Sobolev v. The Queen, docket 2001-1517-IT-I (Informal Procedure)

Date: 20011129

Docket: 2001-1517-IT-I

BETWEEN:

VALENTINA SOBOLEV,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Miller, J.T.C.C.

[1]            Valentina Sobolev is a Canadian citizen. She maintained she was also a Canadian resident for the taxations years 1988 to 1995. As such she claimed the child tax credit, federal sales tax credit, child tax benefit and goods and services tax credit along with certain British Columbia provincial tax credits and British Columbia family benefits (collectively called the "credits and benefits"). The Minister assessed Ms. Sobolev by Notice dated February 18, 2000 for the 1988 to 1995 taxation years on the basis she was not a resident during those years and therefore not eligible for the credits and benefits. The Minister also assessed Ms. Sobolev for gross negligence penalties pursuant to subsection 163(2) of the Income Tax Act ("Act"). Ms. Sobolev appeals those assessments by way of the Informal Procedure.

[2]            The issues are as follows:

1.              Is the Minister's assessment of the Appellant's taxation years 1988 to 1995 statute barred?

2.              Was the Appellant a resident of Canada during the years 1988 to 1995?

3.              If so, does Article IV of the Canada United States Tax Treaty have any impact on her Canadian resident status?

4.              If Ms. Sobolev was a Canadian resident during the years 1988 to 1995 have the credits and benefits been correctly claimed by her pursuant to section 122.2, 122.4, 122.5, 122.6 and 122.61?

5.              Did the Minister properly assess the Appellant for gross negligence penalties pursuant subsection 163(2)?

[3]            Ms. Sobolev became a Canadian citizen in 1975. She lived in Vancouver with her family until 1985 when she married an American citizen, Paul Sobolev and emigrated to the United States. In 1988 Mr. Sobolev lost his job which put some considerable stress on the marriage, resulting in the Appellant returning home to her parents in Vancouver in May of that year. Her parents requested that she stay with them and care for them in exchange for providing room and board to her and her children. At this point Ms. Sobolev had three children all born in the United States. She remained in Canada for the balance of 1988. She indicated that she started the process of obtaining Canadian citizenship for her children as well as looking into the appropriate steps for bringing her husband to Canada. While she described the marriage as on the point of break-up she did not want to divorce for the children's sake. In January she returned to her residence in the United States. Again in 1989 she returned to Canada in May and stayed the balance of the year. She lived in a small apartment at the back of her parents' restaurant, though in later years she stayed at her parents' home on East 17th Street. This timing of her visits to Canada was consistent for the years following, being 1990 to 1995, though in 1991 she remained in Canada for January and February due to the birth of a child in Vancouver in February. In 1990 she described her husband's papers as coming through so he sought work in Canada, but was unsuccessful and returned to the United States. From 1991 to 1994 the three older children attended school in the United States, while the youngest remained with the Appellant in Canada. In 1995 the children remained with the Appellant and were home-schooled.

[4]            The Appellant's routine in Canada for the years in question appeared to be one of caring for her parents (especially 1994 after a serious accident to her father), helping in the restaurant business, caring for the children when present, visiting with siblings (all of whom resided in the Vancouver area) and making use of the local community centre. The Appellant's husband would occasionally visit in Canada, though the Appellant maintained the marriage was never stable. The Appellant kept furnishings in Vancouver and maintained a Canadian bank account. The family all held British Columbia health care cards.

