Citation: 2008TCC406
Date: 20080709
Docket: 2007-3785(IT)I
BETWEEN:
CAROL O'LEARY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal from
the notices of reassessment dated October 30, 2006, for the 2002, 2003 and 2004
taxation years, in which the Minister of National Revenue (the “Minister”) assessed
a penalty for gross negligence under subsection 163(2) of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”), in the
amounts of $731.77, $1,512.17 and $2,083.59, respectively.
[2]
The question raised in
this appeal is whether the Minister was entitled to assess penalties against
the Appellant under subsection 163(2) of the Act because he claimed rental
expenses in his income tax returns for the years in issue of which
approximately 85 percent were disallowed. More specifically, the overstated
rental expenses that were subject to the penalty for gross negligence totalled
$7,120 for 2002, $15,435 for 2003 and $24,602 for 2004. The rental expenses
that were disallowed totalled $21,992 for 2002, $21,428 for 2003 and $31,703
for 2004, on reported gross rental income of $1,200 in 2002, $3,600 in 2003 and
$7,375 in 2004.
[3]
A majority of the
overstated rental expenses consisted of personal expenses: the expenses of
operating a motor vehicle and expenses associated with the Appellant's personal
residence located in Saint‑Mathieu‑de‑Laprairie (telephone,
electricity, insurance, cable, property taxes, maintenance and repairs).
[4]
The Minister determined
that the Appellant had 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 returns filed for the 2002, 2003 and 2004
taxation years, with the result that the tax he would have been required to pay
based on the information provided in the income tax returns for the years in
issue was lower than the amount of income tax payable for those years, based on
the following facts, as set out in paragraph 9 of the Reply to the Notice of
Appeal:
[TRANSLATION]
(i)
the Appellant handled
the budget and administration of the properties (rentals, taxes, maintenance,
insurance, etc.) himself;
(ii)
the Appellant therefore
had an idea of the scope of expenses incurred;
(iii)
the overstated rental
expenses were personal expenses and it was the Appellant himself who provided
the accountant with the invoices or documents;
(iv)
the Minister is of the
opinion that the Appellant demonstrated gross negligence in this case: the
Appellant should have noticed that the rental expenses established by the
accountant were much too high;
(v)
the Appellant signed
the tax returns for the taxation years in issue.
Facts of the Case
[5]
Carol O’Leary comes
from Notre-Dame-du-Lac (Témiscouata County) and has been a teacher with the
Commission scolaire Marie-Victorin since 1977. He lives at 672 Principale, Saint-Mathieu-de-Laprairie.
[6]
In addition to his
residence, the Appellant has owned a cottage at the municipal address 1366 Chemin-du-Lac,
Notre-Dame-du-Lac, since 1992. In February 2002, he purchased a property
located at 1533 Chemin-du-Lac, Notre-Dame-du-Lac, with the intention of
living there when he retired. The property consisted of a century-old home and
a 7.5-arpent lot. The interior of the house was in pitiful condition and had to
be redone in its entirety, in 2003.
[7]
In June 2004, the
Appellant purchased his mother's house at 1364 Chemin-du-Lac, Notre-Dame-du-Lac,
on the same lot as the cottage he already owned. The Appellant's brother was
living in the addition built onto the house, a sort of summer kitchen renovated
as an apartment, and paying rent of $200 per month.
[8]
The Appellant started
renting out the house located at 1533 Chemin-du-Lac in the summer of 2002, and
his mother's home and the cottage in 2004.
[9]
Before 2002, the
Appellant had used specialized agencies such as H & R Block to
prepare his income tax returns. For 2002, at the suggestion of a friend and co‑worker,
the Appellant retained the services of an accountant, Serge Cloutier, to
prepare his tax returns.
[10]
In his testimony,
Mr. O’Leary confirmed that he met Mr. Cloutier in February 2003, and
that this was when Mr. Cloutier asked him to provide him with all his
expense invoices and told him he would add them up. As requested, the Appellant
gave Mr. Cloutier the totals of his annual expenses for electricity,
telephone, municipal and school taxes, insurance, cable, internet, gas, meals
and interest for 2002, for both his personal residence and the residence
located at 1533 Chemin‑du‑Lac. The Appellant also provided the
residual value of his vehicle, a 1999 Sunfire, which information he had
obtained from the Auto Club.
