Findlay v. R., [1997] 3 C.T.C. 2010, 97 D.T.C. 1149

Margeson T.C.J.:

1 This appeal is from a reassessment, notice of which is dated February 28, 1994, confirmed by Notice of Confirmation dated December 14, 1994, in which the Appellant was assessed a penalty, under subsection 163(2) of the Income Tax Act (the Act). That section provides:

(2) False statements or omissions. 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 false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty....

Evidence

2 Exhibit A-1 was filed by consent. There were no restrictions placed upon its admission. It contained the relevant returns for the Appellant and the relevant numbered company, 909002 Ontario Inc. (the company); correspondence between the Appellant and Revenue Canada; correspondence between the appellant and Farm Business Consultants Inc., which was the firm that completed the income tax returns for the Appellant and the company and who had prepared and filed the corporate returns; the election and all documents relevant to a section 85 roll-over of assets from the Appellant to the company; the original Notice of Assessment; the Notice of Confirmation; the Objection; the Revenue Canada Taxation Report on the Objection and all documents filed by the company and the Appellant and signed by the Appellant, relative to the section 85 roll-over.

3 Marlene Gayle Hanson was an appeals officer with Revenue Canada. She was assigned the objection in question for consideration and confirmed the reassessment. She was familiar with the documents in Exhibit A-1 and identified them.

4 She indicated that after the reassessment was confirmed the taxpayer was asked to calculate the goodwill and this was not done. She pointed out line 127 of the Appellant's individual tax return for 1991 which did not include any amount for capital gains as a result of the section 85 roll-over. Further, the return did not include a completed Schedule 3 as required. She pointed out that the election was filed 28 days before the Appellant's T1 return was filed and both originals were signed by the Appellant as well as the corporate returns of the company.

5 She said that she was not aware of any evidence indicating that the Appellant did not know that he had to include the capital gains amount in line 127 of his income tax return.

6 In cross-examination she agreed that taxpayers usually retain accountants to prepare and file corporate returns and supporting documentation. She said that at the time of the filing of the return in question by the Appellant a $500,000 corporate gains deduction applied for small businesses.

7 Further, she said that all of the corporate returns and other documents were properly prepared including the election. No calculation of capital gains was received as requested so that the amount set out in the corporate filings was accepted. No amended return was filed.

8 She did not ask the Appellant for an explanation as to why he did not include the taxable capital gains amount in line 127 of his return but she asked his representative.

9 Revenue Canada did not ask the Appellant to file an amended return but pointed out the omission and allowed a reasonable time to pass before proceeding with the reassessment.

10 The Notice of Objection was filed before the time expired for the filing of an amended return.

11 She indicated that a letter had been sent to the Appellant and his consultants on November 5, 1993 pointing out that the capital gains amount should have been included in the Appellant's returns and the department requested a response within 30 days, asked for further particulars and proposed a penalty. There was no reply but that failure to reply had no bearing on the decision to reassess.

12 She was prepared to admit that section 85 roll-overs are not the “run of the mill situations for taxpayers”. When pressed by counsel for the Appellant she said that she believed that the Appellant knew what he was doing but there could be extenuating circumstances.

13 She said that there was an indication that there may have been a “computer glitch” but this did not prove factual.

14 The Appellant had told her that he had received a $15,000 bonus in the year in question and that there was no T4 slip for it. It was shown in the company's records and reported by the Appellant.

15 She said that as a result of the subsection 163(2) penalty levy, a capital gains deduction was prohibited. She agreed that there would have been a minimal tax effect if the Appellant had reported properly.

16 In re-direct she said that the letter was sent to Mr. Findlay, c/o CD Emporium Video in Hamilton, Ontario for further information regarding the non reported capital gain but there was no reply except to ask for more time to file the information.

17 The department had decided that enough time had been given and proceeded with the levying of the penalty.

18 The Respondent read into evidence certain portions of the examination for discovery evidence of the Appellant without objection being taken.

19 The Appellant testified that he was 32 years of age, had grade 13 education in Ontario and had been in business since 1983. He had been the sole proprietor of video stores in Guelph, Hamilton and Kitchener.

