Manfred Hoefler v. Minister of National Revenue, [1989] 1 CTC 2299, 89 DTC 190

Christie, A.C.J.T.C.: —The issue is whether the appellant is liable to a penalty of $4,088.95 in respect of his 1983 taxation year. The notice of appeal is dated May 26, 1987 and is signed by him. It reads:

I have been penalized by the Winnipeg office of Revenue Canada Taxation for absolutely no reason. I came to Canada in 1981 and started farming in 1982. I am not myself familiar with the workings of the tax system in Canada. Therefore, my income tax return has always been prepared by accounting firms which have been supplied with all my accounting records —bank statements, cheques etc. I have been accused of not declaring the sale of cattle. This however is not the case, since I deposited the proceeds of disposition of the cattle in my current farming checking account (see enclosure). I could have done no more in my position. Therefore, I would like to ask you to waive my penalties.

The enclosure referred to in the notice of appeal is a Bank of Montreal statement dated December 13, 1983 bearing the appellant's name and address. It shows these deposits: November 16, 1983 —$4,800; December 2, 1983 —$42,000 and December 6, 3 — 18,000.

Paragraphs 1 to 4 to the reply to notice of appeal read:

1. He denies the allegations in the Notice cf Appeal, except where they are admitted expressly.

2. In computing his income for the 1983 taxation year, the Appellant failed to include an amount of $65,000 which he received for the sale of cattle and hay.

3. In reassessing the Appellant for the 1983 taxation year, the Respondent included the amount of $65,000, and imposed a penalty in the amount of $4,088.95 under subsection 163(2) of the Income Tax Act.

4. In reassessing the Appellant as described in paragraph 3, the Respondent assumed, among others, the following facts:

(a) The Appellant is a dairy farmer who resides at Steinbach, Manitoba.

(b) The Appellant reported his total income for the 1983 taxation year as $5,896.09.

(c) In his Statement of Farming Income and Expenses for the 1983 taxation year, the Appellant reported the following amounts:

Livestock Sales	$ 5,401.52
Milk & Cream Sales	73,480.63
Dairy Subsidies	6,602.45
Other	2.00
Optional Value of Livestock	25,000.00
	110,486.60
Expenses	104,932.75
Net Farming Income	$ 5,553.85

(d) In computing his net income of $5,553.85 from his farming operation in 1983, the Appellant overstated his cattle purchases by $1,500, and failed to include cattle and hay sales in the amount of $65,000.

(e) After adding the overstated cattle purchases and the unreported cattle and hay sales, and after deducting additional capital cost allowance in the amount of $12,328 and the year-end optional value of cattle in the amount of $25,000, the Appellant's total income for the 1983 taxation year was $35,068.09.

(f) By understating his income in the amount of $29,172, the Appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his return of income.

(g) As a result of the false statement or omission referred to in paragraph 4(f), the tax payable under subparagraph 163(2)(a)(i) of the Income Tax [Act] exceeded the tax that would have been payable under subparagraph 163(2)(a)(ii).

Subsection 163(2) of the Income Tax Act ("the Act") provides:

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 (there follows the manner in which the penalty shall be calculated).

Under subsection 163(3) the burden of establishing the facts justifying the assessment of the penalty is on the respondent.

The first witness, Mrs. Giselle M. Rey, an employee of Revenue Canada, testified on behalf of the respondent. Her evidence is that she has been an appeals officer since March 1987. During the period June 1984 to March 1987 she was a field auditor and in that capacity the appellant's 1983 income tax return was assigned to her to be reviewed. The file was assigned because of information received from another Revenue Canada auditor who conducted an audit into the business affairs of another taxpayer that indicated the sale by the appellant of cattle to that taxpayer for $65,000. The witness examined the statement of farming income and expenses included in the appellant's return of income for 1983 and it showed livestock sold for $5,401.52. This led to a meeting being convened at the appellant's home near Steinbach, Manitoba, on the morning of May 4, 1986. Those present were the witness, the appellant, the appellant's wife and Mr. Kurt E. Friesen, the appellant's accountant.

