Ernst Schwarz v. Minister of National Revenue, [1991] 2 CTC 2162, 91 DTC 840

Lamarre Proulx, T.C.J: — This appeal concerns a penalty levied by the respondent, the Minister of National Revenue, pursuant to subsection 163(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), for the years 1985, 1986 and 1987.

That subsection reads as follows:

163. (1) Every person who wilfully attempts to evade payment of the tax payable by him under this Part by failing to file a return of income as and when required by subsection 150(1) is liable to a penalty of 50% of the amount by which

(a) the tax sought to be evaded

exceeds

(b) that portion of the amount deemed by subsection 120(2) to have been paid on account of his tax under this Part that is reasonably attributable to the amount referred to in paragraph (a).

At the outset of the hearing, counsel for the appellant raised as a preliminary point that under subsection 163(3) of the Act, the burden of establishing the facts justifying the assessment of the penalty is on the Minister and it was his submission that in light of that, the respondent must lead the evidence establishing the penalty. It was counsel for the respondent's view that the appellant had to adduce his evidence first because the question of onus cannot be confused with the question of who is the appellant.

After having been informed by counsel for the respondent that in similar circumstances, where only the penalty was at issue, a member of this Court had ruled that the taxpayer had to proceed first, I followed this precedent asking counsel for the appellant to proceed first.

However, after a review of the authors and the case law on the subject, it would appear to me that who should proceed first is not a rigid rule and it may be left to the appreciation of the presiding judge. It would appear that to begin first may be asked as a right by the party, having the burden of proof, as usually the first word means the last word regarding the argument.

In civil cases, subject to the judge’s discretion to direct the contrary, the plaintiff has the right to begin unless the defendant has the burden of proof on every issue and, in this context, “burden of proof” may be taken to mean “evidential burden". [1]

The right to begin is partially, but not wholly, determined by the burden of proof.

In one sense, the plaintiff always begins, for without an exception the pleadings are opened by him and not by the defendant. The following are the generally accepted rules, however, as to the right to begin in the sense of opening the case to the jury: (1) Where the onus of proving any one of the issues, however numerous they may be, rests upon the plaintiff, and he will undertake to give evidence upon it, he is entitled to begin. (2) Although there may be no issues lying upon the plaintiff yet he is entitled to begin in all actions in which he claims substantial and unliquidated damages (e.g. actions founded on libel, slander, injuries to the person, covenant, or assumpsit). (3) If the onus of proving all the issues lies on the defendant, he is, subject to the exception last mentioned, entitled to begin. But his mere admission at the trial of the plaintiff's whole prima facie case will not be sufficient to give him this right, if he might have made the admission by his pleading. [2]

This view seems to be in accordance with section 135 of Tax Court of Canada Rules (General Procedure) which reads as follows;

135. (1) If at a hearing a party proposes to adduce evidence, the party or the party's counsel shall, unless the judge directs otherwise, immediately before adducing the evidence, open his case by making a short statement giving a concise outline of the facts that the party proposes to prove and of the applicable law.

(2) Unless the judge directs otherwise, the parties shall put in their respective cases by evidence or by putting before the Court the facts on which they rely, in the following order,

(a) the appellant,

(b) the respondent, and

(c) the appellant in respect of rebuttal evidence.

(3) Unless the judge directs otherwise, after all parties have adduced their evidence, they shall be heard in argument in the order in which they adduced their evidence and the party who was first heard in argument may reply and an opposing party may answer a new point of law raised in the reply.

In reassessing the appellant for the years 1985, 1986 and 1987 the respondent relied inter alia upon the following assumptions and findings of fact as described in paragraph 7 of the reply to notice of appeal:

(a) the facts hereinbefore pleaded or admitted;

(b) in his 1985, 1986 and 1987 taxation years, the appellant had taxable income of $17,585, $23,357 and $42,958 respectively on which was payable federal income tax of $3,003, $4,471.94 and $9,875.43 respectively;

(c) for the 1986 taxation year, an amount of $163.11 was deducted at source and remitted to the Receiver General for Canada on account of the appellant's federal income tax liability;

(d) at all material times, the appellant operated a sole proprietorship business known as Ernst Schwarz Masonry;

(e) the appellant never filed a tax return for his 1982 taxation year;

(f) the appellant was assessed for his 1983 and 1984 taxation years, notices of which were dated December 5, 1985; as of this date, the appellant had not filed tax returns for these taxation years;

(g) the appellant failed to file tax returns for his 1985, 1986 and 1987 taxation years within the time required by subsection 150(1) of the Act;

(h) the appellant wilfully attempted to evade payment of the taxes payable by him under Part I of the Act by failing to file returns of income for his 1985, 1986 and 1987 taxation years as and when required by subsection 150(1) of the Act.

The evidence adduced showed that with respect to the assumption of fact described in paragraph 7(d), the appellant carried on business with his brother for the years 1986 and 1987, and with respect to paragraph 7(e) a tax return was filed for that year in 1983.

