REASONS
FOR JUDGMENT
Owen J.
[1]
The Appellant, Mr. George Whissell, is appealing
the reassessment by the Minister of National Revenue (the “Minister”) of his 2006, 2007, 2008, 2009 and 2010
taxation years (collectively, the “Taxation Years”)
to include unreported income and, for all but the 2006 taxation year, to assess
the Appellant a penalty under subsection 163(1) of the Income Tax Act
(the “ITA”).
[2]
At the commencement of the hearing, counsel for
the Appellant and the Respondent submitted an Agreed Statement of Facts (the “ASF”) and a Joint Book of Documents (the “Joint Book”) and advised the Court that they intended
to rely solely on the facts set out in the ASF and in the documents in the
Joint Book that are identified in the ASF as being accepted for the truth of
their contents. These documents are found at Tabs 11 through 21 of the Joint
Book (the “Documents”). The ASF is reproduced in
Appendix A to these reasons.
[3]
Counsel for the Appellant also confirmed that,
as a result of the facts stated in the ASF, the Appellant was admitting that he
failed to report income in each of the returns that he filed for the Taxation
Years and that he was correctly reassessed for those years to add the omitted
amounts to income. For his part, counsel for the Respondent conceded that the
Appellant made a charitable donation of $150 in 2006 and that the appeal of the
2006 reassessment should be allowed solely to reflect that donation.
[4]
The ASF states that the Appellant filed his
returns for the Taxation Years on April 5, 2011 and was initially
assessed as filed by notices dated April 21, 2011. The Minister
subsequently reassessed the Taxation Years by notices dated
December 12, 2011, January 16, 2012, January 23, 2012,
February 3, 2012 and January 30, 2012 respectively (collectively,
the “Reassessments”), as follows:
1. For
the 2006 taxation year, to increase the Appellant’s RRSP income by $4,871.
2. For
the 2007 taxation year, to increase the Appellant’s employment income by
$21,725, other pension income by $2,090 and interest income by $9,024.
3. For
the 2008 taxation year, to increase the Appellant’s other pension income by
$2,170 and interest income by $1,463.
4. For
the 2009 taxation year, to increase the Appellant’s other pension income by $3,157
and dividend income by $131,961.
5. For
the 2010 taxation year, to increase the Appellant’s other pension income by $3,052
and RRSP income by $7,025.
[5]
In the reassessments of the Appellant’s 2007
through 2010 taxation years, the Minister also assessed the Appellant penalties
under subsection 163(1) of the ITA. Both counsel agreed that, because of the
admissions by the Appellant in the ASF, the sole issue to be decided by the Court
is whether the assessment of the subsection 163(1) penalties is correct.
[6]
Subsection 163(1) of the ITA states:
163. (1) Every
person who
(a) fails to report an amount required to be included in
computing the person’s income in a return filed under section 150 for a
taxation year, and
(b) had failed to report an amount required to be so included
in any return filed under section 150 for any of the three preceding taxation
years
is liable to a
penalty equal to 10% of the amount described in paragraph (a), except
where the person is liable to a penalty under subsection (2) in respect of that
amount.
[7]
Subsection 163(1) of the ITA describes what is
commonly referred to as a strict liability offence. A penalty under the
subsection may be assessed for a taxation year of the Appellant (I will refer
to this taxation year as the “penalty year”) if
the Appellant has failed to report an amount required to be included in income
in the return he filed for the penalty year and had failed to report an
amount required to be included in income in a return that he filed for one of
the three taxation years preceding the penalty year.
[8]
The use of the present tense in paragraph
163(1)(a) and the past perfect (or pluperfect) tense in paragraph
163(1)(b) reflects the temporal relationship of the penalty year
(present) to the three preceding taxation years (past). However, the change in
tense has nothing to say about the order in which the returns for the relevant
taxation years are actually filed. Accordingly, the return for the penalty year
could be filed before, at the same time as, or after the returns for the three
preceding taxation years. In this case, the returns for the Taxation Years were
filed at the same time.
[9]
Under subsection 163(3) of the ITA, the Minister
has the burden of establishing the facts justifying the assessment of a penalty
under subsection 163(1) of the ITA. The Respondent submits that the facts in
paragraphs 11 through 15 of the ASF establish that the Appellant failed to
report income in the returns he filed for the Taxation Years. Those paragraphs
identify in detail what income was and was not reported by the Appellant in the
returns he filed for the Taxation Years. As well, the amounts described in
paragraphs 11 through 15 of the ASF are supported by the Documents.