Rey ascertained that all cheques received by the appellant went either to the Steinbach Credit Union or the Bank of Montreal. Except for minor items, expenses were paid by cheque and all bank statements were retained. She noted that some bank statements were missing so she asked the appellant to sign a "bank authorization". Mrs. Hoefler objected but when Friesen explained that this was ordinary procedure for audit the appellant signed the document. The appellant did not keep books in which to record his income and expenses. His accounting records consisted of cheque stubs and invoices which were stored in envelopes and turned over to Friesen to prepare statements of farming income and expenses for income tax purposes. When Rey left the meeting she took the available records and, on receipt of the information from the bank, she proceeded to reconcile money received with reported income. The documents included evidence showing that income from the sale of milk and cream was $73,480.63 which was precisely what was reported in the appellant's income tax return. There were sales of livestock for $5,075 and the amount reported was $5,401. These sales were made to the Manitoba Pool Elevators and Grunthal Livestock Auction Mart. The appellant's bank statement for 1983 showed deposits that related to unreported cattle sales of $4,800 on November 16; $42,000 on December 2 and $18,000 on December 6 of which $2,000 was held from deposit. These sales which total $65,000 were made to J. Wagner Farms Ltd. The two largest deposits made in the appellant's account in 1983 were the $42,000 and 18,000.

The next step was the convening of a second meeting by Rey with the appellant and his wife and Friesen on May 23, 1986 at Friesen's office in the basement of his home in Steinbach. Rey confronted the others at the meeting with the $65,000 in bank deposits and the fact that she had information that it related to the sale of cattle. Friesen said that he did not know anything about it. The appellant said it was not $65,000, only $42,000 in cattle sales and Mrs. Hoefler confirmed this. When Rey pressed for an explanation of the $23,000 difference she was told that the dairy herd had been too much to handle and steps were taken to reduce it and some of the herd was sold along with excess hay. When she asked the appellant why the $65,000 had not been reported, his wife replied to the effect that they had spent a lot of money to obtain the income and she did not feel that they had to report additional revenue. Mrs. Hoefler was described as being "very, very upset". The appellant admitted receiving the $65,000 and authorized in writing that adjustments to his tax liability be made.

On June 9, 1986 Rey wrote the appellant, with a copy to Friesen, indicating precisely the adjustments to be made and she concluded with this:

Having regard to the information obtained by the Department, consideration is being given to levying penalties in respect to the above unreported income in 1983. However, this action will be deferred for thirty (30) days in order to enable you to submit any additional information or explanation you may wish to have considered.

She called Friesen in early July to ascertain if representations were going to be made. He requested that she call back on July 11 and on that date he said he had no further submissions to make.

The next witness on behalf of the respondent was Friesen. He graduated in 1966 in business administration and accounting from the Red River Community College and went on to establish a practice in public accounting in Steinbach. The appellant became a client in the fall of 1982 and Friesen prepared the 1983 return that is in dispute. Early in January of 1984 the appellant brought Friesen a box that included receipts, cheque stubs, cancelled cheques and bank statements. These documents were not at all organized but Friesen understood from the appellant that "everything was there". He sorted the documents into categories of income and expenses and then prepared the statement of farming income and expenses that was included as part of the appellant’s return for 1983. When the return was prepared the appellant and his wife attended at Friesen's office and they went over the return including, of course, the statement of income and expenses. The appellant then signed the return. It is dated February 4, 1984. A copy of the bank statement dated December 13,1983 previously referred to was shown to the witness and he was asked whether it was in his possession when he prepared the return. His answer was no and he indicated he was reinforced in this belief because of the fact that had he seen the document, deposits of the magnitude of $42,000 and $18,000 would have led him to make inquiries. In cross-examination he said that in the fall of 1983 there were discussions with the Hoeflers who were thinking of selling some livestock and were concerned about the tax implications. Friesen told them that the appellant had an optional livestock inventory carry forward and that if they kept within that limit there would be no tax consequences. It was not a detailed discussion. No numbers of cattle or amounts involved were discussed.

The appellant testified through an interpreter. He was born in West Germany on August 10, 1941 and resided there until his arrival in Canada as an immigrant in July of 1982 with his wife and son. He has been a farmer throughout. He attended school for eight years which was followed by three years in an agricultural school. He then engaged in farming in West Germany. He did not study English in school and on arrival here his understanding of written and spoken English was very limited. He was fluent only in German.

In November 1981 he entered into a conditional agreement to purchase a dairy farm that was a going concern near Steinbach. The condition was that he and his family were admitted to Canada as immigrants. He took possession on July 30, 1982. His commitment in time to the farm was very considerable and he worked in isolation from others. This hindered his opportunities to improve his knowledge of English.

