Gary P Sorenson v. Minister of National Revenue, [1981] CTC 2601, 81 DTC 499

D E Taylor:—This is an appeal heard in London, Ontario, on June 23, 1981 against income tax assessments for the years 1976, 1977 and 1978 in which the Minister of National Revenue disallowed certain expenses claimed against commission income for all three years. In addition, the Minister imposed late filing penalties for the years 1976 and 1977, and a penalty for wilful attempt to evade payment of tax for the year 1977. The respondent relied inter alia, upon paragraphs 8(1 )(f) and (g), section 67, subsections 163(1) and 230(1) of the Income Tax Act, SC 1970-71-72, c 63 as amended.

With regard to the disallowed expenses, the Minister contended that they were not supported by adequate documentation and were unreasonable in the circumstances. By common consent, certain documentation dealing with the matter was submitted and a schedule prepared by the Minister provided details of the basis for the assessments:

APPENDIX I

During the times material, the taxpayer was a securities salesman, but in previous years he had been a banker and a senior assessor with Revenue Canada. His income was from commissions and clearly documented by regular T-4 slips. He had issued subpoenas to five officers (or former officers) of Revenue Canada involved in the assessments, but he called only one of them, a Mr Galer, as a witness. In my view, Mr Galer’s testimony corroborated the Minister’s assessments of tax rather than providing any basis whatsoever upon which the appellant could challenge them. The documentation shown in column 2 in the schedule above (“Receipts Submitted”) was provided to the Board, and the appellant agreed that was the total of the receipts available. In testifying himself, the appellant explained that some other receipts had been lost or mislaid, but primarily he relied upon the view that he was not required to provide receipts and documentation in support of his claim for expenses, since he had provided some indication of the expenses. Therefore (because of the “sample”), he should be accorded the balance claimed on good faith and credibility. He had not maintained any record of clients entertained, places visited, or prepared any regular system of keeping track of the expenses he allegedly incurred.

With regard to the imposition of penalty under subsection 163(1), the counsel for the Minister presented copies of the demands to file income tax returns which the Department found it necessary to serve on the appellant with respect to the years 1975, 1976 and 1977, and a Mr Jack Donald, Chief of Appeals for the Kitchener District Office of Revenue Canada, outlined the process by which a person might possibly evade payment of taxes forever, simply by not filing the returns required under subsection 150(1) of the Income Tax Act. In response, the appellant presented no evidence regarding the “non filing”, but stated quite categorically that he had not filed his 1977 income tax return by April 30, 1978, and did not do so until after a demand was issued, because he was short of funds and therefore would have been unable to include the required income tax cheques in the return. He regarded this as merely delaying, not evading, taxes, and was prepared for the 5% penalty for late filing under subsection 162(1) of the Act, but would not accept the 50% penalty under subsection 163(1).

Counsel for the Minister gave a concise and well documented argument in support of the imposition of the subsection 163(1) penalty, acknowledging that the jurisprudence on that point was not totally established. He stressed that the appellant had given no acceptable explanation for not filing the 1977 return (merely that he didn’t have the money to pay); that demands had been issued for 1975, 1976 and 1977; and that the work background and experience of the appellant (particularly that with Revenue Canada) were such that he would be fully aware of the internal assessing procedures in Revenue Canada permitting the possiblity of evasion of payment of tax for all time (or at minimum avoidance or delay in assessing) simply by the non filing of the required return. Counsel noted the following case law:

Jean Louis Tessier v MNR, [1980] CTC 2384; 80 DTC 1322;

Craig Nuttall v MNR, [1980] CTC 2921; 80 DTC 1804;

The Queen v George E Paveley, [1976] CTC 477; 76 DTC 6415.

Counsel also stated that in fairness to the appellant, it should be brought to the Board’s attention that there were other unreported cases in which the Minister’s position in imposing penalties under subsection 163(1) of the Act had not been upheld by the Board and by the courts.

A summary of counsel’s position was presented to the Board in a written Submission:

It is suggested that subsection 163(1) is triggered by the failure to file an income tax return as and when required by subsection 150(1) of the Act. In the case of an individual with tax payable for a taxation year, the applicable date for filing is on or before April 30th of the following year. The subsection is not activated by a failure to file pursuant to a Demand issued under subsection 150(2) or a Requirement issued under paragraph 231(3)(a) of the Act. Such devices are attempts to ensure the filing of a return but only are utilized after a taxpayer has failed to file on his own behalf, without notice, as required by subsection 150(1).

Once it has been established that a taxpayer has failed to file as required under subsection 150(1), it is necessary to examine whether he, by so doing, wilfully attempted to evade payment of the tax payable by him under Part I. In the extreme, subsection 163(1) would be satisfied if the taxpayer made an admission that his inaction was an attempt to evade tax. Such an occurrence, of course, would be exceedingly unlikely and I suggest that the subsection should not be so limited.

