Minister of National Revenue v. Donald M Weeks, [1972] CTC 60, 72 DTC 6001

Heald, J:—This is an appeal by the Minister of National Revenue from the decision of the Tax Appeal Board dated June 12, 1970 (reported [1970] Tax ABC 633) wherein the respondent’s appeal from his 1967 income tax assessment was allowed. In this assessment, a penalty of $65.02 was levied pursuant to the provisions of subsection 56(2) of the Income Tax Act. The appellant’s right to impose said penalty in the circumstances of this case is the sole issue to be determined.

The respondent is presently employed as a service station manager and lives at Tillsonburg, Ontario. In 1967, and for about 28 years prior thereto, he was employed by Jackson’s Bakeries Ltd as a bakery salesman. He is and has been a married man living with his wife Norma at all relevant times. His wife has been continuously employed on a full-time basis for the past 13 years by a tobacco company in Tillsonburg.

For most of that period, approximately 25 years, the respondent had adopted the practice of having his annual income tax returns prepared by an accounting firm in Tillsonburg. Up until about 1965, the said accounting firm was owned and operated by one Poling at which time it was sold to one C W Jamieson and thereafter it was operated by said Jamieson. For several years prior to the change of ownership and for some time thereafter, including all times relevant to this appeal, first Poling and then Jamieson employed as a bookeeper and secretary in the office, a Mrs Ostrander who knew Mr and Mrs Weeks quite well and knew that Mrs Weeks was separately employed on a full- time basis. During the past several years, the respondent had not claimed exemption for his wife and since he believed his accountants knew that she was still working, he naturally assumed that the same procedure would be followed in preparing the 1967 return as in past years. Some time prior to April 3, 1968 he brought his 1967 T4 slips and other necessary material to the accountant’s office so that his 1967 return could be prepared. Nothing was specifically mentioned about his wife’s exemption at that time. However, there was a discussion about the lump sum he had received in 1967 as a return of pension contributions to Jackson’s Bakeries Ltd Pension Trust Fund and the way in which tax would be paid on these moneys received. The respondent changed employers at this point resulting in the return of pension contributions.

On April 3, 1968 the respondent went back to the accountant’s office where he signed the 1967 return which was then filed on his behalf. The respondent did not read the return over, but he did look at the lower right hand corner thereof which indicated he should receive an income tax refund. He remarked to Mr Jamieson that this year was the first year he was eligible to receive a refund. However, he says he did not attach any significance to this and attributed it to the pension moneys. Mr Jamieson had explained to him, in a general way, that he could make an election under the provisions of section 36 of the Income Tax Act in respect of said pension moneys and that it would be to his financial advantage to do so. Knowing that the company had deducted income tax from the pension moneys at source, he assumed that election under section 36 would benefit him to the extent that a refund in his 1967 income tax resulted.

The respondent cannot remember whether he looked at a working copy or the final copy which he signed. He may well have signed the final copy in blank. He cannot remember. However, this same firm had prepared his return for years in a satisfactory manner, there had been no trouble before, and he relied on them to accurately prepare the return based on the information supplied by him.

The respondent says that while he was in the process of signing the return, he mentioned to Mrs Ostrander that his wife was still working and that this conversation was in the presence of Mr Jamieson.

When it was discovered by the tax Department that the respondent’s return claimed the full $1,000 exemption for Mrs Weeks, and a reassessment notice was issued by the Department disallowing said marriage exemption, and imposing the penalty, Mr Jamieson wrote to the income tax Department under date February 25, 1969. The relevant portions of said letter are as follows:

We wish to advise that it is entirely our fault in claiming the exemption for his wife, and while he did sign the return he relied on us to prepare his return correctly. His prior years returns were prepared, taking into account his wife’s earnings and when preparing his 1967 return, due to the work load, we failed to check for his wife’s income.

We do not feel that he was negligent in any way and we request that the penalty under sec. 56 be cancelled.

Notwithstanding Mr Jamieson’s submissions, the appellant imposed the penalty pursuant to the provisions of subsection 56(2) of the Income Tax Act.

Subsection 56(2) provides as follows:

56. (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 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.

(Italics mine.)

Subsection 56(2) was carefully considered by my brother Cattanach, J in the case of Udell v MNR, [1969] CTC 704. At pages 713-14 Mr Justice Cattanach said:

There is no doubt that section 56(2) is a penal section. In construing a penal section there is the unimpeachable authority of Lord Esher in Tuck & Sons v Priester (1887), 19 QBD 629, to the effect that if the words of a penal section are capable of an interpretation that would, and one that would not, inflict the penalty, the latter must prevail. He said at page 638:

“We must be very careful in construing that section because it imposes a penalty. If there is a reasonable interpretation which will avoid the penalty in any particular case, we must adopt that construction.”

The circumstances of this case, as I have found them to be, do not constitute personal gross negligence on the part of the appellant for the reasons I have previously outlined.

Accordingly there remains the question of whether or not section 56(2) contemplates that the gross negligence of the appellant’s agent, the professional accountant, can be attributed to the appellant. Each of the verbs in the language “participated in, assented to or acquiesced in’’ connotes an element of knowledge on the part of the principal and that there must be concurrence of the principal’s will to the act or omission of his agent, or a tacit and silent concurrence therein. The other verb used in section 56(2) is “has made”. The question, therefore, is whether the ordinary principles of agency would apply, that is, that what one does by an agent, one does by himself, and the principal is liable for the actions of his agent purporting to act in the scope of his authority even though no express command or privity of the principal be proved.

