Timothy Nicholas v. Her Majesty the Queen, [1996] 3 CTC 2266, 96 DTC 1740 (Informal Procedure)

Sobier J.T.C.C.: — The Appellant appeals from the assessment by the Minister of National Revenue (the “Minister{}) of penalties under subsection 163(2) of the Income Tax Act (the “Act”) with respect to his 1989 and 1990 taxation years. With respect to the 1990 taxation year, the penalties were assessed by reason of the alleged failure of the Appellant in reporting a taxable capital gain on the disposition of shares of M.D. Growth Investment Fund (“MD”). The assessment for the 1989 taxation year was with respect to an unreported taxable capital gain resulting from the disposition of shares in another mutual fund identified only as Perpetual Growth Funds (“Perpetual Growth”).

The latter assessment arose after inquiries were made concerning the disposition of the MD shares. Revenue Canada invited the Appellant to disclose other unreported income. As a result of this, his accountant while examining the documents dealing with the MD shares, discovered that there might be a problem concerning the Perpetual Growth shares.

According to the Appellant, after considerable effort was made, Perpetual Growth Funds finally provided the necessary documents to file with respect to that disposition. According to the Appellant, at the time of filing his 1989 return, there was no information available to him concerning this disposition.

The Respondent’s counsel, in cross-examining the Appellant, led the bulk of his questions on the issue of the gain on the disposition of the MD shares. There was no evidence concerning the disposition of the Perpetual Growth shares, which would support an assessment of penalties. The Respondent failed to show the circumstances under which the disposition was made and under which the Appellant failed to report the gains, and therefore did not discharge the onus put upon the Minister under subsection 163(3) of the Act. Accordingly, the appeal against the assessment of penalties under subsection 163(2) of the Act for the 1989 taxation year is allowed and the assessment vacated with respect to the penalties on the disposition of the Perpetual Growth shares.

Dealing with the MD shares and Dr. Nicholas’ handling of his tax return preparation, it was Dr. Nicholas’ evidence that he annually gathered all of the information and documents concerning his income and forwarded them to his accountant. He then responded to queries and requests from his accountant which arose in the course of the preparation of his tax return.

Dr. Nicholas had many sources of income, including income from his medical practice, rental income, dividends and interest income, taxable capital gains and income from limited partnerships. He felt inadequate to prepare his own returns, and left the matter entirely to his accountants. While he might give his accountants all the information and documents which he claimed to have received with respect to the MD shares, he apparently made no mention of having disposed of them.

The Appellant began acquiring MD shares in 1979 and gradually increased his holdings until 1990, when he sold all of the MD shares. It was shown by Revenue Canada’s witness that his cost of the shares was approximately $84,000 and the proceeds of disposition were $142,921. Since the disposition was of his entire holdings, he ought to have been aware that he should have made inquiries, so as to ascertain if the disposition carried any tax consequences. This he did not do. He maintained that he handed over all the information which he had and assumed that would suffice.

In order for the penalties to be assessed, it must be established that his conduct was such as is contained in subsection 163(2) of the Act, which reads as follows:

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 false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater ...

and there follows a formula.

Counsel for the Respondent referred to Howell v. Minister of National Revenue, [1981] C.T.C. 2241, 81 D.T.C. 230 (T.R.B.). There the Appellant hired a tax preparer to complete his 1976 tax return. The bulk of his income was unreported when one T4 slip was not included. This T4 slip was for employment income for his employment for the entire year and was the major source of revenue and the largest amount of revenue from all sources.

He claimed to have signed the return without verifying its contents and relying on the tax preparer.

At page 2243-45 (D.T.C. 232), Judge Taylor (as he now is) stated:

Reference is again made to the critical comment quoted above from Udell

(supra) at pages 6024 and 712 respectively:

... I found that his explanation of his failure to question the magnitude of the loss reported in his 1962 tax return to have been a reasonable one. I, therefore, have no hesitation in accepting his explanation in this respect.

