Jerald D. Knudson v. Minister of National Revenue, [1986] 2 CTC 2098, 86 DTC 1576

Bonner, T.C.J.:—The appellant appeals from an assessment of penalty under subsection 163(2) of the Income Tax Act. During the 1981 taxation year the appellant sold shares of 11310 Holdings Ltd. He realized a capital gain on the disposition in the amount of $139,985. No reference to the transaction was made in the appellant’s tax return for the year. The Schedule 2 “Summary of Dispositions of Capital Property in 1981” attached to the return made reference only to the disposition at a loss of certain other shares. The penalty rested on the failure of the appellant to report the gain.

The failure to report the gain did not give rise to an understatement of the income reported by the appellant in his return. Consequently, it did not affect the calculation of tax payable. This was so because the appellant’s allowable capital losses for the year exceeded the taxable capital gain and the former may, by virtue of paragraph 3(b) of the Act, be offset against the latter.

The losses resulted from the disposition of shares in two companies, Surf Oils Ltd. and Radial Resources. The total of the losses was $159,807. The losses, which were reported, were understated in the appellant's return of income by $11,036. In arriving at the reassessment now under appeal the respondent performed a calculation set forth in the explanation attached to the notice of reassessment as follows:

This calculation, which both parties agreed was correct, did not, I emphasize, lead to a finding that the appellant’s income for the taxation year was an amount different either from that declared in his return of income or from that found on the initial assessment.

The appellant attacked the assessment on two grounds. First, his counsel argued that the respondent had failed to discharge the onus imposed upon him by subsection 163(3) of the Income Tax Act of establishing . . the facts justifying the assessment of the penalty . ..” Secondly, he argued that the calculation of the penalty was wrong and that the amount thereof, calculated in accordance with subsection 163(2), is zero. Paragraphs 163(2)(a), 163(2.1)(a) and subsection 163(3) read 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 regulation, is liable to a penalty of

(a) 25% of the amount, if any, by which

(i) the amount, if any, by which

(A) the tax for the year that would be payable by him under this Act exceeds

(B) the amount that would be deemed by subsection 120(2) to have been paid on account of his tax for the year

if his taxable income for the year were computed by adding to the taxable income reported by him in his return for the year that portion of his understatement of income for the year that is reasonably attributable to the false statement or omission

exceeds

(ii) the amount, if any, by which

(A) the tax for the year that would have been payable by him under this Act

exceeds

(B) the amount that would have been deemed by subsection 120(2) to have been paid on account of tax for the year

had his tax payable for the year been assessed on the basis of the information provided in his return for the year, and . . .

163(2.1) For the purposes of subsection (2), the taxable income reported by a person in his return for a taxation year shall be deemed not to be less than nil and the “understatement of income for a year” of a person means the aggregate of

(a) the amount, if any, by which

(i) the aggregate of amounts that were not reported by him in his return and that were required to be included in computing his income for the year

exceeds

(ii) the aggregate of such of the amounts deductible by him in computing his income for the year under the provisions of this Act as were wholly applicable to the amounts referred to in subparagraph (i) and were not deducted by him in computing his income for the year reported by him in his return, . . .

163(3) Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

The only witness called at the hearing was Mr. Van Gayef, the employee of the respondent who was responsible for making the assessment in issue. His evidence was that the penalty was imposed because of the “materiality and significance of the amount” of the unreported gain; that the gain had implications for future years because it almost eliminated the allowable capital loss available to be carried forward; that he had found a letter written by the appellant which indicated that the gain resulted from four transactions; and, finally, that the appellant told him either that he forgot to report the gain or that he forgot to provide the information to his accountant.

A true copy of the return of income was entered in evidence. It was not prepared by the appellant, although it apparently was signed by him. In that return the appellant reported total income of approximately $89,000.

A letter, a copy of which Mr. Gayef obtained from the appellant, dated January 30, 1981, was entered in evidence. It was sent by the appellant to R.

