Gus Constantin Mavridis v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2669

Rip, T.C.C.J.:—The Minister of National Revenue (the "Minister") reassessed Gus Constantin Mavridis ("Mavridis"), the appellant, for 1987 amongst other things, imposing a penalty pursuant to subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Mavridis appealed the reassessment of the penalty electing to proceed under the provisions of sections 18.1 to 18.27 of the Tax Court of Canada Act (informal procedure).

Counsel for Mavridis advised the Court his client does not dispute many of the facts assumed by the Minister in making the reassessment. He stated that at the time the appellant's 1987 tax return was prepared and signed the appellant was emotionally ill and thus was not aware of the omission of $20,000 from his declared income.

The Minister assumed the following facts in assessing the penalty:

(b) on or about June 6, 1986, the appellant entered into an agreement to purchase a property municipally known as 3719 Sheppard Ave. E. (the "property") for $250,000;

(c) the appellant made a down payment in the amount of $10,000 and agreed that the balance of $240,000 was to be due and payable about one year later, on May 31, 1987, on completion of the agreement of purchase and sale;

(d) on or about March 30, 1987, the appellant, entered into an agreement to sell his right to purchase the property to a third party;

(e) as consideration, the appellant received $10,000 as the return of his original down payment with an agreement that a profit in the amount of $20,000 was to be payable to the appellant when the property was sold by the third party;

(f) the property was sold by the third party on September 15, 1987, at which time the appellant received a cheque for the $20,000 profit;

(i) the total income reported on his 1987 return of income was $15,203.68;

The appellant's position is set forth in paragraph four of his notice of appeal and counsel led evidence accordingly. Paragraph four states:

4. The taxpayer failed to report income herein, by reason only of the following:

(i) in 1987, his business, G.M. Furs Ltd., was defrauded of hundreds of thousands

of dollars, which losses forced his said company into bankruptcy;

(ii) as a result of such situation, he fell ill, suffering a virtually complete nervous breakdown;

(iii) he did not fully recover his emotional health and well being until late 1988;

(iv) when his 1987 T1 return of income was prepared, he did not report the $20,000 income gain because he was emotionally ill at that time and unable to properly focus upon and transact his tax matters in the businesslike manner in which he had always conducted himself prior to his illness.

Mavridis immigrated to Canada in 1963. He cleaned offices with his wife, worked as a machine operator in the fur business and during 1967 to 1973 operated a restaurant in Toronto. He then returned to the fur business and from 1976 to May 1987 owned G.M. Furs Ltd., a manufacturer of fur coats.

It was the financial reverses of G.M. Furs Ltd. that caused the appellant the mental anguish which affected the preparation of his 1987 tax return, the appellant states. In 1986, G.M. Furs Ltd. sold merchandise in consideration of a certified cheque in the amount of $270,000 which subsequently was found to be forged. Then, within six months of receipt of the forged cheque, three of G.M. Furs Ltd.'s customers became bankrupt and G.M. Furs Ltd. lost approximately $475,000 as a result. When Mavridis reported the bankruptcies to his company's bank, the bank, on May 1, 1987, put G.M. Furs Ltd. into receivership. Subsequently G.M. Furs Ltd. also became a bankrupt.

Mavridis explained he “lost almost everything". He tried to work but his mind could not be directed to the task at hand. Mavridis stated that at the time he was treated by his family physician. No medicine was prescribed and he was not referred to any specialist. He claims his nerves were "bad".

He described how he would leave home by car each morning with no particular destination in mind and how he would cry before returning home for the day.

Mavridis stated he started “feeling better" in late 1988.

In September 1987, Mavridis was working as a manufacturer's agent for M.B. Furs Ltd. In June, 1986, he had made an offer to purchase property on Sheppard Avenue in the city of Scarborough for $250,000. The offer was accepted and was to close on May 31, 1987. Sometime in March 1987, he received an offer to assign his right to the property. At first, he testified, he refused to sell but subsequently agreed to assign his interest. Although his name appears on the offer to purchase, his signature does not. One May Sue Chong appears to have signed the agreements to assign on his behalf. He stated in Court that he remembers nothing of these transactions but acknowledged their existence because his name appears on the documents and his signature appears on documents respecting the first transaction. He does remember, however, receiving a cheque for $20,000 in September 1987 at the premises of M.B. Furs Ltd., endorsing the cheque and receiving $20,000 cash in return. He says he does not know what he did with the money.

