[OFFICIAL ENGLISH TRANSLATION]
Date: 20021210
Docket: 2001-4109(IT)I
BETWEEN:
JUSTIN SAVARD,
Appellant,
and
Her Majesty The Queen,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal under the
informal procedure concerning the 1994 to 1997 taxation
years.
[2] At issue are penalties assessed
under subsection 163(2) of the Income Tax Act
("the Act"). The penalties were assessed because
deductions were claimed as an allowable business investment loss
on the basis of a misrepresentation.
[3] In making the reassessments, the
Minister of National Revenue ("the Minister") relied on
the following assumptions of fact, set out in paragraphs 2,
3 and 7 of the Reply to the Notice of Appeal ("the
Reply"):
[translation]
2. In a
reassessment dated May 10, 2001, the Minister disallowed the
deduction of an amount of $26,960 claimed as an allowable
business investment loss in the computation of the
appellant's taxable income for the 1994 taxation year.
3. In
reassessments dated May 10, 2001, the Minister disallowed amounts
of $15,000, $15,000 and $3,040 carried forward as a
non-capital loss in the computation of the appellant's
taxable income for the 1995, 1996 and 1997 taxation years
respectively.
...
7. In making
and maintaining the reassessments dated May 10, 2001, the
Minister relied on the following assumptions of fact in
particular:
(a) the case
originates from an internal investigation involving certain
employees of the Jonquière Tax Centre, who had set up a
scheme under which certain persons would benefit from fraudulent
income tax refunds in exchange for a commission based on a
percentage of those refunds;
(b) by means of a
zero balance assessment dated January 6, 1999, the
Minister allowed a total allowable business investment loss of
$60,000 ($80,000 x ¾) and a related deduction of
$26,960 in the computation of the appellant's taxable income
for the 1994 taxation year;
(c) by means of
reassessments dated January 6, 1999, the Minister allowed
amounts of $15,000, $15,000 and $3,040 to be carried forward
as a non-capital loss in the computation of the appellant's
taxable income for the 1995, 1996 and 1997 taxation years
respectively;
(d) as a result of
these reassessments, on January 6, 1999, the appellant
received a total income tax refund of $11,054.43;
(e) the deduction
claimed as an allowable business investment loss for the 1994
taxation year and the amounts subsequently carried forward as a
non-capital loss for the 1995, 1996 and 1997 taxation years were
made possible by means of a fraudulent entry into the
Department's computer system of a total gross business
investment loss of $80,000 for the 1994 taxation year;
(f) the
appellant told the Minister's investigators that he had
agreed to a suggestion from an acquaintance,
one Jean-Eudes Thériault, who had offered
to have the appellant's income tax returns reviewed by
someone working at the Jonquière Tax Centre and that he
had given Mr. Thériault his Social Insurance Number
for that purpose;
(g) the appellant
knew neither the nature of the deduction that would be claimed on
his income tax returns nor the total amount of the resulting
refund;
(h) the appellant
told the Minister's investigators that he had never operated
a business;
(i) the
appellant acknowledged to the Minister's investigators that,
after he received a total refund of $11,054.13,
Mr. Thériault asked him for $7,900 on behalf of the
person working at the Jonquière Tax Centre, an amount the
appellant gave Mr. Thériault in cash on
January 27, 1999;
(j) the
appellant did not approach the Minister in any way, for
example:
(i) by
contacting the authorities at the Jonquière Tax Centre;
or
(ii) by simply
returning the cheque or cheques to those authorities;
(k) the Minister
considers that the neglect shown by the appellant in this case is
similar to complicity;
(l) concerning
each of the 1994, 1995, 1996 and 1997 taxation years, the
appellant made a misrepresentation attributable to neglect,
carelessness or wilful default, or committed fraud in filing the
income tax returns for those years or in supplying information
under the Act;
(m) concerning each of the
1994, 1995, 1996 and 1997 taxation years, the fictitious
deductions claimed led the Minister to believe that the appellant
knowingly or under circumstances amounting to gross negligence
made a misrepresentation or omission in filing the income tax
returns for those years, or participated in, assented to or
acquiesced in that misrepresentation or omission, with the result
that the income tax the appellant would have been required to pay
according to the information supplied on the income tax returns
filed for those years was less than the amount of income tax
actually payable for those years.
