Charles and Gail Burrell v. Her Majesty the Queen, [1994] 2 CTC 2338

Bell J.T.C.C.:—The appeals of the two appellants were heard together. The issue is whether a penalty levied under 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"), in respect of each appellant for the 1987 taxation year was appropriately levied.

The first witness, a designated appeals officer with the Department of National Revenue (“D.N.R.”), testified that the penalty levied in respect of Gail Burrell for failing to include recaptured capital cost allowance in income was $3,465.45. This is the amount that was described in the notification of confirmation by the Minister dated October 10, 1991 in response to her notice of objection. The notice of reassessment from which such objection was taken states the amount of penalties to be $5,197.32. It is left to one's imagination to assume that this sum includes both federal and provincial penalties. No information in this regard was furnished by any document forwarded by the Deputy Minister of National Revenue ("D.N.R.") to this Court. Such failure is reprehensible. As usual, no copy of the original notice of assessment was forwarded to the Court leaving it impossible for the Court to understand the foundation of the reassessment. This is also reprehensible. Subsection 170(2) of the Act requires the D.N.R. to forward to the Tax Court of Canada

. . . copies of all returns, notices of assessment, notices of objection and notification, if any, that are relevant to the appeal.

It is difficult to comprehend why the D.N.R. would fail or refuse to include a copy of the original notice of assessment. The absence of any explanation as to how the "penalties" are computed is unfair to the taxpayer and to this Court and the absence of compliance with the statutory requirement aforesaid is inappropriate and also unfair to the Court.

The same witness advised the Court that the amount of penalty levied in respect of Charles Burrell due to his failure to include recaptured capital cost allowance in income was $2,388.60. This is at variance with the amount of $2,918.40 described as the amount of penalty in the notification of confirmation by the Minister dated November 1, 1991. Although appellants’ agent said that he agreed with the federal amounts, no explanation of the difference was proffered, leaving the Court to assume that the computation contained in the Minister's Notification was incorrect.

A second witness for the Respondent, Derek Ellis, stated that Charles Burrell was reassessed in respect of his 1979 year in respect of his failure to include in his return of income for that year the sum of $4,271 representing unreported recaptured capital cost allowance. He stated that he had no information that this applied to Gail Burrell.

The third witness, being the appellant, Charles Burrell, after identifying a photocopy of his 1987 income tax return, was unable to explain why the words “NO CCA EVER CLAIMED ON PROPERTY" were set out in Schedule 8 — Capital Cost Allowance. That notation followed the words "SOLD APRIL 24/87". His 1986 income tax return showed that no capital cost allowance was claimed. His 1985 income tax return showed capital cost allowance claimed in the amount of $9,045.65. The 1984 income tax return showed capital cost allowance claimed in the amount of $9,757.78. In response to whether the information was correct, Charles Burrell stated that he did not know, that his accountant goes over his return with him, that he is a plumber and reviewed his return to the best of his ability but that he only went to grade eight. Charles Burrell, in the absence of his wife, Gail Burrell, identified her signature on her income tax returns for the 1985 and 1987 taxation years, the 1986 return not being presented because it was not signed. He then testified that Gail Burrell was always a 50 per cent owner of property which was sold in 1987 for $485,000. In that year, Charles Burrell’s tax payable was $1,970.28. Michael E. Coghlan, C.M.A. was the appellants’ accountant for the years 1984 through 1987.

On cross examination by Mr. Coghlan, Charles Burrell stated that he did not know what capital cost allowance meant, that his accountants, Ward & Mallette handled all the schedules that he and his wife signed. The evidence was not clear as to the implications of this line of questioning.

The evidence indicated that the amount of unreported recaptured capital cost allowance for each of the appellants was $41,919.67. This sum is greater than the amount of $38,853 described as "Total Income Previously Assessed" on the December 12,1990 reassessment of Charles Burrell. The same sum of $41,919.67 was added to "Total Income Previously Assessed of $82,314” as described in Gail Burrell's 1987 income tax return.

By virtue of the provisions of subsection 163(3) of the Act the burden of establishing the facts justifying the assessment of the penalty is on the Minister of National Revenue. Accordingly, Respondent's counsel, in argument, emphasized the fact that Charles Burrell had unreported recaptured capital cost allowance of $41,919.67, a large amount compared to the sum of $39,137 reported by him. He also emphasized that such sum of unreported income was approximately half of the income reported by Gail Burrell. He pointed out that the total capital cost allowance taken by the appellants was $83,839.33 and that, in the 1987 return of each appellant, the notation about no capital cost allowance having been claimed was made. He stated that the sale price of property of $485,000 should have, in the case of Mr. Burrell’s reported tax of $1,907, given him sufficient notice that something was wrong. He argued further that Mr. Coghlan was the accountant for the appellants in the 1984 and 1985 taxation years when capital cost allowance was Claimed and that had he checked his files he would have found that to be the case. He outlined the special nature of the capital cost allowance class in which the subject property fell. It was different from other classes in that, being a multiunit residential building, the owner was permitted to create a loss by deducting capital cost allowance. His point was that the appellants had to go out of their way to obtain a Central Mortgage and Housing Corporation certificate to effect such result. He also, in the case of Charles Burrell, referred to the earlier omission of recaptured capital cost allowance. He pointed out that the property was sold at about the same time as the 1986 tax return would have been prepared. He referred to the case of Morin v. M.N.R., [1988] 2 C.T.C. 2334, 88 D.T.C. 1596 (T.C.C.), in which this Court found that the taxpayer was liable for penalties under subsection 163(2) of the Act due to his gross negligence in failing to report all of his income for the taxation years in question. He was a residential construction contractor who was familiar with his business and should have been sufficiently familiar with the details thereof that he could not rely upon his accountant's actions as an excuse. He also referred to the case of Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (T.C.C.), where Strayer J. said, 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.

Appellants’ agent stated simply that it was not the intent of the appellants to avoid tax and that they did not knowingly fail to report the capital cost allowance.

In Cloutier v. The Queen, [1978] C.T.C. 702, 78 D.T.C. 6485, Marceau J. said,

The question that arises is whether the circumstances in which the omission occurred are such that gross negligence may be ascribed to the taxpayer, gross negligence meaning relatively serious negligence in behaviour, difficult to explain and socially intolerable.

[Translation.]

Subsection 163(2) under which the penalties were assessed states, in part, that

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 . . . filed ... is liable to a penalty.. ..

I have no hesitation in adopting the arguments of respondent's counsel in respect of both appellants. It is difficult, if not impossible, to believe that persons who acquire an asset, one of the important characteristics of which is the aforesaid special capital cost allowance feature, would not be aware of the impact that a sale would have upon the claims made in that regard. It is not sufficient, in my judgment, for someone in these circumstances to profess lack of knowledge or to employ the excuse of lack of education as a defence for such a glaring omission from income. Admittedly, this was not an amount of income received in monetary terms in 1987 but it was a large amount required by the operation of capital cost allowance rules to be included. Charles Burrell had failed, in a prior year, to include recaptured capital cost allowance in income.

Accordingly, the appeals are dismissed.

Appeals dismissed.