Rip T.C.J.:
1 Theodore Spruyt and Maria Spruyt, who are married to each other, have appealed income tax assessments in which the Minister of National Revenue (“Minister”) assessed each of them penalties pursuant to subsection 163(2) of the Income Tax Act (“Act”). The issue in the appeals is whether the appellants knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under the Act have made or have participated in, assented to or acquiesced in the making of a false statement or omission in their respective income tax returns for 1987 and, for Mr. Spruyt only, for 1988.[FN1: <p>In their Notices of Appeal, the appellants purported to appeal from assessments for 1987, 1988 and 1989. Prior to trial counsel for appellants advised the Court that the appeals for the 1989 are to be withdrawn. At trial counsel advised that Mrs. Spruyt is withdrawing her appeal for the 1988 taxation year since there is no issue between her and the Minister.</p>] .
2 The appeals were heard on common evidence. Mr. and Mrs. Spruyt testified on their own behalf, as did Michael Ashmore, their accountant. Mr. Johannes (Hans) Weltner testified on behalf of the Minister.
3 Mr. and Mrs. Spruyt immigrated to Canada from the Netherlands in 1960. The Spruyts lived and worked in various areas of Ontario before settling in Grand Valley, Ontario in 1964 to work on a farm.
4 Mr. Spruyt has seven years education. Much of his schooling took place in occupied Holland where he went to school half-days only. He also studied at night for two years at an Agricultural School in Holland. Mrs. Spruyt has a Grade 8 education. Neither Mr. or Mrs. Spruyt has any formal Canadian education.
5 In 1964 Mr. and Mrs. Spruyt purchased a farm comprising 100 acres of land for $43,000 “lock, stock and barrel”. This property was subsequently called, and is herein referred to as, “Riverhill Property” or Lot 31.
6 In 1969 Mr. and Mrs. Spruyt purchased approximately 60 to 65 acres of land in the county of Dufferin for $10,000. (This land is sometimes referred to as the “Greenwood Property”.) The property was adjacent to the Riverhill Property. Mr. Spruyt explained that he also gave the vendor the right to remove gravel from the property and “over the years” the vendor exercised his right. There was no evidence of any consideration to the value of the gravel.
7 In 1981 Mr. and Mrs. Spruyt acquired in partnership the Home Hardware store in Grand Valley for $70,000. Subsequently they purchased the building in which the hardware business was carried on for $35,000. The purchases were financed by mortgages on the appellants' home and the purchased building.
8 The Spruyts purchased property together, either jointly or in partnership. Mr. Spruyt explained that while he discussed any potential purchase of property with his wife, he makes the final decision. He also testified that it is he who discusses the preparation of their tax returns with Mr. Ashmore. Mrs. Spruyt confirmed that she does not participate in making her tax returns except for signing the certificate on the last page of the returns.
9 The Greenwood Property was sold by Mr. and Mrs. Spruyt to Davison Bus Lines Limited in May 1987 for $60,000. The evidence is that between the date of purchase of the land and December 31, 1971 the value of the land did not increase in value. When the Minister assessed the appellants with respect to the disposition of the Greenwood Property, he calculated the capital gain on the basis that the cost of the property was $10,000.
10 Mr. Spruyt testified he “can't say” where the proceeds from the sale of the Greenwood Property went but “thinks” the money “went to the business bank account at the Royal Bank of Canada because it was used to pay off the mortgage”. The proceeds of the sale were deposited in the bank account and then applied as to $48,000 to reduce mortgage debt and as to $12,000 to acquire a van. Mr. Spruyt testified that his lawyer did not give him any advice on how to treat the disposition of the Greenwood Property for tax purposes and he did not ask.
11 In 1985 a tornado struck Grand Valley destroying the appellants' home and hardware store. Mr. Spruyt recalled that two years before the tornado, he was offered $1,500 an acre for the Greenwood Property, because of the gravel. In 1979 he sold 0.318 hectares (or 0.941 acres) of the Greenwood Property to Ontario Hydro for $14,000. Mr. Spruyt reasoned that the Greenwood Property was worth at least $1,000 an acre in 1971 so when he sold the land to Davison Bus Lines Limited for $60,000 there was no capital gain.
12 On October 23, 1968 Mr. and Mrs. Spruyt gave an option (“Riverhill Option”) to Riverhill Developments Limited (“Developments”) to purchase the Riverhill Property “or any parcel thereof consisting of seven acres or more, free from encumbrances, for the sum of two thousand (sic) ($2,000) per acre at any time before the 1st day of October 1978.”