As I read the above quotation, the learned Judge indicates that in his opinion, that tax return (Udell) was complex and nothing in the return should have alerted the appellant to the fact that the loss reported was in error, as such an alert could be expected from a “normally wise and cautious man”. In my opinion, a “normally wise and cautious man” would be one who would at least review, and attempt to understand any document placed before him for signature which contained the certificate and caution on the standard income tax form. It is not apparent to me from Udell (supra) that the learned Judge is certifying that a “casual” review of the return, and failure to “scrutinize the computations” because the profit or loss “coincided approximately with his own estimate” in that case absolves all taxpayers from the specific responsibility for the contents of the documents signed and filed. The certificate and the caution are placed in the return for precisely the purpose of ensuring that the taxpayer conduct himself in a prudent manner considering his own circumstances and the matters upon which he is reporting. The certificate and caution are ignored at peril.

There are certainly income tax situations in which only a comprehensive review and specific explanations by professional help would make the income tax return intelligible to even a knowledgeable and interested taxpayer. Those situations are the exception, not the rule, when a personal income tax return is at issue. The standard income tax form in use today is not complex and impossible to understand. It does not place the ordinary taxpayer in a labyrinth of confusion or a maze of insurmountable disorder. The simplified step by step tax form itself, the explanatory booklet meticulously prepared by officials of Revenue Canada, and other available documentation provide a written record to refute any allegations of unusual or unwarranted complexity in the obligations imposed upon a taxpayer. Personal assistance is readily available from Revenue Canada to amplify the printed material and a taxpayer who remains uninformed does risk a certain scepticism when confronted with inadequacies in the return he has filed.

Snelgrove (supra) is explicit in indicating that simple negligence must be exceeded in order to warrant the penalties under section 163(2). However, it does not stand for the proposition that a taxpayer can justify any level of negligence simply by arguing difficulty or lack of comprehension on his part with regard to the tax document he has filed. The use of professional help in certain circumstances is clearly more of a convenience than a necessity, and may not be relied upon exclusively to expunge the “gross negligence” of the taxpayer, whatever may have been the contribution or competence of the agent. [1]

However, not having informed his accountant of the disposition of the MD shares, no amount of review could have brought to light the disposition, unless the tax preparer knew of the disposition, which he did not. The Appellant had a duty to inform his accountant. Having disposed of his entire holdings of MD shares is not something insignificant to be forgotten or to be put aside. He received some $142,000.

I believe the Appellant when he says that he did not knowingly fail to disclose the disposition. However, does his action constitute gross negligence?

Judge Dussault of this Court in Sigouin v. Minister of National Revenue, [1993] 2 C.T.C. 2760, 93 D.T.C. 210, refers at pages 2763-64 (D.T.C. 212) to the reasons for judgment of Chief Judge Couture, also of this Court in Girard v. Minister of National Revenue, [1989] 1 C.T.C. 2138, 89 D.T.C. 60, when he said at page 2763-64 (D.T.C. 212):

For an appellant to avoid liability under the Act when he fails to report income, he cannot simply attribute the omission to circumstances apparently beyond his control and try to place the blame on third parties. When he signs his tax return for a taxation year he also signs the following certificate:

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

This statutory formula appears to me to be quite clear and to require no explanation. When signed by a taxpayer it creates a presumption that the return is correct, based on the fact that the taxpayer was aware of and satisfied with its contents when he signed it. The same is true for all additions that must be completed and filed with the statement without exception, if the circumstances so require.

I do not suggest that the fact that a taxpayer signed such a certificate automatically makes him liable to the penalty mentioned in section 163(2) if he commits any offence in the return. I admit that there are a whole range of circumstances in which he will be entirely free of liability under this subsection; but for him to succeed in persuading the Court that the offence committed by him resulted from independent circumstances beyond his control, and so avoid liability, he must how [show] that in the circumstances he exercised reasonable attention and diligence in preparing and filing his return.

The evidence indicates that he knew that the MD shares were sold and did nothing to inquire as to the tax consequences, and he has not brought forth any evidence which would mitigate this failure. He was not misled or confused by information or disinformation. Unlike the issue with respect to the Perpetual Growth shares, the Respondent has shown the Court evidence which leads to the conclusion that he acted without any regard as to whether he was complying with the law. He chose to ignore the fact that he disposed of shares for over $140,000. This is not carelessness, but as Strayer J. said in Venne v. R. (sub nom. Venne v. The Queen), [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D.), he was indifferent as to whether the law was complied with or not. [2] The Appellant is an intelligent person. The standards of care are greater for him than for a person of limited intelligence and education.

Therefore, the appeal is dismissed with respect to the assessment of penalties resulting from the disposition of the MD shares.

Appeal allowed in part.