Huard v. Minister of National Revenue, [1996] 1 CTC 2682

Archambault J.T.C.C.: — Mr. Robert Huard, an attorney, did not file income tax returns for the years 1972 to 1982. In addition to income tax, the Minister of National Revenue (Minister) assessed penalties under subsection 163(1) of the Income Tax Act (Act) for the taxation years 1976 to 1982 inclusive. Mr. Huard disputed only those penalties.

Facts

Mr. Huard became an attorney in 1968. Prior to 1972, he was a salaried lawyer with a Trois-Rivières law firm. He founded his own office in October 1972. At December 31 of that same year, his income statement showed a profit of about $1,500. His employment income amounted to $8,750. In 1973, Mr. Huard incurred a loss of less than $100. He realized a profit of $15,640 in 1974 and about $25,800 in 1975. The Minister assessed the following taxable income for the years 1976 to 1982:

Year: Taxable Income

1976: $38,146.00

1977: $46,569.00

1978: $46,653.00

1979: $21,791.00

1980: $42,060.00

1981: $66,943.00

1982: $49,717.00

It was Mr. Huard’s secretary who handled the law office’s accounting. At the start, Mr. Huard had the impression that he did not have to file an income tax return since he believed he did not owe the Minister any income tax. Such was the case for 1972 and 1973. As to the other years, Mr. Huard explained his failure to file them by a certain psychological block. He appears not to have been able to resign himself to doing so. This did not seem too serious to him at first. However, his problem grew as the years passed.

He stated that he had had no intention of evading payment of taxes during those years. He did not conceal his income. He deposited the sums he owed the Minister in the bank and refused to make more speculative investments with those amounts. He said he eventually intended to pay his taxes.

Mr. Huard made a few attempts to straighten out the situation over the years. In 1978, he hired an accountant whom he met at a political meeting. Nine or 10 months later, that accountant had done nothing. He said he was very stressed by the fact that he had not filed income tax returns. When his friends talked about income tax matters, he withdrew.

In the spring of 1983, Mr. Huard made an appointment with Mr. Barakett, a former colleague from the time when he had been a salaried attorney. He was to meet him at his cottage during the Victoria Day long weekend. Mr. Barakett, who had already worked for the Quebec Department of Revenue, had invited two former colleagues from that department for a weekend of fishing. When Mr. Huard arrived, he was frightened by the sight of those officials. However, he did not contact Mr. Barakett again until after August 24, 1983, on which date the Director of Taxation of the Department of National Revenue served a demand on him to file income tax returns for 1980, 1981 and 1982. On September 19, 1983, he retained the services of Yvon Martineau, C.A., to prepare his returns. The Department granted him an additional time period of six weeks. On August 24, 1983, Mr. Huard had $25,000 in his current account and the sum of $256,000 in term deposits.

It appears that Mr. Huard had asked Mr. Martineau to prepare his returns for the years prior to 1980. However, the Department’s special investigations auditors arrived before he had the time to do so; a seizure was conducted on January 11, 1984. From Mr. Huard’s accounting documents, the Department determined the amount of taxable income for the years 1976 to 1979. Mr. Huard cooperated by providing all the documents and information requested. The Minister decided not to assess penalties for the years 1972 to 1975. During his audit, the tax auditor observed that Mr. Huard had all the necessary documents to enable him to prepare his income tax returns. Mr. Huard admitted that he knew he owed income tax for the years 1976 to 1982. It should be noted that Mr. Huard filed an income tax return in 1971.

Analysis

The Minister assessed penalties for the years 1976 to 1982 pursuant to subsection 163(1) of the Act, which provides:

(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).

In Murray v. Minister of National Revenue, [1990] 2 C.T.C. 2103, 90 D.T.C. 1600 at page 2106 (D.T.C. 1603), Judge Rip of this Court made an excellent analysis of subsection 163(1) of the Act as it read during the 1976 to 1982 taxation years. He described as follows the three conditions that must be present for a taxpayer to be liable for a penalty under that subsection:

Three elements must be present for a taxpayer to be liable for a penalty under subsection 163(1) as it read during the years in appeal. First, the taxpayer must have failed to file a tax return as and when required by subsection 150(1). Second, the taxpayer must have attempted to evade the payment of Part 1 tax. Third, the taxpayer must have been acting wilfully.

The first condition poses no difficulty. As to the second, the notion of evading income tax, the case law has clearly recognized that merely defer- ring payment of tax does not constitute an attempt to evade tax. To meet this condition, a taxpayer must have the intention of never paying it. Judge Rip made the following comment on this matter [1990] 2 CTC 2103, 90 D.T.C. 1600 at 2109 (D.T.C. 1604):

When a taxpayer fails to file his tax return as required by subsection 150(1), and if the Court is satisfied that the taxpayer had the intention of eventually filing it, then the taxpayer is not liable to a penalty under subsection 163(1). R. v. Pongratz, supra', R. v. Branch, 76 D.T.C. 6112 (Alta. Dist. Ct.) re paragraph 239(1 )(d); Nuttall v. Minister of National Revenue, 80 D.T.C. 1804 (TRB).

As to the third condition, Judge Rip also recognized that the evidence of intention may be inferred from the taxpayer’s failure to file his income tax return Ibid'.

If there is proof of a failure on the part of the taxpayer to file a tax return, I may infer that the taxpayer committed the act with the intent to evade payment of taxes if on the whole of the evidence I reach the conclusion that it is proper to draw that inference and if I do decide to draw the inference, then I may find the appellant wilfully attempted to evade the payment of tax by failure to file a tax return. R. v. Paveley, supra; Sturgess v. The Queen, 83 D.T.C. 5434 (F.C.T.D.); R. v. de Wolf, supra; R. v. Thistle, supra.

