Date: 20070912
Docket: A-218-06
Citation: 2007 FCA 281
CORAM: LINDEN J.A.
LÉTOURNEAU J.A.
TRUDEL
J.A.
BETWEEN:
EDWARD PALONEK
Appellant
and
THE MINISTER OF NATIONAL
REVENUE
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
[1]
This is an
appeal from a decision of Mactavish J. of the Federal Court of Canada (judge)
rendered on April 18, 2006. She dismissed Mr. Palonek’s (the appellant’s)
application for judicial review of the decision made by the Minister of
National Revenue’s delegate to deny the appellant access to the Voluntary
Disclosures Program (VDP). The VDP finds its source in subsection 220(3.1) of
the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) and section
281.1 of the Excise Tax Act, R.S.C. 1985, c. E-15.
[2]
This
appeal cannot succeed. There is no need to relate all the facts in details. The
following summary will be sufficient to understand the issues at play before
this Court and this Court’s brief reasons for dismissing the appellant’s
allegations. I hasten to add that counsel on appeal had to struggle gallantly
with a record created by the appellant in the Federal Court where he elected to
be self-represented.
FACTS
[3]
The
appellant, who lives in the Republic of Panama, did not file Canadian income tax and Goods and Services
tax returns for the 1993-2001 taxation years. In June 2002, his counsel
contacted Canada Revenue Agency (CRA), which at the time was the Canadian
Customs and Revenue Agency, in order to make a voluntary disclosure under the
VDP. The VDP is a program which allows the CRA to provide relief from
penalties, interests and possible prosecution to individuals who make a disclosure
to correct inaccurate or incomplete information or to disclose information not
previously reported. Neither the appellant nor his counsel were presented with
or asked to sign a “Client Agreement Form” before disclosing any relevant information.
[4]
At the request of the appellant’s counsel, a
CRA’s agent asserted a few days later that the appellant was not under CRA’s
investigation by saying that “everything was fine” and asked the appellant to
prepare documentation for submission. The appellant then produced his T-1
income tax and GST returns for the years in question.
[5]
During the process, CRA’s audit department
advised the CRA’s agent in charge of the appellant’s file that the appellant
was potentially involved with two or three companies, as well as with a “T3
Trust”. CRA’s audit department had located a website which indicated that the
appellant had been very successful in a business venture known as “Found
Money”. Found Money Inc. and Found Money International were noted as associated
companies.
[6]
After being advised and asked to provide
additional information concerning these entities and his source of income, the
appellant asked for extensions of time due to his responsibilities outside Canada. He later declined to present
further submissions other than the fact that he had disposed of his Found Money
Inc. shares five or six years ago. According to the respondent, no capital gain
or loss had been declared on any of the appellant’s tax returns filed under the
VDP.
[7]
CRA’s agents conducted three level of administrative
review regarding the appellant’s admissibility to the VDP. The last review
confirmed the two earlier decisions which denied the appellant access to the
VDP because of an incomplete disclosure by him. The third-level decision was
rendered on November 15, 2004. This is the decision that was challenged by way
of judicial review before the Federal Court.
THE ISSUES ON APPEAL
The
respondent’s failure to warn the appellant of the consequences of an incomplete
disclosure
[8]
First, the
appellant complains that the Minister of National Revenue (Minister) failed to
inform him of the possible consequences of making a disclosure under the VDP.
That failure also consisted in not requesting the appellant to sign a “client
agreement form”. These failures, according to the appellant, constituted a
violation of administrative law obligations of fairness as well as an
infringement of his rights under sections 7 and 8 of the Charter of Rights
and Freedoms.
[9]
The short
answer to this contention is, as the judge found, that the appellant was
represented by knowledgeable counsel in the field of taxation, who, on behalf
of his client, initiated the process of voluntary disclosure. In his initial
contact with CRA, counsel for the appellant made a specific reference to the
Information Circular describing the VDP in a way, as the judge found, that
indicated “a familiarity with the VDP process”: see reasons for judgment, at
paragraphs 101 and 102 and counsel’s letter at pages 312 and 313 of Appeal
Book, volume 2.