20 Initially the books and records of his businesses were kept by a friend, Glen Inglis. This person also completed the income tax returns. Subsequently the Appellant retained Farm Business Consultants to do his work and they are still doing it including the daily bookkeeping work. They come in to the business two to three times a year. He also had a lawyer and still does.

21 In 1990 he received advice that it would be advantageous from a liability point of view and for income tax purposes to incorporate. This he did through his lawyer, Ms. Margaret MacKenzie.

22 At Farm Business Consultants he originally dealt with Larry Oosterhout who completed the corporate returns at Tabs 7 and 8 of Exhibit A-1. When the Appellant was operating as a sole proprietorship he took out of the business about $15,000 per year. After he incorporated, he received $15,000 as a management fee which was shown in the income statement of Thomas Home Video.

23 He identified the various documents in Exhibit A-1 and admitted having filed the returns and to having received the letter from Farm Business Consultants Inc. dated March 30, 1992 referable to the transfer of assets from himself to the company, including the election and the listing of the amounts assigned for goodwill for the three stores. He explained that the amount of goodwill assigned to the Hamilton store was only given as $1 since it had just started operation.

24 He said that when he signed the election, Form T2057, he did not know that there would be a capital gain. He did not think that the rollover would generate tax. He did not receive any money as a result of the transaction.

25 He said that his returns were normally prepared by Larry Oosterhout. The Appellant met with him at the store or his home, the return was prepared and sent to the Appellant. The Appellant had no idea of how much tax he owed each year. He signed the return and filed it.

26 His tax return for 1992 was not prepared by Mr. Oosterhout. It was prepared by Richard Fleuelling of the same firm. He was unknown to the Appellant. He was contacted by Farm Consultants Inc. to meet with Mr. Fleuelling. They met in April for a couple of hours. The Appellant gave all particulars to Mr. Fleuelling about his income.

27 He said that he did not include any capital gains in line 127 of the return. He did not realize that line 127 had to be filled in. It was not discussed with Mr. Fleuelling.

28 The tax return was prepared by Mr. Fleuelling and sent to the Appellant. The Appellant reviewed it and sent it in. He believed it was accurate.

29 The Appellant first realized that there was a problem when he received a letter from Revenue Canada a few months later. He had no problem earlier with the work of Farm Consultants Inc.

30 In cross-examination he said that he met Mr. Fleuelling for the first time in 1992. He received the covering letter set out in Exhibit A-1, Tab 6, which included copies of the corporate returns. He was told to examine them and contact the preparer if he had any questions. He would have looked at the work but did not think that he had to check it. He signed the returns and sent them in.

31 He was referred to his evidence in examination for discovery when he said that he did not remember what he did with the material after he received it and before sending it to Revenue Canada. He said that he has had time to think since that time and to review documents. He did not say what documents he had reviewed. Then he said, “I am quite sure that is what I did”. Then he said: “Now I am quite sure.”

32 He admitted that he did not know that the Hamilton store's goodwill was only valued at $1 until it was pointed out to him by counsel for the Respondent at the time of discovery.

33 Richard Fleuelling testified that he was a “Member Services Representative” for Farm Business Consultants. He was experienced in completing tax returns, corporate returns and in the banking business since 1987. He did not deal with the Appellant until the 1992 returns were to be done.

34 He was familiar with section 85 rollovers and identified the covering letters sent to the Appellant on March 30, 1992 regarding a transfer of assets to the company as well as the corporate returns. He said that he was involved with the completion of the Appellant's 1991 return. He was asked to go out to see the Appellant on April 23, 1992 and he did so. He went to the Appellant's store, he took printouts from the Appellant's files with him and obtained information about his income.

35 He said that the did not know that there was a company involved with the Appellant and was not sure about the company's business. Then he said that there was a corporate file note in the Appellant's file which might have necessitated a check of the corporate returns since there was a business related to the individual taxpayer.

