Giovanni Pompa v. Attorney General of Canada, [1995] 1 CTC 466, 94 DTC 6630

Décary J.A. (Hugessen and Desjardins, JJ.A., concurring):-The applicant is asking the Court to set aside a decision by a Tax Court of Canada judge which allowed the appeals filed by the respondent from two notices of assessment, accompanied by penalties, issued by the Minister of National Revenue ("the Minister").

The action is based on the following three grounds:

1. The Court made an error of law in not observing the rules on the burden of proof that apply to the hearing of appeals to tax disputes;

2. The Court made an error of law in using material which was not entered in evidence at the hearing;

3. the Court made a decision based on findings of fact which did not take into account the evidence before it.

Proceeding in the reverse order to that suggested by the applicant, we will dispose of these grounds as follows.

The third ground was dismissed forthwith. It cannot be concluded in the case at bar that the judge did not take into account the evidence before him.

The second ground requires that we recall certain facts. The Minister had found that a construction business was blithely defrauding the Revenue by transferring considerable amounts of money to another company by means of fictitious purchases. When this illegal manoeuvre was put to them the shareholders of the business admitted that they had in fact siphoned off sums of money, but alleged that this money was used to make cash and under-the- table payments to employees who did overtime.

The Minister then promptly audited the tax returns of the employees in question and reassessed them. About 100 employees objected to these assessments, including Côté. The latter’s appeal was heard by the Tax Court of Canada, by the same judge who some time later heard the respondent’s appeal.

In the reasons for judgment at issue in the case at bar the judge, after summarizing the evidence submitted by the Minister, continued as follows at pages 7 to 10:

This completes a summary of the evidence adduced by the solicitor for the Minister. To this evidence must be added the facts of an appeal instituted by a certain André Côté from an assessment for the 1985 taxation year in which the Minister added $6,110 to his income, an amount which had been indicated on a T4 supplementary slip produced by Dunn & Benoît. This appeal also concerned a settlement, and a consent to judgment was filed reducing the amount from $6,110 to $2,000.

Having referred to this Coté case, I find myself obliged to point out the actions of the Revenue Canada officials and also of the solicitors who worked on that case because they clearly made misrepresentations to the Court concerning that appeal. They appear to me deliberate since they were made in documents filed with the Court, documents that are of a public nature. It should be noted that the original assessment respecting Coté was dated May 13, 1986 for the 1985 taxation year, and the notice of reassessment from which an appeal was instituted was dated January 7, 1992, that is six years later and clearly beyond the three-year time limit provided in paragraph 152(4)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ’’Act”). According to the Act and case law, the burden was therefore on the Minister to prove that the assessment was correct, that is in respect of both the increase of income and the penalty assessed.

The Deputy Minister of Revenue Canada has a statutory obligation under subsection 170(2) of the Act to send the Court copies of all returns, notices of assessment, notices of objection and notification that are relevant to the appeal.

A letter date July 24, 1992 was sent to the Court registrar on behalf of the Deputy Minister and read in part as follows:

In compliance with the requirements of subsection 170(2) of the Income Tax Act, we hereby send you copies of the following documents:

(1) T1 income tax return(s) for the 1985 taxation year(s) and documents relating thereto. [(2), (3), (4) n/a]

[Translation.]

Since this return was not among the documents thus sent, the Deputy Registrar of the Court contacted the Assistant Deputy Minister of Revenue Canada and asked him to forward a copy of the return in question. The answer he received indicated that that return had long since been destroyed and that the document attached to the letter of July 24 was a computerized statement. It was alleged that that document contained the various amounts that had appeared on the income tax return filed by the appellant. It appears to me elementary that such a document cannot constitute an income tax return within the meaning of the Act since an income tax return is a form prescribed by the legislation, and the legislator specifically refers in subsections 170(2) and 165(3) (sic) to an income tax return.

Notwithstanding the fact that Côté’s income tax return no longer existed, the Court noted that the notice of confirmation by the Minister provided "that the taxpayer knowingly, or under circumstances amounting to gross negligence, made an omission in his income tax return with respect to the 1985 taxation year within the meaning of subsection 163(2) of the Act... .” This document is dated June 3, 1992.

[Emphasis added.]

Furthermore, paragraph 5(g) of the reply to the notice of appeal filed with the Minister reads:

5. The Minister took for granted, in particular, the following facts in making this assessment:

(g) in thus failing to report his income, the appellant knowingly, or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of, a false statement or omission in the income tax return filed for the 1985 taxation year as a result of which the tax which he was apparently required to pay, based on the information provided in the income tax return filed for that year, was less than the amount of tax payable for that year.

[Emphasis added; translation.]