The proper approach, I submit, is that the Court must review the totality of evidence in each particular case and, based upon such review, determine whether, as a balance of probabilities, it is reasonable to draw the inference that the taxpayer failed to file his return with the intent to evade payment of tax. This is the approach suggested by Mr. Justice Bayda in The Queen v Paveley, 76 DTC 6421. In reviewing the evidence to draw the required inference, it is submitted that the Board should take into account, if such be the case, the fact that taxes were owing at the date of filing and the fact that the taxpayer knew or ought to have known both the date for filing and that taxes were in fact owing at such time. It is submitted that repeated failures to file in a timely fashion tend to confirm such inference.

If, after such review, the Court is undecided or concludes that the failure to file was as a result of inadvertence or ignorance, the penalty should not be upheld. In such cases, a late filing penalty imposed pursuant to subsection 162(1) may be appropriate. On the other hand, I suggest that where the Court concludes that the failure to file was the means used by the taxpayer in an attempt to evade, or avoid, payment of tax for even a temporary period of time, the penalty is exigible.

The appellant, also in written form, submitted comments in reply, from which the following portions were extracted:

.. .with respect to the applicability of section 163(1) . . . The triggering device referred to is quite correct, but, applicable to 162(1). To trigger, as suggested by counsel under 163(1), is the remotest aspect of the statute.

. . . it is not the Minister’s prerogative to legislate as he would like to see it for the purpose of administration and enforcement, in effect simplify it by reversing its clear applications and responsibility. This section of the Act 163(1) — its simplicity is straightforward: the onus is on the Minister . . .

With regard to the Paveley 76 DTC 6415-22 case quoted by Counsel, I studied it at great length and I might add I do not share Counsel’s suggestions that is Mr Justice Bayda’s approach; I suggest Counsel read the case, however if it is his approach, he simply erred. I need not comment further in detail regarding the Paveley case. It speaks for itself. That taxes were owing at date of filing is not fact but fiction. I might suggest Counsel support such fact and not allege presumptions — 158(1). As to the failure to file, this remains an ‘elective option’ of a taxpayer with elective consequences as known to the taxpayer and/or practice.

.. .I will present the law as it may be defined with respect to 163(1) of the Act:

1. Every person who willfully attempts to evade payment of tax sought by the state is liable to a penalty of 50% of the tax sought. That’s a bill by way of Notice of Assessment pursuant to 152(1) — period with a dot behind it. This ends the law and this matter. 150(1), 150(1)(d), 151, 152(1), 156(1), 158(2),

159(1), . .. etc.

2. Proof of Translation of Law — (a) Minister’s responsibility by statute — procedural application.

(1) Establish, pursuant to 163(3) proof of, by ways of, indisputable evidence (facts), willfull attempt, and (not either or, but both) tax sought to be evaded (supported by dollar amount — fixation — Notice of Assessment, or residual balance sought to be evaded).

(2) Indisputable proof of a return not filed by the taxpayer pursuant to 150(1), etc. Remember, if the proof is challenged successfully, it becomes no proof.

Only when numbers (1) & (2) are accomplished is the taxpayer liable to 50%.

In order to effect it properly the Minister must raise his own assessment against the taxpayer first in order to proceed with effective result. Application of 152(1) prevents Mens Rea.

If the taxpayer files a return upon demand or otherwise and the Minister effects 152(1), any applications of 163(1) is null and void. The Minister is out to lunch and is in violation of statute, including employment, if any attempt is made pursuant thereto.

On the issue of the assessment of tax itself, the evidence leads to only one conclusion — the appellant was accorded greater amounts of deductible expenses in each of the years under appeal than any of the evidence or his testimony could substantiate. His perception that he was not required to maintain and present adequate and complete documentation is not supported by the jurisprudence, and I would quote from Frank Muir v The Queen, [1979] CTC 259; 79 DTC 5267, at 262 and 5269 respectively:

The Income Tax Act requires each person to maintain proper books and records of his business. . ..

