Kenneth Sommers v. Minister of National Revenue, [1991] 1 CTC 2451, 91 DTC 656

Sarchuk, T.C.J.:—The appeal of Kenneth Sommers is from a reassessment of income tax with respect to his 1977 taxation year. The appellant in his pleadings outlined the matters to be determined as follows:

The Appellant's appeal will be confined to the assessment of penalties of $2,075.91 under subsection 163(2) of the Income Tax Act, Canada ("the Act”) and the sum of $913.39 under section 17 of the (Ontario) Provincial Act, together with any interest thereon as set out in the Appellant's Notice of Objection, paragraph 2, sentence 2. Such penalties should not have been added because the appellant did not breach the above sections, and the onus of proving such breach is on the Minister and it has not been discharged.

The position taken by the appellant raises two issues. The first is whether the imposition of a penalty by the respondent pursuant to the provisions of subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the"Act") was correct. The second is whether this Court has jurisdiction to entertain an appeal in regard to penalty levied under section 17 of the Income Tax Act (Ontario).

At the commencement of the appeal counsel for the appellant indicated that no evidence was being adduced. It was admitted as a fact by him that with respect to the 1977 taxation year he had failed to include the sum of $21,446.35 of commission income received from Winpower Corporation of Iowa, U.S.A. in the computation of his income. Furthermore, there was no dispute as to the calculation of the penalty.

Evidence on behalf of the respondent was given by Cheryl Anne Oxley. Oxley is an auditor and has been an employee of Revenue Canada for 14 years. At one stage in her career she was attached to the Special Investigations Section of the London District Office, and during that period was one of the persons involved in the audit which ultimately resulted in the reassessment in issue. Ms. Oxley produced a series of cheques, all drawn by Winpower Corporation in 1977; all payable in United States funds to Sommers (Exhibit R-1). These cheques represented the total amount of income which the appellant had failed to disclose in his 1977 return. The first in the series was negotiated by him at the Royal Bank of Canada at Stratford, the next four at the Canadian Imperial Bank of Commerce in Tavistock, while the last two were negotiated at the Marine Midland Bank in Buffalo, New York on the last day of 1977.

In the course of the audit Oxley met the appellant and determined that he carried on his business at 35 Elizabeth Street, Tavistock, Ontario under the business name of Sommers Motors Generator Sales. She learned that in addition to his business interests he was a commissioner for the Public Utilities Commission, was the president of the Rotary Club and was involved in other community and church activities.

From her testimony it does not appear that in the course of the audit any explanation was offered by Sommers to Oxley regarding the source of these funds nor was any explanation offered as to why they had been excluded from his return of income for 1977. I note that in cross-examination no questions were asked of this witness in this context.

The foregoing is the totality of the evidence adduced.

Counsel for the appellant advanced a number of arguments which, for the sake of convenience, I will deal with in the following order.

A. Canadian Charter of Rights and Freedoms: Sections 7 and 11

Counsel submitted that on February 16, 1987 the appellant was acquitted on five counts of failing to properly declare income and one count of evading the payment of tax, which charges were preferred against him pursuant to the provisions of paragraphs 238(1)(a) and 239(1)(d) of the Act. He argued that proceedings under subsection 163(2) are of a penal nature and that as a result the assessment made by the Minister pursuant to the provisions of that subsection constitutes an infringement of the Canadian Charter of Rights and Freedoms (the "Charter") under both sections 7 and 11. As authority for this conclusion Mr. Giffen cited Wigglesworth v. R., [1987] 2 S.C.R. 541; 45 D.L.R.

(4th) 235; Amway Corporation v. R., [1987] 1 C.T.C. 97; 8 F.C.R. 321; Udell v. M.N.R., [1969] C.T.C. 704; 70 D.T.C. 6019; Ven ne v. The Queen, [1984] C.T.C. 223; 84 D.T.C. 6247 and De Graaf v. The Queen, [1985] 1 C.T.C. 374; 85 D.T.C. 5280.

