REASONS
FOR JUDGMENT
Boyle J.
[1]
The Appellants George Samson and Elizabeth
Hilliard are married. Their informal appeals were heard together on common
evidence in Ottawa. They were each assessed $2,500 penalties under subsection
162(7) for each of the years 2008 through 2011 for failing to file forms T1135
in respect of their foreign property by the end of April of the following year
as required by section 233.3 of the Income Tax Act (Canada) (the “Act”).
[2]
The Appellants do not dispute that they each owned
foreign property in excess of the $100,000 threshold throughout the period. Nor
do they dispute that they did not file their form T1135 information returns for
any of these years within the time required. They were not required to file
income tax returns for each of these years as a result of losses claimed from
their foreign and Canadian rental properties which have not been challenged. It
is their position that they are entitled to maintaining a so-called due
diligence defence to the subsection 162(7) administrative penalties, and that
they were reasonable in their belief at the time that they did not have to
report their foreign property and file T1135 forms for the years in question
because they did not have any income tax payable for the year and hence did not
have to file T1 income tax returns.
[3]
The Appellants now accept that the definition of
filing‑due date for purposes of their T1135s is expressly not affected by
subparagraph 150(1.1)(b)(i) dealing with income tax returns for years in
which no tax is payable, as the definition of filing‑due date in section
248 says that the filing‑due date for a taxation year is the day on or
before which the taxpayer’s Part I tax return for the year is required to
be filed or would be required to be filed if tax under Part I were payable
by the taxpayer for the year.
[4]
The issue to be decided in these appeals is
whether the taxpayers were diligent in their compliance efforts and acted
reasonably.
[5]
Each of the Appellants testified. They also
called their accountant, Ken Grant, who made a voluntary disclosure for
the Appellants in 2013 for each of the years 2007 to 2012, which include all of
the years in issue in these appeals. It appears 2007 was statute‑barred
and their objections for that year were allowed by Canada Revenue Agency (“CRA”) Appeals.
The Respondent did not call any witnesses.
[6]
The Appellants are each both real estate agents
and real estate investors. They own a real estate brokerage company operating
under the name All Pro. The Appellants co-own rental properties in Mont‑Tremblant, Quebec
and on the Outer Banks of North Carolina. These generated annual rental
revenue for them in the hundreds of thousands of dollars, but resulted in net
losses for them in each of the years in issue. Their losses exceeded their
income from their real estate sales activities and other income. Their son is
also a real estate agent and was earning most of the income from the activities
of their brokerage. The cost of the Outer Banks rental property in 2002 was
approximately US$500,000. They complied with the U.S. Internal Revenue Service
filing obligations on a timely basis throughout the period.
[7]
The Appellants had previously done a voluntary disclosure
to CRA in 2007 for the years 1997 to 2006. T1 returns were filed for each of
those years under the Voluntary Disclosure Program. T1135 forms were filed in
respect of the Outer Banks property for 2002 to 2006 under this voluntary disclosure.
They were represented by DioGuardi Tax Law LLP in this voluntary disclosure.
There was income tax payable in the eight years out of the ten in which they
were taxable. At a meeting with CRA regarding this voluntary disclosure,
Mr. Samson acknowledges that his T1135 filing obligations were explained
to him.
[8]
Taxes payable for those years were approximately
$85,000. Penalties were waived. In its one‑page July 2008 letters to each
Appellant concluding their first Voluntary Disclosures:
(i)
It is clear from the subject line that a
separate case number was assigned to the T1 filings and the T1135 filings;
(ii) The operative paragraph dispensing penalties for the taxable years
and for the T1135 obligations reads “Please be advised that having reviewed the 1998 to 2006 T1 Income Tax
Returns and 2002 to 2006 T1135 forms, are accepting [sic] the submission as a
valid voluntary disclosure. Penalties that may otherwise apply are waived.”;
(iii) The next paragraph is a two sentence description of their income tax
record keeping obligations; and
(iv) The next paragraph reads “We also acknowledge receipt of your 1997 and 2006 T1 returns. As
there is no tax payable, we have not considered them under the VDP. We will,
however, forward them for processing.”