[5]            Her ties to the United States consisted of the matrimonial home held jointly with her husband, a rental property, likewise held jointly (though the Appellant claims she never put anything into the property as it was in effect her husband's), a United States Driver's licence, joint United States bank accounts, a landed alien permanent resident status and various United States credit cards. The Appellant had both a Canadian social insurance number and United States social security card. The Appellant's spouse ran a small appliance repair shop from their home in Lake Oswego, Oregon, which the Appellant understood from her husband made little, if any money. She indicated they had to rely on family for financial support. She never worked in the United States though acknowledged receiving monies from the rental of the jointly held property from her husband. A cheque for $440 payable to the Appellant was introduced as evidence of a rental payment. The Crown's witness, a Canada Customs and Revenue Agency auditor, Ms. Chow, stated in her testimony that she had information from British Columbia Ministry of Health, who in turn had information from the Marian Company Housing Authority in Oregon that three families paid $440 a month each to the Sobolevs as rent. No evidence was submitted by Ms. Chow in support of this assertion, which was denied by the Appellant.

[6]            In 1996 the Sobolevs had an unsettling experience at the Canada-United States border where they were interviewed for several hours on entering into the United States. Ms. Sobolev indicated they were questioned about smuggling children, weapons and drugs. She had documents taken away and indicated that she felt she was at risk of being disallowed back into the United States, as having abandoned the United States permanent resident status. She and her husband had to complete an affidavit. She acknowledged that she did not tell the truth in the affidavit from fear of the consequences if she did. She had indicated in the affidavit that she did not live in Canada but wished to continue living in the United States. The Sobolevs were asked to provide evidence of the United States ties. This resulted in a subsequent trip to Customs and the production of US credit cards and United States cancelled cheques. A second officer went through a further lengthy investigation. Ms. Chow acknowledged that she relied on the affidavits, credit cards and cheques in reaching her conclusion that Ms. Sobolev was not a resident of Canada.

[7]            Upon being questioned by Crown's counsel, Ms. Sobolev admitted having at least $2,000 Canadian cash at the border crossing.

[8]            Ms. Sobolev filed Canadian tax returns for all the years in question. The following summarized some information recorded by her on those returns.

               

Year	Appellant's Income	Huband's Income
1988	$2,000	No information
1989	$2,498	No information
1990	$6,451	$4,945
1991	$5,160	$0
1992	$6,874	$0
1993	$6,738	$0
1994	$8,149	$0
1995	$4,278	$538

[9]            The Appellant maintained that she recorded her rental income under the heading of "other" in her return. She also had filed returns indicating her status as being "married" as opposed to "separated", though she claimed that is what she had recalled doing. The documents did not support this contention. In answer to the Crown's question as to why little or no income was shown for her husband, the Appellant stated that she believed only Canadian income needed to be recorded.

[10]          The Crown presented a number or documents purportedly attacking Ms. Sobolev's credibility. As mentioned she acknowledged lying in the affidavits. In her application for British Columbia health premium assistance in 1992 she indicated she had been a permanent resident of Canada for the last twelve months. In Vancouver Hospital admissions in 1996 she indicated that her husband's address was East 17th Street in Vancouver. Frankly, given Ms. Sobolev's belief that she was legitimately a Canadian resident for the year, I am uncertain as to how these documents assist the Crown in impeaching the Appellant's credibility.

[11]          The Respondent needs to overcome the initial hurdle of the requirements of Section 152 which prohibits an assessment of the years in question unless it is proven the Appellant made a misrepresentation, attributable to neglect, carelessness or wilful default. The Respondent maintains the Appellant has made several misrepresentations. Firstly, by filing as a Canadian resident. Secondly, by understating her worldwide income. Thirdly, by understating her spouse's income. With respect to the first alleged misrepresentation, this begs the question. The very issue before me is whether the Appellant was a Canadian resident during the years in question. I am satisfied there is no misrepresentation with respect to residence and am further satisfied that there is no misrepresentation with respect to the Appellant's income. However there was sufficient evidence before me that the Appellant's spouse's income was not as low as the Appellant recorded on her returns for the years in question. Not only was there rental income, although there was no convincing evidence of a definite amount, but Mr. Sobolev was also engaged in a small business. The Appellant maintained she believed only her spouse's income from Canada needed to be reported, consequently leading her to report as she did. If I accept the Appellant's testimony in this regard I am still faced with a misrepresentation, if I am satisfied the Appellant's husband earned income during the years in question. The Appellant's misrepresentation I view as innocent. Is this then tantamount to neglect as required by subsection 152(4)? In the case of Venne v. Her Majesty The Queen, [1984] C.T.C. 223 (FCTD), Justice Strayer stated:

