REASONS
FOR JUDGMENT
Bocock J.
I. Introduction
[1]
These appeals concern US-based stock options
(the “Options”) received by the Appellant. The Appellant did not report the
Option benefits within his 2006 and 2007 tax returns being the respective years
he exercised the Options. Including benefits which arise from a stock option in
the year exercised is required under the combined provisions of sections 3
and 7 of the Income Tax Act, RSC 1985, c.1 (5th Supp.) (the “Act”).
This is conceded by the Appellant, Mr. Robertson.
II. Facts
[2]
The facts relating to Mr. Robertson’s Options
are not in dispute. Simply put, Mr. Robertson exercised the Options for
shares in private US companies in 2006 and 2007. The benefits from the exercise
of the Options totalled $102,600.14 CAD in 2006 and $508,657.97 CAD in 2007.
Mr. Robertson, a resident of Canada, did not report the benefits as
required. The Options and the tax reassessed are not in dispute. At the conclusion
of the first day of evidence, Mr. Robertson’s counsel also conceded that failure
to report the benefit was a misrepresentation, but not one attributable to
neglect, carelessness or wilful default.
[3]
Although originally assessed as filed, the
Minister’s subsequent reassessments for the 2006 and 2007 years were both dated
June 8, 2011. In respect of the 2006 taxation year, this is indisputably
beyond the normal reassessment period. The 2006 reassessment was therefore
issued pursuant to section 152(4) on the basis of misrepresentation
attributable to neglect, carelessness or wilful default.
[4]
A separate issue is before the Court with
respect to the 2007 taxation year. The last possible normal reassessment date
for a notice of reassessment to have been sent was the very date of the Notice
of Assessment: June 8, 2011. Mr. Robertson asserts that the Notice of
Assessment was not sent on that date. While the Respondent led evidence at
trial to prove service within the normal reassessment period, the Respondent alternatively
asserts, that should the reassessment not be within the normal reassessment
period, then the 2007 tax return also contained a misrepresentation, like that
of 2006, attributable to neglect, carelessness or wilful default. Therefore,
the Minister could reassess beyond the normal reassessment period.
III. Issues
[5]
After the first day of hearing of the four
scheduled, counsel for both parties made admissions and concessions affording
simplification and mandating a specific sequencing of the needed analysis by
the Court. As well, counsel requested that argument be made by written submissions
during July and August 2015.
[6]
Accordingly, the two issues and their sequence before
the Court are:
1. was the misrepresentation which occurred in the relevant
tax returns, attributable to neglect or carelessness (wilful default having
been removed as a ground) (the “Misrepresentation Issue”); and,
2. was the 2007 Notice of Reassessment sent within
the normal reassessment period? (the “Timely Assessment Issue”)
[7]
Both counsel agreed that the facts and
submissions relating to the 2006 and 2007 Misrepresentation Issue were
identical. Therefore, if the Court finds that misrepresentation was attributable
to neglect or carelessness, then the Timely Assessment Issue is moot.
A. Misrepresentation on Account of Neglect or Carelessness
(1) Some additional facts
[8]
In respect of the Misrepresentation Issue, the
Respondent called Mr. Robertson as an adverse witness.
Mr. Robertson’s testimony was forthright, but interspersed with occasional
failures to recollect specific conversations related to any review with his
accountant of the Options and related information.
[9]
Mr. Robertson acknowledged that he did file
the appropriate insider trading notifications and disclosures and that he drew
or caused to have drawn, cheques in relation to the issuance and filings of the
Options. On the other hand, Mr. Robertson could not recall raising the
Options with the accountant who prepared his 2006 and 2007 Canadian income tax
returns.
[10]
Mr. Robertson’s tax returns were filed
electronically for both taxation years. He reviewed the draft hard copies of
those returns page-by-page with his accountant. He did not notice that the Options
were not included. He noted nothing unusual within the returns. He signed the
file copies of the returns. At that time, his certain view was that United
States law applied to the Options because of their country of origin and
therefore, legally, he needed to report the Options in the US when the Options
were sold, but he need not include the benefits from the exercised US Options
in Canada. Evidence of Mr. Robertson having included the Option benefits
in US tax returns was not before the Court. Further, had he known these Option benefits
should be included in his Canadian tax returns, Mr. Robertson would have
delayed exercising the Options (through extensions) until immediately prior to
their sale; such an extension would allow him to report the exercised Option,
record the benefit, and have the money to pay the exigible tax all in one taxation
year.
