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Citation: 2005TCC155
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Date: 20050228
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Docket: 2002-885(IT)G
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BETWEEN:
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ZACHARY KLAPKA,
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Appellant,
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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
McArthur J.
[1] These appeals were heard
consecutively with the appeals of five other taxpayers with
respect to the imposition by the Minister of National Revenue of
penalties pursuant to subsection 163(2) of the Income Tax
Act. The other Appellants are Jack Riordan, File no.
2002-806, Luciano Panini, File no. 2002-809,
Bertram Whitzman, File No. 2002-811, Guy Riendeau, File
no. 2002-814, and Roger Southin, File no. 2002-819. All six
Appellants were employees of Pfizer Canada and had exercised
stock options and realized substantial profits on the sale of
their shares. After an audit of Pfizer, the Minister reviewed the
income tax returns of 46 employees who had received stock
options. The six Appellants referred to are amongst a group of 26
who had not declared the proceeds from the exercise of their
options and, in most cases, the sale of their stock. The six
Appellants subsequently filed amended income tax returns and paid
the resulting tax. For the most part, the facts and analysis in
Mr. Riordan's appeals apply equally to the five other Appellants
although a separate judgment is rendered for each Appellant.
[2] Mr. Southin appeals from
assessments of penalties dated February 23, 2001, imposed by the
Minister for his 1995 and 1996 taxation years in the amounts of
$1,649.63 and $1,987.23 in accordance with subsection 163(2)
of the Act. The Appellant did not include in his income
net proceeds in relation to the exercise of Pfizer employee stock
options of $16,577 and $19,971 for the two relevant years,
respectively. Pursuant to subparagraph 152(4)(a)(i)
of the Act, the Minister reassessed the Appellant after
the normal three-year assessment period to include the stock
option benefits which total $36,548.[1] The Appellant
not only exercised his options, he in fact sold his stock and
received the amounts referred to.
[3] The issues are whether the
Minister can reassess the Appellant beyond the normal assessment
period for the years 1995 and 1996 and whether the assessed
penalties are justified. Pfizer Inc. is a multi-national
pharmaceutical corporation with its head office in the United
States and Pfizer Canada is a subsidiary of it. The Appellant was
a senior employee during the relevant period. He received notices
from Pfizer US at least annually setting out his stock option
information. He knew other employees received stock options but
did not know any details.
[4] The following paragraphs from the
Reasons for Judgment in the Jack Riordan appeals apply equally to
these appeals.
[5] The Appellant exercised his
options and sold his stock over the years without declaring the
amounts received in his relevant income tax returns. As stated,
subsequent to an audit of Pfizer Canada conducted by the
Minister, reassessments were issued to the Appellant and he paid
the resulting tax pursuant to subsection 7(1) of the
Act. These appeals are with respect to penalties only.
[6] The Appellant's Notice of Appeal
includes the following accepted facts:
The Appellant does not hold any professional qualifications in
the fields of accounting or taxation.
In the course of his employment, the Appellant received, from
Pfizer Canada, options to acquire shares of Pfizer USA (the
"Stock Options").
Pfizer Canada granted the Stock Options to a limited number of
key employees at various levels of sales and management.
The Stock Options were granted as performance bonuses and were
awarded on a case-by-case basis: There was no defined or
published stock option plan policy.
The Stock Options were not widely available and were awarded
in a very confidential manner.
Employees wishing to exercise their Stock Options contacted an
employee of Pfizer USA and correspondence related to the exercise
of the Stock Options was sent directly from Pfizer USA to said
employees.
The payroll function, including T4 preparation, for Pfizer
Canada employees was handled out of Pfizer Canada's Montreal
office, while Stock Option matters were handled out of the Pfizer
USA head office in New York City.
Pfizer Canada did not report the benefits related to the
exercise of the Stock Options on the Appellant's T4 slips.
... a total of 46 Pfizer Canada employees exercised Stock
Options over the period 1993 to 1997... 23 individuals,
including the Appellant, failed to report the benefits related to
the exercise of their Stock Options.