Subsection 163(3) of the Act provides that it is the Minister who is responsible for establishing the facts that warrant assessing the penalty. Judge Rip made the following comments on this burden of proof in Murray:

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).

Let us apply these principles to the facts of this case. Mr. Huard failed to file his income tax returns for a period of 10 years from 1972 to 1982. It is possible that he may have believed that he did not have to file such a return for the years 1972 to 1974 since his income was low. The Act does not require an individual to file an income tax return when he has no tax to pay. Mr. Huard may not enjoy the benefit of this doubt in the subsequent period. He earned a professional income of more than $25,000 in 1975 and his taxable income varied between $21,791 and $66,943 from 1976 to 1982. Mr. Huard admitted that he had tax to pay for this last period and that he should have filed income tax returns. Mr. Huard knew that he had to file an income tax return when he had income tax to pay since he had done so for the 1971 taxation year.

Although Mr. Huard admitted that he knew he owed the Minister tax and that he had to file an income tax return, he claimed that he had not had the intention of evading payment of his taxes forever. He claimed that he had merely deferred that payment. In support of this claim, he contended that he had set aside the money necessary to pay his tax liability. He had refused to make speculative investments with that money. He further retained the services of an accountant in 1978, although after 9 or 10 months later the latter had not delivered the goods. In the spring of 1983, Mr. Huard made an appointment with his former colleague Mr. Barakett to see him at his cottage during the long Victoria Day holiday. However, the presence of officials of the Quebec Department of Revenue made him leave quickly. Moreover, to demonstrate his good faith, Mr. Huard contended that he had never concealed his income and when the Department arrived to conduct its audit, Mr. Huard cooperated and provided the Minister’s auditor with all the relevant information.

Was this a reasonable explanation from Mr. Huard, who filed no income tax return for the seven years concerned by the assessments, knowing that he owed income tax and had to file income tax returns? This explanation was not reasonable in my view. First of all, Mr. Huard filed no income tax return for those seven taxation years. One could even add 1975 for which Mr. Huard realized a net profit of $25,800. If we limit ourselves to the years in appeal, Mr. Huard’s taxable income in 1976 was $38,146. He should have filed his income tax return on April 30, 1977. When he received a demand from the Minister to file his income tax returns, Mr. Huard was late by more than six years. He said he had intended to file his income tax returns in hiring in 1978 an accountant who had never delivered the goods. It seems to me that if Mr. Huard had seriously intended to proceed with the filing of his income tax returns, he could have found another accountant, as he did after receiving the demand from the Minister. More than five years elapsed between the two mandates given to the accountants to act on his intention to correct the situation. His explanation of a psychological block does not seem plausible to me. There was no evidence that Mr. Huard had suffered trauma or emotional stress resulting from entirely exceptional events such as the death of a relative.

I believe that if the Department had not served a demand to file income tax returns, Mr. Huard would not yet have filed them. I was therefore not convinced by Mr. Huard’s testimony that he had merely deferred payment of tax and had not tried to evade his tax liabilities.

Counsel for Mr. Huard relied in his argument on a number of decisions including that rendered by Bovard J. of the Court of Ontario in R. v. Philp, (sub nom. The Queen v. John David Philp), decision of September 23, 1993, LPJ 94 - 4480. In that decision, there were certain facts similar to those of this appeal. The following is a passage cited by counsel for Mr. Huard:

He always kept the necessary records and assorted documents needed to file his returns in a large cardboard box. He always had the intention to eventually file his tax returns and to pay whatever tax was owed. He never tried to hide any of his income and never destroyed relevant documents or intended to evade the payment of the tax he owed. However, the more he waited, the more formidable a task it became to file his returns because he realized he had to deal with all of the past years in order to file the current year’s return. Mentally he had calculated the amounts owing plus interest and had these amounts notionally set aside.

In that decision, Bovard J. had to decide whether Mr. Philp was guilty of an offence provided at paragraph 239(1 )(d) of the Act: he concluded that the taxpayer was not guilty. However, as counsel for the Minister observed, that case of the Court of Ontario was quite different from this one, not only with respect to the facts adduced in evidence, but also as regards the legal framework. First of all, what was involved in that decision was a criminal proceeding and a much greater burden of proof was on the Department. The Department had to convince the Court beyond a reasonable doubt that the taxpayer had wilfully eluded or attempted to elude compliance with the Act.

As to the facts, there were particular circumstances which explained his delay in filing his income tax returns. Mr. Philp had become an alcoholic; he had been traumatized by certain exceptional events, including the murder of his partner, who had replaced him at the last minute in order to plead the case of one of his clients. That partner and confidant of the taxpayer had been killed when he appeared at the court. In the instant case, we do not have these exceptional circumstances which might explain trauma in Mr. Huard. Moreover, one of the facts that seems to me most important is that Mr. Philp had retained the services of an accountant to file his income tax return before receiving the Minister’s demand to file it. This procedure was consistent with the taxpayer’s intention eventually to file his income tax return. In this case, Mr. Huard saw an accountant in 1978 and his income tax return was still not filed five years later. It is difficult for me to infer a true intention to file his income tax return from this behaviour.

For these reasons, Mr. Huard’s appeal is dismissed and the assessment for the 1976 to 1982 taxation years are confirmed.

Appeal dismissed.