With respect to the alleged infringement against the protection afforded to the appellant by subsection 11(h) of the Charter counsel relied principally on the comments of Wilson, J. in Wigglesworth at page 554 (D.L.R. 247):

It is my view that the narrower interpretation of s. 11 favoured by the majority of the authorities referred to above is in fact the proper interpretation of the section. The rights guaranteed by s. 11 of the Charter are available to persons prosecuted by the State for public offences involving punitive sanctions, i.e., criminal, quasi-criminal and regulatory offences, either federally or provincially enacted. A number of factors impel me to this conclusion.

Although section 7 of the Charter was also raised, counsel cited no cases in support and advanced no further argument.

The position of the respondent is that no infringement of the Charter provisions occurs where in respect of the same taxation year an administrative penalty is assessed by the Minister of National Revenue pursuant to subsection 163(2) of the Act and criminal proceedings for tax evasion are commenced under paragraphs 239(1)(a) and 239(1)(d) against the taxpayer.

Conclusions

The relevant sections of the Charter read:

7. Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.

11. Any person charged with an offence has the right

(h) if finally acquitted of the offence, not to be tried for it again and, if finally found guilty and punished for the offence, not to be tried or punished for it again,

Counsel for the respondent directed the Court's attention to a number of cases in which the applicability of subsection 11(h) of the Charter was considered. These decisions warrant a quick review.

In R. v. Georges Contracting Ltd. and Cloarec (1987), 15 B.C.L.R. (2d) 240 the respondent was charged with ten counts of making false or deceptive statements in his income tax returns contrary to paragraph 239(1)(a) of the Income Tax Act. The Minister of National Revenue also levied a penalty against the respondent pursuant to subsection 163(2) of the Act. The trial judge stayed the criminal charges on the ground that a trial would constitute a violation of paragraph 11(h) of the Charter. The Crown appealed to the Supreme Court of British Columbia. The headnote to the decision of the Supreme Court succinctly sets out the reasons for judgment:

The 25 per cent penalty, from the perspective of the taxpayer, is a punishment. However, the assessment of that penalty as well as the assessments for unpaid tax and interest under the Income Tax Act are purely administrative acts. There is no hearing, no tribunal—the assessment is a unilateral act which results in the taxpayer being obliged to pay, in effect, a civil judgment. On the other hand, s. 239(1)(a) of the Act is truly an exercise of the power of the federal government to legislate in the field of criminal law. A proceeding against a taxpayer under s. 239 is one which brings the citizen out into a public tribunal to be tried and, if convicted, punished for all society to see. While there are similarities between the proceeding under s. 163(2) and under s. 239, including the fact that the misconduct previously penalized under the former section is substantially the same as that which forms the subject matter of the charges under the latter, since under the former the taxpayer has not been tried nor finally found guilty of any offences, his right not to be tried again as envisaged by s. 11(h) is not violated by the prosecution proceeding.

[Emphasis added.]

This judgment was affirmed on appeal to the British Columbia Court of Appeal ((1988), 24 B.C.L.R. (2d) 175; 41 C.C.C. (3d) 95). In The Queen v. Yogendra Sharma, [1987] 2 C.T.C. 253; 87 D.T.C. 5424 the taxpayer was charged with income tax evasion and the Minister also imposed a penalty pursuant to subsection 163(2) of the Act. A judge of the Ontario Provincial Court stayed the criminal proceedings, utilizing the provisions of paragraph 11(h) of the Charter. The matter was appealed and the Supreme Court of Ontario found that the imposition of civil penalties did not amount to either a trial or to a final finding of guilt as contemplated by paragraph 11(h) of the Charter. Furthermore, the Court held that paragraph 11(h) applied only to criminal proceedings and it could not be said that the subsection 163(2) penalties were imposed in a criminal or penal proceeding.

In Yes Holdings Ltd. and Yesmaniski v. R. (1987), 57 Alta. L.R. (2d) 227; 40 C.C.C. (3d) 30 the Alberta Court of Appeal in similar circumstances rejected an argument that there existed a violation of the paragraph 11(h) Charter right not to be tried again for an offence for which one has previously been acquitted or convicted. That court held that the relevant section of the Charter only provides protection against trial, conviction and punishment in the context of section 11 which requires that the proceedings impugned must be"in respect of an offence". "Offence" means an offence which is prosecuted in a criminal or penal proceeding. Although there are penal elements to penalties imposed under subsection 163(2) of the Income Tax Act, those penalties are not imposed through criminal process. Accordingly the proceedings did not violate the rights of the accused under paragraph 11(h). Stevenson, J.A. further stated:

To accede to the appellants' argument would be to conclude that the state cannot impose a penalty other than through the criminal process. This is an extravagant conversion of s. 11, sweeping into it and criminalizing all state imposed penalties.