[7] To exercise his options, the
Appellant informed the Pfizer US office and he would receive a
cheque from the USbrokerage firm of Merrill Lynch. I have no
doubt that he also completed a form titled "Pfizer Stock Option
Exercise Form - Stock and Incentive Plan Sale of Option Shares
through Merrill Lynch",[2]which sets out the
following:
INSTRUCTIONS:
Enter Social Security Number, date, name and address in space
provided: Indicate appropriate employment status. Complete all
information in sections, 1, 2, 3 and 4. Be sure to sign and date
the form in both of the authorized blocks. Return all copies
intact to the Payroll office from which you are paid.
International employees return copies to International Personnel
in the New York Office. All employees should consult a
tax/financial advisor when considering the sale of shares from a
Company stock option.
(Emphasis added)
Subsections 152(4) and 163(2)
[8] The relevant provisions of the
legislation provide as follows:
152(4) The Minister may at any time make an assessment,
reassessment or additional assessment of tax for a taxation year,
interest or penalties, if any, payable under this Part by a
taxpayer or notify in writing any person by whom a return of
income for a taxation year has been filed that no tax is payable
for the year, except that an assessment, reassessment or
additional assessment may be made after the taxpayer's normal
reassessment period in respect of the year only if
(a) the
taxpayer or person filing the return
(i) has
made any misrepresentation that is attributable to neglect,
carelessness or willful default or has committed any fraud in
filing the return or in supplying any information under this
Act, ...
163(2) 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 ...
Appellant's position
[9] The Appellant submits that the
penalties should be cancelled because:
(i)
the income received was not included in a T4 and all Appellants
believed that they did not have to include these amounts in their
respective returns;
(ii)
section 7 of the Act is a complicated provision and it
would be unfair to find that the Appellants were all grossly
negligent for not understanding all the technicalities of that
section; and
(iii) they did not intentionally omit
to include the amounts in issue nor did their conduct amount to
indifference or gross negligence.
[10] In these appeals, the Appellant did not
testify to anything more than what is found in paragraph 9
above.
Analysis
[11] I do not accept that the Appellant
seriously believed that tax had been deducted at the source. I
have no doubt that a clear and accurate accounting was provided
to him by Merrill Lynch. In 1997, the stock option benefits he
received were greater than his salary.
[12] In this instance, the Minister had the
right to reassess the Appellant after the normal reassessment
period pursuant to subsection 152(4). In a similar situation in
Hyndman v. Canada,[3] Angers J. of this Court stated
the following which applies equally in the present case:
16 ... The
appellant is a well-educated individual. He may not have had much
experience in share trading and other related matters but such a
transaction should have alerted him about his obligation as a
taxpayer to report that income. The Minister was therefore
justified in reassessing the appellant.
Mr. Hyndman was one of the 46 Pfizer employees referred to
earlier. He was assessed for not including stock option
employment income of $94,274 for the 1994 taxation year only.
Like Mr. Klapka, he paid the subsection 7(1) tax after being
assessed and appealed the Minister's subsection 152(4)
reassessment and subsection 163(2) penalty. Anger J. found that
the Appellant's life was unmanageable because he suffered from
alcoholism and allowed the appeal, concluding:
20 Although the
amount of money involved is quite substantial, I find that on a
balance of probabilities, the Minister has failed to establish
that the conduct of the appellant amounted to gross negligence.
The appellant had completely forgotten the benefits he could
derive from exercising those stock options. As mentioned earlier,
that benefit would have been lost had he not been notified by a
Pfizer official of the looming deadline. Such inaction could be
considered to be gross negligence by some but it is not that
conduct that needs to be assessed. It is his conduct when he
filed his tax return that must be assessed. There is no evidence
here to allow me to conclude that the appellant intentionally
omitted to include that revenue in his income. The fact that he
believed that the taxes on that amount had been withheld, and I
accept his evidence on this point, is sufficient to establish
that he was not completely indifferent as to whether the law had
been complied with. He believed that the taxes had been withheld
and although he failed to make inquiries and was careless in
failing to report the income, that does not amount to an
intentional omission or indifference tantamount to a high degree
of negligence. There is no evidence as well that his conduct
amounts to wilful blindness.
[13] This belief that "the taxes on
that amount had been withheld" which leads to a finding of
fact by Justice Angers is explained by him as follows:
6 ...
The only other reference to taxes on Form 8200-20A is in the
payment authorization section where the appellant instructs
Merrill Lynch to withhold taxes if applicable.
...
