Sheldon Benjamin v. Minister of National Revenue, [1991] 1 CTC 2041, 91 DTC 175

Mogan, T.C.J.:—The only issue in this appeal is whether a penalty assessed by the respondent under subsection 163(1) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") with respect to the appellant's 1982 taxation year can be sustained. At the commencement of the hearing, the respondent accepted "the burden of establishing the facts justifying the assessment of the penalty” within the meaning of subsection 163(3) of the Act.

The respondent called as a witness Patricia Députât, an identification and compliance officer for Revenue Canada, Taxation CRCT") employed in its Edmonton district office. It is her duty to identify and locate taxpayers who have not filed income tax returns and to try to persuade them to file. She has been working in this area since 1983 and she knew of the appellant because he used to come to the RCT counter in Edmonton requesting information concerning his clients. The appellant is a professional accountant.

In December 1983, RCT learned that the appellant had not filed an income tax return since the 1977 taxation year. On December 28, 1983, a letter issued by RCT pursuant to paragraph 231(3)(a) of the Income Tax Act requiring the appellant to file an income tax return for 1982 was served personally on the appellant. On the same date, similar requirements were served for the taxation years 1978, 1979, 1980 and 1981. The letters required filing of the delinquent returns within 30 days but the appellant was granted an extension and he actually filed the returns on February 28, 1984.

Late filing penalties were assessed for all five taxation years but the discretionary penalty under subsection 163(1)—as it then read—was assessed only for the 1982 taxation year. That is the penalty ($1,960.60) under appeal and the legislation at the time provided as follows:

163. (1) Every person who wilfully attempts to evade payment of the tax payable by him under this Part by failing to file a return of income as and when required by subsection 150(1) is liable to a penalty of 50% of the amount by which

(a) the tax sought to be evaded

exceeds

(b) that portion of the amount deemed by subsection 120(2) to have been paid on account of his tax under this Part that is reasonably attributable to the amount referred to in paragraph (a).

The issue is whether the appellant wilfully attempted to evade payment of the tax payable by him for 1982 by failing to file a return of income as and when required.

A photocopy of the appellant's 1982 income tax return was entered as Exhibit R-2. In that return, the appellant described his type of work in 1982 as" accountant" and he named his employer as Reliable Accountant and Tax Services Ltd. Attached to the return was a T4 Supplementary showing the appellant as having total earnings of $25,000 for 1982 from Reliable Accounting and Tax Services Ltd. (the "accounting company”) with no source deductions except $268.20 for the Canada Pension Plan. The respondent produced as Exhibit R-3 the T4 Supplementary Totals for 1982 as filed by the accounting company showing four employees having aggregate earnings of $11,103.80. The appellant's name was not among the four employees and his 1982 earnings of $25,000 were obviously not included in the aggregate earnings of $11,103.80.

After reviewing the appellant's 1982 income tax return, the Edmonton office of RCT sent a letter to the appellant dated March 27, 1984 stating that a penalty under subsection 163(1) of the Income Tax Act was being considered and inviting the appellant to provide any information or explanation which might establish that the penalty was not applicable. The appellant's lawyer called the office of RCT to offer a verbal explanation and state that he would make a written submission but no reply in writing was received to the respondent's letter of March 27, 1984.

Ms. Députât confirmed in cross-examination that the appellant had filed returns for the years up to and including 1977 and that his late returns for 1978-1982 were assessed as filed, subject to the late-filing penalties, although no payment accompanied the returns for 1980, 1981 and 1982 when tax was payable. She was the only witness to testify at the hearing. No witnesses were called and no documents were entered in evidence on behalf of the appellant.

A person is liable to a penalty under subsection 163(1) if he “wilfully attempts to evade payment of the tax payable by him . . by failing to file a return of income as and when required . . .”. There is no doubt that for 1982 the appellant failed to file a return of income as and when required. Indeed, the appellant filed his return for 1982 (and his returns for 1978-1981) only after receiving a demand in writing under paragraph 231(3)(a) of the Act. But the failure to file a return of income as and when required does not, by itself, justify a penalty under subsection 163(1). (See The Queen v. Pongrantz, [1982] C.T.C. 259; 82 D.T.C. 6200 at 263 (D.T.C. 6202).) In order to justify such a penalty, the Court must be able to determine that the taxpayer wilfully attempted to evade the payment of tax by his failure to file. Subsection 163(3) makes it clear that the burden of proving the facts justifying the penalty is on the respondent. It is, however, only a civil burden based on a balance of probabilities. It is not a criminal burden based on proof beyond a reasonable doubt. (See Murray v. M.N.R., [1990] 2 C.T.C. 2103; 90 D.T.C. 1600 at 2106-107 (D.T.C. 1604).)