13 The Riverhill Option came about when the Reeve of the locality, a Mr. Fife, offered to purchase the Riverhill Property. Mr. Fife and Mr. Spruyt agreed that Developments would acquire land from time to time from the appellants for development into a residential subdivision. Mr. Spruyt was given equity in Developments as well. The plan was to sell Riverhill Property over a ten year period. The first sale took place in May 1975 when 44 lots, comprising about 11 acres, were sold to Developments for $22,110.[FN2: <p>According to tabs 23 and 24 of Exhibit A1, Developments sold three lots to Bruce R.A. Fife by Deed dated January 15, 1980 and registered in the Registry Division of Dufferin (No.7) on February 22, 1980. By Deed dated January 16, 1980 and registered February 22, 1980, Mr. Fife sold one of the lots to Mr. Spruyt.</p>] There is no evidence of any other sales by the appellants to Developments before October 1, 1978, but there may have been. In 1982 there was a sale to Developments of the balance of Lot 31. The sale agreement was not produced[FN3: <p>This Agreement appears to have been entered into on December 21, 1981. See footnote 4,<em>infra</em>.</p>] . However in a letter of October 7, 1982 to Developments from Mr. J. Cecile Wolfe, a lawyer who acted for the appellants, Mr. Wolfe advises that the Agreement of Purchase and Sale provides for the sale of the balance of the Riverhill Property for $100,000. A copy of the letter was sent to Mr. Spruyt. Mr. Wolfe advised that the sums of $25,000 and $55,000 had already been paid for the property and notes that the balance of the purchase price, which I calculate to be $20,000, is to be paid with interest at 4 per cent calculated from the first day of January 1993 payable annually to Mr. and Mrs. Spruyt on the first day of January in each year. The balance of the purchase price is to be paid upon the purchaser requesting a deed for the lands on or upon January 1, 1987, whichever occurs first. It appears, therefore, that by October 7, 1982 Developments had paid the sum of $80,000 to the Spruyts for the 100 acres of the Riverhill Property and the balance of $20,000 was to be paid, at the latest, by January 1, 1987.
14 Notwithstanding that Mr. Wolfe's letter stated the Agreement he referred to was “with respect to the balance of Lot 31...”, Mr. Spruyt declared that he did not believe he had sold the balance of Lot 31 but only 50 acres of Lot 31. He said that he did not recall asking Mr. Wolfe any question with respect to the sale in 1982.
15 By Agreement dated June 6, 1988, Mr. Spruyt agreed to transfer 751 common shares of Developments to a Paul Fife for $61,000 payable $10,000 on closing of the transaction and $51,000 to be paid on June 15, 1988. In paragraph 2 of the Agreement the appellants agree to convey to Developments 70 acres of Riverhill Property in consideration of the sum of $20,000, “being the balance outstanding on the Agreement of Purchase and Sale[FN4: <p>According to the Agreement of June 6, 1988 the sum of $20,000 is the balance outstanding on an Agreement of Purchase and Sale. This Agreement appears to be the Agreement referred to earlier (footnote 3) that is not in evidence. In a letter dated September 23, 1988 from Mr. Wolfe to Developments, Mr. Wolfe insisted the Agreement of Purchase and Sale for the balance of the land, 70 acres, wasentered into on December 21, 1981. I infer, therefore, that the Agreement of December 21, 1981 is the agreement referred to in Mr. Wolfe's letter of October 7, 1982.</p>] entered into between them and the corporation...” together with the interest in the amount of $4,000, the amount of interest owing on the 1981 Agreement. Mr. Spruyt also agreed to resign as director and officer of Developments.
16 His understanding of the Agreement of Purchase and Sale of June 6, 1988, said Mr. Spruyt, was that it “finalizes” a prior agreement that Developments be turned over to Mr. Fife's family. He says he believed that the monies received under this agreement “was final payment for the sale of land”. He admitted he owned shares in Developments but in his view the shares were worthless. He insisted he believed he and his wife had roughly 39 acres of the Riverhill Property left to sell at the time of the agreement in 1988. But in his evidence he referred to the second paragraph of the agreement with Developments which provides for the conveyance by him and his wife of 70 acres. I had some difficulty following this testimony on this point.