He retained Friesen to advise regarding to income tax matters and, acting on his advice, all income from the farm was deposited with the Bank of Montreal at Steinbach and all farming expenses were paid by cheque. Records of these financial transactions were kept together with invoices and other statements received. These documents were all turned over to Friesen for the preparation of the income tax returns together with any correspondence that appeared to relate to the farming operation. About one year after he took over the farm the appellant decided that the workload was more than he could manage and his son was then only ten years old. Further, the revenue from the farm was insufficient to allow him to hire a farmhand. In the circumstances it was decided to reduce the herd and in the fall of 1983 he sold some animals and some hay to J. Wagner Farms Limited from which he received $4,800, $42,000 and $18,000. These amounts were deposited with the Bank of Montreal on November 16, 1983 and on December 2 and 6, 1983. The sale to J. Wagner Farms Limited had been discussed with Friesen who advised that there would be no or very minor tax liability arising out of the sale.

He went on to say that all of the records, including the bank statement of December 13, 1983, had been turned over to Friesen for the preparation of the 1983 return and that when he signed that document he did so relying on Friesen that it was correct and in compliance with the law. His first intimation that something was amiss with his 1983 return was when he was contacted by Revenue Canada and a meeting held at his home with a person from that department at which Friesen was present. This was followed by another meeting in Friesen's office. He did not understand what was in issue or the nature of the discussion and was still under the impresssion that his income had been correctly reported. Subsequently he received communications [1] from Revenue Canada which again he did not comprehend and turned over to Friesen who assured him that all was in order. This was followed by another communication with "an end figure of $17,000." [2] When this was discussed with Friesen the appellant was told that it indicated that he was required to pay that amount and that it included a penalty. This led to a parting of ways with Friesen and, on the advice of the German Consulate in Winnipeg, the appellant engaged another accountant, Christian Hansch. The appellant was advised by Hansch that he was liable to the additional tax and should pay it with interest. This was done forthwith. The appellant's examination-in-chief closed with his assertion that at no time did he attempt to hide or obscure the sale of part of the herd and the hay.

I pause here in the summation of the evidence to make these observations. There is obvious direct conflict between the evidence of the appellant and Friesen and, in particular, with reference to the question whether the bank statement of December 13, 1983 was turned over to the latter and the nature of the discussion with him about what subsequently was the sale to F. Wagner Farms Limited. The disposition of this appeal is not to be construed as reflecting on Friesen's veracity. He impressed me as an honest man giving honest and straightforward testimony. I attribute the conflict to confusion or misunderstanding in the mind of the appellant or to a failure in communication because of linguistic difficulty or, perhaps, some of both.

Counsel for the appellant understandably stressed the appellant's lack of knowledge of English and his relatively recent arrival in Canada after a lifetime in Germany. These are the matters that give me concern. Indeed apart from them, especially the language problem, I would have dismissed this appeal at the termination of the hearing. On the matter of language the evidence of Rey is that when she first called the Hoefler residence the appellant answered, but almost immediately turned her over to his wife. With regard to Mrs. Hoefler it is, I believe, clear from the evidence of Rey and Freisen that her facility with English far outstripped that of her husband. At the meeting that followed on May 4, 1986 most of the replies were given by Friesen or the appellant's wife. In her written record of the May 23, 1986 meeting Rey noted that the appellant was silent throughout most of the interview.

Friesen said that at the meeting in his office on February 4,1984 for the purpose of signing the return it was he and Mrs. Hoefler who focused on the statement of farming income and expenses. He added that the appellant was not very fluent in English and that while the appellant was sitting next to him "how much of it he grasped I really could not tell you.” With regard to the conversation Friesen had with the Hoeflers in the fall of 1983 about the sale of livestock, he said he tried to explain the tax position to them but he did not know whether they fully understood. Friesen spoke Low German and the Hoeflers spoke High German and, according to the evidence, the result was that their conversations were basically in English.

This case is close to the line, but having regard to the whole of the evidence I am not satisfied that, on balance, the respondent has established that the appellant knowingly or under circumstances amounting to gross negligence contravened subsection 163(2) of the Act by omitting to include in calculating his income the $65,000 received on the sales to F. Wagner Farms Limited. There may well have been inadvertent error on the part of the appellant. It follows that this appeal succeeds. The appellant is entitled to party-and-party costs.

Appeal allowed.