[10]
Counsel for the Respondent submits that, given these
facts, a penalty is justified for each of the 2007, 2008, 2009 and 2010
taxation years of the Appellant. I note that a penalty is not justified for the
Appellant’s 2006 taxation year because there is no evidence that the Appellant
failed to report an amount in the returns he filed for his 2003, 2004 or 2005
taxation years.
[11]
I agree with counsel for the Respondent that the
facts disclosed in the ASF and in the Documents satisfy the burden placed on
the Minister to establish on a balance of probability the facts that justify
the assessment of a penalty under subsection 163(1) for the Appellant’s 2007
through 2010 taxation years.
[12]
Counsel for the Appellant did not dispute that
the Appellant failed to report income in his returns filed for each of the
Taxation Years. Rather, counsel submitted that the facts stated in the ASF and
in the Documents support a due diligence defence. Specifically, counsel
referred to the following facts:
1. The
Appellant filed his returns for the Taxation Years at the same time, on April
5, 2011.
2. The
Appellant had not been assessed for any of the Taxation Years at the time he
filed the returns and therefore had no notice of a deficiency in any of the
returns filed on April 5, 2011.
3. Save
for the omission of the dividend of $131,961 in the Appellant’s 2009 return,
the failure to report income followed a pattern or represented the reporting of
some but not all of a particular type of income. The pattern was seen in the
consistent failure to report certain pension type income in all of the Taxation
Years and a partial omission was seen in the failure to report all of the
Appellant’s employment and investment income in 2007.
4. The
failure to report pension type income represented a failure to report a small
percentage of the Appellant’s total income. The percentages were 2%, 0.8%, 0.7%
and 7% for the 2007, 2008, 2009 and 2010 taxation years respectively.
5. The
unpaid tax resulting from the failure to report income in each of the Taxation
Years was not substantial.
6. The
Appellant was reassessed within a relatively short period of time after the
initial assessment of the Taxation Years to include the omitted amounts in his
income.
7. The
omitted amounts were all disclosed on information slips in the possession of
the Canada Revenue Agency (the “CRA”). This means
that the CRA had all of the information it needed to assess the Appellant for
the omitted income and also explains why each Taxation Year was reassessed
within a short period of time after the initial assessments.
8. There
was no evidence establishing either that the information slips were received or
that they were not received by the Appellant.
[13]
Counsel for the Respondent submitted that none
of these facts support a due diligence defence. I agree.
[14]
In R. v. Sault Ste. Marie (City), [1978]
2 S.C.R. 1299, the Supreme Court of Canada stated that there are two possible
bases for the defence of due diligence applicable to strict liability offences:
• reasonable mistake
of fact, that is, an honest belief, on reasonable grounds, in a mistaken set of
facts which, if true, would render the act or omission innocent; or
• reasonable care
taken to comply with the law, that is, taking all reasonable precautions in
order to avoid the event that gave rise to the offence.
[15]
More recently, in Corporation de l'École
Polytechnique v. The Queen, 2004 FCA 127, the Federal Court of Appeal
stated:
[28] The due
diligence defence allows a person to avoid the imposition of a penalty if he or
she presents evidence that he or she was not negligent. It involves considering
whether the person believed on reasonable grounds in a non-existent state of
facts which, if it had existed, would have made his or her act or omission
innocent, or whether he or she took all reasonable precautions to avoid the
event leading to imposition of the penalty. See The Queen v. Sault Ste-Marie,
[1978] 2 S.C.R. 1299; The Queen v. Chapin, [1979] 2 S.C.R. 121. In other
words, due diligence excuses either a reasonable error of fact, or the taking
of reasonable precautions to comply with the Act.
[29] The defence
of due diligence should not be confused with the defence of good faith, which
applies in the area of criminal liability, requiring proof of intent or guilty
knowledge. The good faith defence enables a person to be exonerated if he or
she has made an error of fact in good faith, even if the latter was
unreasonable, whereas the due diligence defence requires that the error be
reasonable, namely, an error which a reasonable person would have made in the
same circumstances. The due diligence defence, which requires a reasonable but
erroneous belief in a situation of fact, is thus a higher standard than that of
good faith, which only requires an honest, but equally erroneous, belief.
