D. Scott Murray v. Minister of National Revenue, [1990] 2 CTC 2103, 90 DTC 1600

Rip, T.C.J.:—D. Scott Murray ("Murray"), the appellant, appeals income tax assessments for 1983, 1984 and 1985 in which the Minister of National Revenue, the respondent, levied penalties under the provisions of subsection 163(1) of the Income Tax Act ("Act") on the basis Murray wilfully attempted to evade payments of the tax payable under Part 1 of the Act by failing to file a return of income for each of the 1983, 1984 and 1985 taxation years on or before April 30 in the next year following the particular taxation year.

Subsection 163(1) reads as follows with respect to the years in appeal:

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).

Murray stated he did not wilfully attempt to evade tax by not filing his returns of income. He did not file, he said, because he “did not have the figures assembled and be in a position to compile” his income for purposes required by the returns. He claimed he was not aware he had taxable income during the years in appeal.

At all times relevant to these appeals Murray was a lawyer practising his profession in Arnprior, Ontario. He was called to the Ontario bar in 1979. In 1971 he graduated with an undergraduate degree from Carleton University in Economics and studied two courses in accounting. After graduation he worked as a Statistician with Statistics Canada for three years before entering the Law faculty at the University of Ottawa in 1974. During summers at university Murray was employed and filed income tax returns reporting income and claiming (and receiving) tax refunds.

Upon his call to the bar Murray worked for a lawyer in Cornwall, Ontario. In early 1980 he learned of a law practice in Arnprior which was for sale due to the death of a lawyer. He got in touch with a friend he knew from the bar admission course and together the two lawyers agreed to purchase the practice from the estate of the deceased lawyer. Murray worked on a part-time basis for the firm during February to mid-March, 1980, before the effective date of sale, March 31 or April 1, 1980, in order to become acquainted with files and staff. The firm consisted of two lawyers, two full-time secretaries and a part- time bookkeeper. The bookkeeper supplied him, Murray said, with "bare bones information"; he would prepare a monthly balance at the end of each month.

For the last fiscal year prior to the death of the deceased lawyer the firm billed $150,000 in fees. Murray believed the firm was “viable economically" but he "did not count on high bank rates".

The fiscal period of the partnership was April 1 to March 31.

During the first two years after purchase the deceased lawyer's bookkeeper continued to work for Murray. The firm's financial statements for the fiscal year 1981 were prepared by the bookkeeper but Murray could not recall if he "sat down to determine the bottom line to determine if tax returns were necessary because the figures did not indicate . . ."he had taxable income for the year. In any event Murray failed to file a tax return for 1981 because he believed he had no taxable income in that year. He stated his "general idea” of profitability of his law firm was determined from bank statements as well as statements prepared by his bookkeeper and his personal bank account. He also dealt with his 1982 financial statements and potential tax liability for 1982 in the same manner.

After the bookkeeper left the firm in mid-1983 no other person was hired to keep the firm’s books since a replacement would cost money. As well, the records, according to Murray, were not up to date: the bookkeeper had "maintained" the bank statements but not office records.

Once the bookkeeper left, the lawyers' secretaries posted the receipts and disbursements on a daily basis. No monthly summaries were prepared.

The only way to determine the financial position of the firm, according to Murray, was by reviewing bank statements but these statements "couldn't tell much". All he could determine was the monthly bank balance. The firm's bank statements did not reflect personal loans taken out by the appellant for his practice and in 1983 he had "no idea” of his loan balance unless he calculated the balance on the interest he paid. Murray acknowledged that from time to time his bank requested financial statements from him but that he was able to put them off.

Murray did retain an auditor for his trust account.

Over the years, Murray said, he believed there was no change in the firm's profits, or lack thereof. Actual losses or income could not be determined from the firm's existing records, he admitted. What he appears to have relied on for this belief was that in 1980 the firm grossed $89,000; during the years 1980 to 1982, the firm's monthly overhead was $6,000 to $7,000. Murray said he was of the view there was virtually no change in the firm's income from year to year to 1985. No improvement was reflected in the firm's cash position between 1982 to 1983 or from 1983 to 1984; there was some improvement in 1985 but Murray said he did not realize the improvement in 1985. As billings went up so did expenses. In 1985 billings totalled $197,000 and expenses totalled $167,000. It was not until 1987 when the returns for 1983, 1984 and 1985 were prepared at the request of the respondent that Murray realized, he testified, that his practice was profitable, although he admitted he had an “idea earlier that he was in a taxable position”.

