[OFFICIAL ENGLISH TRANSLATION]
Date: 20021210
Docket: 2001-824(IT)I
BETWEEN:
DANY HOUDE,
Appellant,
and
Her Majesty The Queen,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal, instituted
under the informal procedure, dealing with the 1991 to 1995 taxation years.
[2] At
issue are the following: a refund of income tax credits claimed on the basis of a
misrepresentation; related interest; and penalties assessed
under subsection 163(2) of the Income Tax Act ("the Act").
[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 6 of the Reply to the Notice of Appeal ("the
Reply"):
[translation]
2. In
a reassessment dated July 14, 2000, the Minister disallowed the deduction of
amounts of $9,900, $14,700, $15,800, $14,950 and $11,800, that were
claimed at line 256 of the income tax returns and previously allowed in the
computation of the appellant's taxable income for the 1991, 1992, 1993, 1994
and 1995 taxation years respectively.
...
3. With
respect to the 1991, 1992, 1993, 1994 and 1995 taxation years, the Minister
assessed the following penalties under subsection 163(2) of the Act:
|
(a) 1991
(b) 1992
(c) 1993
(d) 1994
(e) 1995
|
$ 433.00
$1,099.11
$1,100.78
$1,098.91
$ 858.77
|
...
6. In
making and maintaining the reassessments dated July 14, 2000, the Minister
relied in particular on the following assumptions of fact:
(a) the
case originates from an internal investigation involving certain Jonquière Tax
Centre employees 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) as
a result of reassessments made on March 24, 1997, on the same date the
appellant received a total income tax refund of $11,419.37 for the 1991, 1992,
1993, 1994 and 1995 taxation years;
(c) under
the Notices of Reassessment dated March 24, 1997, the appellant was
allowed a deduction at line 256 of his income tax return in the computation of
his taxable income for each of the 1991, 1992, 1993, 1994 and 1995 taxation
years;
(d) in
a solemn declaration, the appellant admitted to the Minister's investigators
that he had accepted a proposal from Réjean Simard, a Revenue Canada employee,
offering him the possibility of obtaining income tax refunds in exchange for a
commission of 66.6666 per cent and that he had given Mr. Simard
his Social Insurance Number for that purpose;
(e) the
appellant knew neither the nature of the deduction that would be claimed on his
income tax returns nor the total amount of the refund that would result
therefrom;
(f) in
a solemn declaration, the appellant admitted to the Minister's investigators
that he had personally given Mr. Simard, on Mr. Simard's instructions,
an amount of $7,612.92 with regard to the refunds resulting from the
Notices of Reassessment dated March 24, 1997, concerning the 1991, 1992,
1993, 1994 and 1995 taxation years;
(g) the
Minister considers that the neglect shown by the appellant in this case is
similar to complicity;
(h) concerning
the 1991, 1992, 1993, 1994 and 1995 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 supplying
information under the Act;
(i) deduction
of the amounts claimed at line 256 of the appellant's income tax returns
for each of the 1991, 1992, 1993, 1994 and 1995 taxation years leads the
Minister to believe that the appellant knowingly or under circumstances
amounting to gross negligence made a false statement or omission in filing the
income tax returns for those years, or participated in, assented to or
acquiesced in that false statement 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] In
the Notice of Appeal, the following request was made:
[translation]
... When I received
that cheque, I believed it was completely legal because it was a Revenue Canada
"employee" who called me and asked me to check whether my previous
income tax returns had been properly completed and whether all the credits for
which I was eligible had been claimed.
Since he
was an acquaintance and, moreover, a Revenue Canada employee, I trusted him and
provided my Social Insurance Number ("SIN") so that he could perform
the check. Some time afterward, he told me that I would receive a refund
because, in his opinion, my income tax returns had been improperly completed at
the time. Sure enough, a few weeks later, I received a refund, which I cashed
because I believed it was completely legal.
Some
years later I received a visit from Revenue Canada, and I was told that I was
not entitled to the cheque I had received and that the employee who had
contacted me had been dismissed for defrauding the employer. I want to tell the
Court that it is not the fault of ordinary taxpayers if Revenue Canada hires
fraud artists or if I was taken for a ride in this matter.
You can
check my previous file: I have always played a straight game and never had any
problems with the law or Revenue Canada. I therefore ask the Court to cancel
this account in full: the penalty, the interest and the principal. As well, I
am a seasonal construction worker; I make support payments for three children
and I am presently living with another partner with whom I have had two more
children. My situation would therefore make it impossible for me to pay this
exorbitant account, and I ask you to show proper appreciation and to penalize
your employees.
...
[5] The
appellant testified. He is a carpenter and works for various construction contractors
in his region.
He explained that he knew Réjean Simard, a Revenue Canada employee, because
Mr. Simard was the uncle of a female friend. At the time the events
occurred, the appellant had known Mr. Simard for two years.