[11]
The scenario was
repeated for the 2003 and 2004 taxation years, and the Appellant provided Mr.
Cloutier with all his invoices and all the information described in
paragraph 10 above. For 2004, the invoices and information provided also
included the expenses incurred in relation to the properties located at 1364
and 1366 Chemin-du-Lac.
[12]
In his testimony,
Mr. O’Leary acknowledged that he had signed his tax returns for each of
the taxation years in issue and had been given a copy of the tax returns filed
by Mr. Cloutier. The Appellant also acknowledged that he had been informed
by Mr. Cloutier of the amount of the refund he would receive. The
Appellant also confirmed that he had not noticed anything unreasonable when he
signed his tax returns, having regard to the money he had had to pay out to
renovate the various properties in Notre-Dame-du-Lac. The Appellant had
confidence in Mr. Cloutier, given his expertise and the amount of the fees
Mr. Cloutier charged: $546.37 for each of the 2002 and 2003 taxation years and
$2,053.20 for the 2004 taxation year.
[13]
Mr. Cloutier testified;
he is an accountant, and he described the procedure followed in all his files.
He acknowledged that he had met the Appellant when he was first retained and at
that meeting he explained the requirements of the Act regarding the
deductibility of rental expenses. Mr. Cloutier also confirmed that he and
the Appellant had agreed to the fees to be charged for preparing and filing the
tax returns. Mr. Cloutier explained that he had given the invoices provided to
him by the Appellant to Johanne Roy, a subcontractor, for her to add up and
prepare the large worksheets (green sheets) that were shown to the clients, but
were not given to them. According to Mr. Cloutier, Ms. Roy was to contact the
clients if there were missing invoices or if additional information needed to
be obtained, to ascertain which property the invoices related to. Ms. Roy's
worksheets relating to the Appellant were not introduced in evidence, and Ms.
Roy did not testify at the hearing. Ms. Roy also prepared the tax returns and
gave them to Mr. Cloutier, who had the clients sign them.
[14]
Serge Charron, an
investigator with the Canada Revenue Agency, testified and confirmed that a
search warrant had been executed at Mr. Cloutier's offices and home on August
26, 2004, and that in the course of the search over 200 client files had been
seized, including the Appellant's file. Mr. Charron further explained that
Mr. Cloutier had been prosecuted for fraud, but was cleared of those
charges on June 11, 2007. Fresh tax fraud charges were recently filed, civil
ones this time, against Mr. Cloutier.
[15]
Danielle Lépine of the
Canada Revenue Agency also testified, and confirmed that she had reviewed the
Appellant's worksheets that were seized from Mr. Cloutier and the invoices
submitted by the Appellant. After doing that review, she prepared a draft
assessment which she provided to the Appellant. The Appellant then retained Roger
Dubé, C.A., to represent him and correct the errors made by Mr. Cloutier.
In response to the representations made by Mr. Dubé, Ms. Lépine did a
second review and determined that certain expenses were still being claimed
twice, $2,402 for 2002 and $917 for 2003, and that the Napoleon stove
delivered to the Appellant's personal residence had been claimed again. After
the second review was done, changes were nonetheless made to the amounts of the
disallowed expenses and notices of reassessment were issued on October 30,
2006.
Appellant's Position
[16]
The Appellant contends
that Mr. Cloutier must be held solely responsible for the errors made in
the tax returns filed, because he had access to all the tools and relevant
information needed for preparing his tax returns properly.
[17]
The Appellant believes
that Mr. Cloutier abused his trust, and alleges that Mr. Cloutier
knowingly inflated his expenses to justify the professional fees that an expert
would charge.
[18]
The Appellant does
acknowledge his own credulity and his unfamiliarity with tax matters and
alleges that he has always reported his income and expenses to the best of his
knowledge. He also acknowledges that he was negligent but claims that he did
not intentionally act fraudulently.
Respondent's Position
[19]
Counsel for the
Respondent submits that the amounts in issue are significant because the rental
losses claimed represented more than a third of total gross income for 2002 and
2003 and over 50 percent of total gross income in 2004. Over 60 percent of
the expenses claimed were personal expenses.