I am satisfied that it is sufficient for the Minister, in order to invoke the power under sub-paragraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. This is surely what the words "misrepresentation that is attributable to neglect" must mean, particularly when combined with other grounds such as "carelessness" or "wilful default" which refer to a higher degree of negligence or to intentional misconduct. Unless these words are superfluous in the section, which I am not able to assume, the term "neglect" involves a lesser standard of deficiency akin to that used in other fields of law such as the law of tort.

[12]          By relying on her mistaken belief of the requirements of the Act, and relying on her husband's indication to her that the business was not faring well, I find that the Appellant has acted carelessly. This is sufficient to allow the Minister to assess the years in question.

[13]          Turning then to the issue of residence, there are a number of ways in which an individual can be found to be resident in Canada. Firstly, by applying the standard common law test as found in cases such as Thomson v. Minister of National Revenue, [1946] C.T.C. 51 (SCC). Secondly, by relying on the statutory provision of subsection 250(3) which indicates that a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada. Thirdly, by applying the statutory provisions of paragraph 250(1)(a) which indicates that a person shall be deemed to have been resident in Canada throughout a taxation year if the person sojourned in Canada in the year for the period of, or periods the total of which is, 183 days or more. While there was some considerable argument regarding the common-law factors to consider, I find it is unnecessary to review them as the evidence was clear that the Appellant sojourned in Canada for greater than 183 days. That is a complete answer to the issue of residence for Canadian domestic law purposes. I also have no doubt that Ms. Sobolev had significant connections with the United States that she might well be found to be a United States resident if I were to apply Canadian law standards to the issue of residence. That would be inappropriate as the Canada-United States Tax Treaty provides a definition of resident. The Respondent contends that if I find the Appellant was resident in Canada and resident in the United States I must invoke the tie-breaker provisions of the Canada-United States Tax Treaty.

[14]          Article IV of the Treaty reads as follows:

Article IV

Residence

1.              For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature, but in the case of an estate or trust, only to the extent that income, derived by such estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries.

2.              Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a)            he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b)            if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c)            if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d)            if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

[15]          Article IV(1) defines a resident as a person who, under the laws of that State is liable to tax therein. Certainly, as I have already found, as a deemed Canadian resident under the "sojourning" provision, the Appellant is a resident of Canada and liable for tax in Canada. Consequently she is a "resident" for purposes of the Treaty. However she was also a Canadian citizen. I had no evidence before me that she was a person who, under United States laws, was liable to tax in the United States. Certainly there were indices of resident status in the United States based on applying our Canadian laws, but I had no evidence as to how Ms. Sobolev's circumstances caused her to be liable for tax in the United States, resulting in her also being a United States resident in accordance with Article IV(1). I am therefore unable to find that she is a United States resident for purposes of the Treaty and therefore the tie-breaking provisions simply do not come into play in this matter.

[16]          Although counsel for the Respondent cited three Tax Court of Canada cases in support of the application of Article IV (Endres v. Her Majesty The Queen, [1998] 3 C.T.C. 2259 (TCC), Huh v. Her Majesty The Queen, [2000] 4 C.T.C. 2239 (TCC) and Wolf v. Her Majesty The Queen, [2001] 1 C.T.C. 2172 (TCC)), it is unnecessary for me to consider these cases given my finding of the inapplicability of Article IV in the circumstances before me. I would mention however that the three cases cited are all distinguishable from the current case in any event.