17 Mr. Spruyt explained that by virtue of the 1981 Agreement[FN5: <p>See footnote 4,<em>supra</em>.</p>] with Developments, the sale of the Riverhill Property land was for $100,000. He stated that in his view $80,000 was receivable in 1981 and the balance of $20,000 was to be paid in 1987. The $20,000 referred to in the second paragraph of the June 6, 1988 Agreement is the balance referred to in the 1981 Agreement. He said that he honestly believed that the total amounts provided for in the Agreement of June 6, 1988, that is the $61,000 for the shares and the $20,000 for land, was all for the land.
18 Mr. Spruyt did not recall receiving any tax advice with respect to the Riverhill transactions from Mr. Wolfe. Mr. Spruyt stated that he did not “recall but probably read the agreement” of June 6, 1988 providing for the sale of shares in Developments. He said he did not recall discussing the agreement with Mr. Wolfe. He stated he was “keen to disentangle the relationship” with the other shareholders and the agreement was intended to achieve that result.
19 Mr. Spruyt did “not as such” include the proceeds of the transactions contemplated in the June 6, 1988 agreement in his (or his wife's) tax returns whether as a sale of shares or as a sale of land. Mr. Spruyt stated he discussed the transactions with his accountant, Mr. Ashmore, but not their potential tax implications. He explained that the proceeds of the transactions were applied to pay off the outstanding mortgage on the hardware store. The sum of $63,000 was deposited in the Royal Bank business account on August 4, 1988 and on the same day $53,000 was withdrawn to repay a loan. Mr. Spruyt said that he probably discussed the bank deposit of $63,000 and the debit of $53,000 with Mr. Ashmore and that Mr. Ashmore “would probably ask where the money was from ... I would say from Riverhill ... can't say if we discussed tax...”. Mr. Spruyt said he understood he was not taxable on the Riverhill Property transaction because the money he received was for “final payment on transfer of land”. Mr. Spruyt conceded that it is “possible” he could have informed Mr. Ashmore the transaction was not taxable.
20 Since the Riverhill Option was signed in 1969 and provided for sale of land for $2,000 an acre, Mr. Spruyt rationalized that the land value was fixed at $2,000 for Valuation Day[FN6: <p>In computing capital gains, the fair market value of real property on December 31, 1971, Valuation Day, was, one of three amounts that may be, the deemed cost of acquisition of the property and on that day: subsection 26(3) Income Tax Regulations Rules, 1971.</p>] purposes. According to Mr. Weltner, this is Revenue Canada's position as well. Revenue Canada did not assess the Spruyts on the basis they had a gain on the disposition of the Riverhill Property. Rather, Revenue Canada assessed Mr. Spruyt for 1988 on the basis he had a gain on the sale of shares to Developments, and assessed the penalty because he did not report the disposition of the shares. Mr. Spruyt said he did not try to conceal the Riverhill Property transaction in 1988 from anyone. He sold land, not shoes, he said and he believed he incurred no capital gain. He stated he had no intention to conserve any capital gains deduction[FN7: <p>See section 110.6 of the<em>Act</em>as it applied to 1988.</p>] . He said he has reported subsequent capital transactions on his income tax returns. He emphasized that he co-operated with Mr. Weltner when the latter audited his income tax returns in 1993, giving him full access to all documents.
21 In cross-examination, respondent's counsel referred Mr. Spruyt to various adjustments made by Mr. Weltner during the course of his audit of the appellants' tax returns. Mr. Spruyt said he gave his accountant “every statement I have”. He acknowledged that the hardware store had no books of original entry but he insisted that the cash register tapes were complete “as far as I know”. Once a year, he stated, he would give the store records and his personal records to Mr. Ashmore and from these documents Mr. Ashmore would prepare financial statements for the store and tax returns for the appellants. The documents included bank deposit records of the store for Mr. Ashmore “to figure out” the appellants' income.
22 Mr. Spruyt did not give Mr. Ashmore the deposit records of the store's account with Canada Trust. This account was used for Mastercard purchases. Mr. Spruyt stated he believed the Canada Trust records were with the regular bank statements. He also told counsel that since the Canada Trust account only contained Mastercard deposits these monies could not be deposited to the Royal Bank account. Finally, he said he did not give Mr. Ashmore the Canada Trust deposit records because “it was covered in the cash tapes and other deposits”.