[6] It
was Mr. Simard
who called the appellant to tell him that he might be entitled to income tax
refunds. It was apparently after the cheque had been deposited that
Mr. Simard told the appellant he had to repay two-thirds of the amount to
Mr. Simard. The appellant asked Mr. Simard why. Mr. Simard
explained to the appellant that three persons were involved. The appellant felt
worried. Mr. Simard apparently told the appellant not to worry: if
anything came up, Mr. Simard would be the one taking care of it.
[7] The
appellant reiterated the statement he made in the Notice of Appeal that he had
always paid his income tax and had always filed his income tax returns.
[8] Concerning
the wording of subparagraph 6(g) of the Reply, which reads, [translation] "the Minister considers
that the neglect shown by the appellant in this case is similar to
complicity", the appellant made the following statement, as recorded at
page 10 of the transcript:
[translation]
...
A. Well,
I didn't know. At the start, I didn't know, you know. It was afterward, when
... It was afterward, when he told me that, and I said:
"I'm
afraid of that." "Oh," he said, "There's no problem. I
work for the government. If anything comes up, call me and I'll fix it up for
you." It's true, everything was set up, everything was started,
everything was done, so I trusted him ... But he was working for the
government, you know. Usually, I don't know, but ... I didn't know him really
well; I'd seen him two or three times. Usually ...
...
A. Like
I said to the investigator when he came to my place, I'm prepared to pay my
share. My share, I got it, I had it, I was the one who spent it, I know that.
But them, they're asking me for $24,000 and $23,000 and some.
...
[9] An
excerpt from the appellant's bank account was adduced as Exhibit I‑2. This
excerpt shows a direct deposit of $11,419.37 on March 24 and a
withdrawal of $7,600 on March 27. The appellant stated that
Mr. Simard called him on the evening the day the deposit was made; the
appellant himself did not know the deposit had been made. The appellant
provided the following explanation of the circumstances of the deposit, as
recorded at pages 12 to 14 of the transcript:
[translation]
Q. On
the evening the day the deposit was made.
A. Yes.
I didn't know, myself, that the deposit had been made. I didn't know; I was
working. He said, "Dany, your deposit's been made." I said,
"Oh, well, I don't know about that; I haven't been to the credit
union." "Oh yes," he said, "It's done. I checked; it's
been deposited, and you owe me two-thirds of the amount."
Q. Did
you not think that two-thirds of the amount was quite a lot?
A. Well,
right, I asked some questions. I asked him, "Two-thirds? You told me I
was entitled to a refund, and now you're asking me to give you the whole thing?
What is this?" "Well, no," he said, "I'm not the only one
involved in this business." "What's the story?"
"Well," he said, "there's three of us: myself, somebody else (he
didn't name any names) and you." That's when I saw it was some kind of
underhanded business and, you know.
Q. When
you saw it was an underhanded business, did you call to blow the whistle on
it? After all, these people were Revenue Canada employees.
A. No.
That was it. That was it, right.
Q. Did
you not want to blow the whistle on that underhanded business?
A. No.
Well, I thought about it, but then, you know, it was sort of in the family; I
was going out with his niece, a while earlier I was going out with his niece,
and ...
Q. But
you were no longer going out with his niece at that time, when you received the
refund.
A. No,
that's right.
Q. You
were not really part of the family at that time.
A. No.
Q. Why?
What stopped you from blowing the whistle on Mr. Simard?
A. Well,
like I'm saying, it was the amount, you know. There’s no doubt it’s always
appealing, eh? But when he asked me for two-thirds, that was when I ... Then I
wasn't sure.
Q. Do
you know ... did you yourself know, at that time, that this business might have
been tried on someone else?
A. No,
I hadn't heard anything about that. Well, I was working, I was minding my own
business. Personnally, I don't know what he was doing.
...
[10] The
appellant's solemn declaration was adduced as Exhibit I-1. I quote the
following two paragraphs from it:
[translation]
...
I
went to the Rivière Éternité credit union to withdraw $7,612.92 in cash,
which I personally paid to Réjean Simard at my home.
I
also paid Réjean Simard 2/3 of the refund received by Pierre Simard, a
co-worker of mine.
...
[11] The
appellant had told Pierre Simard, a co-worker, about the possibility of
obtaining income tax refunds through Réjean Simard, a Revenue Canada employee.
The two payments by the appellant to Réjean Simard were made in cash on separate
occasions. The payment in the case of Pierre Simard was made some months
later.
[12] Rolland Pelletier
testified at the request of counsel for the respondent. Mr. Pelletier's
testimony was adduced in the two other cases heard today, the appeals of
Justin Savard (2001‑4109(IT)I) and of Robin Villeneuve (2001‑170(IT)I).
Mr. Pelletier remained in the room to be available to the Court and the
two other appellants, in case they wished to cross-examine him.
[13] In
his testimony, Mr. Pelletier explained the scheme referred to in the Reply. Since
the appellant did not challenge the facts stated by Mr. Pelletier, and
since this scheme has already been described in the Reply and in my decision in
Jean-Marc Simard v. Canada, [2002] T.C.J. No. 265 (Q.L.), I do not
consider it necessary to explain the scheme once again.
