Murray Norrad v. Minister of National Revenue, [1986] 2 CTC 2184, 86 DTC 1625

Brulé, T.C.l.:—This appeal involves the matter of penalties only, dealing with the taxpayer's 1980 and 1981 taxation years, it being agreed that any appeal for the 1979 year is dismissed.

The matter of any reassessments of the taxpayer's income is not under appeal, only the penalties.

In 1980 the appellant declared business income in filing his tax return of $14,986 and in 1981 the amount was $10,569. On reassessment these amounts were increased by $3,763.77 for 1980 and by $32,792.05 for 1981. After notices of objection and some adjustments, penalties were levied pursuant to subsection 163(2) of the Income Tax Act of $88.05 for 1980 and $1,898.80 for 1981, both amounts included federal and provincial penalties.

A penalty is generally imposed as a punishment on the offender considered as a responsible person owing obedience to the law and is intended to act as a deterrent.

Subsection 163(2) of the Act reads in part as follows:

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 . . .

The question to be asked is whether or not there were circumstances amounting to gross negligence, it being admitted that the appellant did not “knowingly" do anything wrong.

I do not intend to review all the evidence, suffice it to point out that the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

Here the auditor for Revenue Canada received full information and cooperation from the appellant and his accountant in obtaining all necessary information. As a result of the audit the reassessments were made and penalties levied. The accountant for the appellant admitted that he made certain journal entries believing them to be correct, but without perhaps all the necessary back-up information.

There were two matters of significance in the 1981 taxation year. One was the treatment of $9,688.77 received from the Post Office as a commission for the sale of stamps, and the other amount of $13,522.44 dealt with moneys used by the appellant to refinance various loans.

The task for the Court to consider is whether the treatment of these amounts by the accountant if wrong, was the ultimate responsibility of the appellant thus deeming him to be grossly negligent in his responsibility for his income tax returns.

In the case of Michael J. W. Penn v. M.N.R., [1971] Tax A.B.C. 33; 71 D.T.C. 71, there is a discussion of gross negligence and J. O. Weldon, Q.C. of the Tax Appeal Board set out a four-point yardstick and also said there is a very wide gap between ordinary negligence and gross negligence. He does speak of negligence of "conspicuous magnitude” and the Minister by his counsel is saying that this is the situation here, especially when net profits are examined for 1981. However these are only some $4,000 less than 1980 and in a period of interest costs, being what they were, and inflation I do not find the net difference to be of a "conspicuous magnitude" at least without having a comparison of income and expenses for these years before me to consider.

The other cases advanced by the Minister do not in my opinion have significant application here. In all of these: Arthur William Wallace v. M.N.R., 42 Tax A.B.C. 1; 66 D.T.C. 593; Barry Beech v. The Queen, [1977] C.T.C. 361; 77 D.T.C. 5249; Simon Thibault v. M.N.R., [1978] C.T.C. 2876; 78 D.T.C. 1641, the records of the appellant were either "something haphazard" as in Wallace, "were inadequate" as in Beech, or "very poor" as in Thibault (all supra). No such allegation was suggested here, but rather that the accountant's journal entries caused the problem.

Counsel for the appellant presented to the Court an argument that while the appellant may have been negligent in neither examining his returns before filing, nor in discussing these with his accountant, he was not grossly negligent. For many years the same procedure was followed and there was never any trouble. The accountant may have been negligent.

In Gordon LeRoux v. M.N.R., [1977] C.T.C. 2538; 77 D.T.C. 393 the Court found negligence but not gross negligence. Also, as here, the appellant co-operated with the Minister's investigator.

Also no penalty was imposed for negligence when the appellant had provided the Minister with all necessary and relevant information as in Le Centre de Quilles Laurentien Ltée v. M.N.R., [1968] Tax A.B.C. 721; 68 D.T.C. 570. In Georges Lafrance v. M.N.R., [1971] Tax A.B.C. 221; 71 D.T.C. 172, the Court held a penalty was improper when the Minister could not show bad faith on the part of the taxpayer.

A detailed analysis of the language of subsection 163(2) which is analogous to the old subsection 56(2) was made by Cattanach, J. in Cyrus C. Udell v. M.N.R., [1969] C.T.C. 704; 70 D.T.C. 6019, wherein he said at 713 (D.T.C. 6025):

There is no doubt that section 56(2) is a penal section. In construing a penal section there is the unimpeachable authority of Lord Esher in Tuck & Sons v. Priester (1887), 19 Q.B.D. 629, to the effect that if the words of a penal section are capable of an interpretation that would, and one that would not, inflict the penalty, the latter must prevail. He said at page 638:

“We must be very careful in construing that section because it imposes a penalty. If there is a reasonable interpretation which will avoid the penalty in any particular case, we must adopt that construction.”

At this point it is convenient to reproduce the relevant language of section 56(2). It is that “every person” (which means the taxpayer) “who knowingly” (I have found that the appellant did not have knowledge of the errors and omissions made by his accountant) “or under circumstances amounting to gross negligence . . . has made or has participated in, assented to or acquiesced in the making of a statement or omission . . . is liable to a penalty . . .”

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.

I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.

While there have been many cases and many pronouncements dealing with “negligence” as opposed to “gross negligence” going back to when the latter term was first used by Holt, C.J. some 280 years ago in Coggs v. Bernard (1704), 2 Ld. Ray 909; [1558-1774] All E.R. 1; and arguments pro and con that the terms are synonymous or quite different I would think that if the draftsman in the adopted legislation did not sense a difference he might simply have used the word “negligence” and not “gross negligence”.

My reading and interpretation of the authorities lead me to believe there is a difference and while in the present case the behaviour of the appellant may have been negligent it did not amount to gross negligence. Accordingly, the imposition of the penalties by the Minister was wrong and this appeal is allowed with costs to the appellant on a party and party basis and the assessment referred back to the Minister for deletion of the penalty for the 1980 and 1981 taxation years only, as the 1979 year is not in issue.

Appeal allowed.