Reginald Snelgrove v. Minister of National Revenue, [1979] CTC 2938, 79 DTC 780

Delmer E Taylor:—This is an appeal heard in the City of St John’s, Newfoundland, on July 11, 1979, against the penalty portion only of an income tax assessment for the year 1976. The respondent relied, inter alia, on section 3, paragraph 12(1)(c) and subsections 163(2), 230(1) and 248(1) of the Income Tax Act, RSC 1952 c 148 as amended by SC 1970-71-72 c 63 section 1 and amendments thereto as they applied to the 1976 taxation year and subsection 21(1) of Income Tax Act, RSN 1970, c 163 and amendments thereto as they affect the 1976 taxation year.

Background

The appellant is a businessman with income from salary, commissions, dividends and interest. On January 9, 1976, the appellant cashed Canada Savings Bond coupons at the Royal Bank of Canada, Main Branch, St John’s in the amount of $22,540. At this time a T-600 was issued by the Royal Bank, which Mr Snelgrove signed, numbered 7600674. Mr Snelgrove filed his income tax return which was prepared by the firm Baird & Baird, Chartered Accountants, St John’s, Newfoundland in April 1977 in respect of his 1976 taxation year but did not report the coupon interest of $22,540. His holdings of CSB’s are as follows with respect of the coupons cashed:

Serial No S-24-E0945610/13;

S-24-C0109590/01;

8-24-00109595/601 .

These bonds were issued in November 1969 and the matured coupons were retained until January 9,1976. The appellant did not report any Canada Savings Bond interest income in any of his returns during the years 1972-1977 inclusive. Net incomes as initially reported by Mr Snelgrove are as follows:

Contentions

The appellant’s position was that:

— he was not consciously aware of receiving the Canada Savings Bond interest income of $22,540 in January 1976 when he filed his return in April 1977;

— he was not aware of his oversight nor was he grossly negligent in preparing his 1976 T-1;

— he did not cash the matured coupons in order to employ the funds but merely did so upon the advice of his banker;

—considering that the income was to be reported almost 16 months subsequent to the date of cashing the coupons, it is quite reasonable for an individual to honestly misplace a receipt or to honestly forget about a sum of money received once such a period of time has elapsed.

For the respondent, it was asserted that:

—the interest income of the appellant from Canada Savings Bonds represented 65.2% of his total interest income in 1976 and represented 26.4% of his total taxable income in 1976;

—the appellant signed and received from the Royal Bank of Canada an acknowledgement of receipt (form T600) in prescribed form dated 9 January, 1976;

—this acknowledgement of receipt contained the following words opposite the figure $22,540”, printed in red ink, so as to be particularly noticable: “Report this amount on your Income Tax Return”;

—the appellant reported other interest income in 1976 and so was aware that interest income was taxable;

—the appellant is a businessman and knows or ought to know the importance of keeping records for income tax purposes;

—the appellant, either knowingly or in circumstances amounting to gross negligence, failed or omitted to report as income the amount of $22,540 when filing his 1976 income tax return; and

—the appellant sought professional advice from accountants in preparing his income tax return.

Evidence

The evidence provided by Mr Cavanagh, an officer of Revenue Canada, and the appellant himself tended to confirm the background and pertinent facts of the case. Mr Cavanagh’s position relative to the penalty was that:

(a) the amount omitted was substantial both in itself and as a portion of the appellant’s total income;

(b) a form T-600 has been issued, and it should have been recognized as important and retained by the appellant; and

(c) the appellant was a successful and competent businessman from whom care and caution in the exercise of his responsibility could be expected.

Mr Snelgrove put forward that he had cashed the interest coupons, carried the T-600 with him for awhile without recognizing that it was the official income tax document to be filed, finally misplaced it and forgot about it when turning over to his accountants the necessary 1976 income tax information some 16 months later. In the interim (April 1976), he had filed his 1975 income tax return and, not having included (and properly so) the amount then, its importance did not come up again in his mind. His practice was to deposit in a savings bank account the funds from his various sources of income and from time to time, quite regularly in fact, purchase bank investment certificates with the accumulated funds. Had he received from the bank the usual T-5 form with which he was familiar, the result might have been different, but this was the only experience he could recall with the form T-600.

