Sylvester Brygman v. Minister of National Revenue, [1979] CTC 3117, 79 DTC 855

The Chairman:—The appeal of Sylvester Brygman is from a reassessment dated April 26, 1977, whereby penalties in the amounts of $937.16, $2,307.72 and $2,450.55 were levied by the respondent pursuant to subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and section 17 of the Income Tax Act (Ontario), RSO 1970, c 217 as amended by section 16 of SO 1970-71, c 1, for each of the taxation years 1973,1974 and 1975 respectively.

The amounts of penalties assessed for each of the pertinent taxation years, having been recalculated in respect to the amounts levied under section 17, the respondent, at the hearing, made the appropriate amendments to paragraph 5 of his reply. The amounts of the penalties levied for the appellant’s 1973,1974 and 1975 taxation years are now read $896.08, $2,206.46 and $2,357.28 respectively.

Paragraphs 6 to 11 of the respondent’s reply read as follows:

6. In computing his income from business for the 1973 taxation year, the appellant omitted to include the sum of $5,328 as revenue from sales. He also claimed material expenses and occupancy expenses in excess of the amounts allowable by $5,492.94 and $1,441.72 respectively.

7. By notice of reassessment dated April 26, 1977 the respondent assessed tax with respect to the appellant’s income for his 1973 taxation year. In making the Said assessment the respondent added the unreported revenue from sales and disallowed the excess claimed in respect to material and occupancy expenses. He further allowed as a deduction from income an allowance for cash expenditure in the amount $2,000 and capital cost allowance in the amount of $1,121.28, thereby increasing the federal tax payable by the appellant in the amount of $2,775.60 and the provincial tax payable in the amount of $808.03.

8. In computing his income from business for the 1974 taxation year the appellant omitted to include the sum of $24,864.70 as revenue from sales. He further claimed occupancy expenses in excess of the amount allowable by the sum of $1,370.95.

9. By notice of reassessment dated April 26,1977 the respondent assessed tax with respect to the appellant’s income for his 1974 taxation year. In making the said assessment the respondent added the unreported revenue from sales and disallowed the excess claimed in respect to occupancy expenses. He further allowed as a deduction from income an allowance for cash expenditures in the amount of $2,000 and capital cost allowance in the amount of $981.56, thereby increasing the federal tax payable by the appellant in the amount of $6,863.20 and the provincial tax payable in the amount of $1,962.65.

10. In computing his income from business for the 1975 taxation year the appellant omitted to include the sum of $2,628.89 as income from sales. He further claimed material expenses in excess of the amount allowable by the sum of $12,555.96 and sub trades expenses in excess of the amount allowable by $11,877.50.

11. By notice of reassessment dated April 26, 1977 the respondent assessed tax with respect to the appellant’s income for the 1975 taxation year. In making the said assessment the respondent added the unreported revenue from sales and disallowed the excess claimed in respect to material and sub trade expenses. He further allowed as a deduction from Income an allowance for cash expenditures in the amount of $2,000 and capital cost allowance in the amount of $760.37, thereby increasing the federal tax payable by the appellant in the amount of $7,299.40 and the provincial tax payable in the amount of $2,131.02.

Issue

As the figures contained in the above paragraphs are not contested, the sole issue is whether the penalties were properly levied pursuant to subsection 163(2).

Appellant's Submissions

The appellant submits:

The appellant took all reasonable steps to ensure that accurate income tax returns were filed on his behalf during the taxation years 1973 to 1975.

The appellant did not knowingly make or participate in the making of inaccurate income tax returns for the taxation years 1973 to 1975.

Respondent's Submissions

In his reply, the respondent states:

The respondent submits that the penalties were properly assessed in 1973, 1974 and 1975 because the appellant had knowingly, or under circumstances amounting to gross negligence made or participated in, assented to or acquiesced in the making of, statements or omissions in returns of income filed as required under the Income Tax Act and the result of such statements and omissions was that the tax that would have been payable for the 1973,1974 and 1975 taxation years (if tax had been assessed on the basis of the information provided in the said returns) was less than the tax in fact payable by him for those years within the meaning of subsection 163(2) of the Income Tax Act.

Summary of Facts

The appellant, of Polish extraction, came to Canada in 1946 and practised the trade of welding and that of boiler maker—doing custom iron work, manufacturing and repair work. Late in 1966 and during the pertinent taxation years, he carried out his business under the name of Alaska Steel and Iron Works. Although the appellant could make himself understood, he could not be said to be fluent in speaking, and could barely write in English. He apparently was a good tradesman and his business prospered. It is alleged that the members of his family participated in the operation of the business and in fact maintained all the business records. Prior to the pertinent taxation years, the appellant’s income tax returns were prepared by H & R Block. The evidence is that the appellant usually had to send with his return the balance of taxes payable. The appellant also stated that he was somewhat concerned with unexplained possible difficulties he might have with Revenue Canada and therefore retained the services of a Mr Duquette, who posed as a chartered accountant and drew up the appellant’s tax returns for 1973, 1974 and 1975. In those years, rather than paying additional taxes, the appellant received tax refunds although the income from the business was increasing. The appellant considered that Mr Duquette was a good accountant and even offered to increase his remunerations.

