Lamarre Proulx T.C.J.:
1 The Appellant is appealing, by way of the informal procedure, a penalty in the amount of $7,225 imposed pursuant to subsections 163(2) and 163(2.1) of the Income Tax Act (the “Act”) for having understated his income by an amount of $67,260 and having correspondingly increased his net business loss for the 1994 taxation year.
2 The Minister of National Revenue (the “Minister”) in deciding to impose the above-mentioned penalty made the assumptions of fact described in paragraphs 4, 5, 6, 7, 8, 9 and 10 of the Reply to the Notice of Appeal (the “Reply”) as follows:
4. The Appellant filed his income tax return for the 1994 taxation year and declared gross business income of $499,773 and a net business loss of $221,320.
5. By Notice of Assessment dated April 13, 1995, the Minister of National Revenue (the “Minister”) initially assessed the Appellant's income tax return for the 1994 taxation year.
6. In reassessing the Appellant for the 1994 taxation year, by Notice of Reassessment dated November 24, 1995, the Minister decreased the Appellant's net business loss by the amount of $124,943.
7. Further, in reassessing the Appellant by the said Notice of Reassessment, the Minister levied a penalty, pursuant to subsection 163(2) of the Income Tax Act (the “Act”), in the amount of $10,154.83 for the 1994 taxation year.
8. The Appellant objected to the said Reassessment by Notice of Objection dated January 25, 1996.
9. In response to the said Notice of Objection, the Minister reassessed the Appellant for the 1994 taxation year by Notice of Reassessment dated October 2, 1996, and decreased the said penalty by $2,929.67 with respect to unreported income which is not at issue in the current appeal.
- 10. In so reassessing the Appellant, the Minister made the following assumptions of facts:
(a) the fact herein before stated and admitted;
(b) on or about September 1, 1992, the Appellant acquired two Pet Food Plus stores (the “Franchises”) from All Pet Enterprises (the “Franchisor”);
(c) these two Franchises, operated under the business name of Abnaki Enterprises Reg'd, involved the selling of pet food and supplies at the retail level and were located at 2179 Ogilvie Road, Gloucester, Ontario, and at 44 Northside Road, Nepean, Ontario;
(d) the Franchises had a December 31 fiscal year-end;
(e) the Appellant sold back the Franchises to the Franchisor on October 1, 1994;
(f) the total selling price of the Franchises included the following allocation to inventories on hand, valued at cost, on October 1, 1994:
| Ogilvie store: | $35,060.80 |
| Northside store: | 32,199.18 |
| Total | $67,259.98 |
(g) in his 1994 income statement, the Appellant failed to include the amount of $67,260 in the Sales figure;
(h) the reported 1994 Sales of $499,773 were thus understated by $67,260;
(i) the amount of $67,260 was included in the Cost of Goods Sold;
(j) the Appellant knowingly, or under circumstances amounting to gross negligence in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in the income tax return filed for the 1994 taxation year with respect to unreported business income of $67,260, as a result of which the tax that would have been payable assessed on the information provided in the Appellant's income tax return filed for 1994, was less than the tax in fact payable attributable to the false statement or omission by the amount of $14,450; and
(k) as a consequence of the said understatement of income, the Minister levied and the Appellant is liable for a penalty in the amount of $7,225 for the 1994 taxation year, pursuant to subsection 163(2) of the Act.
3 The Notice of Appeal states the following with regard to why no penalty should be imposed:
1) ...The errors in my return increased the losses incurred when I sold my business; but did not change the bottom line. I still incurred a major loss and had no taxable income. I have been reassessed $11,537.56 in penalties when no taxes were attributable to the overstatements made.
2) Ms. P. Archambault of the Enquiries Division spoke to my wife in regard to the reassessments of 1992 and 1994 and said that because my wife was an accountant (she is not; she is a bookkeeper) she should have seen the errors made by Mr. Holla in the 1994 return. My wife is not familiar with procedures for closing down a business; and both my wife and I were in a state of panic and distress; under a doctor's care. Neither of us were in a position to do my tax return, even if we knew how. No errors or omissions were knowingly made. We trusted Mr. Holla, a former Revenue Canada Taxation employee, to do the return correctly.
4 Mrs. Dawn Case Bouchard (the Appellant's wife) and the Appellant himself both testified for the Appellant. The Appellant told the Court that his wife was in a better position than himself to discuss the case. He did testify but to a lesser extent. Mr. Daniel Rivet, a business auditor at Revenue Canada, testified at the request of counsel for the Respondent.
5 All the facts stated in the Reply, with the exception of the statements made in subparagraphs 10(i), 10(j) and 10(k) of the Reply, were admitted.