[11]
Mr. Robertson could neither recall asking
his accountant about the correctness of his understanding of the taxation of the
US-based Options nor his “knowledge” of the treatment under Canadian law of the
Options. For stock options issued to Mr. Robertson in respect of Canadian
companies, he had executed and filed Form T1212 (Statement of Deferred Security
Option Benefits) in respect of stock options for other tax years, including the
preceding year, 2005.
[12]
With respect to his general business knowledge, Mr. Robertson
was an attentive, knowledgeable, and organized president and/or director of
many different Canadian, US, and offshore companies. Stock options in his name
were commonplace. He directed various securities and other regulatory forms be
filed with respect to such stock options.
[13]
Mr. Robertson was involved in and acutely
aware of the relevant audit by the CRA. He was focused upon and adeptly made
direct representations to the CRA relating to the issue of whether certain
share sales should be treated as a capital gain or income. Ultimately, the Notices
of Reassessment in 2006 and 2007 addressed only the benefits for the Options
and not the income versus capital issue.
[14]
Mr. Robertson oversaw a reliable filing,
recording and compliance system within his offices. Half-a-dozen staff assisted
his direction for securities, corporate, and reporting compliance.
[15]
The accountant, who prepared the tax returns for
his review and signature, was otherwise a very knowledgeable person and had
worked for Mr. Robertson for some 15 years. There was no evidence adduced
of accountant negligence aside from Mr. Robertson’s testimony that she,
like him, did not raise the inclusion of the benefits from the Options in the
2006 and 2007 taxation years.
IV. The Law Generally and the Appellant’s
Submissions
A. The
Law Generally on the Misrepresentation Issue
[16]
Subparagraph 152(4)(a)(i) of the Act
provides an exception to the normal reassessment period. For the Minister to
raise an assessment after the normal reassessment period, the taxpayer or
person filing the return must have committed: (i) a misrepresentation; and (ii)
that it is attributable to neglect, carelessness or wilful default.
[17]
The Minister has the onus to prove that both
elements more likely than not occurred: Vine Estate v. Canada, 2015 FCA
125 (“Vine”) at paragraph 24. In the present case, the Appellant conceded
existence of the first element: misrepresentation.
[18]
Therefore, with the Misrepresentation Issue, the
evidentiary hurdle is whether sufficient evidence has been adduced by the
Respondent to show, on balance, that misrepresentation occurred through the
lack of reasonable care: Venne v. Canada (Minister of National Revenue),
[1984] FCJ No. 314 (QL), 84 DTC 6247 (“Venne”). In turn, reasonable
care requires objective conduct expected of a “wise and prudent person” in
analogous circumstances: Angus v. R, [1996] TCJ No. 883, 96 DTC 1823 (“Angus”)
at paragraph 29. This objective standard filters this Court’s analysis of
Mr. Robertson’s conduct, omissions, and/or assumptions at the relevant
time, namely, the time of the misrepresentation: Vachon v. Canada, 2014
FCA 224 (“Vachon”) at paragraph 4.
B. Appellant’s
Submissions on Misrepresentation Issue
[19]
In written submissions the Appellant submitted
three broad bases for the appeal.
(1) No Neglect or Carelessness on the Part of the
Appellant
[20]
Mr. Robertson’s erroneous understanding of
the treatment under US/Canadian tax law of stock options was a reasonably held
belief not borne of neglect or carelessness. The belief was held as a result of
a commingling of the Appellant’s compliant past practices, legal assumptions
based upon the foreign origin of the Options and lack of advice to the contrary
from the accountant upon whom he relied.
[21]
With respect to the reliance upon the
accountant, this longstanding relationship encompassed all of
Mr. Robertson’s corporate and personal tax returns and filings. He and his
advisors employed efficient and effective filing and reporting systems, all of
which left the Appellant with a sense of certainty and assurance.
[22]
Given his sophisticated systems, compliant past
practices and reliance upon his professional advisors, why would Mr. Robertson
ask a question about the Canadian tax treatment of US-based Options?
