Harry Chaimberg v. Minister of National Revenue, [1983] CTC 2081, 83 DTC 81

Guy Tremblay:—This appeal was heard on June 15, 1982, at the City of Montreal, Quebec.

1. Point at Issue

The only point at issue is whether the respondent is correct in imposing, pursuant to subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, a penalty of $1,923.81 for fraud or gross negligence because the appellant failed to report the amount of $14,083 in interest in computing his income for the 1975 taxation year.

2. The Burden of Proof

In the case of penalty, as in the instant case, the burden of proof is on the respondent as provided in subsection 163(3) of the Income Tax Act. It reads as follows:

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.

3. The Facts

3.01 In his testimony Mr Gilles Bouchard, agent of appeals for the respondent, testified that:

(a) By notarial deed dated January 17, 1975, (Exhibit I-2), the appellant disposed of a piece of land located on Cavendish Boulevard, Montreal, Quebec, for the sum of $417,818. The purchaser, Cavendare Construction Ltd, paid $50,000 in cash.

(b) The balance of $367,818 bore interest at an annual rate of eight per cent, and the balance so computed was payable semi-annually on June 18th and December 18th of each year.

(c) During the 1975 taxation year, the appellant received an amount of $28,931, representing interest on the unpaid balance from the sale of the land.

(d) In fact, none of the capital amount was ever paid, On October 27, 1977, the appellant was obliged to reclaim possession of his property from the purchaser by legal process due to its inability to meet its obligations (Exhibit I-3).

(e) The total interest earned on the capital was $83,372. The Interest due and exigible in October of 1977 was $24,880. The interest assessed for the years 1975 ($14,848) and 1976 ($29,561) totalled $44,409. Unreported interest of $14,083 remained ($83,372 - $69,289 ($24,880 + $44,409) = $14,083) (Exhibit 1-1).

(f) Originally, in the 1975 income tax return no interest had been declared. In 1976 $29,561 in interest was declared.

(g) In a letter dated October 28, 1977, (Exhibit I-7) Mr H Walter, CA, the appellant’s accountant, informed the respondent that his client had omitted to include $14,847.96 in his 1975 income tax return. On March 17, 1978, the respondent issued a first notice of reassessment including the said amount of $14,847.96, in the appellant’s income for the 1975 taxation year. No penalty was then imposed on his income (Exhibit 1-8).

(h) He (the witness, Mr Bouchard) took charge of the file in 1979 and found the $14,083 in interest missing, as explained in subparagraph (e) above. On December 12, 1980, a second notice of reassessment (Exhibit 1-1 ) was issued by the respondent including the said amount of $14,083 in the appellant’s income for the 1975 taxation year and imposing a penalty of $1,923.81.

(i) The penalty was imposed because, in his opinion, one cannot forget interest received on capital due in the amount of $400,000, and, if the appellant did forget to include the amount of $14,083, there is at least a gross negligence.

3.02 In cross-examination Mr Bouchard testified that the appellant’s agent, Mr H Walter, was informed by letter that the said amount of $14,083 would be included in income and he was also informed in a telephone conversation that a penalty would be imposed.

3.03 In re-examination Mr Bouchard testified that the amount of $24,880 in interest alleged in the 60-day notice (Exhibit I-3) was due on October 27, 1977, and this was a very significant fact to him. It was the basic point from which he computed the total interest of $83,372 (paragraph 3.01(e)). In the 1977 income tax return no interest was declared.

3.04 In his testimony the appellant testified that:

(a) On June 5, 1975, a registered letter (Exhibit A-2) was sent to the purchaser, Cavendare Construction Ltd, informing it that on the next June 18, the semi-annual interest due would be in the amount of $14,712.72. He received the said amount forty-two days after June 18. For this late payment he claimed on August 6, 1975 (Exhibit A-3), an amount in interest of $135.24 which was paid on August 8.

(b) On November 11, 1975, he sent a letter of the same nature as Exhibit A-2 to Cavendare informing it that on December 18, 1975, the amount of $14,712.72 would be due (Exhibit A-4). He received the payment on January 29, 1976, again forty-two days later. He claimed another amount of $135.24 for the late payment (Exhibit A-5).

(c) On May 26, 1976, another letter of the same nature as Exhibits A-2 and A-4 was sent claiming an amount of $14,712.72 due on June 18, 1976 (Exhibit A-6). The said amount was received on time. It was not deposited in the bank account, but was used to pay municipal taxes which were two years in arrears. In fact, he endorsed the cheque and gave it to the City of Cote St-Luc; therefore, this cheque did not appear anywhere in the bank records. He said it was “only on the pressure” of the taxes that this was done (SN page 42),

(d) Another letter of the same nature and for the same amount as Exhibits A-2, A-4 and A-6 was sent on December 2, 1976, (Exhibit A-7), which amount was due on December 18, 1976. The amount was received on January 27, 1977, and deposited in the bank account on January 31, 1977, (Exhibit A-8 — photocopy of bank book).

