Edwin W. Chalupiak v. Her Majesty the Queen, [1997] 1 CTC 2066 (Informal Procedure)

McArthur J.T.C.C.: - These appeals were heard in Regina, Saskatchewan, under the informal procedures of this Court.

The first issue is whether penalties were properly assessed pursuant to subsection 163(2) of the Income Tax Act (the “Act”) on unreported capital gain of $8,009.00 in the 1992 taxation year.

The second question is whether the Appellant received the amounts of $4,693.00 and $916.00 with respect to automobile usage in his capacity as employee of Edlie Enterprises Ltd. for the 1991 and 1992 taxation years respectively.

Acknowledging that he had the burden of proof with respect to the first issue, Counsel for the Respondent proceeded first. Mr. Chalupiak conceded that he understated his 1992 taxable income by $8,009.00 after it was revealed to the Minister of National Revenue (the “Minister”) during an audit. The Appellant is a Certified Management Accountant (C.M.A.). The unreported capital gain arose out of the sale of shares in a Company that operated a restaurant.

The Appellant was aware of a Province of Saskatchewan 2% flat tax imposed on taxpayers with taxable income in excess of a certain amount. The inference made is that the Appellant was attempting to avoid the 2% flat tax by keeping his income under the limit. About 1988 the Appellant had a somewhat similar capital gain that he duly reported.

During the relevant years the Appellant was primarily employed as a property manager for 15 single family or duplexes residential units. He appeared to have done most of the maintenance repairs, purchasing of materials needed, collection of rents and other property care requirements, on his own.

The Appellant’s position with respect to the first issue follows largely taken from his Notice of Appeal:

1. I agree that the $10,678.00 should be included in income, however, I am appealing the assessment of penalties for failing to include this amount in income.

The 1992 adjustment relates to the sale of shares in Edlie Enterprises Ltd. to Karen Walker. When the 1992 tax return was filed the exact amount, if any, of the capital gain was not known since the agreement called for adjustments to the sale price that would not be known until later. For this reason, I initially file the 1992 tax return without reporting the transaction, with the full intention of filing an amended return when the exact amount of capital gain, if any, was determined. I did not interpret this action as inappropriate since there would be no material effect on the tax to be paid or refunded since there would be an offsetting deduction to record against the capital gain, and there would be no material effect on the tax liability. The actual amount of the capital gain was not determined until July 28, 1993 at which time it was determined to be 10,678.00. On November 2, 1992 Saskatchewan Economic Development Corporation (SEDCO) obtained a judgement against me for 200,357.71, and J was convinced that I would be filing for personal bankruptcy and my state of mind was such that I had little time and interest in anything at the time but trying to get this matter settled, let alone my tax situation. The Revenue Canada collections department will have correspondence and information on file where I had indicated that if I was successful in settling the matter with SEDCO I would then handle my tax situation and pay all taxes owing: if I was not successful I would be filing for personal bankruptcy.

I was completely unaware that if penalties were assessed that I would be prohibited from claiming the capital gains deduction. If I would have been aware of this, and if I would have been in a more stable state of mind, I probably would have handled the situation differently. In my mind I was doing nothing inappropriate because the bottom line was that there was no material effect on the tax liability: to me this was the significant factor. An amended return would be filed when the exact amount of capital gain, if any, was known. Given the circumstances, I believe it is grossly unfair to assess penalties in this situation.

Edwin Chalupiak testified that he was under extraordinary stress because of a $200,000.00 action and a judgment against him during the relevant period. He added that the amount of capital gain was not known at the time of filing his return for the 1992 taxation year and in any event the amount of tax payable on the unreported sum was or could have been less than $200.00. He also submitted that, while being a Certified Management Account, he prepared fewer that 5 or 6 income tax returns yearly, suggesting that he should not be held out as an expert in tax matters. He introduced evidence to the effect that his partner in the sale of the shares was not assessed a penalty under similar circumstances. His partner was not a C.M.A.

The Respondent’s position

The unreported income was known to the Appellant in July 1993. No supplementary return was filed. A higher standard of care is required from the Appellant who holds himself out to the public as an expert in the preparation of income tax returns.

Analysis

1. Penalties

To be liable for the imposition of a penalty under subsection 163(2), this Court must find that the Appellant was responsible for omitting to include the $8,009.00 capital gain for his 1992 taxation year. The Minister has the onus of proof in establishing that the Appellant had the requisite state of mind to justify the imposition of penalties. Because of the Appellant’s expertise and experience, there must be attributed to him a relatively high degree of understanding of taxation principles. The jurisprudence recognizes an element of subjectivity in the application of subsection 163(2).

While the Appellant was an accountant during his time was primarily devoted to residential real estate management to the extent that he personally attended to the repairs and maintenance requirements personally. While he presented no medical evidence, he was pursued by creditors to an extent making the relevant period a very stressful one for him.

Although one should expect a higher standard from the Appellant because of his professional designation, I accept his submissions that his omission was not a deliberate one with a motivation to avoid taxation. He clearly was more a business man and entrepreneur than a professional and dedicated or fastidious accountant.

