Simard v. The Queen, docket 2001-88-IT-I (Informal Procedure)

Date: 20020523

Docket: 2001-88-IT-I

BETWEEN:

JEAN-MARC SIMARD,

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 1990 to 1994 taxation years.

[2]            The points at issue are the interest on the tax owed, the assessment of penalties under subsection 163(2) of the Income Tax Act (the "Act") and the interest on those penalties.

[3]            The facts on which the Minister of National Revenue (the "Minister") relied in making his reassessments are set out in paragraph 9 of the Reply to the Notice of Appeal, as follows:

[TRANSLATION]

(a)            the case arises from an internal investigation of certain employees of the Jonquière Tax Centre who set up a scheme to enable certain persons to receive fraudulent tax refunds in exchange for a commission based on a percentage of the said refunds;

(b)            on March 28, 1996, the appellant received a total tax refund of $8,027.47 for the 1990, 1991, 1992, 1993 and 1994 taxation years as a result of reassessments dated March 28, 1996;

(c)            the notices of reassessment dated March 28, 1996, for the 1990 and 1991 taxation years showed that the appellant was the father of two children; they allowed the equivalent to married credit and the credit for dependants in the computation of the non-refundable tax credits and allowed the child tax credit in the computation of the federal credits;

(d)            the notice of reassessment dated March 28, 1996, for the 1992 taxation year showed that the appellant was the father of two children and allowed the child tax credit in the computation of the federal credits;

(e)            the notices of reassessment dated March 28, 1996, for the 1993 and 1994 taxation years allowed in the computation of the appellant's income the deduction of amounts of $5,750 and $6,345 respectively in respect of alimony or other allowance payable on a periodic basis;

(f)             the appellant admitted to the Minister's investigators in a solemn declaration that he had accepted the offer, made by a Revenue Canada employee, Mario Boucher, of tax refunds in exchange for a 50 percent commission, which offer involved, more precisely, indicating that his marital status had changed to that of a separated person;

(g)            the appellant stated to the Minister's investigators in a solemn declaration that he was not married nor was he the father of any children in the taxation years in issue;

(h)            the appellant admitted to the Minister's investigators in a solemn declaration that, in April 1996, he had transferred to a bank account belonging to Mario Boucher, in accordance with Mr. Boucher's instructions, two amounts exceeding 50 percent of the total refund received in March 1996 for the 1990, 1991, 1992, 1993 and 1994 taxation years;

(i)             in the Minister's view, there was collusion, connivance and complicity on the part of the appellant with respect to this scheme;

(j)             in support of the reassessments dated March 28, 1996, for the 1990, 1991, 1992, 1993 and 1994 taxation years, the Minister alleged that the appellant made a misrepresentation that was attributable to neglect, carelessness or wilful default or committed fraud in supplying information under the Act;

(k)            the claim, under non-refundable tax credits, of the equivalent to married credit and the credit for dependants as well as the claim for the child tax credit under federal credits, for the 1990 and 1991 taxation years, and the claim of only the federal child tax credit for the 1992 taxation year, as well as the claim for alimony for 1993 and 1994 lead the Minister to believe that the appellant knowingly, or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of a false statement or omission in the income tax returns filed for the 1990, 1991, 1992, 1993 and 1994 taxation years, as a result of which the tax which he would have been required to pay based on the information provided in the income tax returns filed for those years was less than the amount of tax actually payable for those years.

[4]            The Notice of Appeal reads as follows:

[TRANSLATION]

. . .

As I have already told Revenue Canada, I did receive a tax refund in 1996, I believe. I cashed the cheque at that time since I believed it was perfectly legal since it was a person who had been working at Revenue Canada for a number of years who had approached me.

When that Revenue Canada employee contacted me, he told me that he could check my previous tax returns to see whether they had been properly completed and all credits to which I was entitled had been claimed.

