John C. Wiese v. Her Majesty the Queen, [1995] 2 CTC 2246

Mogan J.T.C.C.:-The appellant is a farmer who operates a mixed farm, but primarily a dairy farm, about 15 miles from Westlock, Alberta, which is about 45 miles northwest of Edmonton. The appellant sells all of his milk product to Northern Alberta Dairy Pool, commonly referred to as "NADP”.

When reporting his income for the 1986 and 1988 taxation years, the appellant failed to include in the revenue from his farming operation an amount of approximately $61,000 in each year. He never did find the error on his own. It was discovered by an auditor from Revenue Canada in January 1990 when the auditor arrived at the appellant’s farm to conduct what would have been a routine audit of the farming operation. When the error was discovered, there were further investigations by Revenue Canada with the result that reassessments were issued to the appellant with respect to the taxation years 1986, 1987, 1988 and 1989. Those reassessments were appealed. At the commencement of this hearing, the appellant withdrew his appeal for 1989. Therefore, only the three earlier years remain in dispute.

The appellant’s first income tax assessment for 1986 was issued on July 6, 1987. The three-year normal reassessment period ended on July 6, 1990. The reassessment for 1986 which is under appeal was issued after that date, and so it is ’’statute-barred” as that phrase is used in relation to subsection 152(4) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act”). The reassessments for 1987 and 1988 are not statute- barred.

In these appeals, there are two primary issues and one secondary issue. The first primary issue is whether the Minister of National Revenue was entitled to reopen the 1986 taxation year. And if the Minister was so entitled, the secondary issue for 1986 is what amounts can be added to the reported income of the appellant for that year. Those two issues are tied together. The second primary issue is whether the appellant should be subject to one or more penalties under subsection 163(2) of the Income Tax Act. The Minister did in fact levy significant penalties under that provision. I will deal with these issues in due course but will first set out a brief Summary of the relevant evidence.

The appellant finished grade 12 high school around 1956. He had been raised on a farm. His parents farmed near Westlock, Alberta and, soon after finishing school, the appellant embarked upon a farming career of his own. In 1964 he bought two quarter-sections of land. He was married in 1966 and now he operates a farm on six quarter-sections of land, of which he owns four. In his evidence he described his farming as mixed, but it is predominantly a dairy farm because approximately 75 per cent of his gross revenue from farming is derived from milk product which he delivers to NADP.

The appellant built his original barn in the very early 1970s and, around 1981-82, he engaged a contractor to construct a much more substantial barn to house his cattle. This construction resulted in a near calamity for him. The new barn was not completed in time. The winter of 1981-82 was extremely severe, and some of his cattle either froze to death or parts of their bodies were so frostbitten that they were no longer useful as dairy cattle. He lost so many milk-producing cows that he was unable to maintain his quota with NADP. Notwithstanding his claim that it was a calamity, his quota was cut back. He entered into an arrangement to recover his quota over a period of time by working it up, but he never did recover the full quota. The money borrowed to build the new barn; and the reduction of his quota; and his lower milk sales caused a terrible financial crisis in which he almost lost his farm.

In 1983, the Farm Credit Corporation (a federal agency which helps farmers) agreed to lend the appellant about $350,000 so that he could pay off his bank and other creditors. The FCC loaned the amount on terms which permitted the appellant to make fixed payments for a minimum of ten years. The loan agreement was entered as Exhibit A-11. It is clear that there were two loans which I shall refer to as the small loan and the big loan. They were amortized with monthly payments commencing in the late spring of 1983.

The FCC wanted to be sure that it was paid because it was the principal creditor of the appellant. As security for the FCC loan, there was an assignment by the appellant delivered to NADP directing them to make certain payments to the FCC. Those payments, two each month, were the precise amounts required to amortize and pay off the big loan and the small loan in ten years. The payments going to FCC were $756 each month for the small loan, and $4,405.26 each month for the big loan. The total of those payments over a 12- month period is computed as follows:

The evidence is clear on this: NADP issued two cheques each month to FCC, one in the amount of $756 and one in the amount of $4,405.26. FCC received each month and each year the amounts required to amortize the significant $350,000 loan it made to the appellant in April 1983. At all relevant times in the taxation years under appeal that arrangement remained in place.