36 He was asked why line 127 of the Appellant's individual tax return was not filled in and he provided no clear answer except to say that it was missed. He said that 2% to 3% of their clients might be involved in section 85 rollovers. In cross-examination he was asked why he would not “pull the corporate file and review it”.

37 He suggested that it might have had something to do with time constraints. He then said that he did not know if the corporate returns were pulled for comparison purposes by others at his office. It was suggested to him that when he met with the Appellant he knew about the company and it was also noted on the file.

38 He suggested that there was a system's breakdown at the office. He asked the other workers to “do everything right and it was not done.”

39 In re-direct he said that sometimes they would take a corporate tax return with them when talking to the individual taxpayer but he did not realize that there was a corporation involved in this case until he was in the Appellant's office.

40 In response to questions asked by the Court this witness could not explain how the breakdown had occurred but his evidence was clear that the corporation's returns and the matter of the rollover had obviously been discussed with the Appellant at their meeting.

Argument of the Respondent

41 Counsel for the Respondent said that if ever there was a case where the facts justified the reassessment, this was one. The taxpayer failed in his duty under the Act. But for the scrutiny of the department, the taxpayer might not have been caught.

42 The explanation offered by the Appellant is not good enough. His recollection is questionable. He showed himself as self-employed, yet the evidence indicated that he was employed by the company. He did not correct this in his return. At no time did he even know that the goodwill for the Kingston store was listed as $1 until counsel for the Respondent pointed it out to him.

43 Counsel took the position that the Appellant was “wilfully negligent”. He had not reviewed the information as shown at Tabs 9 and 10 of Exhibit A-1 which clearly indicated the nature of the transaction. In light of off the facts here, the Appellant was “grossly negligent.”

44 The Appellant was advised of the advantages and disadvantages of incorporation before he took that route and he must have been advised as to the corresponding duties under the Act. He was invited to review the information and the returns by his advisors and he failed to ensure the accuracy of his returns.

45 Counsel relied upon the case of Andrulionis v. Minister of National Revenue (1968), 68 D.T.C. 725 (Can. Tax App. Bd.)in support of his argument that it is no defence for the Appellant to say that he relied upon someone else to prepare his return. Once the taxpayer has signed his return, the accuracy of it is his responsibility.

46 Further, counsel relied upon the case of Howell v. Minister of National Revenue (1981), 81 D.T.C. 230 (T.R.B.), where D.E. Taylor, then a member of the Tax Review Board, found that the taxpayer should have at least made an attempt to review and comprehend his return. If he had done so, it was highly probable that he would have discovered the error.

47 In that case the penalty imposed by the Minister was found to be proper and the appeal was dismissed.

48 In the case at bar, counsel argued that the appeal should be dismissed.

Argument of the Appellant

49 Counsel for the Appellant took issue with the argument put forth by counsel for the Respondent that the Appellant did not know if he reviewed his return before filing it. One does not normally remember what one does to review the return and supporting material but the Appellant here “did what he generally did”. No review of any of the documents would have caused the Appellant to believe that the goodwill item should have been included in his personal return. He was never told that he was required to report it. Other persons completed his tax returns from day one.

50 What occurred here was an isolated mistake by the taxpayer. It was not a “litany of events”. Everything was done properly up to the time that the return was filed. “The system did not bring it up”. This was not “gross negligence”. It is not enough to find only “negligence”.

51 Counsel said that the person who prepared the Appellant's personal return did not have the corporate return with him when he visited the Appellant before completing the Appellant's personal return.

52 Counsel submitted that the case law goes both ways. He would not agree that Vincas Andrulionis, supra, stands for the proposition that just because the taxpayer signs a return that turns out to be incorrect, that that amounts to gross negligence.

53 He distinguished John W. Howell, supra, on the basis that the non-reporting of employment income is different from the non-reporting of a capital gain that had no affect on the tax payable. In Udell v. Minister of National Revenue (1970), 70 D.T.C. 6019 (Can. Ex. Ct.), the gross negligence of the tax preparer, in itself, was not the gross negligence of the taxpayer. The question to be asked is, “was the taxpayer privy to the gross negligence of the preparer?” In that case the Court found that the “gross negligence of the accountant was not attributable to the Appellant because he was not “privy to it”.

