Lamarre Proulx T.C.J.:
1 These two appeals were heard on common evidence. The appeal by Communications Daniel Morency Inc., hereinafter referred to as “Communications”, concerns the 1991 taxation year and that by Daniel Morency, hereinafter referred to as the appellant, concerns 1990.
2 There is an issue common to both appeals, namely whether the penalty imposed under s. 163(2) of the Income Tax Act (“the Act”) was properly imposed and, in the case of the appellant, there is the further question of whether the Minister of National Revenue (“the Minister”), in computing the appellant's income, properly included the sum of $42,000 as a benefit received from Communications, pursuant to s. 15(1) of the Act.
3 At the start of the hearing, counsel for the respondent raised a preliminary point, which was mentioned summarily in the Replies to the Notices of Appeal, regarding the possibility that the Notices of Appeal had been filed beyond the prescribed deadlines. According to this allegation the Minister's confirmations were dated August 30, 1994 and the Notices of Appeal were filed, in one case, on December 5, 1994, and in the other case, on December 6, 1994. The Court expressed surprise that under such circumstances the respondent had not proceeded by way of a preliminary motion on a date well before that of the hearing of the appeals on their merits.
4 Counsel for the respondent took note of this comment and then set out the facts relating to these applications. She explained that in the appellant's case there had been a second confirmation dated September 13, 1994, similar to that of August 30, 1994, except as regards the appellant's address. Accordingly, there was no basis for an application to dismiss on the ground that the Notice of Appeal had been filed out of time. As to the Communications appeal, counsel for the appellants had filed in the Registry of this Court, by fax, on November 24, 1994, a Notice of Intention to Appeal. This Notice was filed for both appeals but for the reason given above there was a possibility of prescription only in the Communications appeal. That fax contained the following paragraphs:
[TRANSLATION]
Following our telephone conversation of November 24, 1994, we advised you that it was the intention of our clients, Communications Daniel Morency Inc. and Daniel Morency, to appeal to the Tax Court of Canada from the notices of confirmation issued by the Minister on August 30, 1994.
As the time for appealing will expire on November 28 next you indicated to us that this Notice of Intention will suspend the running of the limitation period. Within the next few days you will receive by mail the original hereof as well as the fees payable under Tariff A of Schedule II of the Tax Court of Canada Rules.
You will also receive by next week the Notices of Appeal in accordance with the Rules of the Court, and we will provide for you therein particulars as to the relevant facts and the reasons why the appeals are being brought.
If this notice does not suspend the running of the limitation periods as you told us it would, please inform us at once so that we can act accordingly.
5 The Notice of Appeal for Communications was thus filed on December 5, 1994 and the Registry of this Court indicated as the date of receipt November 24, 1994, which is the date on which the Notice of Intention to Appeal was received.
6 Counsel for the appellants argued that if this procedure had not been accepted he could have sent the Court a summary Notice of Appeal which he would later have modified, but this would involve unnecessary steps.
7 Counsel for the respondent argued that a Notice of Intention to Appeal is not in the nature of an appeal, that the difference is fundamental and not consistent with s. 169 of the Act, and that the Notice of Appeal was not filed on November 24 as indicated by the stamp of this Court, but on December 5, 1994. She maintained that the Registry of this Court did not have the power to suspend appeal deadlines laid down by statute and that that is what is done when the Registry stamps a date of filing earlier than that of the actual filing.
8 Judgment was reserved on this motion and the hearing proceeded on the merits. A review of the precedents led the Court to the judgment of the Federal Court of Appeal in Dawe v. Canada[ Dawe v. R. (1994), 174 N.R. 1 (Fed. C.A.)], rendered on September 13, 1994, [1994] F.C.J. No. 1327 (Q.L.),which court, in identical circumstances, though having to do with the Customs Act, concluded that a Notice of Intention to Appeal was not tantamount to a Notice of Appeal and that accordingly the Notice of Appeal had been filed beyond the prescribed limitation period. I quote at length from that judgment:
This appeal by the Crown raises two issues: whether the Federal Court Rules can be used to enlarge the limitation period prescribed by subsection 135(1) of the Customs Act R.S. 1985, c. 1 (2nd supp.) (the Act) and, if not, whether the respondent sufficiently complied with the requirements of that subsection by sending to the Minister of National Revenue (the Minister) on July 15, 1992 a letter of intention to appeal the Minister's decision rather than bringing an action to the Federal Court - Trial Division.
I am of the view that these two questions ought to be answered in the negative and, therefore, that the appeal ought to be allowed.