Since it was a person working for the government, that is, Revenue Canada Taxation, I trusted him and gave him my social insurance number so that he could check my taxes upon his return to the office.

Some time later, he informed me that he could correct my previous returns because the person who had prepared my returns at the time had failed to claim some credits to which I was entitled. Sure enough, a few weeks later, I received a tax refund, as he had said. However, the employee in question had told me to think of him when I received my refund, and, in fact, when I got my cheque, I did reward him. Perhaps I should have informed on him at that time, because I know that no government employee is entitled to receive kickbacks from taxpayers, but I was really pleased to receive the unexpected refund, and that's why I rewarded him.

To my great surprise, in the fall of 1999, I was visited by representatives of Revenue Canada's Special Investigations, who asked me to explain why I had received such a refund. My answer to the investigators was very brief and simple. I told them that one of their co-workers had contacted me and that he had reassessed my previous taxes since some credits had been overlooked and I was entitled to them.

As soon as I had given my explanations, an investigator informed me that the employee in question had been dismissed and that I was not entitled to the refund I had received a few years earlier. I knew that the investigator was not joking, but I could not believe him.

It is not the fault of ordinary taxpayers if Revenue Canada hires fraud artists. I would like to point out to you that I trusted Revenue Canada, but now I am one among many other people who are disillusioned at how things work in a number of government departments.

In conclusion, I ask the Tax Court of Canada to cancel this entire bill, that is, the penalty, interest and principal amount to which it is stated that I was not entitled.

I request the understanding and clemency of the Court in my case since I was duped and, in any case, cannot repay this enormous amount.

. . .

[5]            The witnesses in this case were, for the appellant, the appellant himself and his brother, Réjean Simard, who represented him at the hearing, and for the respondent, Roland Pelletier.

[6]            The appellant gave his occupation as being a carpenter's apprentice, third year.

[7]            The appellant said that, one day, his brother, Réjean Simard, who worked for Revenue Canada, had telephoned him to say that he could get him income tax refunds for five years. The proposal was made by telephone because the appellant lives in Saint Lin, a town in the Laurentians, whereas his brother lives in Chicoutimi.

[8]            The appellant did indeed receive an amount of $8,027.47 in 1996, which was deposited directly to his bank account. He said he was very pleased to get that money and that he had thanked his brother by giving him approximately $3,000.

[9]            The appellant admitted that, in the years in issue, he was not the father of two children, had never been married and had not paid any alimony. In fact, he did not know on what basis his brother, Réjean Simard, had claimed the refunds. The reassessments for 1990 to 1994 were filed as Exhibit I-4.

[10]          At the time of the hearing, the appellant had reimbursed $7,000 through monthly payments of $500. His brother had given him back the $3,000, which explains why he had already repaid $7,000 of his tax liability.

[11]          The appellant said that, at first, he had thought he was entitled to the refund. He explained his attitude as follows, at page 8 of the transcript: [ TRANSCRIPTION] "And, being a naive person, I asked no questions; I trusted him because he had always done my taxes, and there had never been any problems."

[12]          He said that he had always worked and earned an honest living and that he had been taken in in this case. He has been working for 25 years, having started at the age of 14.

[13]          The appellant stated that, when a Revenue Canada officer had contacted him to arrange to come and visit him, he telephoned his brother. His brother, who had not yet been suspended, suggested a scenario, which the appellant agreed to follow in order to protect his brother's job. The scenario was to say that Mario Boucher had contacted him, not his brother. Mr. Boucher had already been suspended and had purportedly agreed to shoulder the blame for everything.

[14]          In cross-examination, counsel for the respondent filed Exhibit I-1, which is a solemn declaration signed by the appellant and dated December 9, 1999. That solemn declaration states that it was Mario Boucher who had called the appellant and that the appellant gave him over 50 percent of the amount received. Exhibit I-1 is the second solemn declaration. Exhibit I-2 is the first solemn declaration and was signed on December 8, 1999. The solemn declarations repeat the scenario that the appellant's brother Réjean had suggested to him.