In October, 1976, Mr John Tunstall, an auditor for the Department of National Revenue, commenced an audit of the appellant’s business income for the 1973,1974 and 1975 taxation years. He held several discussions with the appellant and testified that he had no language problem in communicating with him. The business records were found in the appellant’s home and in his shop consisting of a book of receipts, vouchers for purchases, bank statements, cancelled cheques and a separate book for ongoing jobs. In auditing the appellant’s books, Mr Tunstall found serious discrepencies between the information contained in the appellant’s records and the figures used in the appellant’s tax returns, as more particularly set out in paragraphs 6 to 11 of the Minister’s reply. In questioning the appellant of the considerable differences between the records and his tax returns, the appellant was unable to provide any explanation and shrugged off the question.

In cross-examination, the question was asked of Mr Tunstall whether the Department was looking into all tax returns prepared by Mr Duquette because of the substantial errors found in the appellant’s returns. While allowing the question, I noted the objection raised by the respondent. I believe the question to be pertinent to the present issue. The answer, to which I will give some weight, was that the Department had in fact found many errors in tax returns prepared by Mr Duquette for several taxpayers. The evidence is also to the effect that Mr Duquettte, after borrowing money from the appellant, disappeared and has not been seen since. It would appear from the evidence that Mr Duquette was less than a conscientious accountant. There can be no doubt, however, that the ultimate responsibility for filing accurate tax returns rests on the appellant. Statements and omissions included in filing returns which distort the taxpayer’s tax payable and which were made knowingly or under circumstances amounting to gross negligence, render the taxpayer subject to a penalty pursuant to subsection 163(2).

The sole issue here is whether the appellant, in this appeal, knowingly or under circumstances amounting to gross negligence, omitted to report certain income in the 1973, 1974 and 1975 taxation years.

Subsection 163(2) 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 statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

I will accept the appellant’s contention that Mr Duquette had not given the appellant the professional services that the appellant had a right to expect from his accountant. I also accept that the appellant was not fluent in the English language, but I cannot accept that the appellant, who was an excellent craftsman and a successful entrepreneur, was not sufficiently intelligent to have had some general appreciation of the increased earnings of his business.

In 1972, the appellant’s net business income reported by H & R Block was $16,391.24 and the appellant had to pay additional tax in the amount of $1,526.53. (Exhibit R-4.)

In 1973, when Mr Duquette filed the appellant’s returns, the business income reported was $12,873.36 which was revised by the respondent to $25,136.02. In that year, the appellant had claimed without question a refund of $3,878.27. (Exhibit R-4.)

In 1974, the appellant’s business income was reported as being $6,793.78 and revised to $33,029.43. (Exhibit R-4.)

In 1975, his business income was reported as being $7,519.98 and revised to $34,582.33. (Exhibit R-4.)

The revised figures, representing a discrepancy of over $65,000 for a 3-year period, are not challenged by the appellant, who testified that he knew that the income from his business was increasing during the pertinent taxation years.

It is the appellant’s contention that he had retained an accountant for the purpose of filing his tax returns and did not look at the figures contained in the returns.

There are very many taxpayers who rely on the competence and integrity of accountants whom thay have retained to make out their tax returns and, in most cases, their trust is well placed. However, at no time is the taxpayer’s obligation and responsibility of filing accurate returns transferred to the accountants. If an accountant, on behalf of a taxpayer, files erroneous tax returns which cause prejudice to the taxpayer, the latter may well have recourse against the accountant in some other judicial body, but the taxpayer, nevertheless, remains ultimately responsible for reporting accurately the amount of taxes payable and he cannot easily shrug off that obligation.

Consideration, of course, is given by the Board to the degree of literacy, the schooling and the familiarity with accounting, etc, of each taxpayer. A taxpayer is not expected to make a meticulous and professional service of his tax returns prepared by an accountant, but he is expected to be sufficiently interested in reporting his income to question his accountant on any matter which appears to him to be inconsistent with facts known to him.

The circumstances amounting to gross negligence within the meaning of subsection 163(2) are, in my view, for the appellant to have completely abdicated his personal responsibilities in respect of his tax returns. The appellant has been in Canada since 1946 and the evidence is that he had always earned a rather moderate income. Without being an accountant, the appellant could not possibly have been unaware of a very sizable increase in his business income in the pertinent taxation years. Yet, the appellant posed no questions to his accountant as to how he could possibly be paying his taxes while earning more income; he merely accepted the refund and paid less taxes.

The credibility of the taxpayer is not really in issue here. I believe that the appellant wanted to pay only the taxes he owed and that he felt that Mr Duquette was a good accountant because he was paying less taxes. What is wrong here is the belief that once a taxpayer has retained an accountant, he can no longer be held responsible for inaccuracies or omissions in his tax returns. In this instance, the appellant had the responsibility of ascertaining that his increased business earnings did not attract more taxes than he actually paid. His failure to do so amounts, in my opinion, to gross negligence within the meaning of subsection 163(2).

Decision

For these reasons, the appeal is dismissed.

Appeal dismissed.