(2) Respondent’s Evidentiary Burden Not Met
[23]
No evidence led by the Respondent, either
through CRA witnesses or Mr. Robertson himself, shows that
Mr. Robertson failed to exercise reasonable care in filing his returns;
the honestly held, but incorrect view, explains why a careful review would not have
revealed the misrepresentation.
(3) Previous Section 7 Remission Orders
[24]
As an alternative ground, certain previously
granted remission orders illustrate that section 7 reporting omissions, which
have occurred with others before, have not necessarily arisen from carelessness
or neglect. Further, executive orders have granted tax remissions for principal
and interest under section 7. While not relying upon the previous
remission orders, Mr. Robertson asserts these illustrate and recognize a
systemic problem with the inclusion of stock option benefits under
section 7 and demonstrate that Mr. Robertson’s misunderstanding was
not unique.
V. Analysis on the Misrepresentation Issue
[25]
For the reasons which follow, the appeal is
dismissed.
A. Neglect
or Carelessness
[26]
Mr. Robertson was knowledgeably sophisticated
on certain matters, but consistently certain in ignorance on the root issue. With
respect to filings, compliance in the context of securities, corporate
existence, and likely in terms of US tax law, Mr. Robertson’s knowledge may
have exceeded that of his Canadian accountant. By contrast, his unwavering assumptions
regarding the applicability of US tax law were simply an error of law within
the context of the Canadian tax system.
[27]
The legal principle of ignorantia non excusat
lex is longstanding and is a principal cornerstone of the rule of law and
utilized also within the context of tax legislation: Trsic v. R, [1998]
3 CTC 2852, 1997 CarswellNat 2779 (TCC) at paragraph 11. It is fundamental
that at law a reasonably informed person exercises reasonable care in the
circumstances that would be expected of a wise and prudent person to recognize
and know the law or retain someone who does. This is also consistent with the
relevant and topical taxation case law: Venne at page 6251, Angus
at paragraph 29, Vine at paragraphs 47 and 48, supra, and
Aridi v. The Queen, 2013 TCC 74 (“Aridi”) at
paragraph 32. A wise and prudent person, as Mr. Robertson was in
other related corporate, securities, and business matters, from time-to-time
ought to solicit confirmation of, or at least question, such an assumption which
is patently an error of law.
[28]
In Corporation de l'École Polytechnique v.
Canada, 2004 FCA 127, the Federal Court of Appeal considered whether the
defence of error of law could be relied upon to avoid the imposition of a penalty
under the Excise Tax Act. At paragraph 32 of its decision, the Court
stated the following:
There is no
distinction between mistake of law and ignorance of the law as such: Molis
v. The Queen, [1980] 2 S.C.R. 356. Both in criminal law and in statutory and
regulatory law, its justification can be found in the following factors set out
by Prof. Don Stuart, Canadian Criminal Law, A Treatise, 3d ed., 1995, at
pp. 295 to 298:
1. Allowing a defence of ignorance of the law would
involve the courts in insuperable evidential problems.
2. It would encourage ignorance where knowledge is
socially desirable.
3. Otherwise every person would be a law unto
himself, infringing the principle of legality and contradicting the moral
principles underlying the law.
4. Ignorance of the law is blameworthy in itself.
[Emphasis added]
[29]
In considering the application of subsection
163(2) of the Act, Justice Strayer in Venne stated the following
at page 6258:
The section has
in the past been applied subjectively to taxpayers, taking into account their
intelligence, education, experience, etc., and I believe this implies that an
ignorance of the law which is not unreasonable for the particular taxpayer
in question and the particular circumstances may be acceptable as a defence to
the application of penalties. [Emphasis added]
[30]
Regarding mistaken interpretation of the law, in
Seni v. R, [2005] GSTC 15, [2005] GTC 756 (“Seni”), Justice
McArthur found that the taxpayer had made a mistake of law while acting in good
faith. This characterization is somewhat similar to Mr. Robertson’s
alleged “honest mistake of law”. Despite such a reasonable mistake Justice
McArthur further found that the taxpayer had made a misrepresentation due to
carelessness because consequently the taxpayer had not filed a return with
respect to the sale of certain real estate. While the taxpayer in Seni
may have made a mistake of mixed law and fact, nonetheless, contrary to
Mr. Robertson’s argument, an honest mistake of law has led to a finding of
neglect or carelessness before this Court.