[15]          Réjean Simard said that he was now working as a labourer. He would have been working for Revenue Canada for 17 years on April 16, 2000. He said that he had been a good employee until, one day, Mario Boucher from the Tax Centre approached him. Mr. Boucher had apparently worked for Revenue Canada for nearly 18 years. The witness explained that Mr. Boucher knew that he (Réjean Simard) was going to buy a house and that he had lots of plans. He then spoke to him about the frauds he had been committing for a number of years: [ TRANSLATION] "I'm a bit of a risk-taker so I said yes; he explained the situation to me, and I said yes."

[16]          An investigation concerning Réjean Simard was begun on September 13, 1999, and he was dismissed six weeks later. He was tried in the Court of Quebec, Criminal and Penal Division. He pleaded guilty and was sentenced to one year in prison on November 12, 2001 (Exhibit I-3), of which he served two months before being released for good behaviour. He was also ordered to pay a fine of $25,371 and given 36 months in which to do so. He is on probation until November 2005.

[17]          Réjean Simard said that that period was very difficult for him. He knew that he had gotten a lot of people into trouble besides himself. He very much regretted his actions. He had had a good job which he liked. He had been drawn into doing what he did by the lure of gain. He knew Mr. Boucher had been doing it for a few years and it seemed easy.

[18]          Mario Boucher was authorized to give the electronic command for a refund to be made. In none of the fraud cases was there any written claim from the refund recipients specifying particular credits. Messrs. Boucher and Simard decided which refunds to request by making the electronic entries they deemed necessary.

[19]          Réjean Simard explained that it was always he who had done the appellant's income tax returns. One day he approached his brother, telling him that he could get a sizeable refund for him. His brother, out of generosity, according to Réjean Simard, gave him back $3,000 in cash.

[20]          He said that Jean-Marc was innocent and that he had not known the refund was fraudulent. One Sunday, his brother Jean-Marc called him to tell him he had received a letter from Revenue Canada investigators saying they wanted to meet with him. It was then, Réjean Simard said, that he had explained to Jean-Marc that he was not entitled to the refund.

[TRANSLATION]

. . .

But Jean-Marc didn't know that I had gotten him into that. At that point, I explained to him: "Jean-Marc, I've gotten you into something and it was really fraudulent; it was a refund you really weren't entitled to." He was taken aback and didn't believe his . . . he didn't believe it. He didn't believe it, but, "Jean-Marc, that's the way it is."

After that, I told Jean-Marc, because I didn't want to lose my job, because I thought that Revenue Canada didn't have a lot of evidence against me to fire me, okay, to remove me from my job. I was under investigation, but I thought they didn't have enough evidence. Whereas Mario Boucher, okay, he had a lot of reassessments. In all, he had . . . there were a number of fraudulent refunds, and Mario was in a deep depression and didn't want to go back, and he was definitely going to lose his job. I told him: "You just have to say that Mario Boucher got you into it, and that will protect me." Because I didn't want to lose my job. I valued my job and didn't want to lose it. That job was everything for me; I loved it. I said so a moment ago.

I really left it with Jean-Marc. Jean-Marc, you're going to have to say that, and that, and that. When the investigators arrived, that's what he said. And none of it was true; it was all me manipulating Jean-Marc; it was all my doing. And the evidence . . . I was sentenced; I got a year in prison; I've already paid a high price for my mistake, and what makes me sick in all this is that Jean-Marc is involved in it and has a big tax bill.

. . .

[21]          When Réjean Simard prepared tax returns for people in his family or for the appellant, he charged nothing, but, in the case of the $8,027.47 refund, he expected the appellant to reward him. Why would he have rewarded him for that refund? Réjean Simard continued to assert that the appellant did not know he was not entitled to the refund and that it was out of generosity that he gave him $3,000.