However, the Associate Senior Prothonotary of this Court granted the respondent an extension of time within which to file a Statement of Claim against the Minister. The appellant immediately attacked the decision of the Prothonotary before the Trial Division of this Court. The learned Associate Chief Justice heard the matter and dismissed the Crown's appeal.
Yet, on July 13, 1992, that is two days before the limitation period was to expire, the respondent spoke to his lawyer, cleared up the misunderstanding and gave instructions to appeal. Rather than filing a Statement of Claim within the time limit, counsel for the respondent was satisfied with delivering a letter by courier to the Minister in which he indicated his client's intention to appeal the decision. It was not even until July 21, 1992 - six days after the limitation period had expired - that a Statement of Claim was drafted seeking an extension of time to appeal the Minister's decision and the return of the penalty.
The learned Associate Chief Justice came to the conclusion that subsection 135(2) of the Act, by making explicit reference to the Federal Court Rules, renders these rules applicable to all elements of an action originating thereunder, including its initiation. Therefore, it was proper to use the rules to grant an extension of time and to extend the ninety-day appeal period fixed by Parliament in the Act itself.
More precisely, the learned judge found that it was an appropriate situation for the application of Rules 2(2), 6 and 302(a) and (b)...
With due respect, I am of the view that the learned judge erred in law.
Subsection 135(2) of the Act simply makes the Federal Court Rules applicable to actions that have already been instituted within the time limit established by subsection 135(1). It constitutes no statutory authority to use the Rules to enlarge or abridge the time prescribed therein. Unlike subsection 56(1) of the Trade Marks Act R.S. 1985, c. T-13 for example, subsection 135(1) of the Customs Act does not empower the Court to enlarge the limitation period fixed by Parliament.
...Nor, as I have already pointed out, can they be waived or extended in the absence of a clear statutory provision: Rules of Court cannot be used to enlarge or abridge the time prescribed by a statute.
In essence, the respondent contends that the notice of intention to appeal that he sent to the Minister on July 15, 1992, is, at least in exceptional circumstances, sufficient compliance with the requirements of section 135 of the Act. He relies for this contention on the authority of some decisions of the Trial Division of this Court which exhibit a willingness to accept this kind of alternative compliance with the Act when the letter of intention had been filed with the Court.
With respect, whether there are exceptional circumstances or not, and in my view there are none in the present case, a mere notice of an intention to eventually bring an action is not tantamount to, and is no valid substitute for, the actual bringing of an action.
Subsection 135(1) of the Act requires, for an action to be validly brought under the law, that a Statement of Claim against the decision of the Minister be filed within the time limit. Only chaos and unwarranted litigation could result if appellants were entitled, within or after the time limit, to substitute their personal views of what the procedure ought to be for what the actual procedure is.
9 Accordingly, the Communications appeal is not valid because a Notice of Intention to Appeal is not tantamount to a Notice of Appeal. The Notice of Appeal filed beyond the time laid down by s. 169 of the Act must consequently be disallowed.
10 However, as I have heard both appeals on the merits, I will nevertheless set out my analysis of the evidence and the conclusions to which the evidence in the Communications appeal would have led me. I will of course dispose of the appeal by the appellant Daniel Morency solely on the merits.
11 The appellant and Mr. St-Jacques, an accountant, testified at the request of counsel for the appellant. Christine Desroches and Jean Mercier, employees of the Department of National Revenue, testified at the request of counsel for the respondent.
12 The facts on which the Minister relied in making his reassessments are set out in paragraph 7 of the Reply to the Notice of Appeal (“the Reply”) in the case of Communications, and in paragraph 8 of the Reply in the case of the appellant. I will reproduce only the latter paragraph, as the facts of these two appeals are identical:
[TRANSLATION](a) the appellant is the sole shareholder of Communications Daniel Morency Inc.;
(b) Communications Daniel Morency Inc. operates a business providing advertising services;
(c) on or about October 3, 1989, Communications Daniel Morency Inc. concluded an oral contract with Les entreprises Loma Ltée;
(d) as Communications Daniel Morency Inc. was experiencing financial problems, Les entreprises Loma Ltée agreed to make an advance payment of $42,000 for advertising services to be provided by Communications Daniel Morency Inc.;
(e) in return for the payment of $42,000 by Les entreprises Loma Ltée the appellant gave his personal residence as security;
(f) on October 6, 1989 a cheque for $42,000 from Les entreprises Loma Ltée was deposited in the appellant's personal account, less a $1,000 cash withdrawal;
(g) on the same day a cheque for $35,000 made out to Communications Daniel Morency Inc. was deposited in the company's account by the appellant;
(h) the amount of $35,000 was recorded in the books of Communications Daniel Morency Inc. as an issue of capital stock to the appellant;
(i) as a consequence of services rendered by Communications Daniel Morency Inc. three invoices dated August 18, October 5 and November 20, 1990 for a total of $42,000 and in Daniel Morency's own name were sent to Les entreprises Loma Ltée;
(j) the appellant failed to report the sum of $42,000 as income in his tax return for 1990;
(k) Communications Daniel Morency Inc. failed to report in its income tax return for 1991 the sum of $42,000 deriving from the contract between it and Les entreprises Loma Ltée, even though Communications Daniel Morency Inc. had incurred expenses in connection with this contract and claimed them as business expenses;
(l) as the appellant knowingly or under circumstances amounting to gross negligence made an omission in his tax return for the 1990 taxation year by not reporting the sum of $42,000 in his income for that year, a penalty in the amount of $5,573 has been imposed pursuant to s. 163(2) of the Income Tax Act.