6 Mrs. Bouchard, an experienced bookkeeper, did the bookkeeping for her husband's business. She was very much involved in the running of the business, especially in the last year when she went to the stores everyday. It was a family business and that fact was confirmed by the Appellant.
7 Mrs. Bouchard participated in the discussions in 1994 relating to the sale of the franchises back to the franchisor. Exhibit R-1 is a report dated November 17, 1994, concerning the settlement reached regarding the Appellant's dispute with the franchisor. This report provided to Mr. and Mrs. Bouchard by their solicitor explained the final agreements that were enclosed with the report.
8 Exhibit R-2 is the purchase agreement agreed upon by the parties thereto. It was drafted by the franchisor's solicitors and accepted by the Appellant on October 2, 1994. It states that the purchase price was in payment for the inventory and equipment as follows:
We are writing to set out the terms upon which All Pet Enterprises Ltd. (“All Pet”) will purchase the Pet Food Plus franchises at 2179 Ogilvie Road, Gloucester, Ontario and at Northside Road, Nepean, Ontario.
All Pet will purchase the Pet Food Plus businesses as carried on at those locations as going concerns. The purchased assets and the price to be paid for them are as follows:1. All inventory of merchandise located on the premises and used in the businesses to be valued on the same basis as when you purchased the businesses in 1992.
2. Equipment and leasehold improvements - $20,000.00 for each location being the amount paid for the equipment and leaseholds by you in 1992, subject to the equipment and the leasehold improvements being on the premises and in good condition.
3. The balance of the term of the sublease - by our releasing you from payments due after September 30, 1994.
4. Goodwill and the franchise - no payment.
9 Exhibit R-3, which is entitled “Statement of Adjustments”, shows also that the amount of $67,259.98 was in payment for the inventory of the two stores and that an amount of $40,000 was paid for the equipment of the two stores. Mrs. Bouchard acknowledged that she received this statement of adjustments.
10 Mrs. Bouchard made the entry in the books under the item “loans” and nowhere else. She made it under “loans” because at the time of purchase of the franchises, the Appellant had given two promissory notes. The evidence did not reveal clearly the object of these promissory notes, but it seems that at least in part, they were given for the acquisition of the beginning inventory. The Appellant also had a line of credit with the franchisor for the ongoing inventory. Payment for the inventory on hand, as agreed in the purchase agreement, Exhibit R-2, was made by the cancellation of these outstanding loan debts.
12 Mrs. Bouchard testified that she did not give the statement of adjustments to the tax preparer, nor did she show him the closing agreements. She did not discuss with anyone how the proceeds from the sale should be entered.
13 Exhibit R-8 is a letter dated July 17, 1995, from the Appellant to Revenue Canada requesting that the losses for 1994 be applied to the Appellant's 1991, 1992 and 1993 taxation years.
14 The Appellant's wife denied that she had made the error knowingly. Although she now has difficulty forgiving herself for the error, she also stated that it was not made in circumstances amounting to gross negligence. At the time, she had difficulty thinking and acting correctly because her world had fallen apart. She explained that when the sale of the franchise back to the franchisor took place, she and her husband “were in a tremendous uproar and we were, at one point should have gone bankrupt on, other than the fact that we had our RRSPs that had too much -- could not cash them, we had no -- we were in a terrible state of affairs and when this money finally came in for the inventory was in December when it was finalised and we were both under a doctor's care and both on tranquillisers and whatever, I made this entry in the books and I made it to the loan that we had with the franchisor and the inventory and I looked at my entry yesterday and it's a totally ridiculous entry and it wasn't done correctly.”
15 Mr. Daniel Rivet testified on behalf of the Minister. He performed the audit on Mr. Bouchard's income tax return for the 1994 taxation year. He explained that the Minister felt that it was appropriate to impose a penalty in this case because Mrs. Bouchard realized that the business losses were fairly high, but as she was fed up with the business, she put everything in a box and stored it in her garage and forgot about the whole thing. The Minister assumed that with her accounting background she knew or should have known that the $67,000 had not been properly recorded.
Analysis
16 Subsection 163(2) of the Act provides:
163(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 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 of the greater of $100 and 50% of the total of...