[9]
The September 2007 DioGuardi voluntary disclosure
request to CRA specifically withdraws the 1997 and 2006 T1 income tax returns
from the Voluntary Disclosure Program due to the fact that there is a credit or
nil balance for these years. That is, the one‑and‑a‑half page
DioGuardi letter also makes it clear that a T1135 form remained due for 2006. It
was included and not asked to be excluded from the Voluntary Disclosure
Program, notwithstanding that no T1 return was due as no tax was payable. It is
a reasonable inference that this would have been explained to the Appellants by
Ms. DioGuardi. Further, this should have been relatively easily understood by
Mr. Samson reviewing it on behalf of himself and his wife.
[10]
It appears from the DioGuardi letter that the
Appellants had also not filed returns for years prior to 1997, but that there
were no longer any records to confirm their recollection that they were net
loss years or to compute losses and report them in a return.
[11]
Mr. Samson described himself as self-taught
with respect to financial and record keeping matters. He said he learned his
tax as he went along but would not consider himself an expert. His wife
described him as being anally retentive in these departments.
[12]
The Appellants retained their accountant,
Mr. Grant, in late 2010 to deal with their unfiled T1135 forms going back
to 2007. According to Mr. Samson, their new accountant told him he was not
sure a second voluntary disclosure would be accepted with respect to T1135
forms but it was worth trying. Mr. Grant submitted a voluntary disclosure
letter to CRA on August 30, 2013 with respect to T1135 forms for 2007
through 2012. In that letter Mr. Grant acknowledges the T1135s are past
due. He also affirms that he informed the Appellants of their non-compliance.
The T1135s were not put in to evidence.
[13]
In his short voluntary disclosure letter, Mr. Grant
sets out only one reason for the Appellants’ non-compliance. He pointed out in
bold and initial capitals that the T1135 states that specified foreign property
does not include a property used or held exclusively in carrying on an active
business. He goes on to write, again in bold initial capitals, that rental
income for Canadian tax purposes is property income, not active business income
as defined in CRA T4036, and that the taxpayers were not aware of this
difference and believed they were exempt from filing a T1135 for rental income
from a business. There was no suggestion whatsoever in his letter that the
Appellants had not filed T1135s on time because they thought they didn’t have
to if no tax was payable.
[14]
In his testimony, Mr. Grant acknowledged
that the reason for the failure to comply set out in his voluntary disclosure
letter was not correct and that there had been no such confusion or lack of
understanding about rental versus business income. When asked why he wrote it,
he said it was because he knew there was not a chance in hell of getting the
voluntary disclosure accepted as it was their second with respect to T1135
non-compliance dealing with years shortly after their first voluntary disclosure.
Apparently this irrelevant distinction between rental and business income had
been relevant to some unrelated Quebec provincial tax compliance issue he was
also working on with the Appellants with respect to their Mont‑Tremblant
chalet.
[15]
Notwithstanding the clear language he used in
his voluntary disclosure to CRA that the T1135 forms were past due and that
this was non-compliant, in evidence he explained that he nonetheless thought
they were not necessary. I do not accept this. Mr. Grant’s credibility is very
badly damaged by his acknowledged untruth in his voluntary disclosure letter to
CRA about the reason for the Appellants’ non-compliance. This explanation in
his testimony smacks of after‑the‑fact advocacy, not credible
testimony as to past facts.
[16]
This second voluntary disclosure was not
accepted by the CRA per its letter of October 2013. The Appellants were
reassessed $2,500 penalties each for each of the years 2007 to 2011.
[17]
The Appellants had another law firm act on their
objections to these reassessed penalties. It was at this stage that it was
pointed out to CRA Appeals that the 2007 reassessment was beyond the normal
reassessment period. Apparently CRA had missed that when the reassessments were
issued. Appeals decided to allow their objections with respect to 2007 only.