In addition, the recent case of Gerard Coffey v MNR, [1980] CTC 2545; 80 DTC 1478, may be noted. At 2550 and 1482 respectively, the following quotation is found:

Section 8(1 )(f) of the Act has been reviewed in the jurisprudence, but I will note two aspects of it that appear to be its extremities, both in quantum deductible and verification for deductions claimed. First, with regard to quantum, it appears to me that the phrase inserted in parentheses ‘(not exceeding the commissions or other similar amounts fixed as aforesaid received by him in the year)’ permits the salesman to expend the entire amount of commission income earned. It is the only place in that section such a phrase is used. Obviously that qualification was placed in the section to prohibit, in effect, charging off commission income expenses against other income. In my view, it also leaves the greatest possible latitude for the deductions claimed to the discretion and the determination of the salesman. One argument for permitting special deductions to this class of employees is the assumption that they are self-motivating, enterprising individuals upon whom unnecessary restraints should not be placed. But, the converse is also true — “amounts expended by him in the year for the purpose of earning the income from the employment”. Again, a general glance over the entire section 8 indicates to me that this is the only place such a phrase is employed therein. It is specific, it is unique, and it is the counterbalance to the special and virtually uninhibited status for deductions accorded to such salesmen-employees. In the extreme, the Minister would be within his rights to require the most detailed support for each cent claimed to ensure that it was:

(1) actually spent;

(2) spent by the appellant himself;

(3) spent in the particular year at issue;

(4) related directly, with no dilution or personal element, to an identifiable and provable effort to earn income;

(5) an expenditure incurred while the salesman was away from his employer’s place of business.

I am unaware of a procedure, short of the maintenance of detailed documented records and vouchers, which would permit a salesman-employee to fulfill such exacting conditions. It is evident that the Minister does not require total detail and precision under practical circumstances but merely estimates, generalities or assumptions by the taxpayer (on appeal of the Minister’s assessment) with regard to the deductions claimed, are unsatisfactory and ineffective.’’

The appellant has completely failed to overturn the Minister’s assessment of tax for the years 1976,1977 and 1978, and both the tax fo rthose three years and the late filing penalties imposed for 1976 and 1977 should be upheld.

Turning to the penalty issue as assessed under subsection 163(1) of the Act, the appellant in this instance has admitted that his failure to file as and when required by subsection 150(1) of the Act resulted from his conscious decision not to do so since he was short of funds and could not have paid the tax on time. His argument at the hearing, however, was that this was only to “defer”, not to “evade” the tax — simply that it was not his intention to permanently leave his responsibility to file and to pay unfulfilled. He would pay when it would be economically feasible and more convenient.

My appreciation of the relevant section of the Act is similar to the written submission of counsel for the respondent. It is expressed by the learned judge in The Queen v Paveley (supra) at 487 and 6421 respectively:

That the Act does not contemplate an artifice or scheme to be the only manner in which an “evasion” may be accomplished is further evidenced by section 163(1) which clearly enacts that an attempted evasion under that subsection can take place by simply “failing to file a return of income.”

As I read that comment, to fulfill his responsibilities under subsection 163(3) of the Act, the Minister need not show that the purpose of the taxpayer in “failing to file a return” was an attempt to “evade payment of the tax payable”. Such a requirement on the Minister would turn the critical phrase completely around instead of reading it precisely in the order it is written — “attempts to evade payment of the tax payable . . . by failing to file a return of income. . I am satisfied that when the failure to file “without notice or demand” under subsection 150(1) of the Act has resulted in a demand or requirement to file under subsection 150(2) of the Act, it is a valid primary conclusion on the part of the Minister that the taxpayer’s lack of compliance under subsection 150(1) was an attempt to evade tax, and the Minister may look at the possible application of the provisions of subsection 163(1) of the Act. At that point I fail to see that the taxpayer’s protests, differentiating between “deferral” and “evasion” (temporary or permanent) can be taken seriously when his opportunity to file voluntarily under subsection 150(1) of the Act has thus been extinguished, and his requirement to file is now mandatory and directed under subsection 150(2) of the Act. This is not to say that such a demand to file under subsection 150(2) is a prerequisite in order to conclude that the circumstances indicate an attempt to avoid payment of tax, it is only to say that when such a demand has been issued, I would regard that as sufficient to demonstrate an attempt to evade payment of tax, and to “trigger” the consideration of subsection 163(1). As I see it, therefore, according to Paveley (supra), a taxpayer’s risk is not limited to the 5% late filing penalty under subsection 162(1), but he also runs the risk that his non-compliance may be viewed as an attempt at evasion under subsection 163(1). In itself, however, that does not warrant the application of the penalty provisions of subsection 163(1).

It rests then with the Minister to show that the attempt at evasion was wilfully committed. To do so, the Minister must be able to demonstrate that the taxpayer:

(a) knew or should have known his obligation to file under new section 150(1) of the Act; and that

(b) he knew or should have known that there was tax payable at the proper filing date.

In the instant case, the taxpayer’s background and experience, together with previous regular tax return filings, show that the first condition was fulfilled. The nature of the income (commission) together with the amount (some $23,000 from which no tax had been deducted) should have led him (and apparently did lead him) properly to conclude that there would be tax payable when and if he had filed on April 30, 1978.

The appeal is dismissed.

Appeal dismissed.