Stanley S Filger v. Minister of National Revenue, [1980] CTC 2591, 80 DTC 1498

Guy Tremblay:—This case was heard in Montreal, Quebec, on May 16, 1979. The Board took the matter under advisement after receiving the transcript on October 2, 1979.

1. The Point at Issue

The point is whether a penalty of $653.81 pursuant to subsection 163(2) of the Income Tax Act for wilful or gross negligence must be maintained because the appellant, an accountant, omitted to include in his income the amount of $16,718 when filing his 1974 return.

2. Burden of Proof

The burden of proof is on the shoulders of the respondent according to subsection 163(3) which reads as follows:

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. Respondent’s Assumptions of Fact

The respondent in paragraph 7 of his reply to notice of appeal described those assumptions of fact as follows:

In assessing the appellant for his 1974 taxation year, the Minister of National Revenue relies inter alia, on the following assumptions of facts:

(a) Appellant is a chartered accountant who apparently is quite knowledgeable of both basic accounting principles and basic income tax principles.

(b) Appellant is also a sole shareholder of S Filger & Associates Limited (hereinafter referred to as SF Ltd) and is the sole member of S Filger & Co (hereinafter referred to as SF Co).

(c) Between October 72 and December 1973, SF Ltd paid to SF Co $18,150 of which $16,718 represented accounting fees.

(d) In the books of SF Ltd the $16,718 was deducted as an expense to the company.

(e) In the books of SF Co the amounts so received however, were credited to a loan account and not considered as income by the appellant.

(f) By notice of assessment dated June 14, 1976, an amount of $5,118 was added back to the 1973 declared income and an amount of $11,600 was added back to the declared income of the 1974.

(g) Subsequent to the filing of the notice of objection, the Minister of National Revenue as requested by appellant added back the full amount of $16,718 to appellant declared income for the 1974 taxation year and accordingly varied the reassessments for both years in issue.

(h) In re-assessing the appellant for his 1974 taxation year, the Minister also assessed a penalty in the amount of $653.81 pursuant to sub-section 163(2) of the Income Tax Act, such penalty now being the issue of this appeal.

4. Facts From Evidence

4.01 The respondent’s main witness is the appellant himself who has been a chartered accountant since 1957. The adduced evidence is to the effect that the above assumptions of fact by the respondent are true. The witness, however, has explained the circumstances surrounding those facts.

4.02 The corporation, SF Ltd, was operated from his accounting firm. The main activity of SF Ltd concerned negotiation of contracts for hockey players. This company was incorporated especially, according to the witness, to financially protect himself.

4.03 In the taxation year 1974 the accounting firm, SF Co, sent to the company, SF Ltd, a bill for the work done by SF Co as administration fees of $1,432 and as accounting fees of $16,718.

4.04 The appellant testified that he was not responsible for the fact that the amount of $16,718 deducted as expenses in the book of SF Ltd was not considered as income in his income tax return because the entries in the books of the accounting firm were not made by himself, but a Mr Shaikh who credited it to an account “loans payable”.

4.05 According to Mr Shaikh, however, all entries involving transfers from the company SF Ltd to the appellant were credited to the account “loans payable”, and debited to whatever form of payment which was made, normally cash.

4.06 Mr Shaikh testified that none other than Mr Filger decided what amount to the account “loans payable” would be transferred to income in order to prepare his income tax return.

4.07 The financial year-end of the appellant for 1973, 1974 and 1975 was January 31. The financial year-end of the company SF Ltd was August 31. According to financial statements of the company (Exhibit R-1, Tab E) the following amounts were claimed as accounting fees: in 1973; $16,718; in 1974: $4,050; and in 1975: $4,345. None of these amounts can be traced in Mr Filger’s books either as loans payable, as income, or as work in progress, or accounts receivable except for about $2,595 (Exhibit R-2, page 60 ($800); page 61 ($345); page 63 ($250 and $300); page 71 ($1,000)).

4.08 Moreover, after filingthe notice of objection and after the meeting with the respondent’s representatives, he included $13,500 in the income for the 1975 year. The appellant, in his notice of objection for the 1974 year, said concerning this $13,500: “undeclared fees as shown in notice of assessment does not give benefit to $13,500 already included in income figures”. In fact, the proof was to the effect it was not included (Exhibit R-4, page 2). This amount appears as account receivable in January 1972. It is still found in January 1974 ($13,500 + $9,130 - $22,630). It was reversed on February 1, 1975, and included in the income of 1975. In a letter dated June 1,1977, the appellant wrote to the District Taxation Office concerning this $13,500:

An additional amount of income in the amount of $13,500 to be added to my accounts receivable representing a correction of an accounting reversal which should not have taken place.

In fact, it was proved that the gross income for 1972 was $38,762 ($52,262 - $13,500 (Exhibit R-4 page 25; R-1, Tab A).

4.09 Mr Shaikh stated he worked for the appellant in June 1975. He had just arrived from Pakistan. He said he prepared the T-2 Form 1975 return for the company SF Ltd. It was a hard job. He did not have too much time to discuss with the appellant who was very busy with hockey, guests and his sick wife. He said, however, that all the work was put on Mr Filger’s desk for verification. He said, he prepared the notice of objection by himself.

4.10 The notices of objection re: 1973 and 1974 were filed in September 1976, and the T-2 1973 return of the company was filed in March 1976. The T-2 1975 return of the company was filed on January 14, 1977. The T-1 1974 return of the appellant was filed on April 30, 1975.

4.11 The declared net income in the 1974 return was $6,885 ($6,033 net accounting fees and $852 taxable family allowances).

4.12 The facts described in subparagraphs (f), (g) and (h) of paragraph 3 are admitted by the appellant.

5. Comments

It is the Board’s opinion that the appellant’s system of transferring money due by the company to himself by the intermediary of the general account “loans payable”, is by itself, a trap which invites errors (par 4.07).

The evidence showed how the system was, at least, complicated (par 4.08), and that the appellant can blame only himself for not including in his income the amount of $16,718 (par 4.04, 4.05 and 4.06).

The lame accounting system established by the appellant who is an accountant and the way the entries were recorded or not in the said system constitutes by themselves gross negligence. The penalty is well founded.

6. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.