Lymer v. R., [1997] 2 CTC 2952

Somers DJ.T.C.:

This appeal was heard in Toronto, Ontario, on March 10, 1997, pursuant to the Informal Procedure of this Court. The Appellant, Steven J. Lymer, appeals the penalty imposed by the Minister of National Revenue (the “Minister”), for the taxation year 1990.

In December 1989, the Appellant a police officer, along with his father John Lymer, and his brother Gregg Lymer, invested the sum of $50,000.00 in Bewco One Limited Partnership (Bewco). In computing income for the 1990 taxation year, the Appellant failed to include his income in the amount of $15,990.00 from Bewco.

In reassessing the Appellant, the Minister made the following assumptions of facts which the Appellant admitted or denied:

(a) the amount was received by the Appellant in the 1990 taxation year; (admitted)

(b) the amount was received by the Appellant in respect of his investment in Bewco; (admitted)

(c) in the year 1989, the Appellant invested $50,000.00 in Bewco to acquire 10 units of Bewco as a limited partner; (admitted)

(d) while the Appellant failed to include the amount in income, he claimed Capital Cost Allowance and Carrying Charges in respect of his investment in Bewco as a deduction from other income reported for the 1990 taxation year; (admitted)

(e) the amount is material in relation to the Appellant’s total income for the 1990 taxation year; (admitted)

(f) the Appellant knowingly, or under circumstances amounting to gross negligence, in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in the income tax return filed for the 1990 taxation year, as a result of which the tax that would have been payable assessed on the information provided in the Appellant’s income tax return filed for that year, was less than the tax in fact payable by the amount of $4,023.80. (denied)

The Appellant, his father a police officer in 1989, and his brother Gregg Lymer a senior assessment officer with the City of Toronto, wished to invest money in Bewco, having operations in film investments. Before doing so, they sought advice from Tony Boyden, a financial adviser.

Therefore, the Appellant borrowed $50,000.00 and invested in Bewco. Prior to 1989, the Appellant always prepared his own income tax returns, without experiencing any problem. In 1990, since he invested in this company, he decided, as well as his father and brother, to rely on David Nathan Cantor, a certified general accountant, to prepare his 1990 income tax return. He gave all the necessary documentation to the accountant for the filing of his return for the 1990 taxation year. This accountant prepared the taxation returns for the Appellant, the father, and Gregg Lymer. However, the accountant dealt only with Gregg Lymer. The Appellant and his father relied on Gregg Lymer to supply the accountant with the necessary information and documents.

When the returns for the 1990 taxation year were prepared, the Appellant signed the T1 General 1990 document without reading it. It was only in May, 1995, when the Appellant received the Notice of Reassessment, that he realized there was a problem. The Appellant admits that he most likely received Exhibit R-1, “Offering Memorandum”, from Bewco.

He did not understand the document which consisted of approximately 58 pages. Since it was a big investment, he relied on his financial adviser. The Appellant admits having received a letter dated March 14, 1991, Exhibit R-2, from Bewco Television Management Limited, signed by William E. Bateman.

Information contained in paragraphs appearing in Exhibit R-1, page 21, is crucial for the purpose of calculating his return for the 1990 taxation year:

Taxation of Limited Partners’ Income or Loss

A Limited Partner will be required to include in computing his income or loss for his taxation year his share of the Partnership’s income or loss for the fiscal period which ends in that year. This inclusion must be made whether or not the Limited Partner has received or will receive actual distributions from the Partnership. Provided that a Limited Partner is a member of the Partnership on December 31, 1989, the income or losses of the Partnership for such fiscal period will be allocated to him. The amount allocated will be based on the ratio that the number of Units held by the Limited Partner is to the number of Units then outstanding. The same will be true for each subsequent fiscal period of the Partnership.

A Limited Partner’s share of the losses of the Partnership for any fiscal year may be applied against his income from any other source to reduce the income in that year and, to the extent not deductible in that year, may be carried back three years and forward seven years against taxable income of such other years.

The essence of the foregoing paragraphs is shown, in Exhibit R-2, in the contents of a letter, received March 14, 1991 from Bewco Television Management Limited, which reads as follows:

Generally speaking, each Limited Partner is entitled to deduct any Partnership losses from personal income during a fiscal year. Conversely, each Limited Partner is also required to include in his or her income the amount of income generated by a Limited Partnership interest during that fiscal year.

A statement of operations was attached to this letter, Exhibit R-2, indicating as net income per unit, the sum of $1,599.00. Since the Appellant had 10 units, he should have indicated as revenue the sum of $15,990.00. The Appellant, most likely received these two Exhibits, not understanding the contents and left everything with the accountant for his perusal and consideration. Not having received the sum of $15,990.00, he thought he did not have to declare it.

Nathan Cantor told the Appellant, his father and brother that there was an income of $15,990.00, but the accountant was told not to consider it as income. The accountant further consulted with Tony Boyden, the financial adviser, and spoke with William E. Bateman from Bewco. A notice dated March 6, 1991, from Kathryn P. Steffan was attached to the letter from Bewco. Part of the notice reads as such:

...I have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information or to determine whether this statement contains departures from generally accepted accounting principles. Accordingly, readers are cautioned that this statement may not be appropriate for their purposes.

