Tony Joris v. Minister of National Revenue, [1981] CTC 2596

D E Taylor:—This is an appeal heard in the City of London, Ontario, on June 22, 1981, against the imposition of penalty in an income tax assessment for the year 1978. The notice of objection gives details regarding the appeal:

The objection is against the penalty. At the time of preparing my tax return my bookkeeper asked for the last three milk statements of the year. I handed them to him, he totalled them on his adding machine but somehow forgot to mark the total down on his working paper $9,218.65. I would not have been taxable anyway because of section 28 optional value of livestock and as a result none of us noticed that this big error was made. However, my bookkeeper takes full responsibility for it, but it is my honest opinion that a penalty of $553.82 should not be levied for such an honest mistake.

The subsequent confirmation of the assessment by the Minister reads as follows:

.. . the taxpayer under circumstances amounting to gross negligence assented to or acquiesced in the making of a false statement in his return of income in respect of the taxation year within the meaning of subsection 163(2) of the Act whereby the tax that would be payable if computed under that subsection 163(2)(a)(i) exceeds the tax that would have been payable if computed under subparagraph 163(2)(a)(ii) of the Act in the amount of $1,377.80; that accordingly a penalty of $344.45 has been levied under subsection 163(2).

Niagara Farm and Business Consultants, Hamilton, Ontario, had acted as accountants for Mr Joris, and Mr Harry DenHaan of that firm represented the appellant at the hearing.

Mr John Cullingham, an assessor with Revenue Canada, testified that the penalty had been imposed because the amount omitted ($9,218.65) had been quite large, and the taxpayer should have been able to detect the omission by comparing the amount reported for milk and cream sales in 1978 with that reported for the two previous years 1976 and 1977, since 1977 had shown an increase over 1976. The appellant testified that he had a Grade 7 education, that he paid little attention to such matters and really only looked after the farming. His main interest was in making sure there was enough money to pay the bills, and his wife who had a high school education took care of the record keeping. He believed the tax return had been mailed to him for his signature, but he didn’t know for certain whether or not he had looked at it. He maintained he could not possibly have understood it, particularly the farm income and expense statements. Those farm income statements had been prepared by Niagara Farm and utilized the “basic herd” provisions of section 28 of the Income Tax Act to reduce the appellant’s taxable income during years when it was to his advantage to do so. The net income from the farming operation (after taking into account the section 28 provisions) for 1976 was a loss of $2,877.52, for 1977 a loss of $20,332.63 and for 1978, a profit of $7,145.40 as he had filed his income tax returns.

The same income tax returns showed that the appellant had not been liable for income tax in 1976 and 1977, and the appellant had actually received a refund due to the Ontario Tax Credit system. In 1978, the appellant had shown a balance of $74.64 tax owing on his own filing, before the reassessment at issue in this appeal.

Among other case, law, counsel for the Minister referred to John W Howell v MNR, [1981] CTC 2241; 81 DTC 230, and in particular to the following quotation to be found at 2245 and 234 respectively:

I am in agreement with counsel for the respondent — there is a bottom limit to the responsibility which must be accepted by even the most inexperienced or trusted taxpayer. That bottom limit is not simply to read the last relevant line of the return (a balance owing or a refund). It must demonstrate a reasonable effort on his part in the circumstances and within his own framework of comprehension and competence to understand the component elements of that final result. The fact that the amount in question was omitted from the tax preparation in itself is “negligence” on Mr. Howell’s part. A review of his income tax return, which is warranted by the certificate thereon, would have been adequate for him to discover the omission before filing the return since, in my view, this was within his comprehension and competence. There is no evidence that the opportunity for such a review was not available to him and, accordingly, based upon the evidence presented to the time of the motion by counsel for the appellant, the Board finds that the Minister was correct in characterizing such “negligence” as “gross negligence” for purposes of the penalty imposition.

The agent for the appellant accepted that Niagara Farm had made the error, but contended that the penalty result of that error could not be held the responsibility of the taxpayer under the circumstances.

In my opinion, while the tax return of the appellant was not of the complexity indicated in Donald IV Weeks v MNR, [1970] Tax ABC 633; 70 DTC 1431; MNR v Weeks [1972] CTC 60; 72 DTC 6001; M S Mark v MNR, [1978] CTC 2262; 78 DTC 1205; R Snelgrove v MNR, [1979] CTC 2938; 79 DTC 780, nevertheless it did contain a substantial and detailed statement of farming income and expenses. Gross income (from some 10 different sources) was $62,528.61, and gross expenses (about 20 categories) was $55,383.21. The basic reason that penalty was imposed, it would appear, was that a review of the three years 1976, 1977 and 1978 by the taxpayer, should have alerted the appellant to the fact that his accountants had forgotten to include the amount in question. I am quite convinced that a review of the 1978 income tax return alone would not have so alerted him — in fact it would probably have indicated to him that he was finally starting to show a profit — he had tax to pay. There would be nothing particularly suspicious about the total amount shown on the farming statement of income and expenses for milk and cream sales — $27,637.16, as opposed to the amounts of $29,737.75 and $31,504.15 for 1976 and 1977 respectively, even if the appellant had compared them, and I can think of no particular reason why this farmer would get out the previous years’ returns to so compare them. Short of that, he would be required to have retained in his mind the approximate total of the 12 monthly cheques he had received, an unlikely task for a farmer.

The evidence is not clear that the appellant reviewed the return but he might have done so. It is possible that his wife looked it over, and there is no evidence that she noticed the error and/or failed to bring it to his attention, even with her greater familiarity with the records. All in all, the error was not one which would immediately leap out for his attention, in any reasonable review of the tax return, and the general improvement in the apparent total farm income, together with the fact that there was income tax to pay, would have militated against any suspicion.

I would reference to another comment to be found at 2246 and 234 respectively of Howell (supra):

In an appeal where the question of ‘gross negligence’ arises, the responsibility of a taxpayer for the accuracy of his own tax return is not eliminated by engaging a third party to prepare the return. Such professional help may be one point to be considered along with other factors such as the taxpayer’s own conduct, competence and contact in the preparation of the return; the complexity of the return; the practicality of any review; and the extent of such review before filing. These considerations are not all-inclusive, but they are indicative of the objective basis and serious approach he may have taken to that responsibility, and the degree therefore to which any inadequacies therein should reflect upon him. In the instant case the taxpayer failed to do that which a prudent man should have done — faced with a requirement to certify certain facts which were within his own knowledge — he did not review the return at all.

In the instant case, the benefit of the doubt should be given to the taxpayer that he did review the return (perhaps with his wife) but did not notice anything improper about it. In addition, it is far from certain that at the moment of any such review, the fact that the “milk and cream” receipts should have been $36,855.81 rather than $27,637.16 was “within his own knowldge”, comparing the educational background and work experience of this taxpayer to that of the appellant in Howell (supra). The omission of income was of such a nature that “in the circumstances and within his own framework of comprehension and competence to understand”, the taxpayer should not be held grossly negligent for the negligence (or even gross negligence, if it should be so termed) of his accountants. In this connection, I would make reference to the case of Columbia Enterprises Ltd v MNR, [1978] CTC 3082; 78 DTC 1783 as upheld on appeal, [1981] CTC 180; 81 DTC 5133.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.