Daniel F. Glass v. Her Majesty the Queen, [1994] 1 CTC 2390

McArthur, J.T.C.C. (orally):—This appeal was heard in Regina, Saskatchewan on December 8, 1993, pursuant to the general procedure of this Court. The appellant, Daniel F. Glass, appeals the penalties imposed by the Minister of National Revenue for 1988 and 1989 taxation years.

The burden of establishing the facts justifying the assessments of the penalty is on the Minister pursuant to subsection 163(3) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Upon the motion of the appellant unopposed by the respondent, the Court ordered the respondent to proceed first.

The appellant has a cattle and grain farm on approximately 5,000 acres of land in the vicinity of Chaplin, Saskatchewan. He farmed together with his father until 1986 when his father died and continued alone with his family since then. Although he has limited formal education, I have no doubt that he is an astute as well as hardworking farmer.

About 1980, he retained Farm Business Consultants (F.B.C.) to look after his accounting and tax returns. In 1983, he incorporated Darniel Farms Ltd. (Darniel) and disposed of certain farm property, including cattle, to Darniel pursuant to provisions of section 85 of the Act. He testified he has never heard of a section 85 "rollover" but incorporated because he was advised by F.B.C. that it would save him tax. He owns 99 shares and his wife Darlene one share. The appellant took back a note from Darniel in the amount of $137,500. Darniel paid the appellant, $75,000 in rental income, $10,000 of which was not reported by him in 1988.

On February 7, 1989, Darniel received $124,450 from the sale of cattle which was transferred to the appellant’s personal account on February 8, 1989. These two sums $10,000 and $124,450 were not included in the appellant’s income (nor that of Darniel) in the 1988 and 1989 taxation years. The omission was discovered upon an audit of the affairs of Darniel and the appellant in June 1991. The appellant did not deny the omission to income, co-operated with the authorities, paid the tax owing forthwith, but denied the responsibility for penalties.

The Minister permitted the $124,450 to be treated as income to the appellant which the Minister's counsel referred to as a major concession. Counsel for the Minister called Mark Novak, former auditor, with Revenue Canada out of Regina who was examined and cross-examined. He testified in a professional, competent and forthright manner. As the result of a routine audit of the records of Darniel and the appellant in June 1991 he discovered the omissions to income referred to and recommended to his superiors that the taxpayers be penalized under subsection 163(2) apparently, for the most part, because of the magnitude of the omission.

The appellant and his wife, who was the record keeper co-operated fully. There were small cattle sales during 1989 totalling about $25,000 that were included in income. The $124,450 was recorded in Darniel’s bookkeeping and bank statements and apparently easily detected by the auditor. There was no apparent cover up. I do not feel it serves a useful purpose to review all of his testimony.

A further witness for the respondent, confirmed the auditors’ conclusion, which included a finding that there did not appear to be any fraud of a criminal nature.

The appellant denied there was any gross negligence on his part. He had relied absolutely on F.B.C. to do the accounting and tax returns for Darniel and himself and paid them approximately $2,000 per year. His wife kept the day to day records and did the banking. She deposited the $124,450 on February 7, 1989 into the Darniel account and had the bank transfer the following day to the appellant’s personal account in order that it would gain interest.

F.B.C. attended Darniel and the appellant quarterly to record their respective income and expenses. A representative of F.B.C. (the manager of service representatives) testified that the 1988 and 1989 returns were prepared by his firm. At least two of the four relevant income tax returns were signed and certified by a F.B.C. representative.

Part of the responsibility for the omissions was placed on a former employee of F.B.C. who is deceased who may have had failing health while preparing the appellant’s statements and returns in 1989. In addition to the two omissions, interest expense of $17,448 and $17,532 for 1988 and 1989 taxation years respectively was not claimed. The interest expense and adjustment in 1988 more than offset the unreported $10,000 rental income for that year.

The F.B.C. representative manager agreed with the appellant’s testimony to the effect that the appellant provided his company with all the necessary books and records and the $124,450 cattle sale and rental income was clearly recorded and it was F.B.C.'s responsibility to include them for tax purposes. The representative acknowledged that the returns in uestion were prepared by his company and in 1989 he signed and certified on oehalf of the appellant and Darniel and filed before the April 30 deadline—subsequently copies were sent to Darniel and the appellant. On the evidence presented it is not unreasonable to conclude that F.B.C. was grossly negligent. The representative, who identified himself as a tax consultant and with F.B.C. for ten years, acknowledged that the appellant relied on him and his company's expertise to accurately report and record income and expenses.