[10]
I agree
with the learned judge that “in these circumstances, it was entirely reasonable
for the Agency to presume that the appellant would have had the benefit of
legal advice regarding the parameters of the program”: see reasons for judgment
at paragraph 101. There is no evidence at all on the record that appellant’s
counsel was incompetent.
[11]
The
appellant contends that the respondent had a specific duty to inform him
individually of the consequences of an incomplete disclosure. This duty, he
submitted, exists despite the fact that he was represented by counsel. Apart
from the fact that it would have been unethical for the respondent or
respondent’s counsel to contact the appellant directly, the duty that the
appellant faced here is not different from the duty that any taxpayer has with
respect to income tax returns, i.e. full disclosure of all income from all
sources.
[12]
Nor are
the consequences of a failure to disclose different for the appellant, as he
contends, from those that a taxpayer would suffer if he failed to disclose
income. Both would be subject to interests, penalties and a possible
prosecution.
[13]
The
appellant submits that his situation is different because he is making
voluntary disclosure. I do not agree. A taxpayer is in the same situation as
the appellant when, at the end of the fiscal year, he files an income tax
return: he voluntarily discloses his income. The only difference here is that
the appellant has hidden his income for nine years when he should have declared
it annually. Surely, he cannot be put in a better position than another
taxpayer would be if he fails to make a complete and truthful disclosure.
The alleged unfair treatment by the judge
in the judicial review proceedings
[14]
As
previously mentioned, the appellant elected to represent himself in the
judicial review proceedings. On appeal, he was represented by two experienced
counsel. He now complains that the judge should have counselled and helped him
throughout the process. The fact is that she did to the extent permissible. The
appellant’s complaint is not supported by the record as a whole.
[15]
The
appellant is a sophisticated businessman. He sought to obtain in his favour a
summary judgment on his application for judicial review which certainly showed
some knowledge of the procedure.
[16]
Counsel
for the appellant drew our attention to selected excerpts of this Court’s
decision in Wagg v. Canada, 2003 FCA 303, page 206 where Pelletier J.A.,
properly so, reasserted the need to maintain fairness in the proceedings when a
person is self-represented. However, he also sounded the following warning at
paragraphs 23, 24 and 25 of his reasons for judgment:
[23] Litigants
represent themselves for a variety of reasons. If they come to realize before
the commencement of trial that they have underestimated the complexity of the
task before them, it is in their interest and the Court's to allow them to
obtain representation. But once a trial is underway, I do not think it
unfair to hold appellants to their choice to represent themselves, and to be guided
by their own judgment.
[24] The decision
to represent oneself is not irrevocable, nor is it trivial. Persons who
undertake to represent themselves in matters of the complexity of the Income
Tax Act [R.S.C., 1985 (5th Supp.), c. 1] or the Excise Tax
Act must assume the responsibility of being ready to proceed when their
appeal is called. If they embark upon the hearing of their appeal, they are
representing to the Court that they understand the subject matter sufficiently
to be able to proceed. …
[25] Putting the
matter another way, litigants who choose to represent themselves must accept
the consequences of their choice (Lieb v. Smith et al. (1994), 120
Nfld. & P.E.I.R. 201 (S.C.T.D.), at paragraph 16):
Thus, while the court
will take into account the lack of experience and training of the litigant, that
litigant must also realize that, implicit in the decision to act as his or her
own counsel is the willingness to accept the consequences that may flow from
such lack of experience or training.
[Emphasis added]
This is also true in judicial review proceedings challenging
decisions made under or in relation to the Income Tax Act or the Excise Tax
Act. The rationale in paragraphs 23 to 25 of the Wagg decision has
also been applied in a number of decisions of this Court: see Canada
(Minister of Human Resources Development) v. Hogervorst, 2007 FCA 41; Bérubé
v. Canada, 2006 FCA 166; and Dionne
v. Canada, 2003 FCA 451.