[4] The Notice of Appeal provides the
following explanation:
[translation]
...
I object to the amount claimed because, under the
circumstances, I consider that I have been victimized. I have
already made a deposition to an investigator who came to see me
at home. I did not deny the events and I explained to the
investigator all the facts as they occurred.
In 1997, an acquaintance, Jean-Eudes Thériault, told me
that he had a friend who could redo income tax returns and that I
would save money; all I had to do was to give him my Social
Insurance Number. I said to myself, "If I can save some
money, why not?" Months went by, and I heard nothing more
about this business.
In October 1997, I went through a very difficult divorce. I
managed to get shared custody, but I had to go to a lawyer and
that cost me money. Then a very painful time followed. I started
drinking a lot; those months were really tough. Early in 1998,
Mr. Thériault contacted me and told me to go and
check the account in which my income tax returns are deposited
because a deposit had been made. I went and checked and, to my
great surprise, about $11,000.00 had been deposited. I had been
expecting a lot less, say, a few hundred dollars.
I contacted Mr. Thériault to tell him the amount and to
say that it wasn't possible. At that point, I realized it was
illegal because he told me I had to pay him 2/3 of the amount in
order that he give it to the person who did the income tax
returns. I asked a few questions, but in the state of mind I was
in (divorce, alcohol, depression), I was in no shape to see the
situation clearly or to think about the consequences of my
decision.
So, I gave him the 2/3 of the amount and had about $3,000.00
left. My life went on; I would go out and drink. Slowly I managed
to pull myself together and tried to get my life back on track.
During that time I remembered the mistake I had made; that
mistake bothered me, until the day I got a call from the
investigator. It was a relief at last, and I told the
investigator the whole story.
In short, I acknowledge that I made a mistake. I believe that the
amounts of money I am being asked to repay are unreasonable in
the circumstances in which the event took place. I therefore ask
to be discharged from paying the amounts of money, the interest
and the fines.
...
[5] At the beginning of the hearing,
counsel for the appellant told the Court that, contrary to what
was stated in the Notice of Appeal, only the penalties assessed
were being appealed from. The appellant admitted the truth of
subparagraphs 7(a) to 7(e), 7(g), 7(h) and 7(j) of the Reply.
[6] The appellant works as an
electrician for Hydro-Québec.
[7] The appellant stated that he did
not know the nature of the claim made in order to obtain the
income tax refund. One Jean-Eudes Thériault
told him that he could obtain income tax refunds. As recorded at
pages 7 and 8 of the transcript, the appellant related the
circumstances of his meeting with Mr. Thériault as
follows:
[translation]
Q. Can you explain
to the Court how those deductions, the ones that are the subject
of the case before us today, were applied for? Under what
circumstances did that happen?
A. Well, I don't
know that at all¾what deductions were applied for. I had
no idea about that at all until I got the documents at home.
...
Q. How did that
begin; under what circumstances were you ...
A. O.K., I was at my
dad's place at a summer bonfire and, that was it,
Mr. Thériault was there and at one point we were sort
of standing at a distance or ...
Q. When you say
Mr. Thériault, do you know his full name?
A. Jean-Eudes
Thériault. Right, he told me he knew somebody, somebody
who redid income tax returns and that people could get income tax
refunds, like I'm going to say. And, that was it, all I had
to do was to give him my Social Insurance Number. So, fine, I
said, "Why not?" So I gave him my Social Insurance
Number and that ended the discussion; we went on having a beer
around the bonfire and that was all there was to it.