The appellant, like most farmers, kept his own books. At various times in the evidence he was referred to as having relatively meticulous books for a farmer; and from what I see of the evidence, that is probably a fair description. He did not maintain the books of original entry which one might find in a small manufacturing company, but he did maintain records in accordance with certain standards which were suggested by the agriculture department in the Province of Alberta.

Each farmer, apparently, was provided with a book from the Alberta Department of Agriculture called a "Basic Record for Alberta Farmers" showing in plain language how to record revenue and expenses both of a farm nature and of a personal or housekeeping nature. By keeping that book, a farmer could know where he stood and how to maintain his affairs from an accounting point of view. The appellant was very faithful in keeping the necessary documents which permitted him to make the entries into that book. He did not pay any of his expenses by cash; he paid them by cheque. He kept the stubs from the cheques so that he would know what he paid for. That way, he could record his expenses. On the revenue side, he kept all the stubs from the cheques which were issued to him by NADP. He also kept the stubs from NADP for those cheques which they issued to FCC. Those stubs were delivered to him twice a month and left in his milk house by the driver of the NADP milk truck which came to pick up his milk every second day. He also recorded, of course, the lesser amounts received from grain sales and cattle sales.

Each year in the spring, around March or April, the appellant would spend about four days working on his farm book transferring onto the relevant pages his revenue from different sources, and his expenses. He stated that this exercise consumed four days if he could concentrate on it all the time but, if he were distracted by the needs of farming, it might take up to a week. In any event, it was a period of intense concentration on documents and paper work by a person who probably spent the other 360 days of that year outside farming, in activities quite different from the clerical recording of revenue and expenses.

When his book of basic records was completed, he delivered it to a chartered accountant, Ian Ramsay, who practiced with a small firm of accountants in Edmonton. Mr. Ramsay testified in this appeal, and in all significant matters the evidence of Mr. Ramsay is consistent with the evidence of the appellant. The appellant would attend at Mr. Ramsay’s office some time in April; deliver to him the farm book issued by the agriculture department; and deliver certain other documents. There is some doubt as to whether the documents delivered to Mr. Ramsay were the stubs of the NADP cheques or the annual statement issued by FCC showing the status of what had happened in the preceding year with respect to the FCC loan. The appellant’s testimony was clear, however, that he recorded the revenue in his farm book from NADP cheque stubs and not from the annual statement issued by FCC. That is how he would have both stubs for his own expense cheques and the stubs from NADP with respect to milk revenue. There may have been other documents delivered to Mr. Ramsay. In his view, he had adequate documents to make up an income tax return for the appellant.

At the time of this meeting in Mr. Ramsay’s office in April, the appellant would sign a blank income tax return and deliver his farm book and the accompanying documents to Mr. Ramsay who would personally make up an income tax return for the appellant. The amounts written into the blanks on the income tax returns for the early years were actually in the handwriting of Mr. Ramsay. When the returns were completed, Mr. Ramsay would mail them to Revenue Canada so as to have them in the mail by the deadline date of April 30. It appears that they were always mailed at the 11th hour on April 29 or 30.

Just before mailing the income tax return, it was the practice of Mr. Ramsay to phone each client, like the appellant, and tell him the result. That is to say, whether the client would owe $500 in tax or would receive a $500 refund but the bottom line result on the last page of the income tax return was always telephoned to the client. A copy of the return in its completed form was then placed in a brown envelope together with the farm book, whatever documents had been delivered to Mr. Ramsay, and Mr. Ramsay’s account; and it was mailed to the client presumably on the same day when the original return was mailed to the tax department at the end of April.

The appellant’s evidence was that when he received the envelope from Mr. Ramsay he would put it away with his other documents in a kitchen cupboard and not look at it. He knew from Mr. Ramsay’s telephone call the "bottom line" as to whether he had to pay some money or would get a refund. The appellant also said that if he did owe money, he would wait until he received a Notice of Assessment from Revenue Canada which for him was like an invoice.

Mr. Ramsay said that he was in a partnership with two other accountants. Each spring they would do between 600 and 700 personal income tax returns like the one that was done for the appellant. He said that, human nature being what it was, 80 per cent of those returns were usually done in the last two weeks of April. It appears that that is when the appellant’s return would also have been done. The meeting between the appellant and Mr. Ramsay would last about 15 minutes, and the appellant confirmed this. In those circumstances, there were minimum instructions given, and I can only infer that the basic instruction was to prepare and file an income tax return based on the documents delivered to Mr. Ramsay.