54 Likewise, in the case at bar the Appellant was not “privy” to the acts of the tax preparer and if those acts amounted to gross negligence, such gross negligence was not that of the Appellant.

55 In Guttman v. Minister of National Revenue (1979), 79 D.T.C. 243 (T.R.B.), it was found that there was not sufficient evidence to satisfy the Tax Review Board that it was the taxpayer who had been grossly negligent even where he was an accountant and the tax preparer was an accountant also.

56 In Venne v. R. (1984), 84 D.T.C. 6247 (Fed. T.D.). The Federal Court — Trial Division, found that the Crown had failed to establish, although there was negligence by the taxpayer, that there was “gross negligence”. In that case the taxpayer had failed to read his returns before signing them and where the errors were “sufficiently obvious that a reasonable man of even limited education and experience would have noticed them.”

57 Likewise, in Norrad v. Minister of National Revenue (1986), 86 D.T.C. 1625 (T.C.C.), the Court found that while the taxpayer may have been negligent in neither examining his returns before filing them, nor in discussing them with his accountant, he was not “grossly negligent”.

58 The situation was somewhat similar in Armstrong v. R (1993), 93 D.T.C. 1043 (T.C.C.), where the Court found that the taxpayer was not “grossly negligent” where his accountant had failed to include in his return an amount of income even though the taxpayer had supplied all the proper records, where the taxpayer's regular accountant had been ill and the preparer may not have understood the taxpayers' records. The Court was satisfied as to why the omission had occurred.

59 In Dunleavy v. R (1993), 93 D.T.C. 417 (T.C.C.), Tax Court of Canada, March 26, 1993, Court File No. 91-1082(IT), the Court characterized the actions of a busy doctor as “less than being careful but not as gross negligence”, where the taxpayer had discussions with his tax preparer well before the return was completed, had concluded that no tax would be payable as a result of a certain transaction, that the matter would be included in the return and merely signed the return and went back to this patients.

60 In Glass v. R (1993), 94 D.T.C. 1091 (T.C.C.), the taxpayer relied intrinsically upon the tax preparer who had for at least two years of the four years in issue, signed and filed the returns of the Appellant. A witness for the tax preparer testified that the Appellant relied completely upon him and that the error may have resulted from the actions of an employee who was in failing health.

61 The Court held that even where there was a degree of negligence by the Appellant in dealing with his return, he should still be given the benefit of the doubt. The Court, at page 5 said, “The evidence is not sufficiently convincing to conclude that the Appellant in the present case had the requisite state of mind or mens rea required to apply section 163(2)”. While agreeing that there was a degree of negligence exhibited by the Appellant, it did not amount to “gross negligence”.

62 In Godin c. Ministre du Revenu national (1994), 94 D.T.C. 1649 (T.C.C.), the taxpayer was not liable for penalties for failure to report a capital gain where the taxpayer had believed it had been reported by his accountant. In summary, counsel argued that in the case at bar, the actions of the accountant may not even have amounted to gross negligence, but if they did, the Appellant should not be found to be liable for such actions.

63 The appeal should be allowed.

Analysis and Decision

64 The burden in this case is on the Respondent to show that the Appellant's actions culminating in the filing of his 1991 individual income tax return, subject him to the penalty levied under subsection 163(2) of the Act.

65 On the basis of the evidence led by the Respondent there was certainly a prima facie case made out for a finding of liability and counsel for the Appellant did not take issue with this conclusion at the close of the Respondent's case, even though ultimately he suggested that the actions of the tax preparer, might not have amounted to “gross negligence”. In any event, counsel for the Appellant relied upon his argument that even if the actions of the tax preparer amounted to “gross negligence” they were not attributable to the Appellant.