[17]          Having concluded that Ms. Sobolev was a Canadian resident, and that her status is not denied by the application of the Canada-United States Tax Treaty, I am satisfied that there has been no gross negligence justifying the Minister imposing penalties pursuant to subsection 163(2). While the subsection has been amended over the years the relevant wording has remained constant. It reads as follows:

Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, 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 as required by or under this Act or a regulation, is liable to a penalty ...

[18]          The statements alleged by the Respondent to be false are the indication of Canadian residence, which I have already found was not false, the understatement of the Appellant's income and the understatement of the Appellant's spouse's income. I have already referred to these matters in the preliminary issue involving subsection 152(4) and concluded that only the understatement of the Appellant's spouse's income justified the late assessments. The level of neglect for the application of subsection 152(4) is less than the level of neglect, being gross negligence, for the imposition of penalties pursuant to subsection 163(2). As Justice Strayer indicated in the Venne case,

                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.

[19]          On balance, I accept the misrepresentation as innocent, careless but innocent. I do not believe this Appellant was knowingly trying to obtain the credits and benefits under false pretences. Her lack of understanding of the requirements of the Act and her reliance on casual statements from her husband regarding his income, do not constitute the severity of negligence required to impose the penalties pursuant to subsection 163(2).

[20]          I must now address the appropriate application of sections 122.2, 122.4, 122.5 and 122.6. I have found that Ms. Sobolev understated her husband's income. This might have an impact on the calculation of the credits and benefits. Regrettably I heard only vague evidence as to the quantum of Mr. Sobolev's income. He ran a small repair business. He rented some real property. The amount of income derived from both these ventures is unknown, though I am satisfied it is something greater than zero. I am not in a position to attempt to conduct a net worth assessment of the Appellant's spouse, nor would it be appropriate for me to do so even if I had relevant information.

[21]          In calculating the credits and benefits at issue there are threshold amounts of adjusted income, being the combined income of the Appellant and the Appellant's spouse. For example, a threshold amount in subparagraph 122.5(3)(f)(ii) for 1992 to 1998 was $25,921. Even assuming gross rental suggested by the Respondent, less some amount reported by the Appellant herself, this would result in only $10,000 - $15,000 of income at the very most. The Appellant denied the rental income was any more than $5,000. Add to this very limited financial information the fact that there was no evidence of the income from the small machine repair business, other than the Appellant's evidence that her husband's business was not successful, I conclude that the Appellant's and the Appellant's husband's income was most likely less than the threshold amounts in the pertinent section. Consequently no adjustment is required to the amount of the credits and benefits.

[22]          For these reasons I allow the appeals and refer the matters back to the Minister for reconsideration and reassessment on the basis the Appellant was a resident of Canada for the years in question, that the penalties pursuant to subsection 163(2) are not applicable, and that the sum of the Appellant's and the Appellant's spouse's income was less than the threshold amounts for the purposes of calculating the credits and benefits. I make no award of costs.

Signed at Ottawa, Canada this 29^th day of November, 2001.

"Campbell J. Miller"

J.T.C.C.

COURT FILE NO.:                                                 2001-1517(IT)I

STYLE OF CAUSE:                                               Valentina Sobolev v. The Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           November 20, 2001

REASONS FOR JUDGMENT BY:                      The Honourable Judge Campbell J. Miller

DATE OF JUDGMENT:                                       November 29, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant herself

Counsel for the Respondent:              Johanna Russell

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2001-1517(IT)I

BETWEEN:

VALENTINA SOBOLEV,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on November 20, 2001 at Vancouver, British Columbia

by the Honourable Judge Campbell J. Miller

Appearances

For the Appellant:                                The Appellant herself

Counsel for the Respondent:                Johanna Russell

JUDGMENT

          The appeals from the reassessments made under the Income Tax Act for the 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995 taxation years are allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the terms of the attached Reasons for Judgment.

Signed at Ottawa, Canada this 29^th day of November, 2001.

"Campbell J. Miller"

J.T.C.C.