[20]
Counsel for the
Respondent argued that the Appellant is an intelligent person who was thinking
about retirement, and that in 2002 he sought information from the Quebec Ministère
du Revenu, the Canada Revenue Agency and the Régie du logement du Québec and
obtained the relevant guides and forms dealing with rental property. The
Appellant was therefore in a position to see the errors in his tax returns. In
counsel's submission, the Appellant demonstrated wilful blindness, his vision
being clouded by the fine tax refunds he received.
Analysis
[21]
Subsection 163(2) of
the Act provides for a penalty for anyone who, knowingly, or under
circumstances amounting to gross negligence, has made or participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return filed or made in respect of a taxation year. More specifically, the
portion of subsection 163(2) of the Act preceding the provisions for
calculating the penalty reads as follows:
163 (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:
...
[22] Under subsection 163(3) of the Act, the
burden of establishing the facts justifying the assessment of the penalty is on
the Minister and not on the taxpayer. Subsection 163(3) of the Act reads
as follows:
163(3) Burden of proof in respect of penalties
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.
[23] As Dussault J. said in Prud'homme v. Canada,
2005TCC423, [2005] T.C.J. No. 329 (QL) at paragraph 47:
... the facts on which the imposition of a penalty for gross
negligence under subsection 163(2) of the Act is based must be analysed
having regard to their particular context, which means that drawing a
comparison with the facts of another situation would be a purely random
exercise, if not patently dangerous.
[24] The concept of "gross negligence" that
is applied by the courts is as defined by Strayer J. in Lucien Venne v.
Her Majesty the Queen, 84 D.T.C. 6247 at page 6256:
... “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. ...
[25] The Federal Court of Appeal further said, in Villeneuve
v. Canada, 2004 D.T.C. 6077, [2004] F.C.J. No. 134 (QL),
that the expression "gross negligence" could include wilful blindness
in addition to an intentional act and wrongful intent. In that decision, Létourneau J.A.
stated on this point, at paragraph 6:
With respect,
I think the judge failed to consider the concept of gross negligence that may
result from the wrongdoer's willful blindness. Even a wrongful intent, which
often takes the form of knowledge of one or more of the ingredients of the
alleged act, may be established through proof of willful blindness. In such
cases the wrongdoer, while he may not have actual knowledge of the alleged
ingredient, will be deemed to have that knowledge.
[26] The applicability of the concept of "wilful
blindness" to tax cases was also confirmed in the recent decision of the
Federal Court of Appeal in Panini v. Canada, 2006 FCA 224.
[27] Although the taxpayer must be given the benefit
of the doubt in relation to penalties under subsection 163(2) of the Act,
in this case there is no doubt in my mind that the Appellant was guilty of
gross negligence within the meaning of subsection 163(2) of the Act.
[28] Having regard to the facts, it is clear to me
that the Appellant in this case knew when he signed his tax returns that the
rental expenses claimed had been overstated by the accountant. He in fact
confirmed that Mr. Cloutier had told him the amounts of the refunds he should
be getting.
[29] The Appellant is an educated person who had
sought information from the tax authorities about the rules that apply in
relation to rental properties. When he signed his tax returns, he was in a
position to realize that personal expenses had been claimed as deductions. The
Appellant did not ask the accountant any questions to ascertain the reasons why
the rental losses were so high, and most importantly, he did not check anything
after his tax returns were filed.
[30] The amount of the disallowed rental expenses in
relation to the rental income reported, and the fact that this conduct was
repeated over three years, clearly shows that the Appellant was involved in
putting a scheme in place that goes well beyond mere negligence. In my opinion,
this is an indication of wilful blindness, if not intentional conduct,
amounting to gross negligence.
[31] Having regard to the foregoing, the Appellant's
appeal is dismissed in respect of the penalties. With respect to interest on
the penalties, the Court has no jurisdiction to review the exercise of the
Minister's discretion in this regard.
Signed at Montréal, Quebec, this 9th day of July 2008.
"Réal Favreau"
Translation certified true
on this 21st day of August
2008.
Susan Deichert, Reviser
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