23 Mr. Spruyt withdrew money out of the Canada Trust account for personal use and also to “return” money to the Royal Bank business account. Mr. Spruyt also had a personal account at the Royal Bank. He did not recall transferring any funds from Canada Trust directly to the Royal Bank business account, although it “is possible” he did. He did not know why he did not authorize Canada Trust to deposit funds out of that account directly to the Royal Bank account. The appellant told respondent's counsel he was not attempting to have Mr. Ashmore conclude that he was contributing capital to the hardware business partnership by personally withdrawing funds from the Canada Trust account and then depositing those funds to the business account.
24 Mr. Ashmore calculated the appellants' income, in part, by reviewing their cancelled cheques, bank statements as well as the hardware store invoices and receipts. Mr. Spruyt said it was “quite possible” Mr. Ashmore queried him about the various cheques and “to the best of my knowledge”, he asserted, he gave Mr. Ashmore correct information.
25 Respondent's counsel referred Mr. Spruyt to an expense deducted by the hardware store partnership for rent paid in 1990 on behalf of the appellants' son, Harry. Mr. Spruyt said that the rent was paid “in lieu of wages”. Mr. Weltner testified that when he discovered rental payments, Mr. Spruyt informed him he was renting some additional storage space for out of season stock. Only when Mr. Weltner attended at the Registry Office did he discover that Harry Spruyt was registered as being a tenant in the basement apartment of the rented premises.
26 Counsel for the respondent also queried Mr. Spruyt with respect to his purchase of a motor home from Hughes Motor Homes. The motor home cost $49,000 and after trade-in, taxes and other charges and credits the appellant owed Hughes Motor Homes $34,640. This amount was paid by two cheques, one drawn on the hardware store account in the amount of $28,000 and the other on Mr. Spruyt's personal account in the amount of $6,640. The cheque for $28,000 was payable to “Hughes”. When the cancelled cheque in the amount of $28,000 was returned by the bank, Mr. Spruyt wrote the word “shelving” on the cheque and included the cheque with other cancelled cheques he gave to Mr. Ashmore. Mr. Ashmore added the $28,000 to the cost of depreciable property (“shelving”) of Class 8 for the partnership's 1989 fiscal period. Mr. Spruyt explained that he had purchased shelving for approximately $28,000 but “not with that cheque”. He believed Mr. Ashmore “would have known” the cheque was for a motor home since it was payable to “Hughes”.
27 Mr. Spruyt testified that he would usually give Mr. Ashmore documentation required for preparing tax returns in March or April and Mr. Ashmore would have the returns ready “before” the deadline. I assume Mr. Spruyt means before April 31. If Mr. Ashmore had questions, Mr. Spruyt would attend at Mr. Ashmore's offices but, Mr. Ashmore rarely had questions. Mr. Ashmore would not ask for documents other than those already given to him. Mr. Spruyt did not recall discussing tax matters with Mr. Ashmore but did remember telling Mr. Ashmore that the Greenwood transaction was not taxable.
28 Mr. Spruyt testified he was not very knowledgeable about capital gain matters in 1987 and 1988, although he was familiar with the concept of Valuation Day and “probably instructed Mr. Ashmore accordingly”.
29 With respect to the Riverhill transaction in 1988, Mr. Spruyt said he “would discuss” the transaction with Mr. Ashmore but he could not recall what he told him. He could not recall whether he provided Mr. Ashmore with Mr. Wolfe's reporting letter or a copy of the deed transferring the property. There was “none that I recall”.
30 Mr. Ashmore is a chartered accountant. He is also the main shareholder of a corporation which operates Johnson's Bookkeeping. Johnson's Bookkeeping provided bookkeeping services for the store and prepared personal income tax returns; Mr. Ashmore prepared financial statements.
31 The hardware store, according to Mr. Ashmore, operated on a cash basis. He said that he would review bank statements, returned cheques and ask questions to Mr. Spruyt concerning the operation of the bank account. The bank deposits would reflect sales from the business, which Mr. Ashmore would adjust for provincial sale tax and later on, for Goods and Services Tax. From this information he would prepare financial statements for the hardware business.
32 The partnership year end was May 31. Mr. Ashmore said Mr. Spruyt would give his documentation soon after year end and he would start preparing the draft financial statements almost immediately. He would discuss the draft with Mr. Spruyt before preparing the final financial statements.