In my view the use of the verb “made” in the context in which it is used also involves a deliberate and intentional consciousness on the part of the principal to the act done which on the facts of this case was lacking in the appellant. He was not privy to the gross negligence of his accountant. This is most certainly a reasonable interpretation.

I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty, if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.

The facts in the Udell case (Supra) are similar to this case. There, although the taxpayer recorded his transactions meticulously in an account book, the professional accountant who prepared his tax returns made a number of errors which resulted in substantial understatements of income. Counsel for the appellant here attempts to distinguish Udell on the basis that it was a case of a fairly large farmer involving both a grain and a cattle operation, that it was a far more complicated return and that, accordingly, the taxpayer could not be expected to understand the complexities of preparing the tax return and so was not grossly negligent in relying on his accountant to correctly prepare the returns. The appellant submits that in the case at bar the return was a relatively simple return, complicated to some extent by the election under section 36 insofar as the pension payments were concerned, but certainly not nearly as complicated or involved as in the Udell case.

In this case, the respondent was a bakery salesman. I think it rather unusual that he was prudent enough over the years to have his return prepared by an income tax consultant. I believe that most employees in this category prepare their own returns. There is some irony in this situation where a taxpayer faces a penalty under subsection 56(2) through the alleged gross negligence of his agent, an agent considered by the taxpayer to be expert in this field.

I was impressed by the respondent on the witness stand. I believe him when he says that over the years he acquired confidence in this accounting firm. I accept his explanation as to why he did not check the return over carefully — that is, his reliance on and confidence in his accountants — confidence established over some 25 years of satisfactory service. I believe him when he says that he did not notice that a $2,000 exemption for married status was claimed instead of the $1,000 exemption which should have been claimed. I also accept his explanation concerning the fact that a refund was being claimed. He could not be expected to understand the complexities of an election under section 36 of the Act so far as the return of pension contributions was concerned. His accountant advised him to make the election because it would benefit him financially — he therefore attributed the claimed income tax refund to said election — surely, this is a reasonable conclusion for a layman to draw. In his mind, the two things different about his 1967 return from previous years was the pension matter and the claim for tax refund. He mentioned to the accountant that this was the first year he was getting anything back.

I do not think it unreasonable that he would associate the two and attribute one to the other.

I am certainly not prepared to find personal gross negligence by the respondent on the facts of this case. I am not so sure either that I would be prepared to find gross negligence on the part of the accountant; however, as in the Udell case (supra), the facts here do not disclose any course of conduct by which I could find the respondent privy to any gross negligence by the accountant anyway. I say that I have doubts as to the gross negligence of the accountant because I find his explanation of what occurred as set out in his letter of Febru ary 25, 1969 to the income tax Department to be reasonable and acceptable. A simple mistake was made. This return was prepared in the month before the filing deadline. The accountant had many other returns to prepare and file. He was under considerable pressure. The person preparing the return simply made a mistake, an understandable mistake. I am not convinced that a mistake in these circumstances is “gross negligence” within the meaning of subsection 56(2).

However, the appellant argues additionally that, if the facts here established do not amount to gross negligence, the respondent has “knowingly made, or has participated in, assented to or acquiesced in” (italics mine) the making of a return which results in less than the correct tax being payable.

For the purposes of this argument, the appellant relies on the case of Roper v Taylor’s Central Garages (Exeter), Limited, [1951] 2 TLR 284, and in particular, the judgment of Mr Justice Devlin at pages 288 and 289. The learned Justice there deals with three degrees of knowledge: the first is actual knowledge; if the Court feels that the evidence falls short of that, it should then consider knowledge of the second degree — whether the defendant was shutting his eyes to an obvious means of knowledge — a deliberate refraining from making inquiries, the results of which he might not care to have and thirdly, what is generally known in the law as constructive knowledge — what is meant by the words “ought to have known” in the phrase “knew or ought to have known” — it does not mean actual knowledge at all, it means the defendant had in effect the means of knowledge.

By way of comment, I observe that the learned Justice’s comments were obiter. Furthermore, the facts in this case do not come within any of the tests of knowledge set out by Mr Justice Devlin.

First of all, I am satisfied from the evidence that there was no actual knowledge. I am also satisfied on the evidence that there was no deliberate eye-shutting or deliberate refraining from making inquiries; the respondent was following the same procedure as he had in previous years. He believed that his accountant and the secretary-bookeeper knew that his wife had been and still was fully employed. Exemption for his wife had not been claimed in previous years. The respondent acted reasonably in assuming that they would not claim an exemption for her in 1967. Learned counsel for the appellant did not urge “constructive knowledge” on me, but there is nothing in the evidence before me from which I could infer “constructive knowledge” anyway.

As my brother Cattanach, J said in the Udell case (supra), where there is a fair and reasonable doubt in a penal statute the statute should be construed so as to give the party charged the benefit of that doubt.

In conclusion, I am of the opinion that the appellant has not brought himself within the provisions of subsection 56(2) of the Income Tax Act and the appeal is accordingly dismissed with costs.