Q. How long have you
known this Mr. Thériault yourself?
A. Well, I've
known him, he's mainly, he's more a friend of my
brother's because he plays hockey with my brother and of
course, the way things go, I've only got the one brother, so
at one point I ran into Mr. Thériault and everything;
that's how I met him.
Q. O.K. Did ... What
was explained to you about the nature of the deductions that you
would obtain? Did ...
A. Well, nothing. I
mean, Mr. Thériault told me about that too; briefly,
it's ... That ended the discussion and then we went back to
talk with the group, I'd say. Afterwards I never talked about
that with anybody again, not even with Mr. Thériault.
I mean, I was getting divorced at the same time, so ...
[8] The payment was made as follows,
as recorded atpages 12 and 13 of the transcript:
[translation]
A. ... It was ... At
one point, Mr. Thériault called to say that deposits
had been made into my account. I went and checked. I said,
"Nope," I said, "Nothing's been deposited into
my account." And that's the way things stayed.
He called me back a week later to tell me again that deposits had
been made, and that I should go and check. I said,
"No," I said, "There aren't any." Anyway,
the next week he called me back and said to me, "Yeah,"
he said, "But do you have another account? Do you have ...
" "Well," I said, "Yes, I do; when I was with
my wife who's now my ex, actually, the income tax, the tax
refunds were deposited into a separate account that was hers. So,
well, I said, "I'm going to go and see her and ask if we
can go and see if any deposits were made."
...
A. After that, well,
I did see that deposits had in fact been made. So then I called
Mr. Thériault to tell him that a deposit had been
made.
...
A. And that was when
he told me I had to pay back two-thirds.
Counsel ISABELLE SIMARD:
Q. What was your
reaction to that?
A. Well, I thought
it was a lot. I said, "That's huge," I said,
"Look, two-thirds ... " Well, he said,
"That's what it costs to get income tax returns redone
... " So I said, "O.K., in any case they're
deductions that H & R Block, say, didn't see, and nobody
else saw either. So much the better," I said; that was
all.
Q. And how did you
pay him that amount?
A. Well, the time it
took for me to ...
Q. But how did you
pay it?
A. Oh, in cash, just
plain cash.
[9] The notes of the attending
physician were adduced as Exhibit A-1. These notes
show that on October 28 and November 4, 1997, the
appellant consulted a psychiatrist because of difficulties he had
adjusting as a result of the separation from his spouse.
[10] The conversation with
Mr. Thériault apparently took place in the summer
of 1998.
[11] At pages 24 to 26 of the
transcript, the appellant provided the following explanation
under cross-examination concerning the payment of two-thirds of
the amount of the refund to the persons who had engineered the
refund:
[translation]
Q. I presume that
you were also very surprised that he asked you to give him
two-thirds of the amount.
A. Yes. That
two-thirds, I said, "That's a lot, you know." But I
said, "O.K., if that's the way it works." I
didn't ask him a whole bunch of questions. I said,
"O.K., fine, that's huge, but that's the way it
is." And, like I say, at the time, it would have been, what
do I know, twice as much or three times less or ... O.K.,
fine, that's the way it is. That's the way it is,
fine.
Q. But, tell me,
when he asked you for that amount, what explanation did he give
you for saying that you had to give him $7,900 or nearly
$8,000?
A. Oh, it was to pay
the person who had done the income tax returns. That's what
he told me.
Q. But you knew
yourself it cost $100 to have an income tax return done at
H & R Block.
A. Yes, yes,
yes.
Q. But there, it
cost $8,000.
A. Yes, but those
were deductions I certainly never thought of; I never thought I
would get even a cent. And then he told me, "It's for
somebody else." I mean, I
didn't ... "
Q. But did it cross
your mind that this business might be, shall we say, illegal or
fraudulent?
A. Not at the time
when ...