[31]
Mr. Robertson was not mistaken as to the
existence of legislation concerning the taxation of stock option benefits, nor
was he mistaken as to the interpretation of section 7 of the Act.
Furthermore, Mr. Robertson was not mistaken as to the interpretation that
should be given to section 7 because he never genuinely interpreted it.
Rather, he incorrectly assumed the law and ignored the provision.
[32]
As stated, the application of subparagraph 152(4)(a)(i)
utilizes an objective test: the conduct expected of a wise and prudent person
in analogous circumstances. This implies that a taxpayer’s ignorance of the law
is not a defence to the application of subparagraph 152(4)(a)(i). A wise
and prudent person is, generally by definition, not unknowledgeable of the law.
However, a wise and prudent person is also not all-knowing. He or she may be
ignorant of specific legislative provisions – section 7 of the Act,
for example. The question to be asked is this: was it reasonable for a wise and
prudent person to remain ignorant, in the circumstances, at the time the
misrepresentation was made? In the present case, the answer to this question is
no. A wise and prudent person in Mr. Robertson’s situation should have at
least raised the issue of the taxation of the Options in his own mind or with
his accountant or another professional advisor.
[33]
Mr. Robertson’s testimony surrounding his
own knowledge of the law at the time of the tax filing was unequivocal as
stated. The time of filing is relevant: Vine at paragraph 33
describing paragraph 8 of Nesbitt v. Canada, [1996] FCJ
No. 1470. He firmly held a view that Canadian law did not require him to
report the stock options in 2006 and 2007: the years of exercise. On
questioning from both counsel, he remained forceful, unequivocal, and assured
of his view at the time of filing.
[34]
By contrast, Mr. Robertson’s testimony
surrounding his discussions with his accountant regarding the Options was
ambivalent and uncertain. He stated he could not recall specifically raising
the issue of the inclusion of the Options in his tax returns. He also indicated
that he would not have raised the issue because of his pre-existing view that
the US origin of the Options precluded the necessity of including the benefits
in his Canadian tax returns. Given his strongly held belief, even if raised by
his accountant, the correct inclusion of the Options in the tax returns may not
have occurred. The failure of Mr. Robertson to raise the issue at all is
inconsistent with conduct expected of a wise and prudent taxpayer in the
circumstances.
[35]
Importantly, subsection 152(4)(a)(i)
is not punitive in its purpose, but rather remedial: College Park Motors v.
The Queen, 2009 TCC 409 at paragraph 13. Since it is not concerned
with establishing culpability on the taxpayer’s part, even innocent and honest
mistakes can lead to a finding of neglect, carelessness, or wilful default
under subsection 152(4)(a)(i). Its purpose is to ensure that, in a
self-reporting tax system, misrepresentations that occur as a result of honest
mistakes do not go unassessed through taxpayer inadvertence. This is such a
case. The Minister should not be robbed of her reassessment rights by virtue of
an honestly held mistake of law and consequent undisclosed benefits where such
a mistake and misrepresentation arise from a lack of reasonable care.
B. Evidentiary
Burden of Respondent
[36]
The Respondent, through Mr. Robertson’s
testimony as an adverse witness, established Mr. Robertson’s neglect, per
se, at the time of the misrepresentations. On the evidence, this is his
error or mistake of law more than his accountant’s. Mr. Robertson never
was of the view that the benefits from the Options need be included in his
Canadian tax returns. There was evidence the accountant never offered a
contrary, or indeed any opinion to that effect. As well, there was testimony by
Mr. Robertson that there was never a query, explanation or discussion
regarding the mistake of law that led to the misrepresentation. Lastly, there
was evidence Mr. Robertson never directly or indirectly relied upon advice
from his professional advisor regarding the specific misrepresentation which
may have dissuaded Mr. Robertson from an otherwise compliant filing
position. Quite the opposite occurred. The conduct, omissions, and assumptions
at the time of filing are at least as much, if not more, Mr. Robertson’s,
the taxpayer, than his accountant’s. Simply put, based upon his testimony as a
witness called by the Respondent, the Court finds that Mr. Robertson contributed
conjunctively, if not primarily, to the misrepresentation because of this
mistake of law attributable to and occasioned by an unequivocally held opinion
inconsistent with his other legal knowledge, business experience and compliance
systems.