No profit and loss statement for the practice for 1983 was prepared since, according to Murray, he "didn't need someone to tell him profits were marginal". Murray said he did not realize the partnership earned a profit of $50,000. He claimed that he was “struggling to say afloat” and did not realize he had spent as much as $25,000 on personal expenses.

Murray insisted that in 1984 he was still "trying to keep above water” and was not aware the partnership made a profit, his share being $21,000.

In 1985, however, Murray said he began to suspect the practice was profitable and he was earning enough money to earn a living. By summer or fall of 1985 he acknowledged he was aware he owed some tax but did not file a return because he did not have any money available to pay the tax. Thus, he said, he “out it off”.

In 1985 his secretary began to compile financial statistics from the past several years. She also, according to Murray, "started keeping things current on a month-to-month basis". A procedure was instituted in 1985 to keep a running account of the figures.

Profit and loss statements for 1983, 1984 and 1985 were prepared for the partnership by Murray's secretary during the summer of 1985.

In the spring of 1986, Murray retained a lawyer to make inquiries with officials of the respondent as to their reaction to his failure to file returns and how the matter could be resolved. He did not wish to make the inquiries himself he explained, because he did not want his identity revealed at the time. He testified his lawyer contacted the respondent's officials to ascertain the "damages" (amount of tax, interest, penalties) and determine if payment could be arranged. He had informed his lawyer he had not filed tax returns since 1979 or 1980 and it appeared he had some taxable income in some years. No profit and loss statement was given to his lawyer. His lawyer advised him that the respondent would not commit himself and for Murray to file and take his chances.

Once advised by his lawyer, Murray did nothing. Murray's brother, also a lawyer, had earlier problems with Revenue Canada and because of his brother's experience, culminating in personal bankruptcy, Murray was leery of filing. Murray said he feared what bankruptcy might do to a professional in a small town like Arnprior. He admitted that "had I something more concrete from counsel” he would have filed.

In March 1987, Murray was visited by Mr. Edward Kutkewich ("Kutkewich"), a member of the Compliance Group in the respondent's Ottawa District Taxation Office.

Before Kutkewich's visit, Murray said, he planned to pay the tax. Murray's partner also failed to file his tax return. They discussed their difficulty and realized they would "have to file and bite the bullet”. However, they did not fix a time to file. It was, said Murray, "a question of getting money together and making part payments". Murray agreed with the respondent's counsel that he did not file income tax returns because he did not have money to pay the taxes.

Murray stated he intended to approach the respondent “in some fashion to get the returns filed and pay tax". He said he was aware he would be liable for interest on late payments as well as a five per cent late filing penalty but did not wilfully evade payment of any tax. Murray claimed the firm paid all withholding tax and other remittances to the respondent on a timely basis. He believed, he said, the respondent would be amenable to his plight. When the respondent indicated to his lawyer they could not be co-operative in the circumstances, Murray had not formulated a time schedule to settle matters.

Kutkewich testified the penalty was imposed on Murray for several reasons. Firstly, Murray knew he was under a legal obligation to file returns; he had filed in earlier years when he was owed a refund of tax. Secondly, he was a professional, a lawyer, and the respondent assumed Murray knew he was aware of his obligation under the Act. Murray had information available from which he could have prepared his returns; because the firm was profitable Murray should have assumed he may have a taxable income. On a "complete package” of facts before him, and not any one factor, Kutkewich determined Murray wilfully evaded payment of tax by not filing his returns.

Three elements must be present for a taxpayer to be liable for a penalty under subsection 163(1) as it read during the years in appeal. First, the taxpayer must have failed to file a tax return as and when required by subsection 150(1). Second, the taxpayer must have attempted to evade the payment of Part 1 tax. Third, the taxpayer must have been acting wilfully.