Q. No?
A. No. No,
that's the way it was. That's the way ... That's the
way it is. I mean, it's like, I buy a pound of butter and
that's the price. O.K., fine, you know ... O.K., that's
the way it is.
Q. But how many
years had you been working, by 1999? At least nine years?
A. Nine years,
yes.
Q. As an
electrician?
A. Yes, yes.
Q. O.K. And each
year, you filed your income tax return?
A. Yes.
Q. Did someone do it
for you?
A. Yes, yes,
that's right, there was H & R Block, my dad at first,
and then ...
Q. Now then, I'm
going to ask you once again, because I'm trying to
understand. You see nothing odd in the fact that H & R Block
charges you $100 while a guy you don't even know charges you
$8,000?
A. Well, no, I mean,
to me, money, deductions. Listen, I don't know him; I have it
done, I didn't know.
Q. But did you think
that money belonged to you? Did you think you were entitled to
those deductions?
A. Well, I guess if
they gave them to me, it's income tax I had overpaid.
...
[12] The appellant's solemn declaration
was adduced as Exhibit I-1. With respect to the
payment, the following two passages are quoted:
[translation]
...
Then I withdrew in cash the 2/3 of the refund issued on
January 6, 1999, in order to give it to Jean-Eudes
Thériault so that he could give it to the person who
looked after my refund.
I do not know the name of the person who processed my income
tax return so that I would obtain the refund of $11,054.43.
...
[13] Counsel for the appellant submitted to
the Court that each case stands on its own merits. She referred
to the decision of Tardif J. of this Court in Houle v. Her
Majesty the Queen, [2002] T.C.J. No. 24 (Q.L.), and in
particular to paragraphs 8, 10, 15, and 17:
To heighten interest, Highway prepared the prospect's
income tax return, claiming fictitious and ludicrous expenses.
The tax refund thus considerably reduced the amount of the
outlays required. To obtain the tax refund quickly, Highway,
through its own personnel, antedated the contract so as to
produce effects for the previous fiscal year.
...
So, like all the others, the appellant went to Highway's
place of business. After hearing the convincing pitch, she
accepted the proposal that was made, signing all the required
documents for becoming a distributor.
...
All the appellants that the common evidence concerned,
including, obviously, this appellant, were persons without
experience in the business world. All had their tax returns
completed by third parties, and all were interested in the
Highway concept, in which they saw first and foremost an
opportunity to improve their financial situation by earning
additional income. I have no doubt that the appellants'
motivation in this regard was sound, reasonable and normal.
...
The false and untruthful information sent for and on behalf of
the appellant was forwarded by a Highway employee, who did this
electronically so that, as a result, in most cases those
concerned did not know the exact content of the information
transmitted. As to the conventionally processed returns, copies
were given to them, and when they asked questions, they were told
that everything was in order, proper and legal, that they now had
their own business and that they were accordingly entitled, as
self-employed workers, to deduct the stated expenses.
...
The burden of proof with respect to the assessment of
penalties under subsection 163(2) of the Act is a heavy one.
In Farm Business Consultants Inc. v. Canada, [1994]
T.C.J. No. 760 (Q.L.), Judge Bowman (now Associate Chief
Judge) set out a highly interesting approach to penalties. I
think it helpful to reproduce a passage from that judgment:
... In such a case a court must, even in applying a civil
standard of proof, scrutinize the evidence with great care and
look for a higher degree of probability than would be expected
where allegations of a less serious nature are sought to be
established. Moreover, where a penalty is imposed under
subsection 163(2) although a civil standard of proof is required,
if a taxpayer's conduct is consistent with two viable and
reasonable hypotheses, one justifying the penalty and one not,
the benefit of the doubt must be given to the taxpayer and the
penalty must be deleted. I think that in this case the required
degree of probability has been established by the respondent, and
that no hypothesis that is inconsistent with that advanced by the
respondent is sustainable on the basis of the evidence
adduced.