In any event, when he brought his records to a Mr. Sideratos to prepare his income tax return for 1987, Mavridis did not mention his receipt of the $20,000. Mavridis testified there was no written document or record of the $20,000 and therefore it could not have been included with the material he gave Mr. Sideratos. At the time, he said, he forgot about the $20,000 due to his mental state. Mavridis stated that he kept expense vouchers aggregating $8,564 which he deducted from his commission income from M.B. Furs Ltd. for 1987 and had remembered to remind M.B. Furs Ltd. that he had not received his T4 slip for 1987.

Mavridis testified he did not wish to call the physician who treated him in 1986 and 1987 as a witness since he was embarrassed".

The introductory paragraph of subsection 163(2) reads as follows:

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 regulations, is liable to a penalty of

The appellant acknowledges he suppressed $20,000 of income in making an omission in his tax return for 1987. The only issue before me was whether given the appellant's state of mind at the time he caused to be prepared, and signed his 1987 tax return, he exercised the degree of care, diligence and skill to prevent the failure to omit the $20,000 that a reasonably prudent person would have exercised in comparable circumstances.

In the respondent's view the appellant, if he did not knowingly omit to include $20,000 in his income, was grossly negligent in making the omission. The amount of income omitted was approximately 130 per cent of the amount of income reported. The appellant participated in the making of the return — even though he did not actually prepare it — since he provided the preparer with the information concerning his income for 1987 and signed the return. In addition, the fact that in 1987 the appellant kept vouchers for his business expenses during the year shows that during 1987 he was acting in a competent and businesslike manner.

The appellant’s counsel submitted that I consider the credibility and reasonableness of his client's testimony as well as his demeanour at trial. The appel- lant's business reversals were due to circumstances over which he had no control and which caused him considerable mental anguish. He could not be held responsible for the omission of the $20,000 from his income since he did not know what the facts were when he signed the return. He could not be grossly negligent for the omission because of his state of mind at the time.

Numerous cases have been heard by the courts with respect to subsection 163(2) and its predecessor subsection 56(2). Counsel for the Minister cited several: R v. Taylor, [1984] C.T.C. 436, 84 D.T.C. 6459 (F.C.T.D.), Schwarz v. M.N.R., [1991] 2 C.T.C. 2162, 91 D.T.C. 840 (T.C.C.), Sommers v. M.N.R., [1991] 1 C.T.C. 2451, 91 D.T.C. 656 (T.C.C.), Dymond v. M.N.R., [1990] 2 C.T.C. 2509, 90

D. T.C. 1920 (T.C.C.), De Graaf n. The Queen, [1985] 1 C.T.C. 374, 85 D.T.C. 5280 (F.C.T.D.) and Wallace v. M.N.R. (1966), 42 Tax A.B.C. 1, 66 D.T.C. 593. I have also considered the reasons for judgment of Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D.), Udell v. M.N.R., [1969] C.T.C. 704, 70 D.T.C. 6019 (Exch. Ct.), and Honig v. Canada, [1991] 2 C.T.C. 279, 91 D.T.C. 5612 (F.C.T.D.).

I do not know what the appellant's state of mind was in April 1988. He no doubt was the victim of emotional stress in 1986 and 1987 due to business reverses.

On the whole, I found the bulk of the appellant's testimony credible. However I have some reservations. I am not satisfied Mavridis is the person to best describe his illness at this point in time. In 1986 and 1987 he was being treated by a physician. No special treatment by way of hospitalization, medicine or extended rest appears to have been prescribed. Mavridis testified he began “feeling better” in late 1988. I would like to know his condition in April 1988, one generally does not start “feeling better” all of a sudden. That physician still practises in Toronto and arrangements could have been made for him or her to explain to the Court the precise nature of the appellant's distress in 1986 and 1987 and whether it was severe enough to cause him to omit in April 1988 a significant portion of his income in preparing his tax return. After the bankruptcy of G.M. Furs Ltd., the appellant obtained employment. During 1987, he managed to retain receipts of expenses he incurred during the year entitling him to deductions for income tax purposes. He had the presence of mind in early 1988 to request a T4 slip for 1987 from M.B. Furs Ltd.

The appellant did not demonstrate to my satisfaction that his mind in April, 1988 was in such a state that he was unable to remember that he received $20,000 in September of the previous year. He used this money after receiving it. At trial he said he did not remember how he spent the $20,000. I note that without the $20,000, the appellant's gross income for 1987 was $15,000. I cannot accept the inference I would have to make if I allow the appeal, that by April 1988 the appellant was not aware of the source of funds that was maintaining his family.

On the basis of these facts, I am of the view that the omission of the $20,000 in reporting income for 1987 amounted to gross negligence by Mavridis in the carrying on of a duty under the Act. Accordingly I must dismiss his appeal.

Appeal dismissed.