3.05 Concerning his income tax returns, the appellant also testified that:

(a) When the time came to file his 1975 income tax return he took all of his documents, put them in a folder and sent them to his accountant.

(b) The documents concerning the land transaction on Cavendish Boulevard (his first land transaction) were kept in a different place than where the tax documents were kept.

(c) In 1976, when he filed his 1975 income tax return, he reported the sale of the land on Cavendish Boulevard (Schedule 2: Summary of Disposition of Capital Property).

(d) In his testimony, he said:

. . . I never made any attempt to hide anything. It was pure omission caused by my poor bookkeeping, lack of communication at certain times between me and Mr Walter, or taking for granted that whatever Mr Walter did was a hundred percent. And I never really checked that close. As I say, in my hardware store, with a bookkeeper and an accountant, I run a pretty good business, carefully and methodically. But with the land, like I say, I made one sale in twenty years. It is not an everyday occurrence. My system was not proper.

. . . It was simply an oversight . . .

(SN pages 50 and 51)

(e) For the 1976 taxation year he remitted the documents to his accountant and the interest was declared in income.

3.06 The appellant stated that he was a merchant (SN page 37, lines 5 to 10). He has been operating a hardware store for over thirty years (SN page 51). It was named “St-Louis Hardware Store Ltd”, and later changed to “Bricoleur Pro”. In his various tax returns, pursuant to the financial statements filed, it appears that he is in two partnerships, the first with three other persons and the second with four other persons, including the three from the first-mentioned partnership. The partnerships own three rental properties in Montreal which made gross incomes of $65,500 (1975), $70,000 (1976) and $75,000 (1977) and which made net incomes of $20,400 (1975), $22,200 (1976) and $23,700 (1977).

3.07 On cross-examination the appellant testified that:

(a) It was not only in the year 1976, but also in the years 1973, 1974 and 1975, that he was hard-pressed by the City of Côte St-Luc to pay the municipal taxes, “I was always running two years behind”. (SN page 52) (b) The $50,000 received in cash as the down payment on the land transaction was used to pay the arrears of municipal taxes due on that piece of land. However, as he did not sell all of the land, there remained taxes to pay on the balance of the land.

(c) Once a month a member of Mr Walter’s accounting firm came to his hardware store to check and look at the books, and he also came when it was time to prepare the income tax returns. Moreover, the appellant has a bookkeeper working in his hardware store.

(d) The accounting system concerning the land transaction consisted of a cheque book and a bank book. He only had one bank account for his land transaction.

3.08 In re-examination the appellant explained that the interest payments received were always used to pay taxes. They were just to keep his land going.

4. Law — Cases At Law — Analysis

4.01 Law

The provision of the Income Tax Act involved in the instant case is subsection 163(2). It reads 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 statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

4.02 Cases At Law

1. Sylvester Brygman v MNR, [1979] CTC 3117; 79 DTC 858;

2. Dona Legros & Barbara M Legros v MNR, [1981] CTC 2142; 81 DTC 99;

3. John W Howell v MNR, [1981] CTC 2241; 81 DTC 230;

4. Margaret Copland v MNR, [1980] CTC 2699; 80 DTC 1618;

5. Barry Beech v The Queen, [1977] CTC 361; 77 DTC 5249;

6. Veronica C Bonk v MNR, [1970] Tax ABC 1173; 70 DTC 1762;

7. Fioravante Pavan v MNR, [1980] CTC 2956; 80 DTC 1830;

8. Antal Susztek v MNR, [1978] CTC 2959; 78 DTC 1690;

9. Simon Thibault v MNR, [1978] CTC 2876; 78 DTC 1641;

10. James S Robb v MNR, [1979] CTC 3112; 79 DTC 850;

11. George Ross Carson v MNR, 34 Tax ABC 105; 63 DTC 997-15;

12. Yves Cloutier v The Queen, [1978] CTC 702; 78 DTC 6485;

13. Peter Rawsthorne v MNR, [1981] CTC 2187; 81 DTC 116;

14. Wellington Taylor v MNR, [1980] CTC 3003; 81 DTC 3;

15. R R McDaniel v MNR, [1969] Tax ABC 984; 69 DTC 683.

4.03 Analysis

4.03.1 As explained above in paragraph 2, the burden of proof is on the respondent. What is the evidence adduced by the respondent? What are his arguments?

