REASONS
FOR JUDGMENT
V.A. Miller J.
[1]
The Minister of National Revenue (“Minister”)
reassessed the Appellant’s 2012 taxation year to include unreported interest
income of $51,727 and to impose a penalty of $5,172.70 pursuant to subsection
163(1) of the Income Tax Act (“ITA”).
[2]
Subsection 163(1) applies if a taxpayer fails to
report a taxable amount in his income tax return for two taxation years within
a four year period. The amount of the penalty is 10% of the amount of income
not reported.
[3]
The Minister has the burden of establishing the
facts that justified the penalty under subsection 163(1) but the Appellant can
avoid the penalty if he can demonstrate that he exercised due diligence in
reporting his income. The onus is on the Appellant to establish due diligence.
[4]
Craig Peturson, a Team Leader in the Appeals
Section of the Calgary Tax Services Office of the Canada Revenue Agency (“CRA”)
testified on behalf of the Respondent. His evidence established that the
Appellant failed to report amounts in his 2011 and 2012 income tax returns.
Those amounts were as follows:
a)
For the 2012 taxation year, the Appellant
received interest income of $128.64 from Khalsa Credit Union (Alberta) Limited
(“Khalsa Alberta”) and interest income of $51,598.62 from Stone West Homes Inc.
(“Stone West”). He failed to report both of these amounts;
b) For the 2011 taxation year, the Appellant also failed to report income
which he received from these same entities. He received and failed to report
interest income of $127.16 from Khalsa Alberta and capital gains of $18,817
from Stone West.
Due Diligence
[5]
I realize that at least four other judges of
this Court have held that a taxpayer can be relieved of a penalty under
subsection 163(1) if he can establish a due diligence defense for either of the
two years within the four year period. I disagree with this reasoning. It is my
view that the taxpayer must establish a due diligence defense for the year that
the penalty was imposed. In this appeal that year was 2012. It was the failure
to report interest income of $51,727 in the 2012 taxation year which triggered
the penalty.
[6]
However, because this issue has not been decided
by the Federal Court of Appeal, I will give the Appellant the benefit of the
doubt by considering his due diligence argument for both 2011 and 2012.
[7]
In Résidences Majeau Inc c R, 2010 FCA 28
(FCA), Letourneau J.A. described the elements necessary to establish a due
diligence defence with respect to the imposition of a penalty. He stated:
[8] According to Corporation
de l'école polytechnique v. Canada, 2004 FCA 127, a defendant may rely on a
defence of due diligence if either of the following can be established: that
the defendant made a reasonable mistake of fact, or that the defendant took
reasonable precautions to avoid the event leading to imposition of the penalty.
[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.
[10] As already
stated, the second aspect of the defence requires that all reasonable
precautions or measures be taken to avoid the event leading to imposition of
the penalty.
2011 Failure to Report
[8]
In the 2011 taxation year, the Appellant
reported employment income of $18,000. It was his evidence that he may have
mistakenly reported the capital gains of $18,817 which he received from Stone
West as his employment income. With respect to the interest income of $127.16
from Khalsa Alberta, he stated that he knew he had to pay tax on this income
but he thought that he didn’t have to report it because the CRA would receive a
copy of the T5 slip from the credit union.
[9]
I do not believe that the Appellant mistakenly
reported the capital gains he received from Stone West as his employment
income. Nor do I believe that the Appellant’s explanation is credible. For
2011, the Appellant reported employment income of $18,000 and taxable dividends
of $35,000 for total income of $53,000. The T4 enclosed with his 2011 income
tax return (“2011 return”) was from 1339421 Alberta Inc. and it showed that his
employment income was $18,000. I note that the taxable dividends were also from
the same numbered company.
