, 2006 TCC 51, Justice Woods stated:
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.
[14]
Letourneau J. in Résidences Majeau Inc. v. R., 2010 FCA 28 described
the elements necessary to establish a due diligence defence to the imposition
of a penalty 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]
I realize that the amount of
unreported income in 2006 was only 1% of the Appellant’s total income and I am
satisfied that the failure to report was innocent.
[16]
However, I am not satisfied that a
reasonable person in the same circumstances would have made the same mistake.
The Appellant is intelligent and she appeared to be a sophisticated business
woman. She had only one savings account in 2006 and she received only one
amount of interest income. She failed to report any interest income in her 2006
return.
[17]
When she took her documents to her
accountant to have her 2006 tax return prepared, she ought to have realized
that she had not received the T5 with her interest income. She took no actions
to get a T5 from Amex.
[18]
Appellant’s counsel argued that
the facts in the present appeal were identical to those in Symonds (supra).
I disagree. In Symonds, Webb J. was not sure if that taxpayer had
received and reported other interest income and he drew a negative inference
from the Respondent’s failure to introduce the Appellant’s tax return. He
stated the following:
30 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 had filed for 2006. The
negative inference that I draw is that the return would have disclosed such
other interest income that was reported so that a reasonable person would have
made the same mistake as the Appellant did in these circumstances.
[19]
In the circumstances of this
appeal I conclude that the Appellant has not established a due diligence
defence. The Appellant has not shown that she took reasonable measures to
report all of her income in 2006 or 2008.
[20]
The appeal is dismissed.
Signed at Ottawa,
Canada, this 13th day of April 2012.
“V.A. Miller”
Email this Content