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Citation: 2007TCC356
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Date: 20070615
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Dockets: 2006-1055(IT)I
2006-1056(IT)I
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BETWEEN:
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DAVID LEE DEAN,
GORDON DEAN,
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Appellants,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A. FACTS
[1] The Appellants, Dr.
Gordon Dean and Dr. David Lee Dean, are brothers. Both are dentists with very
busy practices in the City of Regina, Saskatchewan.
[2] Each dentist operated
his dental practice as a sole proprietorship. Dr. Gordon Dean has
been in practice for over 20 years, while Dr. David Lee Dean has
been in practice since 1994.
[3] In 1998, the
Appellants entered into an agreement (the "Agreement") with Ash
Temple Limited ("Ash Temple"), a dental supplier. Pursuant to the Agreement, Ash Temple agreed to sell to the
Appellants dental equipment at a discounted price and to provide a favourable
interest rate to finance the purchase. Ash Temple also agreed to assist the
Appellants to design the office space and install the dental equipment.
[4] The Agreement also
provided that the Appellants would purchase $120,000 of sundry dental supplies
from Ash Temple every year.
[5] The Agreement also
provided that the Appellants would receive rebates calculated at 12% of the
sundry dental supplies that were purchased (the "Rebates").
[6] The Agreement was
designed so that the Rebates that the Appellants received each month would be
approximately equal to the monthly payments for the dental equipment.
[7] The Appellants
purchased sundry dental supplies from Ash Temple during the 1998, 1999, 2000 and 2001 taxation
years. The Appellants claimed the dental supplies as expenses in calculating
their income from their dental practices each year.
[8] The Rebates were paid
by way of cheques issued to the Appellants.
[9] Originally, the
Rebate cheques were issued to Dr. Gordon Dean and the cheques were deposited
into his personal bank account. Dr. Gordon Dean would then write a cheque from
his personal bank account to his brother for the brother’s share of the
Rebates. Dr. David Lee Dean would then deposit his portion of the Rebates into
his personal bank account. Later, the Rebate cheques from Ash Temple were issued to each of
the Appellants independently.
[10] The Appellants did not
include the Rebates in computing their income from their dental practices.
These amounts represented the "Unreported Rebate Income".
[11] The Appellants did not
inform their accountant, Glen Berger, of the Agreement with Ash Temple. The evidence indicated
that all payments made to Ash Temple for the purchase of the equipment were written off as
expenses by the Appellants.
[12] After obtaining
detailed information directly from Ash Temple with respect to the dental equipment purchased and
outstanding loan balances, Mr. Berger set up the equipment as a capital asset,
along with a corresponding loan. At this time, Mr. Berger was still not aware
of the Rebates.
[13] In February 2002, the
Canada Revenue Agency (the "CRA")
commenced an audit of the Appellants.
[14] The Minister of
National Revenue (the "Minister")
issued Reassessments against each of the Appellants to include the Rebates in
their income for the 1999, 2000 and 2001 taxation years. The Appellants did not
file Notices of Objection to the inclusion of the Rebates in their income.
[15] The Minister also
assessed penalties pursuant to subsection 163(2) of the Income Tax Act
(the "Act") in respect of the
Unreported Rebate Income, Appropriated Business Funds and, in the case of Dr. Gordon
Dean, Overstated Dental Supply Expenses.
B. Issue
[16] The issue is whether
the Appellants knowingly, or under circumstances amounting to gross negligence,
made or participated in, assented to or acquiesced in the making of, false
statements or omissions in their income tax returns for the 1999, 2000 and 2001
taxation years pursuant to paragraph 163(2)(a) of the Act.
C. Analysis and Decision
[17] The relevant portions
of paragraph 163(2)(a) of the Act provides:
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
(a) the amount, if any, by which
(i) …
(A) the tax for the year that would be payable by the person under
this Act
…
if the person's taxable income for the year were computed by
adding to the taxable income reported by the person in the person's return for
the year that portion of the person's understatement of income for the year
that is reasonably attributable to the false statement or omission and if the
person's tax payable for the year were computed by subtracting from the
deductions from the tax otherwise payable by the person for the year such
portion of any such deduction as may reasonably be attributable to the false
statement or omission
exceeds
(ii) the amount, if any, by which
(A) the tax for the year that would have been payable by the
person under this Act
…
had the person's tax payable for the year been assessed on the
basis of the information provided in the person's return for the year,
[emphasis added]
[18] The concept of "gross
negligence" was explained by Justice Strayer in the frequently cited
case of Venne v. The Queen, [1984] C.T.C. 223, 84 DTC 6247, at paragraph 37:
… "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. …
[19] In Nicholas v.
The Queen, [1996] 3 C.T.C. 2266, 96
DTC 1740, Justice Sobier
of the Tax Court described a definition of "gross negligence"
that mirrors the definition found in Venne. At paragraph 7, Sobier J.
stated that:
… To amount to gross negligence, there must
be something involving a greater neglect than simply a failure to use
reasonable care, and must involve a high degree of negligence, tantamount to
intentional acting, an indifference as to whether the law is complied with or
not. …
[20] In Ganne v. The
Queen, [1994] 1 C.T.C. 2124, 95 DTC
363,
Lamarre J. of this Court described the term at paragraph 7 thus:
The term "gross negligence" has often been described by the Courts
as meaning "very
great negligence".
[21] In Klotz v. The
Queen, 2004 TCC 147, 2004 DTC 2236,
[2004] 2 C.T.C. 2892, Chief Justice Bowman said at paragraph 68:
…It is important to emphasize that
failure to exercise due diligence is not the same as gross negligence. Gross
negligence connotes a much greater degree of negligence amounting to
reprehensible recklessness.
[22] The above cases and
definitions are clear and consistent about what constitutes "gross
negligence".
[23] Subsection 163(3) of
the Act puts the onus of proof on the Minister:
Where, in an appeal under this Act, a penalty assessed by
the Minister under this section or section 163.2 is in issue, the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
[24] I have carefully
considered the argument of Counsel for the Appellants and Counsel for the
Respondent plus the various Court decisions that they referred to. In my
opinion the failure by the Appellants to report the Rebates and Appropriated
Business Funds in their income in the 1999, 2000 and 2001 taxation years
constituted “gross negligence” as referred to in subsection 163(2) of the Act.
[25] In the case of Dr. Gordon Dean I have concluded that
the overstating of Dental Supply Expenses constituted gross negligence.
[26] I have also considered the arguments raised by counsel for
the Appellants with respect to the application of paragraph 12(1)(x) and
subsection 13(7.4). In my opinion these provisions have no application in this
situation.
[27] I have concluded
that the Minister was correct when he imposed penalties on the Appellants with
respect to their failure to include in income the Rebate Income, Appropriated
Business Funds and in the case of Dr. Gordon Lee, Overstated Dental Supply
Expenses.
[28] The appeals are
dismissed with costs.
Signed at Calgary, Alberta, this 15th day of June 2007.
“L.M. Little”
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