Frost v. R., [1998] 3 CTC 2242

Christie A.C.J.T.C.:

These appeals are governed by the Informal Procedure prescribed under section 18 and following sections of the Tax Court of Canada Act. The years under appeal are 1992, 1993, 1994.

The Notice of Appeal reads:

I wish to file for appeal of tax penalties imposed by Revenue Canada for taxation years 1992, 1993 and 1994.

I wish to elect the INFORMAL PROCEDURE in this regard.

The following is my complete address:

2 - 2 Thomas Bata Blvd.

Batawa, Ontario KOK 1E0

Telephone # (613) 398-0280

Attached is a copy of the Notification of Confirmation by the Minister dated 25 Mar. 97 as required.

I will await further advice as to when and where to appear in this case. This appeal is submitted to reduce the penalty imposed by Revenue Canada on tax and interest paid on income unknowingly subject to tax on a family-related loan. Further details will be provided when requested.

The opening paragraph and paragraphs numbered 1 to 8 of the Reply to the Notice of Appeal read:

In Reply to the Notice of Appeal herein, the Deputy Attorney General of Canada, on behalf of the Respondent, says as follows:

A. Statement of Facts

1. He denies all the allegations of fact contained in the Notice of Appeal.

2. The Appellant filed his income tax returns for the 1992, 1993 and 1994 taxation years and declared interest and other investment income of $5,451.66, $8,922.51 and $6,933.80, respectively.

3. By Notices of Reassessment for the 1992, 1993 and 1994 taxation years, dated June 20, 1996, the Minister of National Revenue (the ‘Minister’) increased the Appellant’s reported interest and other investment income by $17,808.81, $17,645.75 and $5,029.71, respectively.

4. Further, in reassessing the Appellant by the said Notices of Reassessment for the 1992, 1993 and 1994 taxation years, the Minister levied federal penalties of $2,604.60, $1,619.80 and $1,770.46, respectively, pursuant to subsection 163(2) of the Income Tax Act (the ‘Act’) and provincial penalties of $1,413.58, $1,080.15 and $996.99, respectively, pursuant to subsection 19(2) of the Income Tax Act of Ontario.

5. The Appellant objected to the imposition of penalties for the 1992, 1993 and 1994 taxation years, pursuant to subsection 163(2) of the Act, by Notices of Objection dated September 16, 1996.

6. The Minister confirmed the imposition of penalties for the 1992, 1993 and 1994 taxation years, pursuant to subsection 163(2) of the Act, on March 25, 1997.

7. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant is a retiree who spent some 31 years with the RCMP;

(b) on or about December 12, 1991, the Appellant loaned the amount of $170,000.00 to his ex-wife, Carol Ann Gallant, and her present husband, Nicholas Ronald Gallant, as a business loan;

(c) the Appellant did not have sufficient cash on hand to lend Carol and Ronald Gallant the amount of $170,000.00, without in turn borrowing money and paying interest thereon;

(d) in the income tax returns filed for the 1992, 1993 and 1994 taxation years, the Appellant deducted from income interest charges for investments, which included interest described in subparagraph 7(b), in the amounts of $683.83, $1,824.63 and $3,178.18, respectively;

(e) the Carol and Ronald Gallant loan was registered as a secured mortgage under mortgage number KF594 and ranked as a first financial charge against the business property, described as lot 9, district lot 1596, Lil- looet District, plan 17213;

(f) the said business property is jointly owned by Carol and Ronald Gallant;

(g) the payment provisions of the said mortgage included annual interest calculated half yearly at the rate of 10.75%;

(h) on or about March 31, 1994, the said mortgage was discharged and the Appellant accepted a promissory note in the amount of $150,000.00 from Carol and Nicholas Gallant in part payment thereof and a cash payment for the balance;

(i) in the income tax returns filed for the 1992, 1993 and 1994 taxation years, the Appellant failed to include interest income received by him from the said mortgage in the amounts of $17,808.81, $17,645.75 and $5,029.71, respectively;

(j) 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 returns filed for the 1992, 1993 and 1994 taxation years with respect to unreported mortgage interest income, as a result of which the taxes that would have been payable assessed on the information provided in the Appellant’s income tax returns was less than the taxes in fact payable attributable to the false statement or omission;

(k) as a consequence of the said understatement of income in the income tax returns filed for the 1992, 1993 and 1994 taxation years, the Minister levied and the Appellant is liable for federal penalties in the amount of $2,604.60, $1,619.80 and $1,770.46, respectively.

B. Issue to be Decided

8. The issue is whether the Minister properly levied penalties, pursuant to subsection 163(2) of the Act, for the 1992, 1993 and 1994 taxation years.