66 The Court is prepared to accept the argument, supported by the cases cited, that every time a taxpayer files a return that is incorrect, that does not amount to “gross negligence” on his behalf. The Court is further prepared to accept the argument that a taxpayer who retains one whom he believes is a competent tax preparer, familiarizes himself with the return and its contents or what the contents were supposed to be, signs it, files it or allows the tax preparer to file it, is not automatically saddled with the “gross negligence” of the tax preparer if such actions of the tax preparer amount to “gross negligence”.

67 The taxpayer may or may not be, depending upon the circumstances or facts in each case.

68 Further, it is the nature of the actions of the tax preparer and the taxpayer that determine whether or not there was “gross negligence” or merely “negligence”.

69 The Court is satisfied that the state of the law is such that a taxpayer is not liable for penalties under subsection 163(2) of the Act, if his actions amounted to negligence only. See Lucien Venne, supra; Murray Norrad, supra,; Rannie Armstrong, supra; Francis Dunleavy, supra; Daniel F. Glass, supra and Rémi Godin, supra.

70 The Court does not find that the result in John W. Howell, supra, is inconsistent with the results in the cases cited immediately above. In Howell, supra, D.E. Taylor, then a member of the Tax Review Board was obviously satisfied that the taxpayer had made no attempt to review or comprehend his return and so there could have been no reasonable basis for his believing that the return was accurate.

• 1>. Did the actions of the tax preparer, in failing to include in the taxpayer's individual tax return of 1991, the item of capital gain, at line 127 of his return, amount to “gross negligence” in the circumstances of this case?

• 2. Did the taxpayer knowingly “participate in, assent to or acquiesce in”, the actions of the tax preparer in failing to indicate this item in the return?

• 3. Were the actions of the taxpayer on the facts of this case, of such a nature that the Court should conclude that the actions of the tax preparer should be attributed to the taxpayer, so as to enable the Court to conclude that the taxpayer could be said to have “participated in, assented to or acquiesced in”, the actions of the tax preparer?

72 The Court will consider firstly question number 2 above.

73 The Appellant in his evidence said that he did not know that the capital gain item had to be indicated in his return when he filed the election, Form T2057. He did not believe that the transaction would generate tax. He reviewed the return and sent it in. He believed that the return was accurate.

74 There was no other direct evidence on the matter of the knowledge of the Appellant at the relevant time. There is circumstantial evidence but in order for the Court to infer knowledge on the part of the Appellant it would have to be satisfied that there was no other rational conclusion to be drawn from the evidence but that the Appellant knew of the omission and did nothing about it. Under those circumstances he clearly would have violated subsection 163(2) of the Act.

75 The burden is on the Respondent to establish on a balance of probability that the Appellant had such knowledge and acted as he did, notwithstanding that knowledge. The Respondent has not met that burden.

76 Counsel for the Respondent was prepared to acknowledge that there was no direct evidence of that knowledge and did not submit that the Respondent had met this burden.

77 The Court is satisfied that the Respondent has not met the burden of establishing the requisite knowledge on the part of the Appellant.

78 Counsel for the Appellant referred to the case of Daniel F. Glass, supra. That case mentioned the term “mens rea” with respect to the necessary requirements of subsection 163(2) of the Act but that is a criminal concept which the Court does not find is the basis for “knowingly” in that subsection. The Court in Daniel F. Glass, supra, readily passed on to a consideration of the terms “negligence” and “gross negligence” and founded its decision on the lack of sufficiency of evidence of “gross negligence”.

79 The Court turns now to the consideration of question number 1.

80 It is clear from the evidence presented that the tax preparer was an experienced person in preparing individual tax returns, corporate returns and preparing the necessary documentation for section 85 roll-overs including the election and was experienced in business and banking matters generally. He was undoubtedly put forward by his firm as an “expert” in this field and the firm was retained by the Appellant because of their “expertise” in these fields. Therefore, there was a “high standard of care” required of the tax preparer vis-à-vis the taxpayer.

81 It is true that the tax preparer was not familiar with the taxpayer personally up until the time he visited him at his place of business. However, the tax preparer had access to the individual returns of the taxpayer and those of his business at his office. When he visited the taxpayer at his place of business he took printouts of the Appellant's files with him.