[22]          The next witness was Roland Pelletier from the Canada Customs and Revenue Agency (CCRA). He is a senior investigator, Special Investigations, at the Quebec City District Office.

[23]          In 1998, someone from the Jonquière Tax Centre drew the attention of the tax authorities to refunds which were not supported by relevant documents in the case of two taxpayers.

[24]          Mr. Pelletier did a computer check to determine who had worked on those files. This involved tracing entries or flags that remain each time a person opens an electronic file. It is possible to know who worked on a file by seeing that person's password. The check revealed that six or seven persons had had access to the files under review in November 1996, including Messrs. Boucher and Simard and four other persons. Mr. Pelletier expanded the search in order to determine which files Messrs. Boucher and Simard and the other four persons had consulted during the period from September to December 1996. The files of 400 persons had been consulted. Four other persons had received refunds made directly on screen. Messrs. Boucher and Simard had gone into those files while the other persons identified at the outset had not. So there was a constant: Messrs. Boucher and Simard.

[25]          Mr. Pelletier filed his report in June. In July and August, the Jonquière Tax Centre continued the investigation and expanded it to cover the period from April to September 1996. Eleven or 12 questionable cases were found. A CCRA auditor met certain taxpayers and wrote to others, like the appellant. The auditor always received the same reply. Those persons had never made a written request for a refund, whereas, refunds are normally made on the basis of forms or of written claims, accompanied by supporting documents.

[26]          Mr. Pelletier explained that there had been an extensive internal fraud in which the acquaintances and relatives of the two persons in question had unfortunately taken part. The investigation showed, for example, that all of Réjean Simard's brothers and his sister had received refunds by electronic transfer.

[27]          As Exhibit I-6, Mr. Pelletier filed the appellant's bank account, to which the refund had been deposited. It shows a deposit of $8,027.47 dated April 1, 1996. As Exhibit I-5, the witness filed a working document showing, for each of the years, the amounts of tax involved as well as penalties and interest and the total for each of the years, as well as the total for the five years, as at July 14, 2000.

Argument

[28]          Counsel for the respondent referred to the tax credits in respect of which a refund was made, namely the equivalent to married credit, the dependent child credit and the credit for alimony. Yet, the appellant was not married, had no children and had paid no alimony. Counsel for the respondent pointed out that the appellant's versions of things had often changed. One was given in the statutory declaration, another in the Notice of Appeal and still another today at the hearing.

[29]          Counsel referred to subsection 152(4) of the Act, which provides that the Minister may assess after the normal assessment period where a taxpayer has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing returns under the Act. She cited the decision of the Federal Court of Appeal in Nesbitt v. Canada, [1996] F.C.J. No. 1470 (Q.L.), and more particularly the following passage:

. . . It appears to me that one purpose of subsection 152(4) is to promote careful and accurate completion of income tax returns. Whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed. A misrepresentation has occurred if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment. It remains a misrepresentation even if the Minister could or does, by a careful analysis of the supporting material, perceive the error on the return form. . . .

[30]          In the instant case, the appellant contends that he did not make the changes himself; rather it was his brother, with the complicity of one of his co-workers, Mario Boucher, who made the changes in the computer system. Counsel for the respondent argued that the rule of mandate applies. Réjean Simard was the appellant's mandatary, and the employee's acts become those of the appellant. She referred to the definition of mandate in article 2130 of the Civil Code of Quebec (the "Code"), which reads as follows:

2130. Mandate is a contract by which a person, the mandator, empowers another person, the mandatary, to represent him in the performance of a juridical act with a third person, and the mandatary, by his acceptance, binds himself to exercise the power.

                The power and, where applicable, the writing evidencing it are called the power of attorney.

[31]          Counsel for the respondent also referred to articles 2152 and 2153 of the Code, which provide for the ratification of the mandatary's acts by the mandator:

2152. The mandator is bound to discharge the mandatary from the obligations he has contracted towards third persons within the limits of the mandate.