[18]
The Appellants put the CRA Report on Objection
with respect to Mr. Samson into evidence. With respect to 2007, the Report
on Objection says “The 2007
year was reassessed even though it was statute‑barred and it appears the
Voluntary Disclosure officer did not realize that 2007 was statute‑barred.”
The Appeals Officer’s decision included “The taxpayer may have been negligent
and 152(4) may have applied in the reassessment of the 2007 tax year. However,
it is not the Appeal’s [sic] mandate to prove that. The Voluntary Disclosure
officer should have proved that and she did not. She requested that the 2007
tax year be reassessed without even acknowledging that it was statute‑barred.”
The reassessments for 2007 were reversed.
[19]
In its
consideration of Mr. Samson’s due diligence arguments in his objection,
the Report on Objection includes:
The taxpayer has
a long history of non-compliance. He was arbitrarily assessed in 1988 and 1989.
He filed his 1990 through 1993 T1’s in 1994. He did not file from 1994 through
1996. He filed his 1997 through 2006 T1’s in 2008, under Voluntary Disclosure.
He filed his 2008 through 2011 T1’s in 2013, after being contacted by the CRA’s
non-filers officer and asked to file the returns. As of the date of this report
[October 2014], his 2012 and 2013 returns are not filed and he was contacted by
non-filers regarding the returns.
(Obviously, to the extent any of
Mr. Samson’s unfiled T1 returns were in respect of years in which no tax
was owing, he was entitled to not file unless and until CRA made demand.)
[20]
The Report on Objection also indicates
Mr. Samson was a GST/HST registrant and that his 2008 through 2011 GST/HST
returns were all filed late, in 2013, and still had a balance owing.
[21]
The Report on Objection also included the
following entries from the CRA non-filers diary notes:
DATE: 25 Feb 2013
Called taxpayer
at [redacted], spoke to him and he seems to blame his bookkeeper who currently
has fallen way behind in their duties. Over the past few years, he says he has
been lax in staying on his bookkeeper and accountant for service.
[22]
It can be noted that his accountant,
Mr. Grant, in his testimony at the hearing made it clear that he took
offense at this explanation by Mr. Samson to CRA. Mr. Grant maintains
that he did the whole voluntary disclosure within three weeks of receiving the work
from Mr. Samson’s second bookkeeper since he had been hired.
[23]
The Report on Objection also included a
non-filers diary entry in respect of a conversation with Mr. Grant:
DATE: 18 July
2014
Called Ken Grant
at [redacted] and we discussed the account. He explains he has tried many times
to discuss the filing requirements to this t/p and the consequences of not
filing and has had little success. He explains that the t/p dropped off a
banker’s box after hours one day last week which contains the information for
2012 and 2013.
[24]
I have already commented on my serious concern
with Mr. Grant’s credibility given his untruthful statement of the reason
for the Appellants’ failure to file in his voluntary disclosure request. My
credibility concerns are heightened by the fact that he was at times evasive,
would not give clear answers, and was argumentative.
[25]
I also have serious concerns with
Mr. Samson’s credibility. He was evasive and repeatedly deflected clear
questions about the clarity of CRA’s one‑page letter accepting the first
voluntary disclosure on the issue of T1135s being due even in years in which
income tax returns weren’t due because no tax was payable. I do not believe
that he did not understand the questions, and he strikes me as too smart to not
understand this clear distinction from the CRA letter as well as the DioGuardi
letter. Also, Mr. Samson allowed Mr. Grant to file the second voluntary
disclosure with an untruthful explanation of the Appellants’ confusion and
misunderstanding about rental income versus business income. This is not helped
by the fact that it also didn’t even mention the reason now being put forward
in this hearing for the non‑compliance. Further, Mr. Samson seems to
continuously prefer to blame others. He blamed his first bookkeeper, then his
second bookkeeper, then his accountant. He was visibly upset with his lawyer at
the hearing of the appeal, notwithstanding that he was doing the best he could
with the case he had. The accountant, Mr. Grant, disagreed with what was attributed
to Mr. Samson in the Report on Objection about him. Mr. Grant did not
suggest that he did not tell CRA that Mr. Samson did not meet his
compliance obligations even though he had personally explained them to his
client. Nor did he say that this was expressed but related solely to the 2012
and 2013 T1 returns – all of this was going on around the same time.