[14] Counsel for the respondent argued that
there can be no question of naivety if a taxpayer gives
two-thirds of the amount refunded by the Minister to the person
who obtained that refund for the taxpayer or to the person
through whom the refund was obtained. A taxpayer who felt
entitled to that refund or believed the refund was legal would
not have paid out that colossal amount of money.
[15] Counsel for the respondent referred to
a decision I rendered in Lévesque Estate v. Canada,
[1995] T.C.J. No. 469 (Q.L.), and in particular to
paragraph 13 of the English version:
Ignorance or failure to obtain adequate information could in
certain circumstances be a sufficient element to constitute gross
negligence, particularly in cases where there is an economic
interest in remaining ignorant. Here, the element that tilts the
scales in favour of accepting the taxpayer's position is that
there was no economic interest in this omission or in this
failure to obtain adequate information.
[16] Counsel for the respondent also pointed
out that the payment was made in January 1999, not
November 1997, which was the date on the notes of the
attending physician (Exhibit A-1).
[17] Counsel for the respondent further
pointed out that a person can choose what to do or what not to
do. The appellant had the choice of not paying the amount of
$8,000; he chose to pay it.
[18] Counsel for the appellant argued in
reply that the payment was a condition of the refund and that the
appellant learned about that condition after the refund was
deposited. She also pointed out that, at the time the payment was
made, the appellant received Notices of Reassessment providing an
official version of the refund.
Analysis and conclusion
[19] The assessments being appealed from
were not adduced in evidence. I had asked counsel for the
respondent to send me a chart illustrating the computation of the
income tax payable, the interest owing on that tax, the amount of
the penalties, and the interest on those penalties. I received
approximately 30 pages of computerized statements establishing
the amounts at issue. Unfortunately, these data are too detailed
to be helpful to me. I shall indicate only the total figure: as
at September 12, 2002, the balance is $28,123.03.
[20] However, I do consider it worth
reproducing some paragraphs from the letter accompanying those
computerized statements:
[translation]
We point out that, in issuing the reassessments cancelling the
fraudulent refunds and assessing the penalties under
subsection 163(2) of the Income Tax Act, the Minister
computed the interest on the penalties starting on the
eligibility date for each taxation year at issue, but the
interest on the amount of the fraudulent refund starts to accrue
from the date the refund was issued.
...
In the case of Justin Savard (2001-4109(IT)I), an error
appears to have been made in computing the penalties for the
1995, 1996 and 1997 taxation years: apparently incorrect amounts
were used as a basis for computing the penalties.
|
1995
|
$1,686.25 instead of $2,284.30
|
|
1996
|
$1,686.75 instead of $2,349.77
|
|
1997
|
$ 341.13 instead of $2,105.38
|
Please take these new amounts into account in reaching your
decision, following which the appropriate changes will be made.
The interest on the penalties will, of course, be adjusted
accordingly.
[21] Concerning the penalty assessed under
subsection 163(2) of the Act, in Jean-Marc
Simard, [2002] T.C.J. No. 265 (Q.L.), I concluded that
the Court had discretion to assess the amount of the penalty on
the basis of the taxpayer's ability to pay, extent of
criminal intent, and previous behaviour. The respondent has
appealed from that decision.
[22] For the moment, while awaiting a
decision by the Federal Court of Appeal, I consider it more
cautious to follow the approach that Court recently took in
Chabot v. Canada, [2001] F.C.J. No. 1829 (Q.L.). In
that decision, that Court did not assess the taxpayer's
extent of criminal intent but completely exonerated the taxpayer
from any application of subsection 163(2) of the Act
on the ground that the taxpayer had been caught in an ambush.
That decision dealt with a taxpayer who claimed income tax
credits for charitable donations. In 1992, he claimed a
charitable donation of $10,000 for a gift for which he had
actually paid $2,800; in 1993 and 1994 he claimed charitable
donations of $15,000 and $8,000 for gifts for which he
had paid a total of $2,500.