                The mandator is not liable to the mandatary for any act which exceeds the limits of the mandate. He is fully liable, however, if he ratifies such act or if the mandatary, at the time he acted, was unaware that the mandate had terminated.

2153. The mandator is presumed to have ratified an act which exceeds the limits of the mandate where the act has been performed more advantageously for him than he had indicated.

[32]          In the instant case, the appellant received the refund by direct payment into his bank account, and went to the bank that same day and withdrew one third of the amount and handed it over to his brother. There was thus ratification of his brother's act. Counsel for the respondent referred to article 2160 of the Code and argued that the appellant was liable to the third party for the acts performed by his brother as mandatary since he fully ratified the act proposed by his brother.

[33]          With regard to the assessment of penalties, counsel for the respondent referred to the decision of the Federal Court - Trial Division in Venne v. Canada, [1984] F.C.J. No. 314 (Q.L.), and in particular to the following passage:

With respect to the possibility of gross negligence, I have with some difficulty come to the conclusion that this has not been established either. "Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. . . .

[34]          At the hearing, the appellant accepted being assessed for the tax credits or deductions he had obtained or claimed through his brother's fraudulent acts. However, he seeks clemency from the Court with respect to the interest and penalties, arguing that, in view of his annual income, that interest and those penalties are too high.

Analysis and Conclusion

[35]          The appellant received $8,027.47 on March 28, 1996, and, on July 14, 2000, was assessed a total of $19,126.89 for the years 1990 to 1994. According to Exhibit I-4, the appellant's revised taxable income was $22,764, $13,260, $1,540, $19,373 and $19,965 for the years 1990 to 1994 respectively. I have no reason to believe it is much higher at the present time.

[36]          The total amount of the reassessments seems very high, first, compared with the amount received in 1996, and second, in relation to the appellant's annual income.

[37]          By letter dated March 18, 2002, counsel for the respondent sent me the particulars of the assessments, which read as follows:

[ TRANSLATION]

Table - Particulars of Assessments

1990

Unjustified refund                                 $2,125.75                 Interest on this amount between                        $ 973.59

                                                                March 28, 1996, and July 14, 2000

Interest received                   $ 55.08    Interest on this amount between                        $ 25.24

                                                                March 28, 1996, and July 14, 2000

Penalty 163(2)                                        $1,062.87                 Interest on this amount between                        $1,407.01

                                                                April 30, 1991, and July 14, 2000

Total                                                        $3,243.70                                 Total interest                                         $2,405.84

                                                                                Grand total for 1990                                                            $5,649.54

1991

Unjustified refund                                 $2,166.74                 Interest on this amount between                        $ 992.40

                                                                March 28, 1996, and July 14, 2000

Interest received                   $ 56.14    Interest on this amount between                        $ 25.71

                                                                March 28, 1996, and July 14, 2000

Penalty 163(2)                                        $1,083.37                 Interest on this amount between                        $1,160.24

                                                                April 30, 1992, and July 14, 2000

Total                                                        $3,306.25                                 Total interest                                         $2,178.35

                                                                                Grand total for 1991                                                            $5,484.60

1992

Unjustified refund                                 $1,415.00                 Interest on this amount between                        $ 648.08

                                                                March 28, 1996, and July 14, 2000

Interest received                   $ 372.15 Interest on this amount between                        $ 170.45

                                                                March 28, 1996, and July 14, 2000

Penalty 163(2)                                        $ 707.50 Interest on this amount between                        $ 629.63

                                                                April 30, 1993, and July 14, 2000

Total                                                        $2,494.65                                 Total interest                                         $1,448.16

                                                                                Grand total for 1992                                                            $3,942.81

1993

Unjustified refund                                 $ 845.27 Interest on this amount between                        $ 387.15

                                                                March 28, 1996, and July 14, 2000

Interest received                   $ 148.82 Interest on this amount between                        $ 68.16