[26]
On the facts of this case, there is no
reasonable basis to believe that the Appellants were unaware of their
obligation to file their 2007 T1135 form by April 2008 and in each of the
years thereafter. This was clear from CRA’s first voluntary disclosure
acceptance letter. It is a very reasonable inference that this was similarly
made clear when CRA explained the T1135 filing obligations at a meeting with
the Appellants, or at least Mr. Samson, in the course of the first
voluntary disclosure. It would also be a reasonable inference that Ms. DioGaurdi
would have also explained that to them clearly. It was clear from
Ms. DioGuardi’s letter. There had been no real passage of time in which to
forget what they were told. I do not accept as credible Mr. Grant’s
testimony that he may have told them otherwise because he believes he believed
otherwise.
[27]
In the circumstances of this case, due diligence
and reasonable efforts to comply would have, at the very least, included reading
and understanding CRA’s first voluntary disclosure letter. It was a single page
and written very clearly.
[28]
Ms. Hilliard maintains that she behaved
reasonably in relying on her husband to take care of their tax compliance
obligations. On the facts of this case, there is again no reasonable basis for
her to rely on him as she was well aware that he was regularly delinquent with
his tax filings and, since this lead her to also make her first voluntary disclosure,
this extended beyond optional tax filings or tax filings which were not
required if there was no tax payable. It is not enough that she was not aware
he ever “evaded” tax. (While this came out in evidence in chief, there was no
suggestion in any of the evidence that Mr. Samson had in fact ever attempted
to evade tax). Ms. Hilliard was aware her husband was a serial non‑complier.
[29]
Other facts were put in to evidence in support
of their due diligence/reasonableness defence regarding Mr. Samson’s
mother being ill and then passing away, their son’s very severe illness during
the period and some of Mr. Samson’s personal medical issues. None of these
were present when the current round of T1135 non‑compliance started with
respect to the 2007 year due in April of 2008.
[30]
According to his doctor’s letter, Mr. Samson’s
thyroid condition developed in early 2009 and it took the better part of six
months for the disorder to be controlled. Mr. Samson added he had gone to
the hospital emergency department six months earlier to see an endocrinologist.
His mother’s dementia, her resulting move into a care home, and her later death
began in 2011. Their son Robert’s severe bacterial infection also commenced in
2011.
[31]
It is hard to see that these have much relevance
to overlooking filing T1135s, nor is there any evidence these impaired the
Appellants’ functioning to being beyond their ability to recall such things as their
T1135 obligations. Some of the other medical conditions mentioned by
Mr. Samson sounded like those typical of many Canadian men his age.
Similarly, his caring for his elderly mother sounded rather similar to the
situation that many Canadians of the Appellants’ ages regularly find themselves
in. There was no evidence that the Appellants could or did not work through these
periods or that they hired anyone else to do the maintenance that they had
always carried on with respect to their properties. The evidence is that they
did cancel certain trips away while their son was ill and while
Mr. Samson’s mother was dying; they did not go south that winter.
[32]
Again, these were well after the spate of non‑compliance
began. Indeed, the conditions of his mother and their son were after
Mr. Samson retained Mr. Grant to deal with their not having filed their
T1135s since 2006.
[33]
Subsequent to the hearing of these appeals, Mr. Samson
wrote to the Court asking to be permitted to file further written submissions.
This was written by him personally, not his counsel who remained both
Appellants’ counsel of record. Mr. Samson does not appear to have copied
his counsel. The Respondent wrote that it did not oppose the request “as long as the submissions are restricted to
submissions on the evidence already adduced at the hearing and no further
evidence is presented by the Appellant”. In the
circumstances of this case, after considering Mr. Samson’s request, I
decided that additional submissions would not be appropriate, necessary or
helpful in this case.
[34]
The Appeals are dismissed.
Signed at Vancouver,
British Columbia this 10th day of May 2016.
“Patrick Boyle”
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