Argument

Counsel for the Minister, carrying the onus for establishing the facts justifying the imposition of the penalty, prepared a detailed and comprehensive review of the case law. She recognized the distinction which decisions both of this Board and the Courts highlighted between the “responsibility” of a taxpayer, the mere “negligence” of a taxpayer, and the “gross negligence” which must be established in this case. For record purposes the Board notes that counsel, in complete fairness, dealth with cases which upheld the penalty imposition, and cases which did not. The list of authorities is as follows:

Stefan Jachimowicz v MNR, [1976] CTC 2309; 76 DTC 1241;

Her Majesty The Queen v Stefan Jachimowicz, [1977] CTC 162; 77 DTC 5148;

Barry Beech v MNR, [1976] CTC 2175; 76 DTC 1134;

Barry Beech v Her Majesty the Queen, [1977] CTC 361; 77 DTC 5249;

Antal Susztek v MNR, [1978] CTC 2959; 78 DTC 1690;

John Victor Decore v Her Majesty The Queen, [1974] CTC 48; 74 DTC 6051;

John Victor Decore v Her Majesty The Queen, [1974] CTC 791; 74 DTC 6695;

Arthur William Wallace v MNR, 42 Tax ABC 1; 66 DTC 593;

Michael J W Penn v MNR, [1971] Tax ABC 33; 71 DTC 71;

Michael S Mark v MNR, [1978] CTC 2262; 78 DTC 1205;

Morgan et al v MNR, [1973] CTC 2182; 73 DTC 146;

Roderick R McDaniel v MNR, [1969] CTC 984; 69 DTC 683.

Particular comment might be made on certain references made by counsel. From Jachimowicz (supra) at the Tax Review Board level, from pp 2316 and 1246 respectively:

On April 28,1972, a firm of lawyers sent the appellant a letter showing that such a sum of money was paid to him as interest for the period from November 10,1971 to April 28, 1972.

According to the evidence, the appellant was very careful in reporting his income in the years prior to that under appeal and his habit was to put in a special envelope all the information he needed to prepare his returns.

When he received the document, the appellant read it but neglected to put it in his special envelope.

It is difficult to conceive that the appellant, who was usually so careful in preparing his income tax returns and who was able and prudent enough to separate his Cole Harbour property from his company assets, would forget to include as income so substantial an amount of interest as $4,700 in relation to his total declared income of some $9,000.

There is no doubt in my mind that the appellant was grossly negligent when he neglected to put the letter he received on April 28, 1972 in the special envelope he kept for this purpose. The appellant’s course of conduct shows that he has been very clever in all other circumstances and the Board is wondering why the appellant’s conduct was so clumsy when he received the letter. He read the letter, he knew at that time that the interest was income, and his main duty was to put this information in his special envelope.

The fact that the appellant did not put the letter in his special envelope and therefore, by the same token, was in a position to forget to declare the interest as income, constitutes in my view gross negligence within the meaning of subsection 163(2) of the Income Tax Act.

Counsel cited the above passage as support for the view that since Mr Snelgrove also had a practice of keeping his “income tax” material together in one file, that failure to place therein the T-6000 slip in question constituted gross negligence. The agent for the appellant, while appearing quite certain that the actions of the taxpayer should be excusable, did not present distinctions of merit with respect to terminology or jurisprudence upon which the Board might objectively reach the same conclusion. To this extent the taxpayer’s case was at considerable risk, even recognizing the overriding responsibility upon the Minister in this particular matter.

The size of the amount involved and/or its proportionate relationship to total income or other elements of income was also raised at the hearing. In this connection, the following comment to be found at pp 6 and 597 respectively of the Wallace decision (supra), was cited to the Board:

What troubles me is that magnitude of the error made by the appellant in declaring his taxable income. If the error had been, two, three, or perhaps even five, thousand dollars, mistakes made in the circumstances narrated by the appellant might—I do not say would—have seemed excusable. Here, however, the error amounts to the sum of $18,465.18; for most people this is the equivalent of a desirable income in itself. I find it difficult to comprehend how such a wide margin of error could arise if proper thought and diligence had been exercised by Mr Wallace.

A further point was made by counsel for the respondent in a quotation from Susztek (supra), to be found at pp 2960 and 1691 respectively:

The Board can find no reason to reject the Minister’s conclusion in the matter. The appellant was competent and experienced, and certainly well aware of business matters generally. In addition, a matter brought out at the hearing was of significance to the Board—that the appellant had retained the same accountant to prepare his tax returns while he operated the hotel in Oliver, during the sale, and for a period of one or two years thereafter. Obviously, the circumstances during this entire period were uninterrupted, and well known to both parties.

The appeal is dismissed.

It was the assertion of counsel that two factors (also present in the instant case) were vital to the Board in dismissing the appeal of Mr Susztek and they should be significant here also. First, that Susztek was a competent and experienced businessman, and second, that he had retained the same accountants for a long period of time.

Findings

The circumstances recited earlier from Jachimowicz (supra) might imply support for the conclusion of counsel for the respondent. However, I would suggest that in that case, the presiding Member concluded that the filing procedures and general conduct of the appellant must have been seriously and consciously breached or altered by the lack of administrative follow- through with the lawyer’s letter, and that this was sufficient to justify the penalty imposition. An examination of the facts in this case and the jurisprudence upon which such a determination could also be made is required before the break in the record-keeping procedure of the appellant could be judged sufficient to warrant the appellation “gross negligence”. In so doing, I would make reference to a recent decision of this Board in Jet Metal Products Limited v MNR, [1979] CTC 2738; 79 DTC 624, wherein it is asserted that while including a false statement or amount, or omitting a true statement or amount may be described as “misrepresentation”, such misrepresentation in itself does not support the added charge of “negligence”. A transgression which includes a charge of “negligence” by the Minister (subsection 152(4)) must be of a character greater than one might expect and accept as reasonable from a normally wise and cautious man. As detailed in Jet Metal (supra), support for the charge of “gross negligence” (subsection 163(2)) necessitates evidence not merely of “misrepresentation”, nor even of “misrepresentation with negligence”. Gross negligence must breach the parameters of conduct which, in themselves, would encompass and allow for “negligence”.