                                                                March 28, 1996, and July 14, 2000

Penalty 163(2)                                        $ 422.63 Interest on this amount between                        $ 318.36

                                                                April 30, 1994, and July 14, 2000

Total                                                        $1,416.72                                 Total interest                                         $ 773.67

                                                                                Grand total for 1993                                                            $2,190.39

1994

Unjustified refund                                 $ 780.53 Interest on this amount between                        $ 357.49

                                                                March 28, 1996, and July 14, 2000

Interest received                   $ 61.99    Interest on this amount between                        $ 28.37

                                                                March 28, 1996, and July 14, 2000

Penalty 163(2)                                        $ 390.26 Interest on this amount between                        $ 240.91

                                                                April 30, 1995, and July 14, 2000

Total                                                        $1,232.78                                 Total interest                                         $ 626.77

                                                                                Grand total for 1994                                                            $1,859.55

[38]          One notes that interest on the unjustified refunds was calculated from March 28, 1996, and that interest on the penalties was calculated from April 30 of each taxation year for which a refund was obtained. The relevant provision concerning interest on penalties is subsection 161(11) of the Act.

[39]          With regard to interest on amounts of tax, this Court has consistently ruled that it does not have discretion to cancel or reduce that interest, just as it does not have discretion to reduce amounts of tax owed. Interest is considered as being rent on money.

[40]          What of the penalties assessed under subsection 163(2) of the Act? The relevant portion of that subsection reads as follows:

(2)           False statements or omissions - Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of $100 and 50% of the total of . . . .

[41]          In my view, the evidence showed that the appellant acquiesced in the false statements made by his brother. The fact that, on the same day the $8,027.47 was deposited to his account, he handed over one third of it to his brother bespeaks acceptance that the amount in question was not legitimately owed to him. It must be borne in mind that his brother did his income tax returns every year and that the appellant had never before paid him a part of his tax refunds. In this case, however, he immediately withdrew from the account the portion which he handed over to his brother. Furthermore, the appellant's credibility is highly compromised by the fact that his statutory declarations were not true and by the version of the facts given in the Notice of Appeal.

[42]          I must conclude that the respondent has shown that, for each of the years in issue, the appellant made false statements under circumstances amounting to gross negligence. He is therefore liable to the penalty provided for in subsection 163(2) of the Act.

[43]          However, that is not the end of the analysis. How is the Court to interpret that provision? Must it interpret it as meaning it has no discretionary power with regard to the assessment of the penalty? Can the words "is liable to a penalty of the greater of $100 and 50% of the total of" be open to interpretation?

[44]          To date, this Court has not in actual fact considered the question whether subsection 163(2) must be interpreted as providing for a maximum penalty. It of course provides for a minimum penalty.

[45]          While the assessment of the penalty under paragraph 163(2)(a) of the Act has never drawn my attention as a result of any disproportionate outcome, I have previously found penalty assessments under subsection 163(2.1) of the Act to be very high, if not clearly excessive.

[46]          Here I will limit myself to an analysis of the statutory provisions in question in the instant case, that is, paragraphs 163(2)(c), (c.1) and (c.2) of the Act. Do those provisions permit the use of the judge's discretionary power? Should they be interpreted as permitting or precluding such use?

[47]          Returning to the facts in this case, the Minister claims repayment of tax credits of $7,333.29, and payment of interest of $4,370.82 thereon. If we add those two amounts together, the result is $11,704.11. The amount of the penalties is $3,666.63 and the interest on those penalties is $3,756.15, for a total of $7,422.78. The appellant's modest income is described in paragraph 35 of these reasons.

[48]          For taxpayers with moderate incomes, the repayment of tax refund overpayments, plus interest, is in itself highly onerous. It must be understood that the amounts received have usually been spent. It will undoubtedly be very difficult for the appellant to repay $11,704.11. If penalties and interest are to be added to that, does it not become disproportionate? What is Parliament's intent: to permit the use of the judge's discretionary power or to preclude it?