Whether the decision made by the third
level of review was fatally flawed
[17]
The
appellant argues that the decision made by the third level of review was
fatally flawed because the person who undertook the review did not have before
her the tax returns filed by the appellant on August 12, 2002 for the taxation
years 1993 to 2001.
[18]
It should
be recalled that this third review was a review of the appellant’s file
pursuant to the first and second level decisions made respectively on October
21, 2003 and August 19, 2004 which concluded that the appellant had not fully
disclosed his income in his August 12, 2002 disclosure made in his tax returns.
The date at which completeness of disclosure is to be assessed is August 12,
2002.
[19]
The
evidence on the record shows that, after August 12, 2002 the appellant was
informed by CRA agents that they had discovered new sources of income and
additional income. He was given ample opportunity to explain his position in
this respect. He sought, and was granted over a 7-month period, numerous
extensions of time to make submissions or provide explanations. He acknowledged
that he had sold his shares in Found Money Inc., but he never provided
additional information nor did he make further representations: see Appeal
Book, volume 2, pages 337-338.
[20]
The
appellant also admitted, after having filed his tax returns, that he received
income from Found Money International Ltd. as far back at least as year 2000
and possibly before.
[21]
The
decision makers at the first and second level of review examined the 2002 tax
returns filed by the appellant. They found that no capital disposition of the
shares were reported in these tax returns. Nor was the income from Found Money
International Inc. declared.
[22]
I should
add that they found that the accuracy of some of the information disclosed by
the appellant in his tax returns was dubious. According to the separation
agreement signed with his wife, the maximum annual amount that he had to pay
was $30,000. Yet he claimed payments of $70,769, $126,053, $116,810, $85,454,
$100,536 and $88,484 for the years 1996 to 2001: see Appeal Book, volume 2,
page 342.
[23]
This now
brings me to a consideration of the material upon which the third review
decision was made.
[24]
Mrs.
Charlton was the Director of the Hamilton Tax Services Office. She is the
person who made the decision at the third review level.
[25]
In his
argument, counsel for the respondent conceded that the appellant’s 2002 tax
returns were not before Mrs. Charlton when she conducted the review: see Appeal
Book, volume 3, at page 618. However, she consulted the record of events and
information prepared by CRA agents with respect to the appellant’s voluntary
disclosure, especially a substantial and detailed Voluntary Disclosure Report,
dated July 28, 2004 prepared for the second level review: see Appeal Book,
volume 2, pages 336 to 344. The Report is signed by three experienced
officials: an Appeals Officer, the Team Leader, Appeals Division and the Chief
of Appeals. No evidence was adduced by the appellant that the information
regarding the appellant’s 2002 tax returns was not properly summarized in that
report considered by Mrs. Charlton. Nor is there any evidence filed with the
CRA or the Federal Court on the judicial review proceedings which casts doubts
on the accuracy of the information and on the facts set out in the report regarding
these tax returns.
[26]
In her
decision, Mrs. Charlton informed the appellant that she based her decision on
the “evaluation of the information provided by you during the Voluntary
Disclosure review”. At page 178 of the Appeal Book, volume 2, she provided the
following as an example of incomplete disclosure:
However, no
evidence has been provided by you to establish the type of income i.e.
management fees or capital dispositions arising from your involvement to be
reported for tax purposes. Nor has any detailed breakdown been provided to
confirm that the total of all source(s) of income have been included in your
disclosure.