33 With respect to income tax returns for Mr. and Mrs. Spruyt, Mr. Ashmore stated that he asked Mr. Spruyt for all income tax information slips and “anything that affects the personal tax”. He did not ask for personal banking statements. Mr. Ashmore was aware of Developments. He noticed a significant amount of money deposited to the business bank account at the Royal Bank. He asked Mr. Spruyt if it affected his tax situation and was told it did not. Mr. Ashmore indicated that he spoke to Mr. Wolfe as well. He said he also spoke to Mrs. Spruyt but said he did not recall the “specifics” of the conversation. His recollection from conversations with Mr. Spruyt is that Mr. Spruyt had researched the potential taxability of the transaction which, I assume, he means the land transaction only, with Developments and concluded it was not taxable. Indeed, Mr. Ashmore was of the view that Mr. Spruyt had discussed the matter with other advisors prior to concluding as he did. Mr. Ashmore said that it was his “definite impression” that the transaction was not taxable. There was no reason not to report the transaction since any capital gain would be divided between the Spruyts and the Spruyts were eligible for the capital gains deduction.
34 In any event Mr. Ashmore did not pursue the question as to whether the Riverhill dispositions were taxable. He said he saw “lots of money coming into the business” and usually would have queries. As far as Mr. Ashmore was concerned Mr. Spruyt had held land through a corporation, and Mr. Spruyt believed he had sold the land to a company and the company repaid loans to the Spruyts.
35 Mr. Ashmore was of the view that Mr. Spruyt knew the hardware business, he was not sophisticated with respect with capital gains. Mr. Ashmore did not recall discussing tax matters with Mr. Spruyt.
36 Mr. Ashmore confirmed that he did the general bookkeeping for the store. He testified he was told money from the Canada Trust account was deposited to the Royal Bank account. However, he also stated he did not know of the Canada Trust account because Mr. Spruyt considered the Canada Trust account a personal account.
37 In cross-examination, Mr. Ashmore stated that he relied on Mr. Spruyt for all information he required to prepare the tax returns. He stated that Mr. Spruyt had a close relationship with his lawyer. He also believed that Mr. Spruyt discussed his business affairs with others.
38 Mr. Ashmore said he never saw cash register tapes from the hardware store and doubted Mr. Spruyt maintained them. In Mr. Ashmore's view, all of the store's sales were reflected by deposits to the Royal Bank account. Mr. Ashmore stated that if he had any questions after reviewing documentation provided to him by Mr. Spruyt, he would query Mr. Spruyt and accept his answers.
39 Mr. Weltner has been employed as an auditor by Revenue Canada since 1990. He is a Certified Management Accountant. Mr. Weltner advised that he commenced his audit of Mr. and Mrs. Spruyt some 15 months after he joined Revenue Canada. Mr. Weltner recalled that the books and records of the hardware business were “not the most organized”. He stated that he only had the accountant's schedules to work from. There were no books of original entry and the business did not have a proper bookkeeping system. All revenues were deposited in the Royal Bank business account and expenses were evidenced by cheques from the account and invoices. He confirmed the business was on a cash basis and that Mr. Ashmore made adjustments to put the business on an accrual basis.
40 Mr. Weltner originally audited the appellants' 1989, 1990 and 1991 taxation years. The years in appeal, 1987 and 1988, were statute barred at the time. At the time of the audit the appellants were no longer operating the hardware business.
41 Mr. Weltner made “a whole lot of adjustments” to the appellants' declared income for 1989, 1990 and 1991. He noted that there were deposits to an account other than the Royal Bank business account and there were “lot of personal expenses including rent for an apartment and hydro for the residence of Mr. and Mrs. Spruyt” which were “expenses through the business”. This led him to review prior years.
42 Mr. Weltner testified that according to his audit the Spruyts made no disposition of property in 1989, 1990 and 1991 but he did discover they made dispositions in 1987 and 1988. He also found another disposition of property in 1985 which was not reported, as well as the sale to Ontario Hydro in 1979. According to a print-out of the Spruyts' 1979 tax returns, a capital gain of $4,900 was reported on the sale to Ontario Hydro.
43 In Mr. Weltner's view, Mr. Spruyt misled him during the course of audit. Mr. Weltner stated that at first Mr. Spruyt told him there was only one business account but during the audit he discovered the account at Canada Trust. Mr. Weltner testified Mr. Spruyt told him he would accumulate money in the Canada Trust account for two or three months and then write a cheque on that account and deposit the money in the Royal Bank business account. Mr. Weltner explained the funds were not transferred directly to the Royal Bank business account. In some instances a cheque was deposited to Mr. Spruyt's personal account and then a cheque from the personal account for the same amount would be written to, and deposited in, the business account. All this would take place on the same day.