W. Glen, a representative of the persons who bought the shares of 113110 Holdings Ltd. from the appellant. The body of the letter reads as follows:

This letter is to confirm our conversation and agreement of this date pertaining to the purchase of my one thousand, five hundred (1,500) shares of 113110 Holdings Ltd. as follows:

R.W. Glen	533 shares for $49,746.66
Theologian Mgmt. Ltd.	633 shares for $59,080.00
W. Maruyama	167 shares for $15,586.67
Marteen Ent. Ltd.	167 shares for $15,586.67

Your cooperation and consideration in this matter is truly appreciated.

This letter and the fact that four cheques were issued form the basis for Mr. Gayef's conclusion that there were four transactions.

Counsel for the appellant argued that the subsection 163(3) onus had not been met. Furthermore, he asserted that paragraph 3(b) of the Income Tax Act requires the inclusion in income of the net amount, if any, by which the aggregate of taxable capital gains for a year exceeds the allowable capital losses for that year. There was, he said, no such excess in this case and accordingly the amount required to be included in computing the appellant's income for the year within the meaning of subparagraph 163(2.1)(a)(i) is nil. Counsel pointed to the fact that by its very words subparagraph 163(2.1) (a)(i) makes a distinction between amounts required to be reported by a taxpayer in his return and amounts required to be included in computing the taxpayer’s income for a taxation year. Thus, he submitted that a penalty cannot properly be imposed on a taxpayer for a simple failure to report an amount required to be reported in the return of income.

The evidence, which I have reviewed, is insufficient to discharge the onus imposed on the respondent by subsection 163(3) to establish on the balance of probabilities the facts justifying the assessment of the penalty. To suc- ceed the respondent must establish that the appellant is a “. .. person who . . . under circumstances amounting to gross negligence . .. has made or has participated in, assented to or acquiesced in the making of . . . an omission in a return . . .” It is not sufficient to establish that the appellant is a member of a group of persons, one of whom must in such circumstances have made or participated in the making of the omission. In Cyrus C. Udell v. M.N.R., [1969] C.T.C. 704; 70 D.T.C. 6019, Cattanach, J. analysed the wording of subsection 56(2) of the former Income Tax Act, the predecessor of subsection 163(2). At 713 (D.T.C. 6025) His Lordship had this to say:

Accordingly there remains the question of whether or not section 56(2) contemplates that the gross negligence of the appellant's agent, the professional accountant, can be attributed to the appellant. Each of the verbs in the language “participated in, assented to or acquiesced in" connotes an element of knowledge on the part of the principal and that there must be concurrence of the principal’s will to the act or omission of his agent, or a tacit and silent concurrence therein. The other verb used in section 56(2) is “has made". The question, therefore, is whether the ordinary principles of agency would apply, that is, that what one does by an agent, one does by himself, and the principal is liable for the actions of his agent purporting to act in the scope of his authority even though no express command or privity of the principal be proved.

In my view the use of the verb “made" in the context in which it is used also involves a deliberate and intentional consciousness on the part of the principal to the act done which on the facts of this case was lacking in the appellant. He was not privy to the gross negligence of his accountant. This is most certainly a reasonable interpretation.

It is just as likely on the evidence in this case that the omission was the result of the default of the person who prepared the return as of the appellant. I reiterate that the omission did not result in any change in net income or in the amount of tax as calculated in the return. Thus the omission was not something which the appellant might reasonably be expected to have noticed at the time the return was presented to him for signature. A taxpayer who has retained a professional tax preparer cannot reasonably be expected to review the completed return and all of its schedules in such detail as would be necessary to detect an omission of the type now in question. It might be otherwise in a case in which the taxpayer has reason to doubt the competence of the tax preparer, but there is no suggestion that such was the case here. In the result I find that the respondent has failed to discharge the subsection 163(3) burden.

In light of the foregoing I will refrain from making obiter comments with respect to the surprising proposition that the subsection 163(2.1) definition of “understatement of income for a year" can be construed to yield an amount greater than zero in the circumstances of this case.

The appeal will therefore be allowed with costs and the assessment referred back to the respondent for deletion of the penalty.

Appeal allowed.