[27]
Furthermore,
in her decision and her affidavit, she referred to the appellant’s omission to
disclose his ownership of 30,000 shares in Rothwell Corporation and to provide
appropriate information regarding child support and alimony payments. At pages
179 and 303 of the Appeal Book, volume 2, she wrote:
I would also
like to address the concern in your September 14, 2004 letter regarding
documentation related to your child support and alimony payments having been
either lost or misplaced by the Agency. Our records indicate that at no time
were the requested receipts, cancelled cheques, bank transfers or other
documentation provided by you to substantiate the deductions claimed. Your
lawyer (Mr. Pister) indicated in December 2002 that he never received
instructions from you in the making of further representations concerning this
issue. Furthermore, the September 1993 separation agreement makes reference
to ownership of 30,000 shares in Rothwell Corporation. Our records indicate
that during the course of the voluntary disclosure process neither ownership
nor involvement in this corporation by you was communicated. This omission
confirms the incompleteness of the information provided by you.
27.
In the Third-Level Decision, I noted that a September 1993 separation agreement
between the Applicant and his former spouse makes reference to his owning
30,000 shares in Rothwell Corporation and that CRA records indicated
that during the course of the VDP process neither ownership nor involvement in
this corporation was communicated by the Applicant. Attached hereto as
Exhibit “Q” is a copy of the separation agreement.
[Emphasis added]
[28]
Finally,
the record in the proceedings before the Federal Court and this Court indicates
that the appellant made substantial amendments to his 2002 income tax and GST
returns, some in relation to sources of income that he had not originally declared
in 2002, but that he acknowledged after being confronted with the fact.
[29]
The
following is a summary of the amendments brought on February 7, 2005:
|
DATE
|
DOCUMENT
|
AMENDMENT
|
|
February 7, 2005
|
Exhibit 35 – Appeal Book (Volume 2) p.225
|
·
1994 Income Tax Return :
-
Sale of 12,125 Rothwell
Corporation Class A Common Shares for 30 cents a share or $3,628.00, with an
adjusted cost base of 60 cents a share or $7,275.00, resulting in a – Capital
loss totaling $3,637.00
-
Reduction of professional income
from $133,103.00 to $126,253.00
-
Increase employment income from
Found Money Inc. to $6,850.00
·
1995 Income Tax Return:
-
Sale of beneficial interest
in the trust that owns Found Money Inc. – Capital gain of $449,700.00
-
Reduce professional income from
$147,106.00 to $125,454.00
-
Increase employment income from
Found Money Inc. to $21,652.00
·
1996 to 2001 Income Tax Returns:
-
Reduce professional income from
$144,991.00 to $48,030.00
-
Increase employment income from
Found Money Inc
·
1994 to 2001GST Returns:
-
Reduce previously filed taxable
revenue
-
Reduce GST payable
·
2002 Income Tax Return:
-
Reduce employment income from
$641,009.17 to $Nil
-
Reduce legal fees from
$451,334.58 to $Nil
|
|
February 7, 2005
|
Exhibit 36 – Appeal Book (Volume 2) p.243
|
·
1994 to 2001
GST Returns:
-
Reduce previously filed taxable
revenue
-
Reduce GST payable
|
|
February
7, 2005
|
Exhibit 39 – Appeal Book (Volume 2) p.256
|
·
1993 Income Tax
Return:
-
Sale of 1,000 Rothwell
Corporation Class A Common Shares for 55 cents a share or $550.00, with an
adjusted cost base of 60 cents or $600.00, resulting in a capital loss
totaling $50.00.
|
[30]
At
paragraphs 29 and 30 of her affidavit, Appeal Book, volume 2, pages 304 and
305, Mrs. Charlton stated the following with respect to some of these
amendments:
29. I have
reviewed the affidavit sworn by the Applicant on March 14, 2005 and filed in
the within proceeding (the “Affidavit”). I note that Exhibit “35” to the
Affidavit consists of “Notices of Amendment” dated February 7, 2005 sent by the
Applicant to the Chief of Appeals of the CRA’s International TSO in Ottawa in respect
of his 1994 through 2001 taxation years. In each Notice of Amendment, the
Applicant requests that the CRA reduce his previously filed gross professional
income and increase employment income received from Found Money Inc. By my
calculation, the Applicant now claims he received a total of $866,415 in
employment income from Found Money Inc. In the T1 returns filed on August 12,
2002, as described in paragraph 5 above, the Applicant claimed no employment
income from Found Money Inc. or from any other source.