[49]          A judge's discretionary power is defined as follows in the Dictionnaire de droit québécois et canadien, Hubert Reid, 2nd ed., Wilson & Lafleur, at page 425:

[TRANSLATION]

Discretionary power: Power granted to a person called upon to make a decision, within the limits of his authority, to choose among possible decisions the one he considers most appropriate in the circumstances. E.g., a judge's discretionary power.

Note        The power must always be exercised in accordance with the principles of natural justice and the purpose of the Act on which the decision is based.

. . .

[50]          To demonstrate the importance of the exercise of such power, I refer to the decision of the Supreme Court of Canada in Baron v. Canada, [1993] 1 S.C.R. 416, and to Sopinka J.'s comments at pages 435, 436, 437, 439, 444 and 445 regarding a provision of the Act restricting a judge's discretion in issuing a search warrant:

. . .

                In my view, an analysis of the principles on which Hunter was based shows that the exercise of a judicial discretion in the decision to grant or withhold authorization for a warrant of search was fundamental to the scheme of prior authorization which Dickson J. prescribed as an indispensable requirement for compliance with s. 8 in that case. The judgment makes very clear that the decision to grant or withhold the warrant requires the balancing of two interests: that of the individual to be free of intrusions of the state and that of the state to intrude on the privacy of the individual for the purpose of law enforcement. . . .

                . . .

                Not only is the existence of a discretion indispensable to the balancing of interests which Hunter envisaged but the requirement that the officer authorizing the seizure be independent and capable of acting judicially is inconsistent with the notion that the state can dictate to him or her the precise circumstances under which the right of the individual can be overborne. . . .

. . .

                The point is that the characterization of certain offences and statutory schemes as "regulatory" or "criminal", although a useful factor, is not the last word for the purpose of Charter analysis. In R. v. Wholesale Travel Group Inc., [1991] 3 S.C.R. 154, a case in which the false/misleading advertising offence in the Competition Act, R.S.C. 1970, c. C-23, as amended, was attacked under ss. 7 and 11(d) of the Charter, La Forest J. said at p. 209 that "what is ultimately important are not labels (though these are undoubtedly useful), but the values at stake in the particular context", and held that the potential five-year prison term upon conviction of the offence was a deprivation of liberty requiring much greater safeguards to conform with s. 7 or 11(d) than the provisions at issue in Thomson Newspapers Ltd. v. Canada (Director of Investigation and Research, Restrictive Trade Practices Commission), [1990] 1 S.C.R. 425.

. . .

Given the intrusive nature of searches and the corresponding purpose of such a search to gather evidence for the prosecution of a taxpayer, I see no reason for a radical departure from the guidelines and principles expressed in Hunter, supra. The effect of any lessened expectation of privacy by reason of the character of the ITA will no doubt affect the exercise of discretion by an authorizing judge but cannot justify elimination of it.

[51]          These comments assist in understanding the historical utility of a judge's discretionary power. There cannot be rules for every conceivable situation. A judge must be able to exercise his judgment in order to dispense justice. One must also take into account the rules of statutory construction, which require, in particular, that the purpose of a provision be considered and that penal-type statutes be interpreted narrowly.

[52]          It must be observed that paragraphs 163(2)(c) and (c.1) of the Act are provisions much more penal than regulatory in nature by virtue of their requirement of wrongful intent or gross negligence and that the purpose of those provisions is to punish. It is that purpose which is in issue here. Should the punishment be proportionate?

[53]          In the context of penal legislation, it is interesting to note section 734 of the Criminal Code. That section, which permits a court to impose fines, provides in subsection (2) that, except where a minimum fine is provided for, a court may fine only if it is satisfied that the person is able to pay.