8 In
October 1994, he received a cheque from Pfizer U.S. in U.S. funds
for the value of his stock. He went to a friend at the Toronto
Dominion Bank to exchange the amount in Canadian dollars and to
deposit it. He later invested the money with Canada Trust and
never considered the tax implications nor did he discuss the
matter with his wife. The appellant testified that his
recollection from the procedure information he was given led him
to believe that taxes had been withheld and that the amount on
the cheque he received was a net amount. ...
[14] In the six appeals before me, however,
no such findings of fact can be made because documents mentioned
in paragraphs 6 and 8 of Hyndman were not presented in
these appeals. For this, and for the reasons that follow, I
arrive at an opposite conclusion than Angers J. insofar as the
penalties are concerned.
Respondent's position
[15] The Respondent's position was generally
the same for all six Appellants. Counsel submitted that:
(i) while the Appellants did not
possess accounting experience, they were all nevertheless
intelligent individuals;
(ii) section 7 of the Act
is not complicated to apply once a taxpayer receives the amounts
in question. Even if it had been difficult to understand, a
taxpayer still has the duty to consult a tax professional;
(iii) none of the Appellants consulted
a tax professional (but for Mr. Riordan, as referred to
earlier) when they received the amounts in issue;[4]
(iv) the undeclared amounts in all six
appeals are substantial when compared with what each Appellant
should have declared, varying from twenty percent to thirteen
hundred times of what would have been declared; and
(v) None of the present Appellants had
complicated returns. Their employment was by far their primary
source of income other than the subject stock proceeds. In
Nicholas v. Canada,[5] penalties were still upheld even
though Dr. Nicholas "had many sources of income, including
income from his medical practice, rental income, dividends and
interest income, taxable capital gains and income from limited
partnerships".
[16] I am in essential agreement with the
Respondent's submissions. Not only has the Minister met the
burden of proof under subsection 152(4), it has also been able to
demonstrate on a balance of probabilities that the
Appellant's conduct amounted to gross negligence based upon
wilful blindness. Had counsel for the Minister not conceded at
trial that the Appellant's conduct was not intentional, I may
have been inclined to find such conduct in the present
appeals.
[17] Evidence adduced to establish
subsection 163(2) penalties must be carefully scrutinized even
where the standard of proof is a civil one. In Farm Business
Consultants Inc. v. Canada,[6] Bowman A.C.J.
stated:
28 A court must be
extremely cautious in sanctioning the imposition of penalties
under subsection 163(2). Conduct that warrants reopening a
statute-barred year does not automatically justify a
penalty and the routine imposition of penalties by the Minister
is to be discouraged. Conduct of the type contemplated in
paragraph 152(4)(a)(i) may in some circumstances also be
used as the basis of a penalty under subsection 163(2), which
involves the penalizing of conduct that requires a higher degree
of reprehensibility. In such a case a court must, even in
applying a civil standard of proof, scrutinize the evidence with
great care and look for a higher degree of probability than would
be expected where allegations of a less serious nature are sought
to be established. Moreover, where a penalty is imposed under
subsection 163(2) although a civil standard of proof is required,
if a taxpayer's conduct is consistent with two viable and
reasonable hypotheses, one justifying the penalty and one not,
the benefit of the doubt must be given to the taxpayer and the
penalty must be deleted. I think that in this case the required
degree of probability has been established by the respondent, and
that no hypothesis that is inconsistent with that advanced by the
respondent is sustainable on the basis of the evidence
adduced.
In the present appeals, I find that the required degree of
probability has been established by the Respondent and that no
inconsistent hypothesis advanced by the Appellant is
sustainable.
[18] In conclusion, I find that (i) not
having received T4 slips is insufficient reason to not inform
himself; professional assistance was readily available to him;
(ii) while section 7 of the Act is complex, the Appellant
made no effort to inform himself as to whether it applied to him;
(iii) the omissions of the Appellant were errors that an average
taxpayer would not make; (iv) his lack of disclosure was not
simply a failure to use reasonable care but was an indifference
as to whether the law was complied with;[7] (v) the
Appellant had a duty to at least seek the advice of an informed
financial advisor; (vi) it is incomprehensible that the Appellant
could ignore amounts in excess of his annual employment income;
and (vii) the standard of care of the Appellant is greater than
for a taxpayer of marginal intelligence.
[19] For these reasons, the appeals are
dismissed, with one set of costs to the Respondent.
Signed at Ottawa, Canada, this 28th day of February, 2005.
McArthur J.
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