30. In the Notice
of Amendment dated February 7, 2005 for the 1994 taxation year found at Exhibit
“35” to the Affidavit, the Applicant acknowledges the sale of 12,125 shares of
Rothwell Corporation Class A common stock, where no such sale had been
acknowledged in his T1 return filed for 1994 on August 12, 2002. In the
Notice of Amendment dated February 7, 2005 for the 1995 taxation year found at
Exhibit “35” to the Affidavit, the Applicant acknowledges the sale of his beneficial
interest in the Trust that owns Found Money Inc. resulting in a capital gain of
$449,700 for that year, where no such sale or gain had been acknowledged in his
T1 return filed for 1995 on August 12, 2002.
[Emphasis
added]
[31]
In
assessing the reasonableness of the third level decision, the judge did not
consider the amendments brought by the appellant because they occurred after
the third level decision and, therefore, were not part of the CRA’s record at
that time. I think she made the right decision in this respect.
[32]
However, I
am now referring to them for two reasons. First, to show the amount of
undeclared income received by the appellant from Found Money Inc. and the Trust
that owned Found Money Inc. and to show how material these omissions to declare
were. Second, to point out that, even if we were to accept the appellant’s
argument that the third level decision is flawed and order a new revision on
the completeness of the appellant’s disclosure in his 2002 income tax and GST
returns, this new decision would be the same as those rendered by the three
levels of review. To use professor Wade’s words in Administrative Law (6th
ed. 1988) at page 535, “the demerits of the claim are such that it would in any
case be hopeless” if the matter were returned for a new review: see for example
Mobil Oil Canada Ltd. v. Newfoundland Offshore Petroleum Board, [1994] 1
S.C.R. 202, at page 228; Vezina v. Attorney General of Canada, 2003 FCA
67, at paragraph 7; Uniboard Surfaces Inc. v. Kronotex Fussboden GmbH,
2006 FCA 398; Canada (Minister of Human Resources Development v. Hogervorst,
supra; Yassine v. Canada (Minister of Employment and Immigration),
[1994] F.C.J. No. 949 (FCA), at paragraph 9; and Cartier v. Procureur
general du Canada (Ministre du Revenu national), 2003 FCA 67, at paragraph
7.
[33]
The issue
of the extent of the appellant’s actual disclosure involved a question of fact.
The judge found that the third level decision was not only reasonable, but was
also correct on the record before the decision maker: see reasons for judgment,
at paragraphs 122 and 130. I see no overriding and palpable error in the
judge’s finding.
[34]
Finally,
on more than one occasion, the judge found the appellant not credible and
inconsistent in his assertions regarding the extent of his disclosure in his
2002 income tax and GST returns: see for example paragraphs 83, 84, 85, 127 and
128. In these last two paragraphs she wrote:
[127]
During the hearing, Mr. Palonek was insistent that all of his sources of income
were fully disclosed to the Agency in the tax returns that he filed in August
of 2002. According to Mr. Palonek, the only debate was as to whether he should
be claiming as an employee or as an independent contractor.
[128] First
of all, the evidence before this Court does not support Mr. Palonek’s
submissions in this regard. In addition, it is difficult to understand how Mr.
Palonek can assert that all income was properly disclosed to the Agency in
August of 2002, given his equally emphatic insistence that he had not prepared
the tax returns in question, never signed them, and had no knowledge as to
their contents.
[Emphasis added]
She had the benefit of seeing and hearing the
appellant. She made a credibility assessment that this Court is not in a
position to second guess.
CONCLUSION
[35]
For these
reasons, I would dismiss the appeal with costs.
“Gilles
Létourneau”
“ I agree
A.M. Linden”
J.A.
“I agree
Johanne Trudel”
J.A.
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