4.03.2 The undisputed evidence is that the amount of $14,083 in interest income was not included in the appellant’s income for his 1975 taxation year (paragraph 3.01).

The first argument of the respondent’s counsel was that the appellant, a very experienced businessman, knowingly acquiesced to the omission of $14,083. He was fully aware that interest income is fully taxable and that it had to be declared. Moreover, the respondent’s counsel contended that, in fact, the appellant made two omissons of equivalent amounts in 1975 and in 1976 and this confirms that the omissions were knowingly made.

It is difficult to share this opinion. In 1977, the appellant indeed informed the respondent (paragraph 3.01(g)) that he had forgotten an amount of $14,847.96 in interest income. Moreover, in filing his 1975 income tax return the appellant reported that a piece of land had been sold (paragraph 3.05(c)).

In the Board’s opinion, this is not the conduct of a person who knowingly omits to include income. However, the respondent’s counsel contended that if it was not knowingly omitted, “it was at least a gross negligence’, as provided in subsection 163(2) of the Act quoted above.

4.03.3 It is useful to refer to the definition of “gross negligence” given by Justice Marceau in the Yves Cloutier v The Queen case (supra) at 6487:

La question qui se pose est celle de savoir si les circonstances dans lesquelles l’omission a eu lieu sont telles qu’une faute lourde puisse être imputée au contribuable, faute lourde s’entendant d’une faute de comportement relativement grave, difficile à expliquer et socialement intolérable. Les circonstances de faite en elles- mêmes ne soulèvent pas de problème, elles sont toutes acquises; c’est leur appréciation qui est impliquée, c’est ce qu’on peut en déduire pour qualifier le comportement du demandeur qui est mis en cause. Ce n’est pas là une question de fait au sens d’une question relative à une donnée factuelle antérieure ou à un événement qui s’est passé dans le temps, mais une question de qualification juridique et du jugement sur l’agir qui n’est pas soumise à preuve mais dépend de l’intime conviction de celui qui a à en décider.

Or, à cet égard, je partage l’opinion du président de la Commission de révision lorsqu'il écrit:

“Il me semble tout à fait anormal et inexplicable qu’un homme bien versé en affaires, qui a payé de l’impôt depuis 1967 sur les revenus d’une entreprise dont le chiffre d’affaires augmentait chaque année et qui a vendu l’entreprise pour un montant de $1,200,000, consente à réclamer un remboursement d’impôt sans se poser de questions et sans interroger ses comptables à ce sujet. Il ne peut s’agir ici d’une erreur de jugement. Il ne s’agit pas non plus d’une négligence ordinaire et de peu de conséquence, il s’agit d’une negligence d'ordre majeur au sujet d’un montant considérable et imposable que l’appelant n'aurait sûrement pas négligé ou oublié s’il s’agissait de gagner ou de sauver ce même montant pour ses propres fins. Ce genre de négligence, à mon avis, pour fin d'impôt, tombe dans la catégorie d’une faute lourde prévue à l’article 163(2).”

Je ne crois pas qu'il soit nécessaire de commenter plus avant.

L’appel sera rejeté.

In the said Cloutier case, the appellant had forgotten to include an amount of $181,000 in income. Mr Cloutier had testified that his accountant had prepared his income tax return, claiming an important reimbursement.

4.03.4 In the present case the appellant testified that his system of accounting was not proper (paragraph 3.05(d)). This system consisted of a cheque book and a bank book (paragraph 3.07(d)). In fact, was it necessary to have more to keep note of a receivable account of $400,000?

The evidence is to the effect that it was the first time in twenty years that the appellant had sold a piece of land (paragraph 3.05(d)) and therefore that he, personally, had an account receivable. He had other businesses. He is a merchant and the main shareholder of a company operating a hardware store. Also, the appellant is a member of two partnerships which own three rental properties (paragraph 3.06).

The appellant’s testimony was to the effect that an accountant came to his hardware store once a month to check his books, etc (paragraph 3.07(c)). He also had a bookkeeper working in his hardware store (paragraph 3.07(c)).

The amount involved is substantial. However, this $14,083 is a bulk amount and not an addition of numerous smaller amounts coming from different places that the appellant would have forgotten. In fact, no evidence was adduced by the respondent to the effect that another penatly for undeclared income was charged against the appellant, his company or his association for ten to fifteen years.

The respondent has the burden of proof. Because of the evidence adduced, my personal conviction is that the appellant committed an ordinary negligence, meaning a negligence easy to explain in the same circumstances. It is a matter of oversight. It is not a gross negligence.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.