[54]          I refer to the comments of Biron J. (ad hoc) of the Quebec Court of Appeal in R. v. Savard, 126 C.C.C. (3d) 562, [1998] A.Q. no 1565 (Q.L.), LeBel and Nuss JJ.A. concurring:

I cannot satisfy myself that Parliament intended to have fines imposed on people who do not have property or income sources which would allow them to pay them. Before paying fines, the offender must be able to live, and in the appropriate case, provide for those who depend on him. Otherwise, it would be to condemn them to idleness or to have to make money from criminal activities. That cannot be the objective pursued by Parliament, and s. 743(2) appears to me to be the confirmation of this.

[55]          In my opinion, reference must also be made to section 12 of the Canadian Charter of Rights and Freedoms, which provides that everyone has the right not to be subjected to any cruel and unusual treatment or punishment. In R. v. Smith, [1987] 1 S.C.R. 1045, the Supreme Court of Canada held that a provision of the Narcotic Control Act providing for a mandatory seven-year prison term violated section 12 of the Charter on the ground that precluding the exercise of a court's discretion could result in a disproportionate sentence.

[56]          It has been accepted in case law that, where minimum fines are provided for, as in the case of violations of legislation governing speed limits or parking, it is possible that a court has no discretion. I am not aware that there is similar case law with respect to more substantial fines or penalties.

[57]          In the circumstances of the instant case, we are dealing with significant penalties. It is therefore my view that the judicial discretion which has been deemed essential for the ends of justice by the highest court of this country may not be cast aside in interpreting the meaning of paragraphs 163(2)(c) and (c.1) of the Act, unless there is wording clearly excluding that discretion.

[58]          My reading of those provisions does not lead me to the conclusion that there is any such exclusion. I do not believe that the provisions clearly state that the maximum penalty must be assessed. The person is liable to it, but the authority imposing it must exercise its judgment. Under the rules of construction, penal provisions are to be interpreted narrowly, particularly where they impose severe penalties. Consequently, this Court must be able to use its discretion in assessing the penalty in question and ensure that it reflects the seriousness of the act, the taxpayer's previous behaviour and his ability to pay in order to strike a balance in the administration of justice.

[59]          If such judicial discretion exists, does the Minister also have discretion in assessing penalties under subsection 163(2)? The answer can only be yes. Thus, when, in Canada (Attorney General) v. Consolidated Canadian Contractors Inc., [1999] 1 F.C. 209, the Federal Court of Appeal confirmed the implicit existence of the due diligence defence with respect to section 280 of the Excise Tax Act, the Minister had to apply that section taking the taxpayer's diligence into account.

[60]          Having regard to the appellant's income, to the fact that this is a first offence and to the fact that he did not instigate the fraud, the maximum penalty is not appropriate in my view. In light of these factors and, in particular, the appellant's ability to pay, I find that one sixth of the maximum penalty would be appropriate and proportionate. The interest on the penalties is not of the same nature as that on amounts of tax owed; it could be cancelled. In this case, my decision is to reduce the penalties and have the interest adjusted accordingly.

[61]          The appeal is allowed in that the penalty assessed is reduced to one sixth of the maximum penalty provided for under paragraphs 163(2)(c) and (c.1) of the Act. The interest shall be adjusted accordingly.

Signed at Ottawa, Canada, this 23rd day of May 2002.

[OFFICIAL ENGLISH TRANSLATION]

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

2001-88(IT)I

BETWEEN:

JEAN-MARC SIMARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on February 27, 2002, at Montreal, Quebec, by

the Honourable Judge Louise Lamarre Proulx

Appearances

Agent for the Appellant:                       Réjean Simard

Counsel for the Respondent:                Annick Provencher

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1990, 1991, 1992, 1993 and 1994 taxation years are allowed in that the penalty assessed is reduced to one sixth of the maximum penalty provided for under subsection 163(2) of the Act and the interest will be adjusted accordingly, in accordance with the attached Reasons for Judgment.

          The appellant is entitled to no further relief.

Signed at Ottawa, Canada, this 23rd day of May 2002.

"Louise Lamarre Proulx"

J.T.C.C.