44 Mr. Weltner also noted the $28,000 cheque to “Hughes” which was marked “shelving”. According to Mr. Weltner, Mr. Spruyt told him a motor home had been purchased from a private individual. Mr. Weltner asked the Special Investigation Unit of Revenue Canada to verify the license plate of the motor home and he was informed that the previous owner of the motor home was Hughes Motor Homes, not a private individual. The vendor gave Mr. Weltner a copy of the Purchase and Sale Agreement as well as copies of cheques he received from Mr. Spruyt. The copy of the cheque for $28,000 did not have any notation of shelving on it, according to Mr. Weltner.
45 According to Mr. Weltner all 100 acres of the Riverhill Property had been conveyed to Developments by the end of 1988. The final payment of $20,000 “finished the deal” on the sale of land. Mr. Weltner also testified that no interest was reported by the appellants on the balance of the purchase price, $20,000, due on the sale of the Riverhill Property.
46 Appellants' counsel argued that his clients were hard working but unsophisticated people and on the basis of this Court's decision in Johnson v. R.[FN8: <p>(1993), 94 D.T.C. 1009 (T.C.C.)at 1013.</p>] the appeal should be allowed. In Johnson, a dentist relied completely upon his chartered accountant with respect to all aspects of his practice, including the filing of income tax returns and, the trial judge held, “there was no reason for him not to have done so”. The dentist was not knowledgeable or sophisticated either in his investments or tax affairs. Beaubier T.C.C.J. held the failure to report a dividend was that of the chartered accountant even though the taxpayer may have been negligent, but not grossly negligent, in failing to review the tax return prepared by the accountant.
47 Mr. Spruyt, too, relied on professionals, declared counsel. He formed his opinion the Greenwood and Riverhill transactions were not taxable on the advice of professional advisers. Perhaps, she suggested, the professionals, in particular Mr. Ashmore, did not ask the right questions.
48 Mr. Spruyt, counsel argued, thought the acreage value of the Greenwood Property at the end of 1971 was $2,000, the same as that of Riverhill at the time of the Riverhill Option in 1968. Also, as far as the Riverhill Property is concerned, Mr. Spruyt was of the view that all he was selling was land and there was no increase in the value of the land since 1971. Mr. Ashmore, she stated, thought the money in the business bank account from Developments was from a loan.
49 Counsel for appellants submitted the Minister has failed to establish the facts justifying the assessments of the penalties: subsection 163(3). In Venne v. R.,[FN9: <p>84 D.T.C. 6247 (Fed. T.D.), at 6256.</p>] Strayer J., as he then was, noted that:
...it is relevant to the whole question of the application of penalties under sub-section 163(2), that there seems to be a certain element of subjectivity recognized in the case law with respect to assessing the knowledge or gross negligence of a taxpayer with respect of misstatements in his returns: see, e.g., Howell v. Minister of National Revenue (1981), 81 D.T.C. 230at 234 (T.R.B.); Joris v. Minister of National Revenue (1981), 81 D.T.C. 470at 472 (T.R.B.). The taxpayer here is a man with a grade five education, working and paying taxes in a language which is not his first language nor that in which he was educated, a man who is more at ease in a garage than in an office.
50 Later on, Strayer J. explained that:
...“Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.
51 The appellants were ordinary working people and their failure to report the transactions was simply a failure to use reasonable care, according to their counsel.
52 Finally, counsel argued that there was no advantage to the appellants omitting to report the dispositions in their tax returns since each could have obtained a capital gains deduction under section 110.6 of the Act, for the years in appeal.
53 I agree with appellants' counsel that Mrs. Spruyt ought not to have been assessed a penalty under subsection 163(2) for 1987. She relied on her husband for all businesses and tax matters. There was no evidence she was active in the day-to-day business of the hardware store carried on by her husband. Her husband made all the decisions in the business and in the making or disposing of investments. True, she was negligent in relying on her husband to such a great extent. But considering her education and background, her willingness to permit her husband free rein to run her affairs is not surprising. She was not grossly negligent in the carrying out of any duty or obligation under the Act.