The Appellant filed income tax returns for all years up to and including 1977; his failure to file for 1982 was not a one-time occurrence but was repeated for the five years from 1978 to 1982; he is a professional accountant; and he came to the Edmonton office of RCT from time to time on behalf of his clients. I therefore conclude that he is knowledgeable on matters of income tax and familiar with the obligation to file returns. I have no hesitation in deciding that the appellant's failure to file his 1982 income tax return was not accidental or the result of an oversight. The question is whether, in the absence of any explanation from the appellant, I can determine that he wilfully attempted to evade payment of his income tax for 1982. In Murray v. M.N.R., supra, Rip, J. stated at page 2108 (D.T.C. 1604):

If the respondent can demonstrate that Murray (1) failed to file his return as and when required by subsection 150(1); (2) knew or ought to have known his obligation to file under subsection 150(1) of the Act; and (3) knew or ought to have known that there was tax payable at the proper filing date, the respondent has made out a strong prima facie case. And if Murray failed to give a reasonable explanation, that is, a good reason, as to why he failed to file his tax return, I may infer on the whole of the evidence that he wilfully attempted to evade taxes within the meaning of subsection 163(1).

The evidence which comes closest to establishing a wilful attempt to evade the payment of tax is found in the T4 Supplementary slip which confirms the appellant's earnings of $25,000 in 1982 from the accounting company. I assume that the appellant, being an accountant and filing his 1982 return almost a year late in response to a demand, was careful to ensure that the 1982 return was accurate. Employment earnings are taxable only on a "received" basis. Therefore, I am satisfied that the appellant did receive in 1982 earnings of $25,000 from the accounting company consistent with the T4 Supplementary slip which was attached to his 1982 return. If that is so, why was the appellant not listed with his 1982 earnings of $25,000 in the T4 Supplementary Totals of the accounting company for 1982 filed with the respondent and entered as Exhibit R-3?

On or before the last day of February in each year, an employer is required to send to each individual who was employed in the rior year two copies of a T4 Supplementary; and the employer is also required to file with the respondent one copy of each T4 Supplementary. (See Income Tax Regulations 205 and 209.) These forms provide an accurate statement of earnings and source deductions for the prior year for income tax purposes. The individual will use his/her T4 slip when completing an income tax return. The respondent may use his T4 slips to trace individuals who have received but not reported employment earnings.

The T4 Supplementaries filed by the accounting company with the respondent for 1982 show only four female employees with respective earnings of $5,511, $2,754, $2,652.05 and $186.75. And yet, when the appellant filed his 1982 income tax return in 1984, he attached a T4 Supplementary issued by the accounting company showing that his 1982 earnings were $25,000—more than double the gross earnings reported by the accounting company to the respondent for its four female employees. It is interesting to note that there were no source deductions on the appellant's T4 for 1982 except a CPP premium of $268.20. This indicates that he and the accounting company were not at arm's length. An arm's length employer would have deducted and remitted the amounts required under the Income Tax Act and the Unemployment Insurance Act, 1971, S.C. 1970-71-72, c. 48.

Counsel for the respondent argued that the appellant's failure to file a return for 1982 and the accounting company's failure to file a T4 Supplementary showing the appellant's earnings of $25,000 in 1982 are overt steps which, taken together, are evidence of a scheme to evade the payment of tax. When the respondent, in December 1983, demanded that the appellant file returns for the years 1978 to 1982 inclusive, the respondent had no way of knowing that the appellant had received earnings of $25,000 in 1982 from the accounting company. Counsel therefore argued that if the respondent had not issued the demand, the appellant would never have filed a return for 1982 and would have evaded tax on the $25,000 which he received from the accounting company in 1982.

The appellant did not, in his notice of objection or his notice of appeal, offer any explanation as to why he failed to file returns for the years 1978-1982 or why the accounting company's failure to file his T4 Supplementary for 1982 showing earnings of $25,000 coincided with his failure to file a return for that year. He simply alleged that the penalty under subsection 163(1) was not justified. The position he has taken in his objection and appeal is sufficient to get his appeal before this Court and to place the burden on the respondent to establish facts which would justify the penalty. But after the respondent has put in his evidence, the burden may shift.

On a balance of probabilities, and in the absence of any explanation from the appellant, I conclude that the respondent's evidence is sufficient to make a prima fade case that the appellant wilfully attempted to evade payment of the tax payable by him for 1982 by failing to file a return of income as and when required by the Act. I reach this conclusion for the following reasons. The appellant is a professional accountant with knowledge of the income tax laws. His 1982 income tax return showed him to be an employee of the accounting company and not self-employed. He therefore knew that he had employment income of $25,000 for 1982 which would not be reduced by any kind of business deduction. In other words, he knew that there was tax payable by him for 1982.

In these circumstances, he failed to file a return of income for 1982 and the accounting company (his employer) omitted copies of the appellant's T4 slip when it filed its T4 Supplementary Totals for 1982 showing four other employees with modest incomes. The information contained in the appellant's T4 slip would have given a clear signal to the respondent that the appellant needed to file a return and pay tax for 1982. I have already inferred from the absence of source deductions in the appellant's T4 slip that he and the accounting company were not at arm's length because an arm's length employer would not pay $25,000 to an employee without source deductions. In my view, it is equally appropriate to infer that there was an agreement between the appellant and the accounting company not to file the appellant's T4 slip for 1982 because the appellant had decided that he would attempt to evade payment of the tax payable by him for 1982 by failing to file a return of income for that year.

If the respondent had not demanded that the appellant file a return for 1982, I think that the appellant would have evaded tax on his employment income of $25,000 in that year. There is no evidence that the appellant at any time would have filed a return for 1982 or the preceding four years. The respondent has established facts justifying the assessment of the penalty. The appeal is dismissed.

Appeal dismissed.