A letter, dated November 29, 1995, produced as Exhibit A-2, reads in part as such:

While preparing his tax return, I came across a 1990 financial statement for Bewco One Limited Partnership (thereafter referred to as “Bewco”). Since there were no Official Revenue Canada information slips prepared by the partnership my immediate course of action was to inform Mr. Lymer of this matter. Mr. Lymer’s response to me was that he will seek the advice of his financial advisor, Mr. Tony Boyden, whom I was told was instrumental in the offering and arranging the financing requirements for this investment.

After a couple of days had passed, Mr. Lymer informed me by telephone that based upon Mr. Boyden’s advice, the net income stated on the 1990 financial statement of “Bewco” should not be reported on his return unless supported by an official Revenue Canada information slip. Based on Mr. Boyden’s response, I deemed this not to be taxable income and therefore did not include this amount on the aforementioned taxpayer’s return for the year in question.

Tony Boyden, the financial adviser, consulted by Gregg Lymer, wrote a letter dated October 22, 1995, which was produced as Exhibit A-1. The letter addressed to Gregg Lymer reads as follows:

Your father has asked me to write to confirm a telephone conversation between you and me in the spring of 1991. It is my recollection that although I had left the business following a heart attack in 1988, you had called to see if I knew whether some items shown on statements received by you from BEWCO should be included in income by you for tax purposes. My suggestion at that time and probably even today would be that if you had not received a T-5, it was probably not intended to be shown by you as income.

On the basis of these consultations, and the absence of a T-5, the accountant Nathan Cantor and the Appellant who was represented by his brother Gregg relied on the financial adviser. The Appellant decided to sign the return for the 1990 taxation year, without reading it. His father and brother Gregg Lymer, did likewise, relying on the advice of the accountant who was specifically hired to prepare the tax returns. It was the first time, the Appellant and his partners were involved in such a business investment and they considered it advisable to retain the services of the accountant. The only income derived from this business was the sum of $900.00 which was declared as income. The Appellant and his two partners lost their investment, and as a consequence accumulated a considerable debt.

Lenon Moryta, a business file auditor for Revenue Canada, explained the reasons he signed the penalty report. There were according to this witness 59 partners in this business venture; 48 of which reported income for the 1990 taxation year and 11 did not. According to him it is not necessary to receive cash to report an income.

Subsection 163(2) of the Income Tax Act reads, as such:

(2) False statements or omissions. 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...

Subsection 163(3) of the Income Tax Act reads, as such:

(3) Burden of proof in respect of penalties. 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.

There was negligence on the part of the Appellant in signing his return for the 1990 taxation year, without reading it. Based on the evidence, the Court cannot conclude that the Appellant knowingly acquiesced to a false statement. Therefore, the Court is to determine if it was gross negligence.

The following is the case law referred to in Exhibit A-5:

In Can-Am Realty Ltd. v. R., (1994), 94 D.T.C. 6293 (Fed. T.D.), Rouleau, J. of the Federal Court - Trial Division, in commenting on subsection 163(2) said:

The jurisprudence has established the burden on the Minister to justify a penalty under that provision to be an onerous (sic) one. It is not sufficient to show a taxpayer has failed to comply with his obligations under the Act, nor is it enough to demonstrate he has been careless or negligent in the filing of his return. What is required is conduct which is exceptional and flagrant to the degree of gross negligence.

In Contonis v. R., (1995), 95 D.T.C. 511 (T.C.C.), Bowman, T.C.C.J. described gross negligence as:

descriptive of an exceptionally high degree of negligence, amounting almost to recklessness. It goes well beyond mere inadvertence.

In Venne v. R., (1984), 84 D.T.C. 6247 (Fed. T.D.), at 625, Justice Strayer quoted Justice Cattanach in Udell and in dealing with the phrase gross negligence:

I have with some difficulty come to the conclusion that this has not been established either. “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.

In Armstrong v. R, (1993), 93 D.T.C. 1043 (T.C.C.), Tax Court of Canada Judge Brulé at 1044 stated:

When the omission was discovered, the Appellant paid the necessary tax. The Appellant did not deny the omission to income, cooperated all along with the authorities, but denied there was any gross negligence on his part. As in the previous year, he delivered all his books and records approximately one month before the April filing deadline. The accountant, William J. McEachern, was ill at the time and retained another person to prepare the return. This latter person did not fully understand the records, did not ask questions, and as a result the omission occurred.

Judge Brulé concluded that the taxpayer’s actions did not warrant the imposition of a penalty.

The Appellant, his father and brother sought advice from a financial adviser before investing in this partnership. Prior to 1989, the Appellant prepared his own income tax returns. He sought the assistance of an accountant in 1990, when his understanding of the documents were beyond his capacity. The reading of such a large document, was beyond his comprehension. The Appellant was however, negligent by not reading his income tax return. He nevertheless, relied on his brother Gregg, a partner in this investment venture, to communicate with the accountant who prepared the three income tax returns.

The accountant on reading the Partnership document realized that an income had to be declared for the 1990 taxation year. The accountant responsibly, contacted Gregg Lymer, the go-between of the Appellant and his father, to raise his concern. Gregg Lymer in turn referred the matter to his financial adviser. The financial adviser concluded that the amount of $15,990.00, should not be declared because the Appellant had not received a T-5. The accountant followed unfortunately that advice. Maybe the matter should have been pursued further but it was not.

The evidence has shown that there was no intention of making a false statement. More than one person was involved in interpreting the document supplied by Bewco. The wrong conclusion was arrived at, but with a concern to follow the law. It cannot be construed in the circumstances as gross negligence.

The appeal is allowed.

Appeal allowed.