[37]
In rebutting the Respondent’s evidence, counsel
for the Appellant has raised the case of Aridi, a decision of
Justice Hogan of this court. In that particular case, Justice Hogan
indicated that it is not the accountant’s neglect that makes it possible to
disregard the limitation under subparagraph 152(4)(a)(i). Instead,
the taxpayer’s neglect at the time of the misrepresentation must be analyzed.
Justice Hogan further states at paragraph 34 that even where neglect
or carelessness of the accountant is established, a necessary countervailing factual
issue remains: “can the taxpayer establish his own prudence and diligence and
state that the misrepresentation is attributable to his accountant’s neglect?”
[38]
In his analysis of the facts in Aridi,
Justice Hogan identified that there were generally four different factual
elements that reveal conduct of a wise and prudent person where reliance upon
an accountant is asserted. They occur where: (1) the taxpayer submits all
materials to the professional advisor; (2) a discussion is had between the
advisor and the taxpayer touching upon the inclusion or exclusion from income
of the item; (3) that discussion gives rise to a review of the facts
related to the inclusion or exclusion; and (4) a clear, factual
confirmation made by the professional advisor leads to the misrepresentation.
[39]
The evidence of Mr. Robertson in response
to the Respondent’s questions before this Court simply does not support the
required factual elements of Aridi. This is quite apart from the still
live issue in Aridi and discussed in Vine as to whether
subsection 152(4) affords the taxpayer the opportunity to assert the
foregoing elements where the accountant provides such advice. As detailed
factually in paragraph 36 above, none of the four constituent factual elements
found in Aridi exists in this appeal.
C. Section 7
Remission Orders
[40]
If Appellant’s counsel is correct regarding the then
looming confusion in the law concerning section 7 and the reporting of
stock option benefits, such confusion does not justify Mr. Robertson’s
certaintude of his legal filing position. Certain remission orders regarding
section 7 in respect of unrelated taxpayers were issued by the
Governor-in-Council before Mr. Robertson’s 2007 tax return was filed. The asserted
confusion around section 7 ought to have triggered reasonable care to cause
a wise and prudent person to seek and obtain an opinion or undertake conversation
with his professional advisors regarding the inclusion of stock option benefits
in his Canadian tax returns. Factually, the Respondent has proven that it was
Mr. Robertson’s neglect which primarily led Mr. Robertson not to solicit
such an opinion or question his own. The existence of the remission orders
should have heightened, not have lessened, a wise and prudent person’s attentiveness
to the issue. As such, there is no opportunity for Mr. Robertson to argue that
a wise and prudent taxpayer would not have questions or sought advice in such a
purportedly vague and confused area of the law where such remission orders were
issuing with regard to section 7 during Mr. Robertson’s relevant
filing period.
[41]
This lack of query or equivocation, while
perhaps not tantamount to indifference as to compliance with the law (the test
for subsection 163(2) penalties), at least constituted ignorance borne of
misplaced confidence on Mr. Robertson’s part. Based upon his answers,
Mr. Robertson neglected to further query and explore his own unsubstantiated
certainty regarding the Canadian tax treatment of stock option benefits.
Factually, the Court finds that the decision to not include these amounts in
the 2006 and 2007 tax returns arose firstly, foremostly, and determinatively in
the mind of Mr. Robertson. Based on his own evidence, he asked no
questions because of his certainty. The fact that such a question was not
raised is evidence of neglect inconsistent with the requirement at law of a
wise and prudent person in the circumstances at the time the return was filed: Vine
at paragraphs 50 and 51.
VI. Summary and Costs
[42]
As stated, for these reasons the Minister has
met her onus, has established misrepresentation attributable to neglect, and
has not otherwise acknowledged that an uninformed mistake of law related to
section 7 stock option benefits warrants cancellation or remission of the
reassessments in this appeal.
[43]
Since misrepresentation on account of neglect
has been determined to have occurred in respect of both the 2006 and 2007 tax
returns, the Timely Assessment Issue is moot and shall not be considered.
[44]
The Respondent is awarded costs on a
party-and-party basis in accordance with the Tariff, subject to the right of
either party to make written submissions before this Court on that matter
within 30 days of the date of this Judgment.
Signed at Ottawa, Canada, this 21st
day of October 2015.
“R.S. Bocock”
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