[23] Paragraphs 40 and 41 of the
decision in Chabot are quoted:
40. I also note that Denis Lemieux, an investigator with
Revenue Canada, explained to the Court that no action had been
taken against the foundations involved themselves because, in the
Department's view:
[TRANSLATION]
... they had been caught in an ambush. It had grown completely
out of proportion for them. They were genuinely ... they are not
specialists when it comes to artwork. They found the offer very
appealing ...
These are foundations; there was no criminal intent on the
part of these people. They realized themselves that they were in
the wrong.
(Appendix 6, pages 25 and 26)
In his own way, Mr. Chabot too "got caught in
an ambush" and, in his own way, he too "found the offer
appealing".
41. In these circumstances, I find it difficult to understand
why Revenue Canada would assess penalties against such small
taxpayers who, in good faith, tried to benefit from a tax credit
that Revenue Canada itself dangled in front of their eyes and
which, according to the guide, seemed so easy to obtain.
(Emphasis added.)
[24] I believe that the appellant, too, was
caught in an ambush. He was not the one who concocted the scheme.
The proposition came to him through a person acting as an
intermediary for employees of a federal institution. The
appellant was not told that fraudulent acts were involved. He was
told that it was possible that he had not claimed all the income
tax refunds he was entitled to. That is an argument that many
persons of good faith are tempted to believe. The appellant
received a substantial amount of money, which surprised him. He
was told that he had to pay back two-thirds of that amount to the
persons who had engineered the refund. He hesitated but agreed
without taking the time to think it through carefully. There were
difficulties in his personal life. He was in no condition to see
the situation clearly. He then became embroiled in a situation
from which it was difficult to extricate himself. That error
haunted him until the day he received the call from the
investigator. He was relieved to tell the investigator
everything.
[25] The respondent pointed out that a
person has the option of choice and that, even after the
appellant made a choice, he could still have asked to have his
situation straightened out with the tax authorities. Although the
appellant did make a shady, dubious choice and was not open with
the tax authorities despite the considerable anxiety that choice
caused him, it was conceivably difficult for him to consult those
authorities. He paid back too much money to the persons who
engineered the income tax refund. He vaguely felt that he could
not recover that share of the money and would have to repay that
share, along with his own share, to the tax authorities. The
appellant may conceivably have hoped that the operation was
legitimate. The situation was confused and feelings were unclear,
but the situation appears to resemble an ambush much more than a
deliberate decision by the appellant to contravene the
Act.
[26] Unless an occurrence is purely
accidental, individuals always have some share of responsibility
for their acts. Paying money back to government employees who are
performing their duties is a serious act.
[27] That said, according to
subsection 163(2) of the Act, the misrepresentation
or omission must have been made knowingly or under circumstances
amounting to gross negligence. In other words, according to this
subsection, there must have been criminal intent. In my view, the
Court must be all the more certain of criminal intent when the
amount of the resulting penalty is extremely high and
particularly burdensome for the taxpayer, as is the case
here.
[28] Although the appellant has a good
trade, he is neither an accountant nor a legal practitioner.
According to his testimony, he always filed his annual income tax
returns and always intended to comply with the Act. The
respondent has not contradicted that statement.
[29] I consider that initially the
appellant's act was the result of a lack of thought, a lack
of awareness or an error of judgement, not the result of criminal
intent, and that he then became embroiled in an ambush. In
circumstances like those of the present case, the greater a
person's education, the more difficult it will be for that
person to avoid the application of subsection 163(2) of the
Act on the ground of an error of judgment. Here, however,
I consider that the appellant did not form the wrongful intent
required for subsection 163(2) of the Act to
apply.
[30] The appeal is therefore allowed in
order to delete the penalties and interest thereon.
Signed at Ottawa, Canada, this 10th day of December
2002.
J.T.C.C.
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