Gross negligence has been analyzed by the courts on numerous occasions. The decision with respect to penalties that is most often cited, and to which counsel for the Appellants referred, is that rendered by the Federal Court, Trial Division, in Venne v. R., (sub nom. Venne v. The Queen) [1984] C.T.C. 223, 84 D.T.C. 6247. Strayer J. stated the following with respect to “gross negligence”, at page 234 (D.T.C. 6256), quoting Cattanach, J. in Udell v. Minister of National Revenue, [1969] C.T.C. 704, 70 D.T.C. 6019, at page 714 (D.T.C. 6025-26):

In my view the use of the verb “made” in the context in which it is used also involves a deliberate and intentional consciousness on the part of the principal to the act done which on the facts of this case was lacking in the appellant. He was not privy to the gross negligence of his accountant. This is most certainly a reasonable interpretation.

I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.

“Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.

I am prepared to give the Appellant the benefit of the doubt and find that the Appellant’s omission was not deliberate or grossly negligent.

2. Automobile Expenses

The Appellant was assessed benefits from employment in the amount of $4,693.31 and $915.99 for the 1991 and 1992 taxation years in relation to the automobile expenses. The gasoline expenses were claimed by Chalupiak Management and Accounting Services Inc. (the “Corporation”). The benefits assessed were as follows:

The Corporation expensed the automobile expenses for a 1988 Mustang owned by the Appellant.

The Minister estimated, arbitrarily because of a lack of information, that the Appellant’s automobile expenses for his business were 25% of the total usage. The Appellant estimated 90% of the automobile expenses should be charged to business use.

The Position of the Appellant largely taken from his Notice of Appeal reads as follow:

The automobile expenses should be allowed at 90% business use. They all relate to a 1988 Mustang.

I did not keep daily logs of personal and business use because they would have served no useful purpose. The vehicle was used almost “exclusively” for business purposes. [...] I agree that the 90% business use was not all related to Chalupiak Management and Accounting Services Inc. and that some of it would have been related to other companies in which I was actively involved with as manager, director, or shareholder. [...] I do a fair bit of accounting and consulting work outside of the city and a fair amount of the mileage would have come from this area. [...] Business relating to the revenue properties was almost always conducted on my way to and from work, thereby

mixing an element of personal and business use in these trips. During this period there were no vacation trips or personal trips out of town. Approximately 26,000 kilometres a year was recorded on the vehicle. I estimated one trip daily to the office to be of a personal nature.

I have reviewed the number of purchases I made for revenue properties in 1991 and 1992. There were approximately 200 in 1991 and 150 in 1992. Therefore one can assume that I used my vehicle for business purposes on these days.

Therefore in summary one could conclude that the vehicle was used approximately 1,020 times (200 x 3 + 25 x 12 + 10 x 12) for revenue property purposes in 1991 and 870 times (150 x 3 + 25 x 12 + 10 x 12) in 1992. If you use an average of 15 kilometres per trip this works out to 15,300 kilometres in 1991 and 13,050 kilometres in 1992 for revenue property business.

The vehicle was also used in the management and accounting business. 1 have reviewed the records of Chalupiak Management and Accounting Services Inc. and 1 had billed clients for $929.64 (2,516 kilometres) for travel in 1991 and $643.80 (2,220 kilometres) in 1992.

Also, there is some travel associated with the other companies such as Ambassador Coffee Inc. and Edlie Enterprises Ltd. that require a small amount of travel.

I essentially work 7 days a week and I would estimate that there were probably only 3 or 4 days in the year that I did not do any work. Also, there are 2 other family vehicles used for personal use.

Essentially all the travel is business related, and therefore maintaining a daily travel log would have served no useful purpose as virtually all the travel would have had a business component to it.

Position of the Respondent

The Respondent denies that the vehicle was used almost exclusively for business and states that, as no mileage log book was maintained, he has no knowledge of the facts as set out in these paragraphs.

Analysis - Automobile Expenses

The Appellant had the burden of proving that the amounts at issue are not benefits received from the Corporation in his capacity, as employee or shareholder. I find he has not met that burden. Mr. Chalupiak suggests that it is reasonable to conclude that his mustang was used almost exclusively for business purposes. In the absence of any log or other relevant records, the Court does not accept the general statements and records presented by the Appellant.

The Minister was correct in concluding that the Appellant received benefits in the amount of $4,693 and $916 from the Corporation to be added to his 1992 and 1993 taxation years respectively.

In conclusion,

1. The Appellant is not liable to penalties pursuant to subsection 163(2) of the Act in the 1992 taxation year.

2. The Appellant received benefits in the amounts of $4,693 and $916 for the 1991 and 1992 taxation years from the Corporation in his capacity as employee or, alternatively, in his capacity as shareholder.

The appeals are allowed to the extent set forth above. These matters are referred back to the Minister for reconsideration and reassessment on the basis that there is no penalty pursuant to subsection 162(3) and the automobile benefits were properly assessed by the Minister.

Appeal allowed in part.