[16]
In Résidences Majeau Inc. v. The Queen,
2010 FCA 28, the Federal Court of Appeal elaborated further on the reasonable
mistake of fact defence:
[9] A reasonable
mistake of fact requires a twofold test: subjective and objective. The
subjective test is met if the defendant establishes that he or she was mistaken
as to a factual situation which, if it had existed, would have made his or her
act or omission innocent. In addition, for this aspect of the defence to be
effective, the mistake must be reasonable, i.e. a mistake a reasonable person
in the same circumstances would have made. This is the objective test.
[17]
Taken as a whole, the facts highlighted by
counsel for the Appellant and the facts stated in the ASF and the Documents
disclose no basis to support a finding that the Appellant believed on
reasonable grounds in a non-existent state of facts which, assuming such facts
did exist, would have made his or her act or omission innocent.
[18]
These same facts also do not support a finding
that the Appellant took reasonable care. Quite the contrary, the facts
disclosed in the ASF and in the Documents clearly demonstrate that the returns
filed by the Appellant for the Taxation Years omitted significant amounts of
income even though that income was reported on information slips addressed to
the Appellant. As I have not been provided with any explanation as to why the omissions
occurred, I can only infer that the Appellant has no explanation.
[19]
Contrary to the submissions of counsel for the
Appellant, the fact that the returns were filed at the same time does not
explain the omissions in those returns. As well, the fact that the Appellant
was not assessed for the Taxation Years prior to filing the returns does not
explain the omissions in the returns.
[20]
Counsel for the Appellant submitted that the
Appellant should be subject to a lower burden in establishing due diligence because
he filed his returns at the same time and therefore had received no assessments
for the Taxation Years at the time he filed. In my view, it is not reasonable
to suggest that an individual who has failed to file his 2006, 2007, 2008 and
2009 tax returns on or before his filing due date for those taxation years
should be subject to a lower burden in establishing due diligence than one
whose tax filings are timely.
[21]
Counsel for the Appellant and counsel for the
Respondent both referred to the fact that the ASF and the Documents do not
indicate whether or not the information slips disclosing the missing incomes
were actually received by the Appellant. However, the information slips are all
addressed to the Appellant, and his failure to provide evidence that they were
not received or that they were received after the returns for the Taxation
Years were filed leads me to draw the negative inference that the information
slips were received and in his possession at the time he filed his returns for
the Taxation Years.
[22]
With respect to counsel for the Appellant’s
reference to a pattern demonstrating due diligence, the only relevant pattern I
can discern from the facts is that the Appellant failed to report income in
every one of the returns that he filed for the Taxation Years. Without further
explanation, this pattern suggests to me that the Appellant was not diligent in
filing any of those returns.
[23]
It is trite to say that Canada’s income tax
system relies on self-reporting. Here, save for 2010, the Appellant did not
file his tax returns for the Taxation Years on time, and when he did file the
returns, he failed to report material amounts of income in each such return,
without providing any reasonable explanation for this failure. Under these
circumstances, the Appellant has not established a due diligence defence in
respect of any of the Taxation Years. While I acknowledge that the resulting
subsection 163(1) penalty is harsh, that is a matter for Parliament to address.
[24]
In reaching this conclusion, I have considered
the cases provided by counsel in the Joint Book of Authorities, including the
decision of the Tax Court of Canada in Galachiuk v. The Queen, 2014 TCC
188. In that case, the Court found that the taxpayer was diligent with
respect to one of the two taxation years relevant to the application of the
subsection 163(1) penalty and held that this finding was sufficient to
eliminate the penalty. In light of my finding that the Appellant has not
established that he was duly diligent when he filed his returns for the
Taxation Years, I see no need to address the question of whether the due diligence
defence can apply only to the penalty year or whether it applies to the penalty
year and the three preceding taxation years.
[25]
For the foregoing reasons, the appeal of the reassessments
of the Appellant’s 2007, 2008, 2009 and 2010 taxation years are dismissed with
costs to the Respondent. The appeal of the reassessment of the Appellant’s 2006
taxation year is allowed without costs and the reassessment is referred back to
the Minister for reconsideration and reassessment on the basis that the
Appellant is entitled to claim an additional amount of $150 as a charitable
donation made in his 2006 taxation year.
Signed at Ottawa, Canada, this 30th day of May 2016.
“J.R. Owen”
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