Since, in October 1992, Côté’s income tax return for the 1985 taxation year had long since been destroyed, according to the information received from the Assistant Deputy Minister, I am convinced that, in assessing Côté on January 7, 1992, the Minister could not take it for granted that Côté had made a false statement or omission in his income tax return for the 1985 taxation year. It is entirely clear in light of this situation that, in his reply to the notice of appeal, the Minister could not legally represent that he had taken for granted certain facts when he knew that their existence was false. These statements in the notice of confirmation by the Minister and in the reply to the notice of appeal relating to Côté’s income tax return were of a nature to mislead the Court with respect to the assessment’s validity, were a direct breach of a statutory obligation imposed on the Minister under subsections 170(2) and 163(3) of the Act and must undoubtedly have violated the appellant’s rights with respect to his appeal.

Apart from this derogation from the legislation, the above comments nevertheless clearly show that three appeals have been revised by the solicitor for the Minister to date, and in two cases, the latter admitted that the assessments were not accurate as issued. The third case is that of the appellant. In the two situations of Côté and Barbeau, the income of those appellants had been increased in the assessments based on the information indicated on the T4 slips provided by the shareholders of Dunn & Benoît, and the Minister conceded in the consents to judgment that that information was false.

and went on, at pages 15 to 16:

What happened to the amounts recorded on the T4 slips prepared by Benoît for the employees Côté and Barbeau and which were in addition to those admitted in the consents to judgment? Furthermore, Cairns, another witness of the Minister, stated that not all the employees received an envelope containing cash. It is entirely possible that the appellant was one of those who did not receive an envelope. This would confirm his claims, and the Court has no reason to doubt his testimony.

It is important to note that Côté did not testify in this case at bar and that at the hearing no one made the slightest reference to the Côté case.

If there is one well-settled rule of law it is that a judge cannot take cognizance of facts coming directly to his attention in the course of another proceeding to decide on the fate of a proceeding in which those facts were not entered in evidence. A judge simply does not have any ex officio knowledge of what he learned in another case (see Sopinka, Lederman & Bryant, The Law of Evidence in Canada, Butterworths, Toronto, 1992, page 985) and he is failing greatly in his duty of neutrality if he makes use of such knowledge (see Ducharme, Précis de la preuve, 3d ed., Wilson and Lafleur, Montréal, 1986, page 17). As Professor Ducharme observes, "the judge’s neutrality is the best guarantee of his impartiality".

In the case of bar not only did the judge undertake to consider facts which were not in evidence, but in addition he used the record as a pretext for an ex parte settlement with the applicant and his counsel of accounts which he had clearly carried over from an earlier case.

The respondent, who was the unfortunate victim of this vendetta, invited the Court to consider these comments, the relevance of which he could not understand either, simply as an obiter dictum and maintained that, however unfortunate that obiter might be, it could not suffice in the circumstances to vitiate the decision made.

As Dickson J. (as he then was) observed in Kane v. Bd. of Governors of the U.B.C., [1980] 1 S.C.R. 1105, 110 D.L.R. (3d) 311 at 1116 (D.L.R. 324), "We are not here concerned with proof of actual prejudice, but rather with the possibility or the likelihood of prejudice in the eyes of reasonable persons".

As appears from the passage cited above, the judge based his assessment of the respondent’s credibility in part on these facts which he did not have the right to consider.

Further, the nature, length and vehemence of the statements made, as well as the completely unfair nature of the accusations levelled, whether obiter or not, could only taint the entire proceeding and render both the judge’s approach and the conclusion he arrived at suspect to even the most casual observer.

The applicant’s second ground is thus valid.

Finally, as to the first ground submitted by the applicant, the Court finds that by imposing on the Minister the burden "to determine with certainty the amount of income not reported by a taxpayer" when a penalty was levied and subsection 163(3) of the Income Tax Act applied, the judge relied on two decisions of the Tax Court of Canada indexed as Chopp v. M.N.R., [1987] 2 C.T.C. 2071, 87 D.T.C. 374 and Fortis v. M.N.R., [1986] 2 C.T.C. 2378, 86 D.T.C. 1795) which have since been disavowed by the Trial Division of this Court (Kerr v. Canada, [1989] 2 C.T.C. 112, 89 D.T.C. 5348, at page (D.T.C. 5354).

Additionally, to remove any doubt which may arise on reading the reasons of the disputed decision, we feel it is worth noting that the applicable rules as to the Minister’s burden of proof in cases of a penalty and when section 163 of the Income Tax Act is in question were correctly stated by Rouleau J. in The Queen v. Taylor, [1984] C.T.C. 436, 84 D.T.C. 6459 (F.C.T.D.), subject of course to such circumstantial adjustments as may be required by use of the informal procedure laid down in section 18 of the Tax Court of Canada Act.

The application to set aside will be allowed, the decision of the Tax Court of Canada quashed and the matter referred back to it for a rehearing to be held by a judge other than the one who heard the case at bar. In accordance with the provisions of section 18.25 of the Tax Court of Canada Act, the applicant will pay the costs incurred by the respondent in this Court.

Application allowed.