Argument
[14] The
appellant stated that he was prepared to repay the amount from which he
benefited, that is, $3,700, but did not consider that he was required to
repay an amount from which he personally did not benefit.
[15] Counsel
for the respondent argued that the appellant not only acquiesced in the fraud by accepting
the payment and making a kickback of two-thirds of that amount but also went so
far as to collaborate in the fraud by causing a co-worker to participate in it.
[16] 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.
[17] Counsel for the
respondent also referred to a decision by Hamlyn J., formerly of this Court, in
Carlson v. Canada, [1997] T.C.J. No. 1351 (Q.L.), and in particular
to paragraph 19:
Further, wilful
blindness or a lack of care by someone capable of acting in a responsible
manner has been found in circumstances to be gross negligence. Deliberate
failure to make enquiries as to fiscal responsibilities has been found in one
case to constitute gross negligence, and that case is Holley v. M.N.R., 89 D.T.C. 366. That was
Judge Kempo of this Court.
[18] Counsel for the
respondent argued that wilful blindness constitutes gross negligence when a
person does not make enquiries if that person could have done so and obtains an
economic benefit from not doing so. This describes the appellant's behaviour.
The appellant did not make enquiries of the tax authorities about the
legitimacy of the refund or the repayment to the persons who engineered it.
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 amount as at
September 12, 2002: $27,934.06.
[20] However, I consider it
worth reproducing a paragraph from the letter accompanying these 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 from the due date for each
taxation year at issue but computed the interest on the amount of the
fraudulent refund only from the date the refund was issued.
[21] When I first read these
appeals, it appeared to me that the taxation year was incorrect and should have
been the taxation year in which the fraudulent refund was issued, in this case,
the 1997 taxation year. According to the theory of mandates, however, a
mandator accepts an act by a mandatary if the mandator ratifies the act. By
accepting the income tax refund overpayment and by repaying most of the refund
to the persons who engineered it, the appellant ratified the act by those
persons, his mandataries. Since the mandataries used previous taxation years
for the purpose of the fraudulent reassessments, it is therefore correct to use
the same taxation years for the purposes of the reassessments that are being
appealed from.
[22] The appellant would like
to repay only the part of the amount from which he benefited. That option is
not possible. He became the owner of the full amount of money paid into his
bank account. That amount of money belonged to him. He disposed of it as he did
by repaying two-thirds of it to the persons who engineered the refund. He must
therefore repay the amount of the income tax refund overpayment in full, with
interest.
[23] Concerning the penalty
assessed under subsection 163(2) of the Act, in Jean-Marc Simard
(supra) I concluded that the Court had discretion to assess the amount
of the penalty depending on the taxpayer's ability to pay, extent of criminal intent,
and previous behaviour. The respondent has appealed from that decision.
[24] For the moment, while
awaiting a decision by the Federal Court of Appeal, I consider it more prudent
to follow the recent example provided by that Court 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 had 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.
[25] I quote paragraphs 40 and
41 of the decision in Chabot:
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.)
[26] 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 employees of a federal institution,
which he respects. He was not told about fraudulent acts. He was told that it
was possible that he had not claimed all the income tax refunds to which he was
entitled. That is an assumption 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 agreed without taking the time to
think it over. Afterwards, he was caught in a situation he could not easily
escape from.
[27] The appellant has stated
that he was not open with the tax authorities. That is true, and there was no
real response from the appellant when he was questioned on this point. That
said, it was conceivably difficult for him to consult these 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. He
became a victim, and he behaved like a victim. He waited anxiously. He may
conceivably have mentioned the possibility of income tax refunds to a co-worker
in order to assuage his anxiety as a victim and to convince himself that
everything would be all right, or he may conceivably have still trusted that
the operation was legitimate since he advised a co-worker to take part in it.
The situation was confused and feelings were unclear, but the situation appears
to result from an ambush much more than from a deliberate decision by the
appellant to contravene the Act.
[28] Unless an occurrence is
purely accidental, to some degree individuals are always responsible for their
acts. Paying money back to government employees who are performing their duties
is a serious act.
[29] Noretheless, under
subsection 163(2) of the Act, the false statement 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.
[30] Although the appellant
has a good trade, he is neither an accountant nor a lawyer. According to his
testimony and the Notice of Appeal, he always filed his annual income tax
returns and always wanted to comply with the Act. The respondent has not
contradicted this statement.
[31] I consider that initially
the appellant's act was the result of lack of consideration, lack of awareness
or an error of judgment, not the result of criminal intent, and that he then
became caught 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 criminal intent required for subsection 163(2) of the Act
to be applied.
[32] The appeal is therefore
allowed in order to
eliminate the penalties and the interest thereon.
Signed at Ottawa, Canada, this 10th day of December 2002.
J.T.C.C.
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