John West v. Minister of National Revenue, [1980] CTC 2255, 80 DTC 1226

The Chairman:—The appeal of Mr John West is from income tax assessments in respect of the 1971, 1972, 1973, 1974 and 1975 taxation years whereby the Minister, along with interests on tax payable and penalties for late filing, imposed penalties pursuant to subsection 56(1) of the former Income Tax Act RSC 1952, c 148, as amended, in respect of the 1971 taxation year, and penalties pursuant to subsection 163(1) of the present Income Tax Act SC 1970-71-72, c 63, as amended, and subsection 62(3) of the Income Tax Application Rules in respect of the 1972 to 1975 taxation years respectively.

Issue

The appellant’s objection to and his appeal from the Minister’s assessment are directed specifically to the Minister’s application of subsection 56(1) of the former Act and section 163(1) of the present Act to the facts of this appeal.

Summary of Facts

The appellant who allegedly suffered from a dyslexic problem was nevertheless a reasonably successful businessman engaged in various activities: the purchase, repairing of houses and subsequent sale; the purchase of sale of cars; trading in coin collections; finders’ fees etc, the income from which as shown in the returns filed could be classified as being in the low to moderate income bracket.

It was alleged that in transacting his various business enterprises, the appellant because of the dyslexic problem had to rely on his friends and associates and on the good will of the persons with whom he dealt to obtain documentary records of the transactions.

Presumably because of his inability to keep his own records the appellant was reassessed on a net worth basis for the taxation years 1963 to 1968 and was penalized on that occasion. The appellant for a short period of time thereafter retained the services of Blair Anderson, a chartered accountant. Although he claimed to be satisfied with Mr Anderson’s work he nevertheless confided his income tax work in 1969 to a Mr A M Frampton who stated in his evidence that he owed the appellant money and had agreed to do the appellant’s income tax returns without remuneration.

The evidence indicates that Mr Frampton filed the appellant’s returns for 1969 and 1970 but he was reassessed for unreported income, as I understand, for the 1969 taxation year. Mr Frampton, who had been subpoenad by the respondent, admitted that although he had promised to look after the appellant’s tax returns, he found the appellant’s transactions too complicated and kept putting him off on the very numerous occasions the appellant inquired about his tax returns. Mr Frampton also stated that he was responsible for the difficulties in which the appellant found himself because of his incompetence in the field of accounting and income tax returns in which he admitted having had no formal training.

After receiving several demands by the Department of National Revenue, the appellant in 1976 retained the services of Mr Kenneth Pearce, a chartered accountant, who had at one time been employed by National Revenue in the Audit revision. In order to make out the appellant’s tax returns for 1971 to 1975 inclusively he obtained the records which the appellant had given to Mr Frampton. Exhibit A-2 is a letter from Mr Frampton to Mr Pearce corroborating the appellant’s evidence.

Mr Pearce, a credible witness, testified that in preparing the appellant’s pertinent tax returns he had received good cooperation from the appellant. Mr Pearce, however, stated that the appellant required personalized services in maintaining his business records and needed someone to make out his income tax returns. Mr Pearce stated that he had suggested that the appellant see a doctor about his condition. Exhibit A-1 is a letter from Dr Frank Kemble indicating that the appellant had a dyslexic problem.

Counsel for the respondent objected to the production of the letter as being self-serving and on the ground that he had no opportunity to cross- examine Dr Kemble. The Board allowed the production of the letter reserving its decision as to the probative value of the letter. In the circumstances, having heard the appellant’s testimony and on the basis of evidence given by Dr Pearce, Mr Frampton and Mr Gill, the respondent’s assessor in this appeal in respect to the appellant’s evident handicap, Dr Kemble’s letter can only have a corroborative value. Having no direct impact on the Board’s determination of the issue the respondent’s objection is overruled and the letter is accepted as corroborative evidence only.

There is no dispute with respect to paragraphs 3, 4 and 5 of the Minister’s reply which reads:

Says that the Appellant was prosecuted in December, 1974 and in August, 1975 for failure to file tax returns. He pleaded guilty and was fined $50 and $135 respectively.

Says that the Appellant was again prosecuted in March, 1977 for failure to file returns for his 1971 to 1975 taxation years and was fined $1,000.

Says that the Appellant subsequently declared taxable income of roughly $39,500 for the years under appeal.

The appellant therefore was prosecuted for failure to file tax returns during the pertinent taxation years and found guilty. In assessing the appellant the Minister imposed interest charges on the taxes payable, he imposed a penalty for late filing and a penalty under subsection 56(1) of the former Act for the 1971 taxation year, and a penalty under subsection 163(1) of the present Act for each of the years 1972, 1973, 1974 and 1975 respectively.

Finding of Facts

On reviewing the evidence, I am satisfied that the appellant did have a dyslexic problem, and that he needed help in keeping adequate records of his transactions as well as filing tax returns. However, by relying on friends and associates he nevertheless managed to carry on business at a profit in spite of the handicap. The appellant has always known that he was to file returns yet he did not do so in 1963-1968 and after dismissing a competent accountant who apparently helped to settle the 1963-1968 tax problems, relied on a person, who according to his own testimony was unable to file the appellant’s tax returns for the pertinent years, and allegedly kept putting off the appellant. There can be no doubt that Mr Frampton must accept a great deal of responsibility vis-a-vis the appellant in not filing the returns and not advising the appellant that he found the appellant’s transactions too complicated to file adequate reports.