The first element is never very difficult to establish. In the case at bar, the appellant acknowledges he failed to file his tax return as and when required by subsection 150(1).

However, each of the second and third elements contain a key word, namely "evade" and “wilfully”, respectively, which is capable of two different meanings when interpreting a statutory provision.

In general, the different meaning that may be attributed to the word “wilful” depends on whether the word is used in a penal or a non-penal statutory provision. When it is used in a non-penal statutory provision the word “wilful” usually means "voluntary, not by accident or inadvertence". On the other hand, when the word is used in a penal statutory provision it usually means "with an evil intent". In Anderson v. C.N.R. Co. (1917), 35 D.L.R. 473; [1917] 3 W.W.R. 143 (Sask. S.C.) at 480, Brown, J. had this to say about the meaning to be attributed to the word:

“Wilful”, as defined in vol. 8 of the Century Dictionary and Cyclopedia, means: “Due to one's will; spontaneous, voluntary; deliberate; intentional.”

As ordinarily used in Courts of law, the word “wilful” implies nothing blamable, but merely that the person of whose action or default the expression is used is a free agent, and that what has been done arises from the spontaneous action of his will. It amounts to nothing more than this: that he knows what he is doing, and intends to do what he is doing, and is a free agent. It does not imply that an act done in that spirit was necessarily a malicious act. But generally in penal statutes the word “wilful” or “wilfully” means something more than a voluntary or intentional act; it includes the idea of an act intentionally done with a bad motive or purpose; or, as it is otherwise expressed, with an evil intent.: 40 Cyc. 944.

Anderson was a case concerned with the interpretation of the phrase “wilful act or omission” contained in subsection 294(4) of the Railway Act, R.S.C. 1906, c. 37. The judgment in that case was later affirmed by the Supreme Court of Canada at (1917), 57 S.C.R. 134; 43 D.L.R. 255.

The word “wilfully” and the word “wilful” have essentially the same meaning. The Shorter Oxford English Dictionary on Historical Principles defines, in part, the word “wilful” as follows:

2. Willing; consenting . . .

3. Proceeding from the will; done or suffered of one's own force, will or choice; voluntary . . .

The same dictionary defines, in part, the word “wilfully” as follows:

2. Of one's own free will, of one's own accord, voluntarily . . . b. According to one’s own will . . .

The meaning attributed to the word “wilfully” in paragraph 239(1)(d) of the Act, "with an evil intention”: See R. v. Paveley, [1976] C.T.C 477; 76 D.T.C. 6415 (Sask C.A.); R. v. de Wolf, 84 D.T.C. 6029 (B.C. Co. Ct.), affd 84 D.T.C. 6033 (B.C.C.A.); The Queen v. William Sumarah Jr. et al., 70 D.T.C. 6164; [1970] 5 C.C.C. 317 (N.S. Co. Ct.); The Queen v. Landes et al., [1988] 1 C.T.C. 124.

In the case at bar we are concerned with the meaning to be attributed to the word "wilfully" as used in subsection 163(1) of the Act. This subsection imposes a civil penalty on a taxpayer who wilfully attempts to evade the payment of tax by failing to file a tax return on time. The language used in subsection 163(1) is similar to that found in paragraph 239(1)(d), a penal provision, and the jurisprudence suggests that in both provisions the word "evade" has essentially the same meaning: See R. v. Pongrantz, [1982] C.T.C. 259; 82 D.T.C. 200 (F.C.A.); R. v. Paveley, supra.

In R. v. Thistle, [1974] C.T.C. 798; 74 D.T.C. 6632 (Ont. Co. Ct.) Grossberg, Co. Ct. J. held that “evasion” was not limited to suppression of income by false declaration, falsification of books or failure to record. The Court held that the deliberate failure on the part of the taxpayer to file returns constituted a cunning scheme to evade the payment of taxes within the meaning of paragraph 239(1)(d).