The appellant explained to the Court why he did not file his tax returns for the years 1985, 1986 and 1987 within the time required by subsection 150(1) of the Act and this was corroborated by the other witnesses who testified on his behalf and was not contradicted by any evidence adduced by the respondent.

In the year 1980, the appellant separated from his wife. Before the separation and for a year after, the appellant's wife took care of the bookkeeping and made the arrangements with the accountant to file the tax returns on time. He, on his own, was unable to look properly after his affairs and apparently the separation from his wife increased this dependency and caused a marked deterioration of his mental health. He found himself incapable of controlling his alcohol intake. During those years, he failed to send the invoices to his clients and to pay his suppliers on time. He was convicted three times of impaired driving. He continued to work but even on work sites he was unable to abstain from drinking alcohol. The office work was just not done. He described himself, in those years, as being "gone". In 1986, his brother offered to work with him on these terms: the appellant's brother would do the invoicing of the clients and pay the suppliers and the profit would be split in half.

In December 1985, the respondent arbitrarily assessed the appellant for the years 1983 and 1984; the latter paid the amount assessed without disputing it.

With respect to the years 1985, 1986 and 1987, agents of the respondent came to see him on a job site sometime before March 22, 1988, and informed him that if he were not to file his tax returns for those years, that he would be assessed arbitrarily. They advised him to obtain the services of an accountant. That is what he did. He chose an accountant in the yellow pages of the telephone book. The meeting took place on March 22, 1988. He immediately paid the accountant $2,000 to do the work.

This, counsel for the appellant suggests, is another indication of how dejected the appellant felt in those years, as normally someone would pay a small instalment at the beginning, maybe a few payments for the work in progress, and make the last payment at the end when the work is completed.

A respondent's agent came to visit him again afterwards and the appellant directed him to the accountant. Though the accountant was working on the tax returns, the respondent, nevertheless, issued the arbitrary assessments for the years in question.

The evidence showed that during all the years in question, the appellant did not change his address nor move his assets and that since these years, the appellant, through his accountant, files his tax returns on time.

The only evidence adduced by the respondent was that the taxpayer did not file his tax returns on time though having been asked to file them for the years 1985 and 1986.

Counsel for the appellant argued that the appellant did not conceive a scheme in order to evade payment of the tax payable. He did not hide his assets nor change his address. There was no purpose in the appellant's inaction. He was at the survival level. His mental state, after the separation from his wife, was such that he was unable to look after his own affairs including the preparation of his tax returns.

Counsel for the appellant referred me to WA. Fulcher v. M.N.R., [1982] C.T.C. 2198; 81 D.T.C. 569; Nuttall v. M.N.R., [1980] C.T.C. 2921; 80 D.T.C. 1804; The Queen v. A.J. Pongrantz, [1982] C.T.C. 259; 82 D.T.C. 6200, and R. Boileau v. M.N.R., [1989] 2 C.T.C. 2001; 89 D.T.C. 247.

Counsel for the respondent referred me to the cases of Sturgess v. The Queen, [1984] C.T.C. 1; 83 D.T.C. 5434; Murray v. M.N.R., [1990] 2 C.T.C. 2103; 90 D.T.C. 1600.

A review of these cases leads me to believe that the intent to evade payment of the tax payable by not filing one's tax return has to be ascertained from the circumstances of the case at bar. If the conduct of the taxpayer, through doing or not doing, shows a deliberate intention or a plan of not paying the tax payable by not filing the tax returns, the Court will find that subsection 163(1) of the Act is applicable. If, however, the Court finds from the taxpayer's conduct that there was no deliberate intention or no conceived plan of not paying the tax payable by not filing the tax returns, the Court will then find that the taxpayer is not subject to the penalty prescribed by subsection 163(1) of the Act.

In the case of Sturgess, supra, Mr. Justice Muldoon did not find in favour of the taxpayer on the following basis: "He did not speak, and there was no evidence otherwise tendered, of any mental or physical infirmity which might have explained his desultory conduct in this regard.” (Page 6 (D.T.C. 5439))

Similarly to the case of Pongrantz, supra, where the Court found in favour of the taxpayer, the appellant: "denied any intention not to pay his income tax and he denied the existence of any plan or scheme which would result in his not paying tax.” (Pages 260-61 (D.T.C. 6201))

In the Murray case, supra, Mr. Judge Rip was satisfied that the taxpayer did not intend to file returns of income for the years in question because: ”. . . he did not wish to pay the taxes for whatever reason. What he originally started to put off, perhaps temporarily, became an intent to put off indefinitely." (Page 2110 (D.T.C. 1605))

In the case at bar, I do not find any intent, plan or scheme to evade tax by not filing tax returns on time. I find a case of complete disorganization caused by an emotional crisis in the appellant's life. I do not want to appear as saying that an emotional crisis is in all cases an excuse not to fulfil one's statutory duties. I do believe however that in the circumstances of the present case, it so seriously affected the appellant's mental capabilities in dealing in his own affairs, that I am not convinced, on a balance of probability, that the taxpayer wilfully attempted to evade payment of the income tax payable. Therefore the appeal is allowed with costs.

Appeal allowed.