Malleck v. R., [1998] 1 CTC 3015, 98 DTC 1019

Bowie T.C.J.:

The facts of this case are quite simple. The only issue is whether they are such as to subject the Appellant to a penalty under subsection 163(2) of the Income Tax Act (the Act), and to disentitle him to the benefit of the capital gains exemption provided for in section 110.6 by reason of the provisions of subsection 110.6(6), as those provisions stood in 1989, the taxation year under appeal. The relevant parts of those provisions read as follows:

163(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 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 ...

[the amount of the penalty is not in dispute]

110.6(6) Notwithstanding subsections (2), (2.1) and (3), where an individual

has a capital gain for a taxation year from the disposition of a capital property and knowingly or under circumstances amounting to gross negligence

(b) fails to report the capital gain in his return of income for the year required to be filed pursuant to section 150,

no amount may be deducted under this section in respect of the capital gain in computing his taxable income for that or any subsequent taxation year and the burden of establishing the facts justifying the denial of such amount under this section is on the Minister.

The Appellant and Julius Koka were real estate salesmen, and good friends. At some point the Appellant, at the urging of Mr. Koka, obtained a real estate broker’s license. Thereafter, they carried on their real estate sales business together under the name of Gem Realty Ltd., the Appellant’s company. They also entered into a partnership together, known as K.M. Enterprises, whose sole business was to own and operate a building. Part of the building housed the real estate firm, and the balance was rented to tenants.

In 1988, Mr. Koka was diagnosed as having a terminal illness, and as a result he wished to liquidate his assets, including his interest in the partnership. The building was the major partnership asset, and it was sold in 1988, during the 1989 fiscal year of the partnership. The net proceeds of the sale were $129,600 which, after deducting the adjusted cost base of $53,854, produced a gain of $75,746. As equal partners they each received $37,873 of that gain.

Mr. Koka’s accounting firm, Trican Management Consulting Services (Trican), was also the accounting firm for the partnership. The Appellant had no liking for this firm, and no confidence in it. His accountant, whom he trusted and relied on, was a Mr. Simpson. Following the sale, the Appellant and Mr. Koka were concerned that the gain might be considered as being on income account, rather than capital. However, Mr. Koka received the advice from Trican that it was proper to treat it as a capital gain, and that because of the capital gains exemption then available [1] it would not be subject to tax under the Act. Mr. Koka passed this advice on to the Appellant.

At that time, the Appellant’s income tax returns were prepared for him by Mr. Simpson. He did not, however, tell Mr. Simpson anything of the transaction or of the $37,873 gain which it had produced for him, either to have him disclose it on his 1989 income tax return and claim the exemption, or to seek his advice as to the proper treatment of it for taxation purposes. Having received at second-hand the very favourable advice of Trican, a firm that he did not like or trust, he was not at all inclined to seek the opinion of, or even reveal the gain to, his own accountant, whom he trusted and relied upon. As a result, the gain was not reported by him when he filed his income tax return for 1989, as it should have been. [2]

The Minister of National Revenue contends that this amounts to gross negligence on the part of the Appellant, and has assessed accordingly. The Appellant characterizes it as something less. He argues that he could not possibly know all of the reporting requirements of the Act and the Regulations made under it, and that he genuinely believed the amount to be a capital gain rather than income, and so exempt under subsection 110.6(3). He believed, in his submission reasonably, that he did not have to report it in his return. He points to the definition of gross negligence laid down by the Ontario Court of Appeal in Harper v. Prescott (Municipality)? [3] where McTague J.A. described it as “very great negligence”, and as a breach of duty which “approaches the willful, the reckless, the wanton”.

In Venne v. R? [4] Strayer J, as he then was, said this about the meaning of the phrase gross negligence:

It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.

This was said within the context of the same penalty provision as is in issue here. There is, however, little, if any, difference between approaching “the willful, the reckless, the wanton”, and “indifference as to whether the law is complied with or not”.

The facts of this case bring it within the accepted definitions of gross negligence. I agree with the submission of counsel for the Respondent that the Appellant’s action, or inaction, in this case amounted to wilful blindness. He did not disclose the transaction to his own accountant, whom he trusted and relied on, and who prepared his tax returns, not because he had confidence in the correctness of the opinion given by Trican to Koka, but because he was not inclined to risk getting an adverse opinion from either his own accountant or the Minister of National Revenue. By not disclosing it to Mr. Simpson, he avoided having the transaction and the resulting gain disclosed by its inclusion in his return, and thus avoided the very real risk that the Minister, and subsequently the Court, would characterize the gain as being on income account.

Wilful blindness has long been equated to knowledge in the criminal law. The test was recently stated in this way by Sopinka J, writing for the majority of the Supreme Court of Canada, in R. v. Jorgensen? [5]

A finding of wilful blindness involves an affirmative answer to the question: Did the accused shut his eyes because he knew or strongly suspected that looking would fix him with knowledge?

lam satisfied that in the present case the correct answer to that question is “yes”. The only reason that the Appellant could have for failing to disclose the gain to Mr. Simpson was his concern that he would advise him that he must report the gain, which of course is exactly the advice that he would have been bound to give. I conclude, therefore, that the Appellant’s conduct in this case meets not just the standard of gross negligence, but the higher standard of acting “knowingly”.

The Appellant’s argument that he did not and could not know all the reporting requirements of the Act and the Regulations made under it is without merit. As Sopinka J. said in Jorgensen [6] “it is well established that ignorance of the law is no defence”.

The appeal is dismissed, with costs.

Appeal dismissed.