The same conclusion was reached in the case of Lester H Lavers v. Minister of Finance (B.C.), [1990] 1 C.T.C. 265; 90 D.T.C. 6017. This is a decision of the British Columbia Court of Appeal in which the provisions of paragraph 11(h) of the Charter were raised in similar circumstances to those before me. In his consideration of the nature of a penalty assessment Wallace, J. reviewed a number of decisions and concluded, at page 285 (D.T.C. 6019-20):

. . . that the assessments by the Minister and the imposition of penalties pursuant to subsections 163(1) and (2) of the Income Tax Act (Canada) and subsections 23(1) and (3) of the Income Tax Act (B.C.) are properly characterized as private matters of a regulatory nature—primarily intended to relate the conduct of taxpayers with reference to their complying with the requirements of the respective Income Tax Acts. The penalties which may be imposed upon such assessment are designed to achieve that objective. (emphasis added)

In contra-distinction prosecutions for a violation of section 239 are properly characterized as criminal and penal matters intended to "promote public order and welfare within a public sphere of activity" by deterring the public from the commission of flagrant breaches of the Income Tax Act.

Accordingly, I find that the assessments by the Minister andthe imposition of penalties for a violation of section 163 of the federal Income Tax Act and section 23 of the British Columbia Income Tax Act do not constitute a finding of guilty or a punishment for an offence which comes within paragraph 11(h) of the Charter.

The Lavers decision is of particular significance since in his reasons Wallace, J. also considered the question of whether the “punishment imposed" pursuant to the assessments of the Minister constitutes “true penal consequences" so as to bring the penalties consequent upon assessment proceedings within the prohibition expressed in paragraph 11(h) of the Charter. Reference was made to the decision of the Supreme Court of Canada in Wigglesworth v. R. and in particular to the tests suggested by the judgment of Madame Justice Wilson. Utilizing these tests Wallace, J. concluded at pages 286-87 (D.T.C. 6020):

In my view, the distinction in the severity of the respective penalties indicates that Parliament intended that the imposition of the statutory penalty following assessments by the Minister would reflect a sufficiently significant monetary punishment to deter taxpayers from failing to comply with the Income Tax Acts and would thereby achieve the objective of this administrative procedure. It is also an incentive to diligence for those who might be grossly negligent but not truly criminal. On the other hand, the severity of the public sentence which could be imposed following a conviction under section 239 clearly points to Parliament's intention to provide a punishment designed to redress a public wrong. I do not consider this distinction in the nature and purpose of the two punishments to be diminished by the fact that all fines end up in the consolidated revenue fund, via the Receiver General of Canada. In the circumstances this is the only appropriate office to which such payments could be made. In summary, therefore, the penalty assessment, while not trivial, is not so severe as to amount to a "true penal consequence".

I find support for the conclusion I have reached from the decision of Georges Contracting, supra; where this Court, after considering the Wigglesworth decision, found the Minister's assessment and consequent penalty to be a civil proceeding to which paragraph 11(h) of the Charter did not apply.

Accordingly, I find that the assessments of the Minister and the penalties imposed as a consequence of such assessments do not come within paragraph 11(h): they are not criminal or quasi-criminal "by nature", nor are the penalties a "true penal consequence".

[Emphasis added.]

Finally, a similar conclusion was reached by the Ontario Court of Appeal in The Queen v. Compton Joseph Ferreira, Ont. C.A., 88-4676, July 12, 1988 (unreported). I refer to this case because in the lower courts Ferreira argued that having been penalized under section 163 of the Income Tax Act he was in jeopardy of being penalized a second time under subsection 239(1) of the Act and that this was contrary to well established principles of fundamental justice. Thus under section 7 of the Charter his liberty was unfairly at risk in accordance with the principles of fundamental justice, in this case, double punishment or double jeopardy. Both the Trial Court and the District Court of Ontario which heard the matter by way of a summary conviction appeal, concluded that prosecution was barred by reason of section 7 of the Charter. The Ontario Court of Appeal unequivocally found that section 7 had no application in the circumstances, albeit without further reasons.