In R. v. Paveley, supra, the taxpayer, a medical doctor, who had repeatedly refused to file income tax returns despite formal demands made on him by the respondent, was charged with having wilfully evaded the payment of taxes pursuant to paragraph 239(1)(d). Although the taxpayer was acquitted of the offence charged, the learned judges expressed differing reasons in arriving at their decision. Woods, J.A. was of the view that the existence of a scheme or artifice with an intent to deceive was necessary to fall within the meaning of paragraph 239(1)(d). Bayda, J. adopted a contrary view. He felt that the existence of an artifice or a scheme was not a necessary element of an offence under paragraph 239(1)(d). Brownridge, J. did not think that to support a conviction under paragraph 239(1)(d), it was necessary to prove an attempt on the part of the taxpayer to conceal his income. According to Brownridge, J. what governed was whether the taxpayer was motivated by the intention of evading tax. He suggested that a deliberate failure or refusal to file income tax returns as and when required may, in certain cases, constitute an artifice or stratagem to attempt to evade the payment of taxes.

Mr. Justice Heald, in delivering judgment of the Federal Court of Appeal in Pongrantz, supra, at page 261 (D.T.C. 6202), found persuasive the following comments of Bayda, J.A. in Paveley, supra at page 487 (D.T.C. 6421):

It is plain, therefore, that upon proof of a “wilful refusal” to file an income tax return—the "manner" in which it is alleged the offence under section 239(1)(d) of the Income Tax Act is committed—the Court may, not must, infer that the accused committed the act with the intent to evade payment of taxes. If on the whole evidence the Court reaches the conclusion that it is proper to draw that inference, then it may do so. If it reaches the conclusion that it is not proper to do so, or is left in reasonable doubt, then it should not draw the inference.

The burden of establishing the facts justifying an assessment under subsection 163(1) on the respondent. However, at the same time, subsection 163(1) provides for a civil penalty and the respondent only need prove the taxpayer “wilfully attempted to evade payment" of tax by a preponderance of evidence. A taxpayer assessed a penalty under subsection 163(1) is not, by the assessment itself, being charged with an offense described in paragraph 239(1)(d) and the respondent need not prove beyond any reasonable doubt the taxpayer wilfully attempted to evade tax.

If there is proof of a failure on the part of the taxpayer to file a tax return, I may infer that the taxpayer committed the act with the intent to evade payment of taxes if on the whole of the evidence I reach the conclusion that it is proper to draw that inference and if I do decide to draw the inference, then I may find the appellant wilfully attempted to evade the payment of tax by failure to file a tax return. R. v. Paveley, supra. Sturgess v. The Queen, [1984] C.T.C. 1; 83 D.T.C. 5434; [1984] C.T.C. 666; 84 D.T.C. 6525 (F.C.T.D.); R. v. de Wolf, supra; R. v. Thistle, supra.

If the respondent can demonstrate that Murray (1) failed to file his return as and when required by subsection 150(1); (2) knew or ought to have known his obligation to file under subsection 150(1) of the Act; and (3) knew or ought to have known that there was tax payable at the proper filing date, the respondent has made out a strong prima facie case. And if Murray failed to give a reasonable explanation, that is, a good reason, as to why he failed to file his tax return, I may infer on the whole of the evidence that he wilfully attempted to evade taxes within the meaning of subsection 163(1). See R. v. de Wolf, supra, dealing with a paragraph 239(1)(d) provision which requires the Crown to prove its case beyond a reasonable doubt. If I am not satisfied that Murray was aware or should have been aware that tax was payable, he will not be assessable under subsection 163(1). See Fulcher v. M.N.R., [1982] C.T.C. 2198; 81 D.T.C. 569 (T.R.B.); Adam v. M.N.R., [1984] C.T.C. 2978; 84 D.T.C. 1895 (T.C.C.); Gagne v. M.N.R., [1981] C.T.C. 2503; 81 D.T.C. 431. However, in R. v. Greer (1973), 13 C.C.C. (2d) 318 (Ont.), the taxpayer was found guilty of the offence of tax evasion under paragraph 239(1)(d) notwithstanding that the reason he gave to explain his failure to file returns was that he did not believe that he was taxable. The Court found such a belief to be unreasonable under the circumstances.