13 Subparagraphs 8(a) to (g), (i) and (k) of the Reply were admitted. The appellant filed as Exhibit A-1 a book of documents with 14 tabs.
14 The appellant was at the material time the president and sole shareholder of Communications. The turnover of the business was roughly $2,000,000 and it had about ten employees.
15 In 1989 Les Entreprises Loma Ltée, hereinafter referred to as “Loma”, requested the advertising services of Communications. Communications estimated the cost at $42,000 and asked to be paid in advance. Loma agreed in return for a mortgage lien on the appellant's residence, which was granted. The advertising work was done by Communications, which included the costs thereof in the calculation of its income. However, the billing was done in the appellant's own name. In his testimony he explained that an invoice was initially issued in the name of Communications and that it was Loma that asked that the invoice be in the appellant's name. The appellant received a cheque for $42,000. He deposited $41,000 in his personal bank account. On the same day he made out a cheque to Communications for $35,000. This cheque was deposited in the Communications bank account at the same time as other cheques received in payment of accounts receivable. However, the amount of $35,000 was not entered in the receipts account. Rather it was entered in the capital stock account and 35,000 shares were formally issued to the appellant, as indicated by the documents in tabs 10 to 14 of Exhibit A-1. The appellant said that this issue took place by mistake and that he signed the papers without realizing what they were, as with everything that came from his accountant. He signed wherever there were stickers indicating where he was to affix his signature, without concerning himself with the content of the documents he was signing.
16 The accountant, Mr. St-Jacques, explained to the Court that the financial statements were not audited. However, he checked his files before coming to testify and found that the trainee who had prepared the financial statements for his signature had given him as an explanation of the $35,000 that it was for the purchase of capital stock. In cross-examination, he confirmed that he had in his files a worksheet titled [TRANSLATION] “Capital Stock” and that this worksheet contained the following note: [TRANSLATION] “The shares were issued to Daniel Morency. Mr. Morency took out a mortgage on his house and injected the money into the company”. This document was filed as Exhibit I-1. Counsel for the appellant objected to the filing of Exhibit I-1 on the ground that it was not on the respondent's list of documents. Counsel for the respondent argued that she was carrying on a cross-examination and that s. 89(2) of the Tax Court of Canada Rules (General Procedure) (“the Rules”) allowed her to file the exhibit. I indicated that she was correct but regretted the nature of this provision which, in my opinion, is a departure from the usual rules of total disclosure of relevant documents to both parties before the hearing in the interests of the proper administration of justice. However, it should be noted that the document filed merely confirms the accountant's evidence in chief.
17 In re-examination Mr. Morency continued to maintain that there had been a mistake by the secretary who was also responsible for bookkeeping and that he had not given instructions that the amount of $35,000 should be entered as being for the purchase of Communications capital stock.
18 Counsel for the appellants explained to the Court that Communications admitted it should have included in the computation of its income the $42,000 paid for its advertising services. Accordingly, so far as Communications was concerned, only the imposition of the penalty under s. 163(2) of the Act was disputed. As regards the appellant's appeal, counsel for the appellant said he agreed there had been an appropriation of funds in the amount of $7,000 but argued that there was no appropriation of funds in the amount of $35,000 because the issue of capital stock to the appellant was a mistake.