I have concluded that the appellant's position cannot be sustained. In my view the foregoing decisions put to rest any argument that there has been an infringement by the respondent of the appellant's rights under either section 7 or paragraph 11(b) of the Charter.

B. Standard of Proof

Counsel for the appellant submitted that in an appeal against the assessment of penalty the burden of proof is imposed by statute upon the respondent. He argued that since the penalties imposed pursuant to subsection 163(2) of the Act are penal in nature, this burden is evidentiary, requiring the Minister to establish by clear and cogent evidence that the penalty was justified and disentitling the respondent to rely simply on assumptions of fact. Counsel further argued that as a result the degree of proof required was correspondingly higher. He relied on the decisions of the Federal Court of Canada in Venne, Udell and De Graaf, supra, specifically referring to the following comments made in the course of those three judgments. In Udell Cattanach, J., in interpreting the language of subsection 56(2) (currently 163(2)) commented at page 714 (D.T.C. 6026):

I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt, the statute is to be construed so as to give the parties sought to be charged the benefit of the doubt.

Counsel then noted that in Venne Strayer, J., with reference to the comments of Cattanach, J., said at page 233 (D.T.C. 6256):

In coming to this interpretation the learned judge had regard to the fact that the subsection in question is a penal provision and it must be interpreted restrictively so that if there is a reasonable interpretation which will avoid the penalty in a particular case that construction should be adopted.

and then said, at pages 235-36 (D.T.C. 6258):

One must keep in mind, as Cattanach, J. said in the Udell case, (supra), that this is a penal provision and it must be construed strictly. The subsection obviously does not seek to impose absolute liability but instead only authorizes penalties where there is a high degree of blameworthiness involving knowing or reckless misconduct.

Counsel argued that the thrust of the Venne decision is that not only is a higher degree of proof required of the Minister to discharge the onus upon him but that this includes (as Strayer, J. stated in De Graaf at page 5284) the requirement that the Minister establish "the requisite state of mind existed to justify the imposition of penalties". He also referred to the decision of this Court in Boileau v. M.N.R., [1989] 2 C.T.C. 2001; 89 D.T.C. 247 as authority for the proposition that it is incumbent upon the Minister to establish the existence of mens rea or culpable conduct. Mr. Giffen argued that the use of the phrases "requisite state of mind" and“ "mens rea" by the Courts was intended to convey the necessity to find a degree of culpability, an animus, approaching that required in criminal proceedings and that as a result at the very least the burden of proof or degree of proof required of the Minister was substantially higher than that required in a normal civil proceeding.

Mr. Giffen submitted that in the present appeal the evidence adduced by the respondent fell far short of meeting that test and it could not be safely said that any evidence existed of a requisite state of mind in the appellant. He further argued that in the circumstances as established by the respondent's evidence it would not be appropriate for the Court to infer the existence of the necessary intent.

Conclusions

The respondent assessed a penalty against Kenneth Sommers pursuant to subsection 163(2) of the Act. There is no dispute and it was admitted as a fact, that with respect to the 1977 taxation year the appellant failed to include the sum of $21,446.35 of commission income received from Winpower Corporation of Iowa, U.S.A. in the computation of his income. That being the case, the assessment of penalties by the respondent is appropriate if I am satisfied that the taxpayer knowingly or in circumstances amounting to gross negligence failed to include the aforesaid income in the computation of his income for the taxation year in issue. At the outset reference should be made to subsection 163(3) of the Act which states:

Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

There is no dispute that this reverses the general rule regarding the burden of proof in taxation matters.