Analysis

Subsection 163(2) stipulates as follows for the 1988 and 1989:

False statements or omissions. 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 of the greater of $100 and 50 per cent of the aggregate of.. . .

The issue in determining whether to impose a penalty is whether the appellant has ”. . . knowingly or under circumstances amounting to gross negligence . . . has made or has participated in, assented to or acquiesced in the making of a false statement or omission in a return. . . ”. There is a wide spectrum of jurisprudence on this question. As indicated the onus is on the Minister. A high standard has been set.

Counsel for the appellant referred to Udell v. M.N.R., [1969] C.T.C. 704, 70 D.T.C. 6019 (Ex. Ct.). The facts of this case are quite similar to the present case in that the taxpayer failed to include proceeds from the sale of cattle in his income. The Court found that the farmer kept meticulous records and relied on an accountant to prepare returns. The accountant understated income. The Exchequer Court held that the gross negligence of the accountant should not be imputed to the taxpayer.

Justice Cattanach stated 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 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 party sought to be charged the benefit of the doubt.

Strayer, J. in Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247, at page 234 (D.T.C. 6256) quoted Justice Cattanach in Udell, supra, and in dealing with the phrase "gross negligence” stated:

With respect to the possibility of gross negligence, I have with some difficulty come to the conclusion that this has not been established either. "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 laintiff 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.

On the evidence, the appellant had retained and relied on F.B.C. to do the preparation statements and income tax returns for many years. He did not recog- nize an appreciable difference in quality of service from those at F.B.C. who presented themselves as financial consultants and a chartered accountant. He, through his wife Darlene, Kept accurate records that were presented quarterly to the consultants. A record of the $124,450 income was clearly presented. The substantial interest expense was also available and not used as a deduction.

The appellant presented that the end of April is an extremely busy time of the farming year for his operation and he relied heavily upon what he believed were professionals to accurately file his returns. In answer to the respondent's opinion that it is inconceivable that he would not react to viewing a farm income loss in his 1989 return when there was a cattle sale of $124,450, the appellant stated that there have been significant fluctuations in his and Darniel's farming income and he spent little or no time reviewing the 1989 return which appear to have been signed on his behalf by an F.B.C. representative and mailed to him after the filin deadline. It is further noted that the $124,450 was deposited in February 1989 an the appellant received his return in May 1990.

In Armstron v. Canada, [1993] 2 C.T.C. 2681, 93 D.T.C. 1043, at page 2682 (D.T.C. 1044), T.C.C. Judge Brulé stated:

When the omission was discovered, the appellant paid the necessary tax. The appellant did not deny the omission to income, cooperated all along with the authorities, but denied there was any gross negligence on his part. As in the previous year, he delivered all his books and records to his accountant approximately one month before the April filing deadline. The accountant, William J. MC achern, was ill at the time and retained another person to prepare the return. This latter person did not fully understand the records, did not ask questions, and as a result the omission occurred.

Judge Brulé concluded that the taxpayer’s actions did not warrant the imposition of penalty.

In the very recent case of Johnson v. Canada, [1994] 1 C.T.C. 2025, 94 D.T.C. 1009, the appellant forwarded accurate records to his accountant who neglected to include income of over $180,000 in the 1986 taxation year. The appellant was a practising dentist and experienced investor and businessman.

Judge Beaubier, T.C.C. cited both the Venne and Udell cases, supra, and concluded as follows:

The appellant had a system. His employee recorded the cash flow in question in R.J.P.C.'s records and he turned all the documents over to his chartered accountant with respect to income tax matters and his income tax return. When asked by the chartered accountant, insofar as he had knowledge, the appellant reviewed them with the chartered accountant; if he did not have knowledge, then he referred the chartered accountant to his broker. After that the appellant relied on the chartered accountant completely and did what the chartered accountant told him to do respecting his income tax return. The chartered accountant was negligent. But these actions and any consequent omission in the income tax return do not make the appellant grossly negligent.

The evidence is not sufficiently convincing to conclude that the appellant had the state of mind or mens rea required to apply subsection 163(2). While there was certainly a degree of negligence by the appellant in dealing with his tax returns he is given the benefit of the doubt and I find there was no gross negligence that would attract penalties.

The appeal is allowed, without costs and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment.

Appeal allowed.