Guaranty Trust Company of Canada v. Her Majesty the Queen, [1978] CTC 191, 78 DTC 6190

Dube, J:—This is an application by the defendant for an order striking out subparagraphs 9(c) and 9(d) of the statement of claim on the ground that they disclose no cause of action, and striking out Subparagraphs 9(a) and 9(b) and paragraph 10 on the ground that they are frivolous. In the alternative, defendant prays for an order striking out the whole statement of claim.

In its statement of claim plaintiff alleges that, after having discovered that it had failed to fully report its income for tax purposes, it directed its representatives at a board of directors meeting on January 21, 1972 to make a voluntary disclosure. On February 4, 1972 representatives of plaintiff, including chief executive officer Allan B Ramsay, voluntarily disclosed to defendant the failure to fully report its income. Unknown to the board of directors, Ramsay was personally involved and subsequently criminal charges were laid against him. The Minister reassessed the plaintiff for the taxation years 1944 to 1970 and assessed penalties totalling $183,496.52.

Plaintiff appeals the assessment of those penalties on four grounds:

(a) The plaintiff denies that it has wilfully evaded or attempted to evade payment of the tax payable under the Income Tax Act for the taxation years 1949 to 1958;

(b) The plaintiff denies that it knowingly or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under the Income Tax Act did make, or participate in, assent to, or acquiesce in the making of, any statement or omission in a return, certificate, statement or answer filed or made as required by or under the Act or a regulation, as a result of which the tax that would have been payable by the plaintiff for the years 1960 and 1966 to 1970, if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer, was less than the tax payable by the plaintiff for the said years;

(c) The disclosure by the plaintiff at the meeting on the 4th day of February, 1972, was as complete as can reasonably be expected in the circumstances within the spirit and intent of paragraph 42 of Revenue Canada Information Circular 73-10R. The Board of Directors of the plaintiff exerted every effort to make voluntary disclosure of the failure to fully report the plaintiff’s income as soon as evidence of this failure became known to it;

(d) Under the rules of natural justice, the plaintiff should not be penalized for the failure by one of its employees, who has subsequently been found guilty of illegal acts, to disclose all of his knowledge of the matters in order to protect himself.

No evidence is admissible on an application under Rule 419(1)(a) striking out on the ground that a pleading does not disclose a reasonable cause of action, and learned counsel for the defendant did not adduce any on this first branch of his motion attacking subparagraphs 9(c) and 9(d). He did file an affidavit on the second branch, that the pleading is frivolous under Rule 419(1)(c).

As to subparagraph (c) counsel claims that the Circular 73-10R and its predecessor 70-9 is merely a circular published by departmental officials without the force of law and not binding on the Minister. He referred to jurisprudence supporting his allegation. Paragraph 41, and its successor paragraph 42, deal with voluntary disclosures. Paragraph 42 reads:

It is the policy of the Department to encourage voluntary disclosures. Any person who has failed to file a return required under any sections of Acts administered by the Department, or who has filed false returns and subsequently makes a voluntary disclosure pertaining to those returns, that is as complete as can reasonably be expected in the circumstances, will be permitted to settle his liability by paying the tax and interest due, without a Section 163 penalty or a prosecution. This does not waive late filing penalties, late remittance penalties, nor interest for late payment. However, a voluntary disclosure will be subjected to verification. It it is established that it was not substantially complete because the taxpayer disclosed only those amounts or areas of fraud of which he thought the Department would become aware or would accept as being complete, the disclosure will not be considered as voluntary but rather as a definite attempt to further deceive the Department, and the disclosure will be subject to the imposition of a penalty or prosecution as the circumstances warrant. [1]

Even if paragraph 41 was binding on the Minister counsel points out that the plaintiff has taken himself out of the beneficial provisions of the paragraph since it admits in the statement of claim that its own chief executive officer failed to make a total disclosure. Therefore plaintiff would have no reasonable cause of action.

The uncontradicted affidavit in support of the second branch of the motion is of a special investigator of Revenue Canada. He says that both Ramsay and one Albert R Ashforth, the assistant vice- president and chief financial officer, were jointly charged with conspiracy to wilfully evade payment of taxes and convicted. They both appealed. Ramsay withdrew his appeal as to the conviction. The Ashforth appeal was not disposed of at the date of swearing of the affidavit. Ramsay joined the plaintiff company as a trust officer in 1941 and Ashforth joined in 1955 as an accountant.

Counsel argues that the chief executive officer of plaintiff having been found guilty beyond a reasonable doubt in criminal proceedings, it is frivolous to claim that the company of which he was the chief officer may deny, as it does under subparagraph 9(a) and 9(b), that it has wilfully evaded payment of tax. Counsel referred to some decisions and authorities on corporate criminal liability.

At first blush it is difficult to see how plaintiff can find much assistance from the provisions of the departmental circular, or how it may successfully extricate itself from the full consequences of the tax evasions of its two key company officers. Yet, it seems to me to be a situation which would be better solved as a question of law to be determined under Rule 474, or as a stated case under Rule 475. I strongly recommend that both parties agree to such a course and hopefully avoid the expenses of a full trial.

As to the instant motion I cannot find that it is plain and obvious that the plaintiff has no cause of action. However, in view of the circumstances, the costs of this motion will be in the cause.

ORDER

Motion denied. Costs in the cause.