The appellant, on the other hand, notwithstanding his handicap, was well aware as to what had occurred in his previous tax problems with the Department of National Revenue and that he had to engage a competent accountant to file his returns for the period of 1963 to 1968. In 1969, after Mr Frampton filed a return that was reassessed for unreported income and found guilty, the appellant continued to rely on Mr Frampton and he waited a period of five years without filing a return in spite of several demands by National Revenue for him to do so. It is most unlikely that the appellant who was accustomed to relying on friends and associates to complete his business transactions would not have consulted the same friends and associates as to his obligation to file tax returns, had he been as interested in filing the returns as he was in completing business transactions.

In the circumstances the appellant himself was guilty of gross negligence and counsel for the appellant has not established otherwise to my satisfaction in respect of the 1971 taxation year. As to whether or not the appellant wilfully attempted to evade tax payable pursuant to subsection 163(1) which the respondent must establish, is a more difficult question. Notwithstanding that the appellant is admitted by his counsel to have Stated prior to 1971 that “he would not pay one more cent of the tax’’, it is a fact that the appellant suffered from a serious handicap, it is a fact that the person to whom the appellant confided his tax returns for the pertinent taxation years was incompetent and did at the hearing assume full responsibility for the appellant’s problem, yet it is also a fact that the appellant was at all times conscious of his obligation to file proper tax returns on time and did not take the necessary steps to do so.

This, in my opinion, constitutes a difficult borderline case which I need not decide for purposes of this appeal.

Counsel for the appellant at the outset of his argument raised what I consider to be an important and very timely point having to do with the nature of the Minister’s pleadings which the Board cannot ignore.

Counsel pointed out that the Minister’s pleadings must be technically correct, particularly when a penalty is imposed. In the present instance, even though the Minister has referred to subsection 56(1) and subsection 163(1) and has assumed that the appellant knew of his obligation to file tax returns particularly after they were demanded by the Minister, he did not in the pleadings state that the appellant had wilfully evaded or attempted to evade the payment of tax payable.

More importantly counsel for the appellant, in my view, rightly pointed out that the respondent in stating that the appellant had “subsequently” declared taxable income of $39,500 for the years under appeal, did not relate the amount of the penalty imposed to the amount of tax the appellant is alleged to have evaded or attempted to evade in each of the taxation years in question.

In support of his position counsel referred to the decision rendered by Mr Justice Jackett, then Chief Justice of the Exchequer Court in the case of P Elchuk v MNR, [1970] CTC 326; 70 DTC 6235, in which the learned judge Stated on p 329 [6237]:

The allegations of facts, or of facts that were assumed in making the assessments for penalties, as set out in the Reply, do not establish, if correct, that the penalty assessments were properly made. Without saying whether or not the pleading would otherwise be sufficient, it will suffice to say that there is no allegation of any amount of tax that was evaded, or sought to be evaded. In the absence of such information, it is impossible for the Court to determine whether any particular penalty was in an amount authorized by section 56(1). If such amounts had been so alleged, the allegations would have necessarily involved connecting up the amounts with the facts giving rise to the application of section 56(1) in such a way as to raise the factual issues that the Court would have to decide to determine whether the penalties were properly imposed.

Although Mr Justice Jackett was dealing with the application of subsection 56(1) of the former Act in which the burden of proof resided with the appellant, it appears to me to be applicable a fortiori to subsection 163(1) where the onus must be satisfied by the respondent and when the penalty is to be imposed only when the appellant has wilfully evaded or attempted to evade taxation.

Even if the respondent evidently relied heavily on the prosecutions and condemnations of the appellant for failure to file income tax returns in the pertinent taxation years as set out in paragraphs 3 and 4 of his reply, he did not allege in his pleadings that the failure to file his returns was due to a wilful attempt to evade payment of tax.

In reviewing the respondent’s assessments, the Minister has imposed penalties in specific amounts under subsections 163(1) and/or 56(1) for each of the taxation years which are no doubt related to the declared income for each of the years 1971 to 1975 respectively. However, the rough amount used by the respondent as the subsequently declared taxable income for the taxation years under appeal of $39,500 does not appear to me to add up to the appellant’s total taxable income for each of the pertinent taxation years. Moreover, I do not believe that the Board can or should assume a role which properly belongs to the assessor.

It appears to me that in general the allegations set out in the Minister’s reply, and particularly when the onus is on the respondent, should set out clearly not only the assumptions on which the assessment was based but the actual amounts assessed or, as in this instance, the exact basis on which the amount of penalty was calculated. There is nothing in the Minister’s pleadings that can permit the Board as in the Elchuk case, to determine whether the penalties were properly imposed on specific amounts of income which the appellant wilfully attempted to evade for each taxation year under review.

Although it may appear prima facie as a mere technical point, it is in my opinion an extremely important legal point whose application becomes all the more imperative because of the considerable increase of the number of tax appeals filed with the Board. The respondent’s reply to a notice of appeal must be sufficiently complete and clear to properly join the issue before the hearing. The Board should not be placed in a position of second guessing what the respondent’s assessment is in a particular case and on what basis the appellant was assessed.

The respondent’s pleadings in this appeal have failed to present to the Board the information necessary to determine whether or not the penalties were properly imposed in the respective taxation years under appeal.

This appeal must be allowed and the matter referred back to the Minister for reassessment in accordance with these reasons.

Appeal allowed.