82 Initially, the witness who gave evidence on behalf of the tax preparer said that he did not know that there was a company involved but when the Court has regard to all of his evidence it can come to no other rational conclusion except that he did know or should have known the connection between the taxpayer and the corporate entity. He admitted that there was a corporate file note in the Appellant's file which might have necessitated a check of the corporate returns.

83 He could provide no clear answer as to why line 127 was not filled in except to say that it was missed. He gave no appropriate response to the question as to why he had not “pulled the corporate return” and reviewed it except to say that it might have been due to time constraints. His suggestion that there was a systems breakdown at the office provided no illumination as to why the omission occurred.

84 It is clear that at some point in time before he completed the individual tax return of the Appellant, the tax preparer had at least discussed the section 85 roll-over with the taxpayer and the question of the tax implications of the roll-over must have surfaced.

85 The end result is that there was no sufficient explanation as to why the capital gain item was not included in the taxpayer's return. This is a matter which should have been explained by the tax preparer who gave evidence. If he was not able to do so then there should have been someone else in his office who was capable of doing so.

86 The absence of such evidence, together with the rather inconsistent evidence by the tax preparer and the extent of the knowledge that the tax preparer had of the business affairs of the taxpayer result in the unfavourable inference that the omission was either deliberate or at the very least these actions amounted to “gross negligence” and not merely “negligence”.

87 This “gross negligence” is not found in the single act of the omission but in the overall action of the tax preparer culminating in the omission.

88 The Court now considers question 3.

89 The Court accepts the argument of counsel for the Appellant that just because a taxpayer signs a return that is deficient, that does not amount to “gross negligence” on behalf of the taxpayer. As indicated, the case of Cyrus C. Udell, supra, gives some guidance on the point. That case held that the taxpayer must have been “privy” to the gross negligence of the tax preparer to be held liable for penalties under subsection 163(2) of the Act.

90 In Webster's Ninth New Collegiate Dictionary, the word “privy” connotes, “cognizance implying concurrence” which would seem to be the way that this word was used in Cyrus C. Udell, supra.

91 In the case at bar the Appellant was a businessman. He had advice from accountants and from a lawyer about the matter of incorporation of his business. He was made aware of the advantages and disadvantages of incorporation, including the matter of taxation. He had discussed with his accountants the intricacies of the section 85 roll-over, had reviewed the corporate returns prepared by the same tax preparer before he signed and filed them. He reviewed correspondence from the tax preparer dated March 30, 1992 dealing with the transfer of the assets including all the documents that were subsequently filed on behalf of the company. He was invited by the tax preparer to call him if there were any questions and he met with the tax preparer prior to filing his individual tax return.

92 The tax preparer had taken along print-outs from its files relevant to the taxpayer's income when he visited the taxpayer. It would be unreasonable, armed with this information and the fact that there was a corporate file note in the Appellant's file which might have necessitated a check of the corporate returns because it was a business related to the individual taxpayer, to conclude that the taxpayer and the tax preparer would not have discussed the necessity of including the information in the taxpayer's return, even if the tax implications were minor.

93 The taxpayer's evidence was that he did not know when he signed the election that there would be a capital gain but no one apparently told him that there would be or there would not be a gain, so there was no basis for his believing that there would not be a gain.

94 Although the important time for considering the actions of the Appellant was up to the time that he filed the return and not after, it was interesting to note that even after the omission was pointed out to the taxpayer by Revenue Canada and he was asked to supply the information to enable the department to do the calculations for the goodwill, he did not supply the information and did not file an amended return.

95 On the facts of this case, the Court concludes that the “gross negligence” of the tax preparer was attributable to the taxpayer and he is liable for the penalties imposed.

96 Unlike some of the cases cited by counsel for the Appellant, in the case at bar, the taxpayer had reviewed his return, he had discussions about it prior to it having been completed. It was not a matter of having passed information on to his tax preparer only to have it omitted from his return or changed.

97 There was no reasonable explanation given for the omission by the tax preparer nor by the Appellant and that explanation should have been forthcoming from them.

98 The appeal is dismissed and the assessment is confirmed.