Gordon H Fitzgerald v. Minister of National Revenue, [1980] CTC 2949, 80 DTC 1822

John B Goetz:—This is an appeal by the appellant with respect to his income tax liability for his 1972 and 1973 taxation years. The appellant and the respondent agreed on a statement of facts which succinctly sets the basic issues before the Board and reads as follows:

Agreed Statement of Facts

1. By notices of reassessment both dated June 2, 1977, the respondent reassessed the appellant’s income tax liability for his 1972 and 1973 taxation years by adding, inter alia, Revenue omissions to his income and by levying penalties under section 163(2).

2. On August 31, 1977 the appellant filed a notice of objection in respect of the reassessments of income for his 1972 and 1973 taxation years.

3. On March 10,1978 an information was sworn charging the appellant under section 239 of the Income Tax Act in respect of his 1972 and 1973 taxation years.

4. In September 1978 the appellant pleaded guilty to a charge under paragraph 239(1 )(a) of the Income Tax Act.

5. By notices of reassessment both dated December 4, 1979, the respondent reassessed the appellant’s income tax liability for his 1972 and 1973 taxation years by reducing the amounts of his tax liability. Penalties were levied in correspondingly reduced amounts.

6. The appellant knowingly or under circumstances amounting to gross negligence, made statements or omissions in his 1972 and 1973 income tax returns, as a result of which the tax which would have been payable by him for his 1972 and 1973 taxation years if he had been assessed on the basis of the statements or omissions in the returns was less than the tax payable by him for the 1972 and 1973 taxation years.

7. This agreed statement of facts eliminates the requirement for the respondent to call evidence in support of the penalties.

8. The issue to which argument will be addressed before the Board is whether the penalties levied by the assessments dated December 4,1979 contravene the provisions of subsection 239(3) of the Income Tax Act.

Issue

The issue, as can be seen, relates to the application of the provisions of subsection 239(3) of the Income Tax Act, SC 1970-71-72, c 63, as amended. Penalties were levied pursuant to subsection 163(2) of the Act which reads as follows:

(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.

Subsection 239(3) reads as follows:

Where a person has been convicted under this section of wilfully, in any manner, evading or attempting to evade payment of taxes imposed by Part I, he is not liable to pay a penalty imposed under section 163 for the same evasion or attempt unless he was assessed for that penalty before the information or complaint giving rise to the conviction was laid or made.

Findings

The appellant, in his notice of appeal, stated as follows:

5. For the taxation year 1972:

(a) By reassessment dated 1977 the federal tax payable was $53,524.50 which included subsection 163(2) penalty of $10,536.50.

(b) By reassessment dated 1979 the federal tax payable was $24,133.45 which included subsection 163(2) penalty of $4,658.29.

6. For the taxation year 1973:

(a) By reassessment dated 1977 the federal tax payable was $39,959.98 which included subsection 163(2) penalty of $6,790.34.

(b) By reassessment dated 1979 the federal tax payable was $26,171.93 which included subsection 163(2) penalty of $3,758.45.

He then asserts that the penalties, pursuant to subsection 163(2), cannot apply because it is prohibited by the provisions of subsection 239(3).

As can be seen, the reassessments of the appellant’s income tax liability for the years 1972 and 1973, said reassessments dated December 4, 1979, according to the appellant’s own appeal, indicate that both the assessment of tax and the penalties relating thereto for the relevant years were substantially reduced, almost by 50%.

In my view, the purpose of subsection 239(3) seemingly being for the purpose of protecting a person having been convicted of evading or attempting to evade payment of taxes, that person could and should not then be subject to a penalty imposed thereafter under the provisions of section 163 for such evasion.

Subsection 248(1) defines “assessment” as:

“assessment includes a reassessment;.

The original assessment brought with it a substantial penalty. The reassessment made subsequent to the appellant pleading guilty to evading payment of taxes merely changed numerically the quantum of assessment of taxes and the quantum of the penalties imposed as they related to the new assessment of taxes. The penalties re the relevant taxation years were imposed well prior to the filing of the information and complaint whereby the appellant pleaded guilty and was convicted of evasion of payment of taxes under the Income Tax Act.

The penalties were extant throughout all the relevant times as they relate to the appeal.

The provisions in subsection 239(4) of the Income Tax Act permit a stay of proceedings in the Tax Review Board pending the completion of criminal proceedings. Subsection 239(3) is aimed at preventing the Minister from relying upon the judgment of the Criminal Court when assessing a penalty. The Minister must do his own investigation and satisfy himself that the taxpayer was grossly negligent before applying a penalty under section 163(2). A reassessment is merely a numerical change in the original assessment notice given by the Minister. The substance of the assessment follows through and in particular when the original assessment involved a penalty, which was reduced by a subsequent reassessment, it seems to me that subsection 239(3) is of no assistance whatsoever to the appellant.

I quote directly from the able argument of counsel for the respondent:

8. In determining whether a transaction brings a party within the terms of the Income Tax Act the substance and not the form is to be regarded. Dominion Taxicab Association v MNR, [1954] SCR 82. In the present case the substance is that a penalty under subsection 163(2) has been imposed. To hold that a reassessment would eliminate the penalty imposed and impose another penalty would be tantamount to permitting the form of the transaction to supersede the substance.

In my view, the only reasonable interpretation of subsection 239(3), as it relates to the facts in this case, is that prior to the swearing of the information to which the appellant pleaded guilty, a penalty had been imposed. Subsequent to the criminal proceedings, the penalty was still in existence but was reduced by a reassessment. Consequently, the appellant cannot take advantage, as he seeks to do, that he is protected from paying a penalty in the situation in which he now finds himself. See MNR v Ritchie, [1971] CTC 860; 71 DTC 5503.

There is no ambiguity in the words of subsection 239(3). See Attorney General of Quebec v Stonehouse, [1978] SCR 1015 at 1024-5. See also Dominion Taxicab Association v MNR, [1954] SCR 82; [1954] CTC 34; 54 DTC 1020 and Abrahams (No 1) v MNR, [1966] CTC 690; 66 DTC 5451, Jacket, Pas he then was, stated:

I am of opinion that the power conferred by subsection 46(4) (now subsection 152(4)) may be exercised from time to time as circumstances may require. If this were not so the Minister would not be able to make a second or third reassessment for the purpose of reducing a taxpayer’s liability when circumstances reveal that a taxpayer has been over taxed. Furthermore, the power is the same in the case of reassessment made within the four-year period contemplated by paragraph (b) of subsection 46(4) as it is in the case of “fraud” or “waiver” covered by paragraph (a) of that subsection and it would seem clear that the scheme of the act calls for as many reassessments as the circumstances require in such cases. The fact that an appeal has been initiated should not make any difference in the application of the provision.

For the above reasons, I dismiss the appeal.

Appeal dismissed.