54 I cannot come to a similar conclusion with respect to Mr. Spruyt's omissions. My observance of Mr. Spruyt is that notwithstanding his limited education he is a bright individual who was fully cognizant of what was going on at all relevant times. His understanding of the English language is, as far as I am concerned, perfect. His answers in examination in chief and in cross-examination were well thought out and his words were precisely what he wanted to say. Many of his answers were contained by the words “I believe” or “as far as aI know”. Mr. Spruyt's course of conduct was that of a person who was grossly negligent in carrying out duties under the Act. He had started a course of activity to dishonestly reduce his taxable income. The deliberate entry of the word “shelving” on a cancelled cheque, the deductions of personal expenses in computing the income of the hardware business, the concealment of the Canada Trust account and the method adopted in transferring funds from the Canada Trust account to the Royal Bank business account were part of a course of action to conceal income. His failure to report gains on the dispositions of property, whether of land or shares, was part and parcel of this activity.
55 I do not accept Mr. Spruyt's excuse that he thought the sale of shares in Developments was a sale of land. In 1981 he and Mrs. Spruyt agreed to sell the Riverhill Property for $100,000. According to Mr. Wolfe's letter of October 7,1982 they had already been paid $80,000 and $20,000 was payable not later than January 1, 1987. In 1988 Mr. and Mrs. Spruyt received $20,000 (the balance of payment for the land) and Mr. Spruyt received $61,000 for his shares in Developments. I find it incredulous that Mr. Spruyt had not reviewed the Agreement of June 6, 1988 with Mr. Wolfe; it was an important Agreement to him. Mr. Ashmore testified the relations between Mr. Spruyt and Mr. Wolfe were close. Surely Mr. Wolfe knew what his client wanted and discussed the contents of the Agreement with Mr. Spruyt. I note that Mr. Wolfe witnesses the signatures on the Agreement. He was present to advise Mr. Spruyt at all times. The Agreement of June 6, 988 speaks for itself and the $61,000 was received by Mr. Spruyt for his shares in Developments and he knew this.
56 According to Mr. Spruyt he incurred no capital gain when he sold the Greenwood Property in 1987: in 1968 the value of the Riverhill Property was fixed at $2,000 an acre in the Riverhill Option and that was the acreage value of the Riverhill Property in 1971. The Riverhill and Greenwood Properties are contiguous. Therefore their acreage values of both properties in 1971 are the same, i.e. $2,000. However Mr. Spruyt purchased the Greenwood Property in 1969 for $10,000 seven months after he optioned the Riverhill Property. If the properties were similar, if not identical, and had similar values, Mr. Spruyt got a very good deal in 1969, but I do not believe he did. When he sold 0.941 acres of the Greenwood Property to Ontario Hydro in 1979 he and Mrs. Spruyt reported a capital gain on the disposition. When he sold the balance of the Greenwood Property to Davison Bus Lines Limited he also incurred a capital gain and he knew, or ought to know, this. For him to have assumed the value of the Greenwood Property in 1971 was $2,000 an acre for the reason he expressed was wilful blindness on his part[FN10: <p>For a review of the concept of “Willful blindness” see<em>R. v. Hinchey</em>, [1996] 3 S.C.R. 1128 (S.C.C.), at 1186 to 1188; [1996] S.C.J. No. 121 paras 112-115<em>per</em>Cory J.</p>] . He deliberately omitted to make enquiries as to value, because he wished to remain in ignorance as to the real value in 1971 of the Greenwood Property. He was, or ought to have been, suspicious that an acre of the Greenwood Property had a value of $2,000 when he purchased the property only two years earlier for $154.00 an acre and he deliberately refrained from making inquiries the result of which he might not care to have. He knew that he and Mrs. Spruyt had a gain on the sale of Greenwood Property.
57 Mr. Ashmore could have been more aggressive in researching the nature of the dispositions in 1987 and 1988. His evidence and that of Mr. Spruyt reveal that they had, as between themselves, a policy of a “Don't ask, don't tell”. Mr. Ashmore was content with Mr. Spruyt's information and Mr. Spruyt was content in his accountant's reaction to his information. This is not similar to what transpired in Johnson, supra. Mr. Spruyt was an active participant in deciding how his (and his wife's) tax returns were to be prepared.
58 The penalties assessed against Mr. Spruyt were well founded and his appeals will be dismissed with costs. Mrs. Spruyt's appeal will be allowed without costs.
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