When a taxpayer fails to file his tax return as required by subsection 150(1), and if the Court is satisfied that the taxpayer had the intention of eventually filing it, then the taxpayer is not liable to a penalty under subsection 163(1). R. v. Pongrantz, supra; Branch v. The Queen, [1976] C.T.C. 193; 76 D.T.C. 6112 (Alta. Dist. Ct.) re paragraph 239(1)(d); Nuttall v. M.N.R., [1980] C.T.C. 2921; 80 D.T.C. 1804 (T.R.B.).

On the other hand the Court may infer that the taxpayer intended to evade the payment of tax and find him or her liable to a penalty pursuant to subsection 163(1), even if the taxpayer eventually did file his tax return, when it is shown that the only reason the taxpayer finally decided to file was that the respondent had discovered that he had not complied with subsection 150(1) of the Act: Sturgess, supra.

Finally, if the Court believes that the taxpayer's reason for having failed to file his tax return and pay his taxes was that he did not have the necessary funds to pay his or her taxes, the taxpayer may still be liable to a penalty under subsection 163(1) if the Court is convinced that even if the taxpayer had eventually found the necessary funds, he would still not have paid his taxes. R. v. de Wolf, supra.

In the case at bar, the respondent has made out a prima facie case. First, the taxpayer failed to file his 1983, 1984 and 1985 tax returns as and when required by subsection 150(1) of the Act. Second, the taxpayer knew or, as a lawyer, ought to have known of his obligation to file if he had tax payable as and when required by subsection 150(1). Third, there is evidence that from 1985 on, that is, when the partners of the firm began to put their accounting and financial records in order Murray had reason to believe that tax was payable for his 1983, 1984 and 1985 taxation years. I find that even before 1985 Murray suspected he had taxable income but failed to do anything to compute his income. It is no help to Murray even if I believe—and I do not—that when he was first required to file his tax returns for 1983 and 1984 (that is, on April 30, 1984, and April 30, 1985, respectively) he may not have been aware that tax was payable for those years. Murray cannot successfully argue his failures to file his 1983 and 1984 returns by 30 April, 1984 and 30 April, 1985, respectively, were not motivated by an intention to attempt to evade tax, but were due to his mistaken belief, at the time, that no tax was payable for those years, in particular since he made no effort to determine his income for each of the years.

If an individual fails to file a tax return for a taxation year for which tax is payable, on or before April 30 in the next year, as required by subsection 150(1), his or her obligation to file continues until he or she actually files the said return. In other words, if an individual fails to file his or her tax return for a taxation year on or before April 30 in the next year, that individual's obligation to file continues under subsection 150(1). The April 30 deadline does not put an end to his obligation to file under subsection 150(1). Failure to file when required allows the respondent to impose a penalty pursuant to section 163, and the Crown to lay a charge pursuant to section 238 if warranted by the facts: see R. v. Subacious, [1978] C.T.C. 610; 78 D.T.C. 6441 (Ont. C.A.) where it was held that the failure on each successive day to file a return after a demand had been made on the taxpayer by the respondent pursuant to subsection 150(2) constituted a separate offence under subsection 238(1). (It should be noted that subsection 238(1) was amended in 1988.) Also see R. v. Smith, 58 D.T.C. 1125 (S.C.Ont.).

Consequently, in the case at bar, when in 1985 the taxpayer discovered that tax was payable for his 1983 and 1984 taxation years Murray was still under an obligation to file his tax returns for those years as required by subsection 150(1).

I am satisfied that Murray did not intend to file returns of income for 1983, 1984 and 1985 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. His brother's experience in a similar difficulty appears to have struck fear and dread in Murray which caused him continue his default of not filing and paying taxes until Kutkewich appeared at his door. Murray was aware of his obligations under the Act. He took a rather lackadaisical approach in determining his income and, if one accepts his evidence, guessed, more than anything else, as to his liability in each of 1983, 1984 and 1985 taxation years. He simply did not wish to pay his taxes for the years in appeal and his motivation in not verifying whether he was liable for payment of tax was that he did not want to find out the bad news. The whole of the evidence permits me to conclude Murray wilfully attempted to evade payment of tax payable under Part I of the Act for 1983, 1984 and 1985. The appeals are dismissed.

Appeals dismissed.