There was considerable argument by counsel as to what the nature of Mr. Ramsay’s engagement might have been. To me it was quite simple: this was not a protracted professional engagement requiring a yearly audit or an ongoing relationship. It was a procedural thing. I asked Mr. Ramsay if the service he performed as a professional was mainly of a mechanical nature, and he answered that it was all of a mechanical nature. He looked at the material delivered to him; organized it in the manner required on the various lines of the income tax return; entered the respective amounts on the return; and filed it.

I now come to the real issues which must be decided. It is a fact that for 1986 there were three income amounts omitted from the appellant’s return. Those amounts are as follows: milk sales of $61,935, cattle sales of $738 and a patronage allocation from NADP in the amount of $12,073. The first primary issue is whether the Minister can reopen the 1986 taxation year. In the course of argument, after hearing only counsel for the appellant, I decided that the respondent had made a case for reopening 1986. My reasons for that are very brief.

The appellant’s testimony, which I found in general to be very open and honest and credible, is that he signed the blank income tax return and gave it back to Mr. Ramsay. When he received the completed return by mail he did not examine it in detail. I assume that he opened the envelope but he said he did not examine the contents and simply put the envelope with the other documents up in his kitchen cupboard. In my view, that conduct by itself is evidence of neglect because, by signing a blank income tax return and handing it to any third party to complete (whether that third party is a well-qualified chartered accountant or some other person), there is a delegation of a serious statutory responsibility. The Income Tax Act requires every individual to report his or her income. How can any person like the appellant know that he has reported his income if he signs a blank return; hands it to somebody else to complete; and does not look at the completed product? Without regard to what Mr. Ramsay did, whether he was careful or careless, whether he was meticulous or perhaps even negligent, I find that the appellant has made a misrepresentation that is attributable to neglect or carelessness within the meaning of subparagraph 152(4)(a)(i) of the Act.

Waiting until the income tax return was completed and then reviewing it with Mr. Ramsay, was the preferred course of conduct. The appellant has denied himself the opportunity of catching any mistakes by signing a blank return and not reviewing the final return when completed. When a significant mistake is made, like the omission of $61,935 in 1986, the appellant cannot catch it in time or go back to Mr. Ramsay and say: ’’file an amended return or write a letter to the tax department to say that there is $60,000 missing’’.

Therefore, in the words of subsection 152(4) of the Act, the Minister may issue an assessment after the normal reassessment period if the taxpayer has made any misrepresentation which is attributable to neglect. I need go no farther than those words. There was a misrepresentation because the $61,935 amount was missing. The misrepresentation was made by the appellant, because it was in his return. And it was attributable to his neglect because he failed to review that return or even look at it after it had been completed by a third party. On this first primary issue, the Minister may reopen and reassess the 1986 taxation year.

What amounts may the Minister add to the appellant’s reported income for 1986? Clearly, the Minister may add the $61,935 amount because it is the misrepresentation which triggers the reopening of the year. The other two amounts which were added by reassessment are $738 and $12,073. When I informed respondent’s counsel at the commencement of her argument that I had decided that the Minister had made a case for reopening 1986, she stated that the Minister was abandoning his position with respect to the amount of $12,073 because of a misunderstanding in the farming community. Therefore, that amount will be excluded from the computation of the appellant’s 1986 income.

Concerning the cattle sale of $738,1 am inclined to think that the omission of that small amount was not neglect. It was only an oversight. It is very small in relation to the total farm revenue of $156,000, and it is even relatively small in relation to the cattle sales of $19,000. If it were not for the significant amount of $61,000, I assume that the Minister would not have reopened 1986 just to bring the $738 into income. If the Minister had tried, I would not have supported such a reassessment. For 1986, the only amount to be added to the appellant’s reported income is $61,935 for milk sales.

Before considering the issue of penalties under subsection 163(2), I should describe briefly certain other amounts which were identified as NADP patronage allocations. There is the amount of $12,073 already referred to in 1986. Comparable amounts in the next two years were $8,191 for 1987 and $9,261 for 1988. These amounts were something like patronage dividends from a co-op and, according to Mr. Curtis (a witness for the respondent), there was a significant amount of misunderstanding in the farming community as to whether these amounts should be reported in the year when they were allocated or only in the year when they were received.