[10]
At the notice of objection stage of this matter,
the Appellant gave a different explanation for his failure to report income in
2011. His representative wrote the following to the CRA:
With respect to
2011, the Taxpayer submits that:
i. He
reported over 85% of his 2011 gross taxable income on original filing.
ii. He
believed that since he had incurred significant interest expense and other
costs (information he provided in due course) in order to earn the omitted
gross taxable investment income of $9,409, his unreported net taxable income,
if any, from this investment would in fact be much lower. As such, his
unreported net taxable income from this investment, if any was immaterial in
comparison to his 2011 income from other sources.
iii. He
contends that his mistake in not including the slips in question at the time of
filing were innocent, with no intention to under report his 2011 income.
[11]
In these representations, the Appellant did not
even allege that he made a mistake of fact. His rationale is that the amount of
income he failed to report in 2011 was immaterial in comparison to the amount
of income which he did report. Aside from being irrelevant, this statement is
not correct. The Appellant failed to report 35% of the income he received in
2011. Also, the Appellant alleged that he had incurred a significant interest
expense to earn the investment income. This allegation was not supported by any
documentary evidence and even if it had been true, it does not excuse the
Appellant’s failure to report the capital gains which he earned from Stone
West.
2012 Failure to Report
[12]
With respect to the failure to report the
interest income from Khalsa Alberta for 2012, the Appellant testified that he
did not receive the T5 from the credit union by the time he filed his income
tax return. He explained that there was a “takeover” of the Board of Directors
at Khalsa Alberta and it was late sending out the T5s. The Appellant stated
that he wasn’t too worried about it because he knew that his interest income
from Khalsa Alberta was a small amount of income. He did not inform the CRA
that he had received the T5 from Khalsa Alberta; he was just waiting for the
Minister to reassess him.
[13]
The Appellant stated that he had not received
the T5 from Stone West by the time he filed his 2012 income tax return in April
2013. Also, he was not expecting a T5 from Stone West for his 2012 taxation
year. He thought that he would receive it for his 2013 taxation year. The
Appellant further stated that he had invested in Stone West and he had a
disagreement with the owners of Stone West about the amount of income he should
receive. It was his evidence that he borrowed money from his line of credit to
make the investment and he thought that Stone West should deduct the interest
expense he incurred from the interest income he earned with it. He received the
T5 after he filed his 2012 return and he thought that he could report this
interest income after his disagreement with Stone West was settled.
[14]
It is my view that the Appellant’s explanation
is implausible. In cross examination, he admitted that he received the amount
of $51,598.62 from Stone West in 2012. He may not have received the T5 prior to
filing his income tax return but he ought to have expected it for the 2012
taxation year. He had already received the income.
[15]
The Appellant’s explanation about his
disagreement with Stone West is also nonsensical. If he had incurred an
interest expense, he could have deducted it from the income he reported on his
income tax return. Stone West could not deduct the Appellant’s interest expense
from the interest income it gave to him.
[16]
If the Appellant received the T5 from Stone West
after he filed his income tax return for 2012, he did not inform the Minister
that his 2012 return should be amended. After he realized that he could not
settle his disagreement with Stone West, he still did not report the amount of
the T5 from Stone West.
[17]
The evidence demonstrated that the Appellant had
a pattern of not reporting interest income. In 2003, 2006, 2007, 2008 and 2010,
the Appellant failed to report interest income he earned from Khalsa Alberta.
In 2004, he failed to report interest income he earned from TD Mortgage
Corporation. The Minister reassessed the Appellant to include the unreported
interest income in his income for 2003, 2004, 2006 and 2008.
[18]
The Appellant stated that he knew that the
Minister received a copy of the T5s from the issuer and he waited each year for
the Minister to discover the failure to report and to reassess him. It is my
view that the Appellant was playing a game of “catch me if you can” with the
Minister. It appears that the Minister did not catch him in 2007 and 2010.
[19]
The Appellant has not established a due
diligence defense for the 2011 or the 2012 failures to report income. I have
inferred from the totality of the evidence that the Appellant deliberately
failed to include the interest income of $127.16 and capital gains of $18,817
in his income for the 2011 taxation year and the interest income of $128.64 and
$51,598.62 in his income for the 2012 taxation year.
[20]
The appeal is dismissed.
Signed at Ottawa, Canada, this 26th day of June 2015.
“V.A. Miller”
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