19 Counsel for the appellant referred to Lord, Sasseville and Bruneau, Les principes de l'imposition au Canada, Wilson & Lafleur, 10th ed., and in particular to paragraph 4.3.1.5, pp. 81 and 82, titled [TRANSLATION] “False statement or omission made knowingly”:
[TRANSLATION]
Thus, in Thibault v. Minister of National Revenue it was held that errors by the taxpayer due to ignorance of what should be done or to a misinterpretation of the Act may not give rise to a penalty if he can establish his good faith. In Girard v. Minister of National Revenue the taxpayer failed to include in his income a profit made on the sale of his interests in two motels. The judge came to the conclusion that this omission was due to neglect by the taxpayer which amounted to gross negligence, as the taxpayer was an [TRANSLATION] “experienced businessman”. In Decore v. The Queen a taxpayer had inadvertently failed to inform the accountant responsible for preparing his tax return that he had received dividends during the year. The accountant prepared the return, which the taxpayer had previously signed, and did not include the dividends. The Court considered that this was not an omission under circumstances amounting to gross negligence.
However, in Fortin v. Minister of National Revenue it was held that a taxpayer who used an accountant to prepare his return remained responsible for its accuracy. But in Udell v. Minister of National Revenue it was held that gross negligence by an accountant was not attributable to the taxpayer and did not justify imposing a penalty upon him. The scope of this decision was however limited in The Queen v. Columbia Enterprises Ltd., a case in which a company had retained the services of an accountant to prepare and file its financial statements and tax returns...
20 Counsel for the appellant argued that the appellant was an artist who may have been careless in handling his affairs but who had no intention of avoiding the payment of tax.
21 Counsel for the respondent referred to the Federal Court of Appeal judgment in Friedberg v. R. (1991), 92 D.T.C. 6031 (Fed. C.A.), as a basis for arguing that the form of transactions is binding on a taxpayer:
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil, 91 D.T.C. 5106, per Mahoney J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to ‘correct’ documents which clearly point in a particular direction.
22 She also referred to the following passages of my decision in Couture v. R. (1995), 95 D.T.C. 690 (T.C.C.):
Counsel for the respondent contended that there was no evidence that what was done was not done wilfully. Neither the accountant, who allegedly made the erroneous entry nor the appellant testified. He referred to the decision by this Court in Enns v.M.N.R., 87 DTC 208, and to its reference to the decision by the Supreme Court of Canada in Lévesque v. Comeau et al., [1970] S.C.R. 1010. Pigeon J. made the following remarks at pages 1012 and 1013 of that decision:
She alone could bring before the Court the evidence of those facts and she failed to do it. In my opinion, the rule to be applied in such circumstances is that a Court must presume that such evidence would adversely affect her case.
Counsel for the respondent thus contended that the witnesses of the facts had not testified because they could not have corroborated the statements made by the accountant in charge after the investigation by the Minister's officers...
Even without relying on this presumption, an amount of $58,200 was added to the advance account of a shareholder in an account that in those years did not exceed the amount of roughly $120,000 and moreover the capital gain on the sale of the shares was not reported. The size of the amount allegedly lent means that it could not be a thoughtless mistake or a minor error a retroactive correction of which one might think it is reasonable to accept. It could only be a wilful act or an act in the nature of a wilful act. I therefore conclude that the Minister rightly assessed the appellant in applying subsection 15(1) of the Act.
23 Counsel for the respondent argued that the secretary had not testified and that further the share certificates had not been immediately corrected so as to bear out the theory of mistake put forward by the appellant. In fact, the capital stock still includes this amount of $35,000.
Conclusion
24 The Communications appeal is dismissed because it was not validly brought.
25 So far as the appellant's appeal is concerned, I must conclude on a balance of probabilities that as a shareholder of Communications the appellant appropriated to himself a sum of money which should have gone to Communications, and that Communications thereby conferred on him a benefit the value of which should be included in the computation of his income. Although the amount has now been included in the computation of Communications' income, the fact remains that the appellant used $42,000: $35,000 in the form of shares issued in his name and $7,000 for personal purposes. The appellant must account for this appropriation of $42,000. He did so by alleging that the injection of the amount of $35,000 as capital stock was a mistake and that it was done inadvertently. The evidence cannot support such a proposition.
26 So far as the imposition of the penalty under s. 163(2) of the Act is concerned, the whole of the evidence leads to the conclusion that the appellant knowingly acted in the manner described above. He is an intelligent man who is knowledgeable in business matters. The explanation of mistake cannot be accepted: the failure to include the receipts in question in Communications' income, the accountant's notes on the injection of capital, the absence of testimony by the secretary and the signature of all the documents required to formalize the purchase of additional shares in the amount of $35,000 are all circumstances which point to a deliberate action by the appellant.
27 The appellant's appeal must therefore also be dismissed.
28 As these appeals were heard on common evidence, the respondent will be entitled to only one set of costs.
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