The risk which I see in bringing to bear the weight of the law (a penalty under subsection 163(2)) where only one error is involved is simply that the more careful, cautious and meticulous a taxpayer is in maintaining records and providing accurate information for the filing of a voluntary tax return, the greater might be the danger he runs in the event he makes some misrepresentations. It is my view that under subsection 163(2) of the Act, the “gross negligence” in an instance of a single transgression must be closely akin to “knowingly”—virtually indistinguishable from it—when dealing with a taxpayer who is normally careful and diligent about his affairs. For me, it is a difficult leap in logic to conceive of a situation in which a taxpayer whose conduct under usual circumstances is beyond reproach, suddenly for one amount, to become “grossly negligent”. I would find it easier to conclude that such a taxpayer, for whatever reason, might have “knowingly” altered his usual filing or record-keeping practice, the end result of which was a reduction of income tax payable. There was no suggestion in this case at the hearing that Mr Snelgrove “knowingly” omitted the amount of $22,540 at issue from his 1976 return, and indeed counsel for the Minister pointed out that the Minister was not so alleging. There was nothing careless or sloppy about Mr Snelgrove’s approach to business or his understanding of financial affairs—he was indeed a competent and successful businessman. A taxpayer who did not maintain adequate records might well leave himself open to a charge of “gross negligence” because of consistent and persistent poor business practice, but that situation does not obtain in the present case. The grounds that on one occasion this appellant simply did not follow his usual administrative practice (to place the T-600 in the proper file) is insufficient in itself to sustain the charge of “gross negligence” in this matter against Mr Snelgrove.

With regard to the size of the amount itself ($22,540), I would caution against reading the quotation from Wallace (supra) given earlier as support for a conclusion that the size of the amount in itself would be determinative. A large amount, as one factor in conjunction with others also unfavourable to the taxpayer, might be regarded as having significance in supporting a charge of “gross negligence”. But a mathematical or quantitative perspective alone, in my view, would be a tenuous basis upon which to allege “gross negligence”. I would view the gross negligence to be established by the Minister as referring to the actions (or lack of them) by the taxpayer, not to the quantum of the amount at issue.

Finally, dealing with counsel’s comments regarding Susztek (supra), I would note for the record that while the editor’s headnote in the published version of the decision referenced by counsel (78 DTC 1690) uses the term “the taxpayer was grossly negligent”, there is no place in the Board decision where it is indicated that the charge supported by the Board was “gross negligence”. As earlier emphasized in this current decision, the ele- ment of conscious recognition by the taxpayer of the act of omission or commission (“knowingly”) may equally be grounds for the application of a penalty under the relevant section of the Act. Again as noted earlier, that possibility was not pursued by the Minister in substantiating the penalty against Mr Snelgrove.

In summary, the Board recognizes that the burden on the Minister to justify the application of a penalty under subsection 163(2) is onerous indeed. Merely the fact that a taxpayer has not fulfilled his responsibility under the Act is not adequate—nor is it necessarily sufficient that he has been sloppy, careless, neglectful or even negligent. The conduct under review must have been of a very exceptional and flagrant character to support a charge of gross negligence, when the misrepresentation consists of one transaction or amount in an otherwise acceptable and appropriate record by the taxpayer. I would make reference to a quotation from Mark (supra) at pp 2271 and 1211 respectively:

When the allegation of “gross negligence” is examined against the background provided in the judgments cited above, its substantiation bears strongly upon the lack of care taken by a taxpayer to reasonably ensure compliance with the Income Tax Act. The maintenance of an adequate record of financial affairs, the assembling of facts and data in an orderly manner, the appropriate presentation of these in support of the voluntary declaration of income and tax liability, the availability of such records and the co-operation and assistance of the taxpayer would all appear to impinge on the view to be taken by this Board where some form of negligence, carelessness or oversight has resulted in improper declaration of taxable income. Pleas by the taxpayer of inexperience, lack of training, inadequate time opportunity or funds, etc as reasons for the improper preparation of his income tax return generally have not been viewed with favour. A major thread which does seem to bind together certain of the decisions accepting the appellants’ explanations however, is that of seeking out and obtaining competent professional advice.

When cast against that background, the omission of the amount in question in this appeal, under the circumstances made known to the Board, falls considerably short of “gross negligence”.

Decision

The appeal is allowed and the matter referred back to the respondent for reassessment accordingly.

Appeal allowed.