17 Subsection 163(2.1) of the Act deems the taxable income reported by the taxpayer not to be less than nil for the purpose of calculating the penalty under subsection 163(2). Penalties may be imposed under subsection 163(2) of the Act in respect of a taxation year even where there is no tax payable. Christie, A.C.J.T.C.C. pointed this out in Chopp v. Minister of National Revenue (1987), 87 D.T.C. 374 (T.C.C.), at 376 , where he stated that:
...penalties of the kind mentioned can be assessed even if no tax is payable in a taxation year provided, of course, that the essential requirements of subsection 163(2) are met. This rule is understandable. For obvious reasons Parliament desires that, in the preparation of their self-assessments under section 150 of the Act, taxpayers shall not knowingly or in a grossly negligent manner be involved in the making of false statements or omissions. Conduct of this kind attracts penalties per se notwithstanding that there is no liability for tax in a particular taxation year because for example, losses are carried over from another year.
18 Counsel for the Respondent referred the Court to decisions of this Court in which there had been negligent reliance on an agent. In Pratt v. R., [1995] 2 C.T.C. 2900 (T.C.C.), at 2905, Christie, A.C.J.T.C.C. dealt with the issue of delegation of responsibility with respect to penalties. He stated:
It strikes me that if a taxpayer signs a return of income that is filed with the Minister which contains false statements, he or she is not entitled to be exonerated from a penalty under subsection 163(2) of the Act that is imposed on the ground of gross negligence by simply alleging total prior abdication of responsibility for the return in favour of someone else. Delegation of the duty imposed on the taxpayers under the Act to file honest returns is not a road of escape from liability to penalties under subsection 163(2) of the Act. This is subject to the qualification that the result might be different if evidence is adduced indicating that at the relevant time the taxpayer was unable by reason of some disability to exercise a modicum of responsibility and intelligence with reference to the income tax return giving rise to the imposition of the penalty....
19 In Nieto v. Minister of National Revenue (1985), 85 D.T.C. 365 (T.C.C.), Cardin, T.C.C.J., distinguishes the conduct of taxpayers who acted reasonably in relying on their agents and the conduct of taxpayers who acted negligently in relying on their agents. I quote from page 369:
In these three cases, as well as in the decision of Bonner J. of the Tax Court of Canada in David I Guttman v. The Minister of National Revenue, 79 D.T.C. 243(also cited by the appellant), the principle set out by Cattanach J. in Udell (supra) was applied since the evidence was unable to establish that the taxpayers were aware or that they might even have suspected that their respective agents had committed errors in preparing their tax returns. The taxpayers therefore could not have participated in, assented to or acquiesced in the false statements or omissions in their returns. Having found no gross negligence on the part of the taxpayers, with respect to the preparation of the returns, the Courts were not able to conclude that the agents' errors could in any way have been attributed to the taxpayers personally, as required under s. 163(2).
However, the principle stated by Cattanach J. in Udell (supra) in no way changes the statutory obligation of every taxpayer to file or have an agent file an accurate income tax return.The taxpayer has the fundamental responsibility to ensure that the return filed on his behalf is as accurate as possible — an obligation which the taxpayer, in my view, can easily fulfil. The converse of the principle stated in Udell (supra) is equally valid —when a taxpayer knowingly but tacitly accepts omissions or errors committed by a competent or incompetent agent, or suspecting that his return is incorrect, does not bother to check and clarify it, he is obviously not meeting his responsibility to file or arrange for the filing of accurate returns. That would surely be gross negligence on his part. (Emphasis added)
20 Counsel for the Respondent referred to the decision of Strayer, J. (as he then was) in Venne v. R. (1984), 84 D.T.C. 6247 (Fed. T.D.), at 6256 , where he set out his understanding of the meaning of gross negligence in the context of subsection 163(2) of the Act:
...“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.
Conclusion
21 I am unfortunately of the view that the evidence shows that the Appellant's wife acted intentionally in not revealing all the pertinent facts to the tax preparer. She gave him the entries that she had done without showing him any of the closing agreements. It is even unclear whether she told him that the business had been sold. She cited her inexperience in closing a business but she did not ask for anyone else's advice. She also mentioned her husband's and her state of panic. I accept that a state of panic might disturb the mind. But panic will last for a few weeks and usually there will be a request for assistance. There was no request for assistance in this case. The Appellant's wife did nothing from the time of filing the income tax return to the time of the Minister's audit. She had time to pull herself together but instead, as late as July 17, 1995, she prepared a letter for the Appellant's signature requesting that the losses be applied to the Appellant's previous years.
22 The Appellant relied entirely on his wife's advice and it is not indicated in his appeal that he had been deceived or misled by her actions. The business was run as a family business and the Appellant accepted that his wife's action would bind him.
23 The only issue in this appeal is whether the Appellant acted knowingly or under circumstances amounting to gross negligence in the making of a false statement or omission in his return filed for the 1994 taxation year. Since I have found that the Appellant has acted intentionally for the reasons stated above, the appeal is dismissed.
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