Subsections 163(2) and (3) of the Income Tax Act (“the Act”) provide: 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 of the greater of $100 and 50% of the aggregate of (the method of calculation follows)

(3) 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.

Mrs. Mary Minigan, an auditor employed by Revenue Canada, testified on behalf of the respondent. She received information that the appellant had loaned money to his former wife and her husband, Carol and Nicholas Gallant, to enable them to purchase a business in British Columbia. The amount of the loan was $170,000.00 with interest at 10.75%. It was secured by a mortgage dated December 12, 1991. Payments were to commence on January 28, 1992 and terminate on December 28, 1996.

The appellant’s 1992 return of income was placed in evidence through this witness. The only reported interest income was in the sum of $5,451.66 pertaining to Canada Savings Bonds, term deposits and income tax refund interest. The 1993 return of income reported interest income in the sum of $8,922.51 in respect of the same items as in 1992. Regarding 1994 interest income in the sum of $6,933.80 was reported. It related to Canada Savings Bonds, accounts and term deposits with Canada Trust and term interest from the Royal Bank.

The witness and the appellant met on March 19, 1996. Another employee of Revenue Canada, Terence Law, was also present. The appellant said he knew the interest income was taxable when he filed his return for 1992. He did not mind paying the tax and interest, but the penalties were really going to hurt. On March 25, 1996 the witness sent a letter to the appellant indicating that penalties would be imposed. He replied, agreeing with the tax and interest, but not the penalties. In this letter he contradicted what he said at the meeting of March 19 and stated that he did not know the income was taxable.

The three met again on June 26, 1996. The appellant indicated that he was going to appeal the penalties and he inquired if it was acceptable for him to only pay the tax and interest. The answer was yes, but he was told that if the penalties had to be paid, that would involve more interest. Mr. Law pointed out to the appellant that he had already admitted that he knew the interest income was taxable. This was not denied by the appellant.

Early in 1997 it was brought to the attention of the witness that the mortgage had been paid out on March 28, 1994 and that on March 31, 1994 the Gallants signed a promissory note in the sum of $150,000.00 with interest at 8% in favour of the appellant. In the light of this a further proposal was sent to him with appropriate adjustments with respect to 1994, 1995, 1996. This proposal included penalties. In reply to questions asked by him at the meeting the appellant admitted that he was receiving interest on the mortgage and that he knew it was taxable. When asked why he did not report the interest the appellant replied: “It was in the family” and “I had a lot of income that year”.

Mr. Law was also present at the June 1996 meeting. Then the appellant said he would pay the tax and interest, but he considered the penalties “a bit harsh”. Mr. Law reminded the appellant that the latter had already admitted that he knew the interest was taxable. In cross-examination the witness could not be specific about whether the appellant said he knew the interest was taxable when he filed his return. Although not stated, I believe reference was being made to the appellant’s 1992 return of income.

The third witness to testify on behalf of the respondent is Mr. Paul Young, an appeals officer with Revenue Canada. He had received a copy of the promissory note from a law firm in British Columbia. In March of 1997 he and a Mr. Tobin, who was also an employee of Revenue Canada, met with the appellant. What had occurred at the previous meetings with Mary Minigan and Terence Law was reviewed. It was confirmed that at those meetings no mention was made of the promissory note. The witness and the appellant met again on April 21, 1997 at which time the latter was informed that the penalties would be applied. It was also made known to the appellant that he was aware of his failure to disclose the existence of the promissory note to Minigan and Law.

The evidence of the appellant is that he knew the interest was taxable after having spoken to a Mrs. Bailey at Revenue Canada. This conversation took place a few days after he received a letter dated January 16, 1996 from Mary Minigan. He said: “I did not realize that this — a mortgage in the family, the interest was taxable. So, therefore, I didn’t think the promissory note was taxable either. There is a direct connection, like one led to the other.”

In the course of cross-examination it was pointed out that the appellant filed his return for 1995 at the end of April 1996 which was after the March 19, 1996 meeting with Mary Minigan and Terence Law. It did not report interest on the promissory note. The return for 1996 was filed at the end of April 1997. Again it did not include reference to interest on the promissory note.

In the frequently cited case of Venne v. R. (1984), 84 D.T.C. 6247 (Fed. T.D.) Strayer J.A., who was then a member of the Federal Court - Trial Division, said with respect to subsection 163(3) of the Act at page 6256:

With respect to the possibility of 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.

Having regard to the whole of the evidence I am satisfied that the burden placed on the Minister of National Revenue under subsection 163(3) has been discharged. I think it can be said that the appellant knowingly omitted to report interest income in respect of the years under appeal. If not, then certainly he was grossly negligent in respect of those omissions.

The appeals are dismissed.

Appeal dismissed.