It was the appellant’s thought that he did not have to bring these amounts into income until he received them. He said there were a couple of years when the Dairy Pool was on the brink of insolvency and could not make any payments. The board of directors of the Dairy Pool determined that as these allocated amounts would accumulate, they would be paid out about ten or 12 years after the allocation. Therefore, these allocated amounts would, in the ordinary course of events, not be received by a farmer like the appellant until about ten years after the year of allocation.

There is, however, a provision in section 28 of the Income Tax Act which deems these amounts to be income, and so there is no dispute as to their character for 1987 and 1988. The appellant has withdrawn his appeal on those items. The two amounts of $8,191 for 1987 and $9,261 for 1988 will therefore be included in computing the appellant’s income for those years. The Minister did not attempt to assess a penalty under section 163 with respect to any of those NADP patronage allocations.

A penalty was assessed under subsection 163(2) in respect of the two amounts of milk revenue not reported and the three amounts of cattle sales not reported, being the already mentioned amounts of $738 for 1986, $3,350 for 1987 and $31,854 for 1988. I will deal first with the milk amounts because they are the most significant.

This is a tangled tale. There were entered in evidence the farm books for the years 1983 to 1989 inclusive. In evidence and argument, there were frequent references to certain entries in those books. In most of the years, the appellant made a particular notation in the farm book drawing attention to the fact that, where he was recording revenue from milk sales, anyone reading the page would read the notation which stated in substance: "You also have to pick up the payments which were deflected by NADP directly to FCC and which did not come into my hands".

In two years, however, 1986 and 1988, that notation did not appear. I am satisfied that the milk amounts were omitted in those years because the notation did not appear. In other words, I accept Mr. Ramsay’s evidence. He was performing a mechanical function for a person who was a once-a- year client. Mr. Ramsay did not maintain working papers; he did not do a comparison of reporting from year to year to see if they were consistent; he took what was given to him assuming it was complete; he mechanically did whatever additions and subtractions were necessary; and he inserted the gross and net amounts in the relevant places on an income tax return.

The appellant’s counsel argues that there should be no penalty because of the pains which the appellant took to make sure that these payments to FCC were in fact included in milk revenues. In particular, I will refer to the farm books which support the appellant’s position on this issue. For example, in the 1984 book at page 63 the appellant in his own handwriting has listed his milk sales amounting to about $71,900, and then he has written this note:

The farm credit payments that total $61,935 are paid direct to FCC from NADP. They do not show up in our milk cheques.

From that note, Mr. Ramsay would pick up the $61,935; he would add it to the $71,900 and report (together with some milk subsidy which was another amount received) total milk sales for 1984 of $147,578.

Similarly for 1985, on page 63 of the farm book the appellant has listed his milk sales and he has the cash received. He shows what he received directly from NADP, plus the subsidy amount, and he has a note at the bottom stating:

The Farm Credit payments should be added onto this total because they are paid direct from NADP.

He wrote down the amount $61,935, and he adds that to the milk sales of $107,000 and the subsidy payments of $12,000, for a 1985 total of $169,319.

For 1986, at page 44 of the farm book there is a list of milk sales adding up to $96,918. There are subsidy payments over the 12 months which make up $13,300, and a final payment of $3,400 which makes a total of $113,772. That is the total of the milk and cream receipts. There is no note on this page reminding Mr. Ramsay that there was another $61,935 which went to FCC, and so Mr. Ramsay did not pick it up. The net result is that the 1986 income tax return of the appellant showed milk sales of only $113,772, absent the payments to FCC.

For 1987, the farm book at page 37 describes payments made on farm loans, and it shows the amounts payable to FCC. Under that, there is a note which states:

The payments to FCC go direct each month and should be added to the income shown in milk section ($756 and $4,405).

And then a couple of pages over, in the milk and cream section, there is the milk subsidy shown of $12,000 and gross milk sales of $88,000. Mr. Ramsay obviously picked up on that note because, for 1987, there were milk sales reported in the appellant’s income tax return of $167,971.