I first wish to deal with the standard of proof required of the Minister. Notwithstanding Mr. Giffen's well considered argument I have concluded, on the authority of R. v. Georges Contracting Ltd. and Cloarec, Wigglesworth v. R.; The Queen v. Yogendra Sharma; Yes Holdings Ltd. and Yesmaniski, Lester H. Lavers v. M.N.R.; The Queen v. Compton Joseph Ferreira; supra, that subsection 163(2) is not a penal provision and that the penalties assessed pursuant thereto are administrative in nature. As noted in Lavers, supra; such penalties are not a“ "true penal consequence" within the meaning of the tests laid down by the Supreme Court of Canada in Wigglesworth but are private matters of a regulatory nature. I do not read the judgments in Venne and De Graaf, nor the comments of the Court in Boileau as requiring the Minister to meet a higher standard such as that asserted by counsel for the appellant. I note that although the Court in Boileau spoke of mens rea; the learned judge went on to say that the evidentiary proof required of the Minister is capable of being established by clear and convincing evidence including circumstantial evidence. To infer that some other standard of proof akin to proof beyond a reasonable doubt was required is an unwarranted extension of these comments. I am satisfied that there is no basis upon which the Minister can be required to meet some standard of proof higher than the ordinary standard of proof in civil cases.

Mr. Giffen's argument regarding the required standard of proof by inference if not directly touched on a collateral manner which can best be summed up by the following proposition. Can it be argued on the basis of Udell, Venne, De Graaf and Boileau, supra, that the language of subsection 163(3) of the Act operates to require the Court to subject the Minister's evidence with respect to the imposition of a penalty to special scrutiny?

There is no dispute that in certain circumstances, such as where allegations of fraud or conduct of a criminal or penal nature is alleged in a civil action against a party, courts in Canada have invoked the right to test the evidence supporting such allegations more rigorously. This approach was expressed by Laskin, C.J.C. as follows in The Continental Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164; 131 D.L.R. (3d) 559 at 170:

There is necessarily a matter of judgment involved in weighing evidence that goes to the burden of proof, and a trial judge is justified in scrutinizing evidence with greater care if there are serious allegations to be established by the proof that is offered.

Reference was also made in this judgment to the words of Lord Denning in Bater v. Bater, [1950] 2 All E.R. 458 at 459 which I quote in part: "The case may be proved by a preponderance of probability, but there may be degrees of probability within that standard. The degree depends on the subject-matter.”

With these principles in mind I return to the question of whether subsection 163(3) of itself requires such special scrutiny. I have concluded that it does not. The subsection is unequivocal. It puts the burden of proof on the Minister, but there is nothing in the language chosen by the legislators that should be construed as a legislative requirement for special scrutiny of any evidence adduced on behalf of the Minister. Furthermore, as I have previously noted, the penalties under appeal are administrative in nature. There is no allegation of fraud or criminal wrong doing before me which requires such an approach. As was stated in Evidence in Civil Cases, Sopinka and Lederman, Butterworth & Co. (Canada) Ltd., (1974) at page 392: "The danger in applying concepts as elusive as degrees of probability is that, while purporting to decide a case on a balance of probabilities, the courts will continue to exact a criminal burden.”

I am satisfied that as in all civil cases the ultimate test to be applied is whether the Minister is satisfied of the burden on a balance of probabilities.

With the foregoing considerations in mind I turn to the evidence before me. The appellant did not testify. He made no attempt to explain or justify the admitted fact of failing to include the sum of $21,446.35 of commission income in the computation of his 1977 income. Counsel for the appellant argued that no adverse inference should be drawn from this fact. As a matter of law there is nothing to preclude a trial judge from noting the silence of the appellant and drawing logical inferences from his failure to testify. The next question to be considered is when and for what purpose is it appropriate to use the inference drawn from a failure to testify. Much of the law seems to have initially been developed in the criminal jurisdiction. In R. v. Jenkins (1908), 9 W.W.R. 405 (B.C.C.A.) the judgment of Irving, J. reads in part as follows:

It is true that a man is not called upon to explain suspicious things, but there comes a time when, circumstantial evidence having enveloped a man in a strong and cogent net-work of inculpatory facts, that man is bound to make some explanation or stand condemned.

