Citation: 2006TCC322
Date: 20060609
Docket: 2005-3075(IT)I
BETWEEN:
FÉLICIEN SERGERIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This appeal
pertains to the 2000 and 2001 taxation years under the Income Tax Act ("the
Act").
[2] Essentially,
the issue is the imposition of penalties under subsection 163(2) of the
Act. The Court notified the Appellant at the outset that the Tax Court of
Canada has no jurisdiction to review or cancel the interest claimed. As for the
penalties, now the only point in issue, the Respondent called the auditor as a
witness to explain the facts that caused her to impose the penalties set out in
subsection 163(2) of the Act.
[3] Those facts are
as follows:
[TRANSLATION]
(a) The
Appellant works alone in his business. He was the only person responsible for
collecting money and depositing it at the bank. (admitted)
(b) The
Appellant signed all the income tax returns. (admitted)
(c) For
each of the years in issue, the Appellant failed to provide his representative
with the sales figures of the car wash and the amounts for certain mechanical
repairs that were not invoiced. (denied)
(d) The
unreported income represents 120% of reported income for the 2001 taxation year
and 154% of reported income for the 2002 taxation year. (denied)
(e) For
each of the years in issue, the withdrawals made by the Appellant exceed the
net income reported. (denied.)
[4] The auditor
stated that the Appellant's accounting was approximate and incomplete because
there were no control measures and the figures were rather confusing and
incomplete. However, she admitted that the Appellant cooperated during the
audit. Thus, she had absolutely no problem with his attitude, or, in
particular, getting answers to her questions.
[5] The auditor's
first observation was that the amounts deposited greatly exceeded the amounts attested
to and supported by invoices. Based on this, she inferred that the deposits either
consisted of uninvoiced sales, or revenue from the car wash operated by the
Appellant on his garage’s property. Consequently, the auditor concluded
that it was unreported income.
[6] The second
thing that the auditor did was to analyse the accounting clerk's work based on
the documents that the Appellant remitted to the clerk. From the very
outset, she noticed several inconsistencies, a lack of information and a total
absence of control measures, which she felt would have been very important
under the circumstances because the Appellant was the only person who did the
buying and selling.
[7] In other words,
the Appellant was the only person through whom cash flowed in and out. He was
generally the one who submitted the invoices and records, such as the deposit
book and the purchase and sales invoices, to a person responsible for data
entry. Then, at the end of the year, everything was submitted for the purpose
of preparing the income tax return.
[8] The auditor
also stated that despite several attempts and initiatives to hold talks with
the person responsible for closing the books, she never managed to speak with
that person.
[9] It is patently
clear that the people mandated by the Appellant had neither the knowledge nor
the skill to successfully complete the work that the Appellant entrusted to
them.
[10] Is this an
acceptable excuse to avoid penalties? Is it sufficient to exonerate a person from
any fault or negligence determined to exist in his or her case?
[11] Individuals
often entrust their tax work to persons who offer tax-related services.
However, merely using such persons' services will not shield an individual from
reassessment.
[12] Consequently,
upon entrusting a person with the important responsibility of managing all the
data that will be needed in order ultimately to file one's annual tax returns,
it is essential to make efforts to ensure that the person whose services one
proposes to retain is competent.
[13] This might
initially appear to be exaggerated, and perhaps even unreasonable. However, the
same principle applies to all activities of daily life. One does not entrust
work to incompetent people, one does not have one's car repaired by unqualified
mechanics, and so forth.
[14] It is certainly
commonplace to have to deal with people who claim to but do not have the
requisite skill to perform work. Hence, constant vigilance is necessary.
Moreover, given the complexity of certain tasks, it is not always possible to
assess the skill of the agent, mandatary or professional whose services one has
retained.
[15] This makes it a
delicate and difficult task to assess the liability of a person who has
entrusted the performance of important work to someone who did not have the
skills needed to perform the work in question.
[16] The evidence in
the case at bar disclosed that the Appellant is a mechanic who looked
after the entire management of his business. He also operated a car wash, where
essentially all transactions are necessarily done in cash. In fact, it is
not possible to do otherwise.
[17] The Appellant
gave the accounting clerk all the documents, vouchers and other information
that would enable the clerk to do the entries.
[18] At the end of
the year, all of these things were submitted to someone else who was
responsible for completing the annual tax returns.
[19] The auditor said
that this person systematically refused to cooperate during the audit. On the
other hand, she said that the Appellant cooperated fully, and that she had
nothing to hold against him in this regard.
[20] The Appellant's
evidence essentially consists of his testimony. Based on that evidence, he is
not a person who hides behind the fact that he entrusted his accounting and tax
work to another person and feels that this should exonerate him from
penalties.
[21] During the audit,
the Appellant realized that the people whose services he had retained were
unable to perform the work correctly, and he immediately began to cooperate
fully with the auditor so that she could do her work.
[22] Is it possible that
the Appellant, an intelligent, articulate man, did not realize that his
business had generated considerably more taxable income than what was reported?
[23] The answer might
initially seem clear; however, the Appellant operated a business whose
earnings fluctuated, and this required him to make numerous withdrawals. He
explained that a significant portion of his withdrawals was often re‑deposited
so that the business could meet its obligations.
[24] As for the
auditor, she acknowledged that the cash deposits were numerous, and assumed
that they consisted of uninvoiced sales; however, it could quite conceivably
have been car wash income. A person who is deliberately seeking to conceal
income is generally more skilful and subtle. The Appellant affirmed that
he submitted all the information to the persons he had tasked with managing the
accounts of his business.
[25] The burden of
proof, which involves certain requirements, was on the Respondent, as stated in
subsection 163(2) of the Act, which reads:
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
. . .
[26] I do not believe
that the evidence has established on a balance of probabilities that the Appellant
deliberately failed to report $18,083 in additional income for the 2001
taxation year and $21,142 in additional income for the 2002 taxation year.
[27] This evidence
certainly established the carelessness of the Appellant, who entrusted his
affairs to people who clearly did not possess the requisite skills. The Appellant
was unquestionably careless and even somewhat negligent when he retained the
services of unqualified people, but is this sufficient to support a finding of
gross negligence?
[28] I would have
answered in the affirmative if the evidence had shown genuine recklessness and
blatant disregard upon choosing these persons.
[29] If the Appellant
had failed to cooperate or report his car wash income, or if the evidence had
established wilful blindness on his part, the significance of the unreported
amounts would properly have been a determinative factor warranting the
imposition of the penalties.
[30] The evidence
essentially established that a significant amount of income was not reported;
however, given the sums involved, a person who had no notion of accounting
might not have been aware of the gap between his reported income and his actual
income.
[31] The Appellant's
conduct was certainly not that of a prudent, vigilant individual who was beyond
reproach. Nor, however, was it the conduct of a person who has done great
wrong or a person who demonstrated recklessness or gross negligence in the
performance of his obligations.
[32] For these reasons,
I allow the appeal and cancel the penalties imposed. The Court does not
have jurisdiction to intervene with respect to interest.
Signed
at Ottawa, Canada, this 9th
day of June 2006.
"Alain Tardif"
Translation
certified true
on this 19th
day of February 2008.
Brian
McCordick, Translator
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