And then for 1988, in the farm book there is a page which shows ’’cash received from milk" and all the amounts received over the 12 months which add up to $106,743. These were only the amounts deposited by NADP in the appellant’s account at the Toronto- Dominion Bank. Over on the FCC page, the book shows payments to FCC in the amounts of $45,019 for interest and $15,606 for principal, making a total of $60,625. This total is about $1,300 less than the amounts which were contracted to be paid, but there is no notation stating that these amounts were paid to FCC by NADP and that they should be carried over and added to the milk revenue. Because of the absence of that note they were not picked up. Mr. Ramsay completed the income tax return and reported milk sales of only $106,743 which was only the amount received by the appellant himself from NADP.

The notations for 1984, 1985 and 1987 are clear. The appellant is telling Mr. Ramsay to pick up the payments to FCC. Mr. Ramsay does pick them up and they are reported. The absence of a similar notation for 1986 and 1988 is hard to explain. The appellant says that by then Mr. Ramsay should have known that these FCC payments were there, and he could also pick up from the other documents which were delivered to him the FCC payments which were made directly to FCC by NADP. The appellant claims that Mr. Ramsay would have known that the FCC payments were in the book and they should have been reported in the income tax return.

The respondent argues that a person who is as meticulous as the appellant and who knows about the FCC payments every year would realize that the revenue coming to him directly from NADP was $61,935 short of what it otherwise should be. The appellant should have known that those amounts were going to FCC and his failure to draw those amounts to Mr. Ramsay’s attention was an indication that he really did not care whether they were reported, or perhaps wanted them not to be reported in those years. It is difficult to determine what was in the mind of the appellant for 1986 and 1988.

The penalty provision in subsection 163(2) contains the following words, and I shall set out only the charging provision because the formula for computing the penalty is not relevant.

163(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty....

What are the conditions for the imposition of the penalty? The conditions are that a person has knowingly made a false statement or, under circumstances amounting to gross negligence, has made a false statement. There is no question that a false statement was made in the appellant’s income tax returns for 1986 and 1988 because two significant amounts of about $61,000 were omitted. A false statement may be made innocently. If it is, there will be no penalty because the conditions for the penalty are that it has to be made "knowingly" or in "circumstances amounting to gross negligence". The income tax auditor/investigator who recommended the penalty was Mr. Curtis who testified in this appeal. I asked him if he was relying on the "knowingly" or on the "gross negligence". His answer was that he was relying on them both and he did not place reliance in particular on either one.

In argument, however, counsel for the respondent stated that it was possible for me to make a finding that the statement was made knowingly. She marshalled a number of persuasive arguments to that effect and used the appellant’s very careful bookkeeping against him. Mr. Curtis stated quite candidly that the appellant’s bookkeeping was well above average for farmers; among the best he had seen for a person who really took care in reporting the financial affairs of his farm operation. And so counsel quite logically said, if he is that careful, how could he miss $61,000? I must say that I am troubled by that.

She also says that the amounts are material, and they are. Material in the sense that for the two years when they were omitted, milk revenue was at the level of $113,000 for 1986 and $106,000 for 1988. If one were to add $61,000 to those two amounts, the 1986 total becomes $174,000 and the 1988 total becomes $167,000. Those totals would be consistent with the adjoining years because the milk sales in 1985 were $169,000; in 1987 they were $167,000; and in 1989 they were $163,000.

If the appellant had done any comparison at all, he would have been able to see that his milk revenue for 1985, 1987 and 1989 was in the right range, floating between $160,000 and $175,000 in each year. And yet in these two years (1986 and 1988), by omitting $61,000 (the payments that went to FCC), one can see that the milk revenue drops down to the range of $106,000 and $113,000. That makes the case for materiality. Respondent’s counsel argues that that would justify a finding that the appellant knowingly omitted $61,000 in those years, or that he was grossly negligent.

I do not conclude that the appellant knowingly omitted these amounts. I do not conclude that for two reasons. Firstly, he made an explicit disclosure in the adjoining years that this amount which went to FCC should be picked up. He said it explicitly to Mr. Ramsay in 1984; he said it again in 1985; it was missed in 1986 (whether he noticed it or not) but he said it again in 1987.1 cannot think that a person as astute as the appellant would have decided "knowingly" to suppress his income by omitting those sales in this manner. I conclude that the penalty cannot be justified on the basis that he knowingly understated his income.