At 4 C.R. 374, A.E. Popple summarized R. v. Nahirniak (Man. C.A.):

In R. v. Nahirniak, 39 Man. R. 509, [1931] 2 W.W.R. 604, 56 C.C.C. 225 (C.A.), Robson J.A. pointed out that no adverse inference should be drawn from failure to testify where the prosecution fails to make out a case for accused to answer. It must be remembered that no person charged with a criminal offence is bound by law to offer any explanation of circumstances of suspicion which attach to him; but if he refuses to do so where a strong prima facie case is made out and when it is in his own power to offer evidence in explanation of such suspicious circumstances. it is a reasonable and justifiable conclusion that he refrains from doing so from the belief that the evidence so suppressed or not adduced would operate adversely to himself.

[Emphasis added.]

The use of adverse inferences drawn from a failure to testify in criminal law cases has parallel application in civil litigation cases. In Mudrazia v. Holjevac, [1970] 1 O.R. 275 (Ont. H.C.); 8 D.L.R. (3d) 221 a motor vehicle accident case, Haines, J. commented at 276-77 (D.L.R. 222-23):

Secondly, I wish to comment on the failure of the defendant to testify. He was in Court. As the case developed it appeared that the defendant ignored several highway signs and finally the stop sign with its flashing light; nevertheless the defendant did not see fit to testify. Under these circumstances, the state of mind of the operator of the vehicle, his judgment, skill and ability become important matters on the issue of gross negligence. His counsel, who is very experienced in these cases, did not call Holjevac as a witness. Now failure of a defendant to testify does not constitute evidence where no case has been made out against him, but where a prima facie case has been made out the defendant's failure to testify may be the subject of an inference that his testimony if given, would not support the defence raised. It depends upon the circumstances and the evidence as it has developed up to the time of failure to call the witness in question.

[Emphasis added.]

In Medjuck and Budovitch Ltd. and Land Securities Ltd. v. ADI Ltd. and The Rocca Group Ltd. (1981), 33 N.B.R. (2d) 271 (B.N.Q.B.T.D.), a building contract case, Stratton, J. commented at 322-23:

In this respect, I record that Mr. H.E. Whitehead, the engineer employed by ADI who designed the Medjuck store, was not called to give evidence at the trial nor was any explanation given for his failure to testify. It seems obvious to me that his evidence would have been relevant and material on issues of significance and that his failure to testify justifies the inference that his evidence would have been unfavourable to ADI: see Sopinka and Lederman, The Law of Evidence in Civil Cases, pages 535-536; Levesque v. Commeau et al., [1970] S.C.R. 1010; Bosse v. Roy (1972), 4 N.B.R. (2d) 801 (N.B.C.A.) and Belanger v. Reid (1975), 11 N.B.R. (2d) 94; 7 A.P.R. 94 (N.B.C.A.).

I am satisfied on the evidence before me that the appellant received the amount of commission income in issue in taxation year 1977.1 am also satisfied that he knew he was required to include this sum in the computation of his income for that taxation year. He admittedly did not do so. The amount of unreported income is substantial in relation to his gross earnings. From this I draw the logical inference that this amount is unlikely to have been forgotten or overlooked inadvertently as might be the case with something in the nature of a small amount of interest earned in a savings account. The appellant is not an unsophisticated person. He is a reasonably successful businessman, a municipal officer and is active in the affairs of his community. He retained a professional firm of accountants to assist him in the preparation of his returns of income. I specifically note that in his return for the year in issue such amounts as a payment of $440 from the Public Utilities Commission for his services as Commissioner; investment income in relation to a taxable amount of eligible dividends amounting to $8.80 and investment income from the Canadian Imperial Bank of Commerce with respect to eligible interest of $1,149.94 were included.

The evidence adduced on behalf of the respondent established a prima facie case and raised an evidentiary burden for the appellant to meet. This he failed to do. In such circumstances Mr. Sommers' failure to testify and to offer any explanation leads to a reasonable and justifiable inference that he refrained from so doing because his evidence would have been unfavourable. This fact coupled with the facts established by the Minister lead me to conclude that the assessment of penalty was correct. Accordingly the appeal is dismissed.

Counsel for the appellant also argued that in the event the appellant was successful the order of this Court should require the Minister to vacate not only the assessment of penalty made pursuant to the Income Tax Act but also the penalty assessed under the Income Tax Act (Ontario). In view of my decision it is not necessary to deal with this issue.

Appeal dismissed.