David J. Hill v. Minister of National Revenue, [1996] 3 CTC 2081 (Informal Procedure)

Archambault J.T.C.C.: - Mr. David Hill appeals from assessments of penalties pursuant to subsection 163(2) of the Income Tax Act (the “Act”) for the 1989, 1990, 1991 and 1992 taxation years. The Minister of National Revenue (the “Minister”) argues that Mr. Hill knowingly or under circumstances amounting to gross negligence made a false statement in his tax return for these taxation years when he claimed as a deduction the amount of professional dues paid by his employer to the Law Society of Upper Canada. At the beginning of the hearing, counsel for the Minister advised the Court that the Minister was conceding that no penalty should be assessed for the 1992 taxation year.

Facts acts

Mr. Hill started practising law in Saskatchewan, first as a Prince Albert legal aid attorney for four years and then in private practice for two years. After that, he joined the federal Department of Justice as a crown prosecutor. One year later, his employer moved him to the Yukon for two years. In 1988, he was transferred to Ottawa. In filing his tax return for the 1988 taxation year, Mr. Hill obtained the professional help of Peat Marwick. One of his concerns was the proper treatment of the Northern allowance. He provided Peat Marwick with all his information returns and tax receipts and they prepared his tax return. A sum of $1,080.00 was claimed for his professional dues. For the following taxation years, Mr. Hill did not retain their services, because he considered his tax return a fairly straightforward affair. For each of the 1989, 1990 and 1991 taxation years, Mr. Hill requested that his employer pay his professional dues to the Law Society of Upper Canada. The Department of Justice paid an amount of $894.00 in 1989, $951.00 in 1990 and $1,166.30 in 1991. These requests and the payments were made in conformity with the administrative practices of the Department of Justice. Pursuant to such practices, the Department of Justice pays the professional dues to the law societies because its lawyers are required to be members in good standing of a law society in order to perform their duties for the Department. Because this is an operational expense, the Department does not include in the income of its lawyers the amounts paid to the law societies.

When the Department grants a taxable benefit to one of its employees, the amount appears on the pay cheque stub remitted to the employee. This is the case, for instance, with low-cost parking. Furthermore, the amount of the taxable benefit appears on the T-4 in the box for other taxable benefits. In the case of Mr. Hill, for the 1989 taxation year, the amount was $357. The T-4s for the 1990 and 1991 taxation years do not show any amount as other taxable benefits.

In preparing his tax returns for the 1989 to 1991 taxation years, Mr. Hill followed the practice adopted by Peat Marwick and claimed the professional dues paid for his benefit by the Department of Justice. His only explanation for claiming the professional dues was that he followed the practice of a reputable professional firm which prepared his tax return for the 1988 taxation year.

Analysis

The relevant provision of the Act pursuant to which Mr. Hill claimed his deduction is the following:

8(1) In computing a taxpayer’s income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(i) amounts paid by the taxpayer in the year as

(i) annual professional membership dues the payment of which was

necessary to maintain a professional status recognized by statute,

to the extent that he has not been reimbursed, and is not entitled to be reimbursed in respect thereof.

Here, it is clear that Mr. Hill did not personally pay the professional dues to the Law Society of Upper Canada. He is therefore not entitled to this deduction. Mr. Hill does not contest this interpretation. However, he argues that the penalty is not well-founded because he did not knowingly or under circumstances amounting to gross negligence make a false statement in a tax return. He claims he was in good faith when he filed his tax return for the 1989 to 1991 taxation years because he relied on the fact that his accountant had claimed such amount in filing his 1988 tax return and the Minister accepted it.

Mr. Justice Strayer in Venne v. R. (sub nom. Venne v. The Queen), [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D.), at page 234 made the following comment on the meaning of gross negligence:

“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.

Judge Bonner of this Court, who heard some time ago, in Near v. R. (March 31, 1994), Doc. 93-3205(IT)i (T.C.C), an appeal by a lawyer from the Department of Justice raising the same issue, adopted the same interpretation as Mr. Justice Strayer in concluding as follows:

In my view that indifference existed and led to the assertion of the claim to deduct the Law Society of Upper Canada fees in 1990 and 1991.

Mr. Hill retained the services of Peat Marwick because he wanted their help in preparing his tax return for the 1988 taxation year to insure that the receipt of a Northern allowance would be properly treated in his tax return. In preparing this return, Peat Marwick claimed the amount of $1,080.00 as professional dues for the Law Society of Upper Canada. The evidence did not disclose whether Mr. Hill informed Peat Marwick that the Department of Justice was paying his professional dues. It seems to me that had he done so, Peat Marwick would not have claimed the professional dues for that particular taxation year. For this reason, I do not think it is proper for Mr. Hill to raise as a defence the fact that Peat Marwick claimed such amount for his 1988 taxation year. In assessing whether a taxpayer has raised a reasonable defence against the assessment of a penalty pursuant to subsection 163(2) of the Act, it is proper to take into account his academic and professional background. This is what Strayer J. did in Venne (supra), at page 236, when he made the following statement:

... The section has in the past been applied subjectively to taxpayers, taking into account their intelligence, education, experience, etc, and I believe this implies that an ignorance of the law which is not unreasonable for the particular taxpayer in question and the particular circumstances may be acceptable as a defence to the application of penalties.

In these particular circumstances, I find it very difficult to believe that a person such as Mr. Hill, who is a university graduate and a member of the Law Society of Upper Canada and who practises law for the federal Justice Department would think that it is appropriate to claim as a deduction an expense which was paid by a third party. It is also very difficult to accept that Mr. Hill believed the professional dues were paid by the Department of Justice as his agent. Whenever the Department pays as his agent premiums pursuant to the Unemployment Insurance Act or the Canada Pension Plan or his contribution to his registered pension plan, all these amounts appear both on his pay cheque stub and on his T-4 at the end of the year. There is no indication on the T-4s that the Department paid the professional dues as his agent. Furthermore, the only taxable benefit added to his income is an amount of $357 in 1989, an amount much lower than the amount of his professional dues of $894. It is thus not conceivable that Mr. Hill could have concluded that the amount of the professional dues was included in his income. I believe that Mr. Hill acted like an ostrich hiding its head in the sand. He did not want to know whether or not his employer included the amount of professional dues as a taxable benefit. He preferred to follow blindly the practice of Peat Marwick when it prepared his 1988 tax return. When Mr. Hill filed his tax returns, he signed the following certification :

I hereby certify that the information given in this return and in any documents attached is true, correct and complete in every respect and fully discloses my income from all sources.

Mr. Hill was responsible for insuring that his return was accurate and complete and in these circumstances, he cannot hide behind his accountants, especially when we do not know whether they had all the appropriate information in claiming the professional dues for the 1988 taxation year. Like Judge Bonner, I believe that the indifference described by Strayer J. existed and led to the assertion of the claim to deduct the professional dues.

For these reasons, the appeal for the 1992 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no penalty under subsection 163(2) of the Act should be assessed. It is further ordered that the appeals with respect to the 1989, 1990 and 1991 taxation years are dismissed.

Appeal allowed in part.