Was either false statement the cause or the result of gross negligence? I turn briefly to the law which is summarized by Strayer J. in Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247. I refer to a passage frequently cited at page 234 (D.T.C. 6256):

"Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. I do not find that high degree of negligence in connection with the misstatements of business income. To be sure, the plaintiff did not exercise the care of a reasonable man and, as I have noted earlier, should have at least reviewed his tax returns before signing them. A reasonable man in doing so, having regard to other information available to him, would have been led to believe that something was amiss and would have pursued the matter further with his bookkeeper.

That comment and the way it was applied come close to the facts of this case. Why did the appellant not look at his returns? Why did he not look at them in detail? If he had, he would have noted that his milk revenue was down by the amount of $61,000 which went to FCC. There is no doubt about that in my mind because the revenue reported from milk sales in 1986 and 1988 was not just inconsistent with the milk revenue of 1985, 1987 and 1989 but it was out of line to the extent of $61,000. He was about $60,000 out of the normal range. Coming back to the decision in Venne, Strayer J. commences a general discussion of gross negligence as follows on page 233 (D.T.C. 6255):

The similar language [to subsection 163(2)] of subsection 56(2) of the former Income Tax Act was interpreted by Cattanach J. in Udell v. M.N.R.,

[1969] C.T.C. 704, 70 D.T.C. 6019 (Ex. Ct.). In that case a farmer had retained a certified public accountant to prepare his income tax returns. The accountant made several errors in different taxation years in the process of transposing figures from the taxpayer’s account books to his working papers. In some of the years in question the accountant signed the returns on behalf of the taxpayer before they were seen by the latter and in other years the taxpayer reviewed them first and then signed them. He apparently did not notice any errors. The Minister of National Revenue assessed penalties with respect to these errors. In interpreting the language now found in subsection 163(2) of the present Income Tax Act, Cattanach J. said, at page 713-14 (D.T.C. 6025-26):

Accordingly there remains the question of whether or not section 56(2) contemplates that the gross negligence of the appellant’s agent, the professional accountant, can be attributed to the appellant. Each of the verbs in the language "participated in, assented to or acquiesced in" connotes an element of knowledge on the part of the principal and that there must be concurrence of the principal’s will to the act or omission of his agent, or a tacit and silent concurrence therein. The other verb used in subsection 56(2) is "has made”. The question therefore, is whether the ordinary principles of agency would apply, that is, that what one does by an agent, one does by himself, and the principal is liable for the actions of his agent purporting to act in the scope of his authority even though no express command or privity of the principal be proved.

In my view the use of the verb "made" in the context in which it is used also involves a deliberate and intentional consciousness on the part of the principal to the act done which on the facts of this case was lacking in the appellant. He was not privy to the gross negligence of his accountant. This is most certainly a reasonable interpretation.

In a sense, Cattanach J. found in Udell that the negligence of the tax preparer (the person who was paid to prepare the return) should not be attributed back to the taxpayer unless the taxpayer were privy to that negligence. That is not a difficult point in this appeal. In the Udell case, it appears that the taxpayer gave the accountant all the correct information and it was the accountant’s negligence which caused the mistake. Here, the information was given to Mr. Ramsay but, for 1986 and 1988, not in a manner which permitted him to pick up the payments that went to FCC, even though he knew or ought to have known from prior years that a significant portion of the milk revenue had been assigned to FCC. He certainly knew about the loan because he deducted interest of about $50,000 each year which was paid to FCC in respect of the $350,000 loan.

There probably was an element of neglect on the part of Mr. Ramsay when preparing the appellant’s returns for 1986 and 1988 in not matching the interest he was deducting which common sense would have told him was on a very large loan, even though there was no balance sheet. When he saw $50,000 in interest, he could imagine that there was a huge loan sitting out there. He knew about it from prior years. I think there was some burden on Mr. Ramsay to find out how the lender was being paid, and perhaps even to recall that the lender had secured an assignment of payments from NADP. The appellant was more negligent, however, for 1986 and 1988 when he failed to record in his farm book that his milk revenue should include the amounts paid by NADP directly to FCC.

There is no question that there was negligence. Whether it was "gross negligence" which Strayer J. says involves a high degree of negligence tantamount to intentional acting is the real question. I make the following findings based in part on the assumption that a person is permitted to make a significant mistake once but not twice. I will not apply the penalty to the omission in 1986 but I will apply it to the omission in 1988. I could imagine a person, particularly when the notation had been made in both 1984 and 1985 (a very clear note to Mr. Ramsay that this is where he is going to pick up the other $61,000), I can imagine that happening in 1986 with perhaps an assumption on the appellant’s part that Mr. Ramsay will pick it up. But, when the appellant did not review his own return for 1986 and thereby permit himself to see that his milk revenue was down by $61,000 and inconsistent with the prior years, and when he did not review his 1987 return which may have caused him to note the inconsistency with 1986, I find that he was grossly negligent in allowing this to happen a second time. In a sense, I am giving the appellant one significant penalty- free error, but to let it happen twice in three years, when he does not even look at his returns, carries him, in my view, over the barrier that is set for the imposition of the penalty in subsection 163(2). I would uphold the penalty for 1988 on the milk income and not uphold it for 1986.

With respect to the cattle sales, I will not uphold the penalty for 1986 because the amount is too insignificant. That could easily be an error. I make the same decision for 1987. Again, I am relying on materiality. For 1988, however, I will uphold the penalty because the amounts, on a material basis, were significant. There were total cattle sales in 1988 of about $53,000. The appellant reported sales of only $21,752. It is not only that he missed the other $32,000, but there were 42 head of cattle sold that year representing the $32,000.1 fail to see how the appellant could not, in the material he sent to Mr. Ramsay, have noted the fact that he was missing the sale of 42 head of cattle. I uphold the penalty for the omitted cattle sales in 1988.

I would make one comment in conclusion. This statement goes to the state of the appellant’s mind in the spring of each year when he makes up his farm book. He is obviously a careful business man. He saves his records, he saves his cheque stubs; he keeps all kinds of documents; he has the annual statement from FCC; and he has the monthly statements from the Dairy Pool. All the documents were there. It is perfectly clear that when Revenue Canada arrived at the appellant’s farm, they had no problem finding the two missing milk sales of $61,000 and the missing cattle sale of $32,000. It was all there. It was in his own records. The initial auditor who was not an investigator, Mr. Yankowski, found it in ten days. He picked up the documents; took them away; came back and said to the appellant: you are missing these three sales. He sought an explanation.

From then on, it was a kind of tangled path. Revenue Canada, with or without justification, it is hard to say, thought they saw the tip of an iceberg. They thought that if they conducted a more exhaustive search they would capture the underwater part of the iceberg. It turns out that after an intensive investigation, including a seizure of the appellant’s records, they did not find any other unreported income except two little cattle sales of $738 in 1986 and $3,350 in 1987. Therefore, I am satisfied that the appellant is a basically honest person who kept careful records, and I direct my mind to what he was doing each spring when he made up his farm book. This is, in a sense, taking a person out of his element. He has been a farmer all his life. He is not a book person. He is not like the lawyers and accountants whom we usually see in income tax appeals. He works outdoors. But every year he is forced to spend these days with his farm book doing what he can to make up a sensible record. It is mainly on that basis that I have not upheld certain of the penalties. I think he did not do anything knowingly wrong.

In those other items, the cattle sales in 1986 and 1987, and the milk sales in 1986, I think the appellant was not grossly negligent in failing to write that note. He was only negligent in making an otherwise honest attempt to record the results of his farming operation. The first reason for applying the penalty to those two amounts in 1988 is the same reason for reopening 1986, and that is the appellant’s failure to look at his income tax return when it was completed. He said he did not look at it in detail, and I believe him, but that is not an adequate excuse for a second significant omission. I had here a person who really tried to record the results of his farming operation but, if I can use a colloquial expression, he shot himself in the foot by not following up and looking with some care at the completed return. The other reason for applying the penalty to the two amounts ($61,000 and $32,000) omitted in 1988 is the materiality of those amounts with respect to the other farm revenue. The appeal for 1988 is dismissed. The appeals for 1986 and 1987 are allowed in part in accordance with these reasons. There will be no costs to either party.

Appeals for 1986 and 1987 allowed in part; Appeal for 1988 dismissed.