The Queen v. Taylor, 84 DTC 6459, [1984] C.T.C 436 (FCTD)

Rouleau, J:—This is an application of a special case for the specific purpose of deciding two questions:

1. Does the burden imposed upon the Minister of National Revenue pursuant to subsection 163(3) of the Income Tax Act, namely “the burden of establishing the facts justifying the assessment of the penalty”, include as was found by the Tax Review Board, the burden of establishing the facts justifying the assessment of (the underlying income and) tax upon which the penalty was based? [ie Since the Minister must prove the amounts (the constituent elements) evaded to justify the penalty, why should the burden shift to the taxpayer for the imposition of the tax pursuant to an assessment under section 152, when the same elements are involved. I

2. To what extent does the burden imposed by subsection 163(3) of the Act as so determined in question 1, affect the order of presentation of evidence in a tax appeal. Specifically upon whom is the obligation to first adduce evidence and, in this regard, in what issues need evidence be led?

An agreed statement of facts was filed with the Court to determine the two questions. Particulars as to the amounts in question are not relevant but a brief summary is necessary to explain the circumstances giving rise to these questions.

The defendant taxpayer was in the scrap metal business and in computing his income for the years 1974 and 1975, certain amounts of sales were reported, together with expenses related thereto. The Minister reassessed the defendant in respect of both taxation years, alleging unreported income in amounts of approximately $30,000 and $20,000, respectively, and assessed penalties in respect thereof, pursuant to subsection 163(2) of the Act. The defendant objected to the reassessments by filing notices of objection and appealed the assessments of tax and penalties. These matters came before the Tax Review Board in October 1980.

Counsel for the Minister of National Revenue commenced and adduced evidence in support of the reassessments. The taxpayer did not call any evidence and the decision was as follows:

(The) prima facie assumption (that the findings or assumptions of fact made by the Minister on assessment as to the quantum of revenue and expenses are factually correct) is made in an appeal where the sole issue is liability for tax . . .

The common law rule as to burden or onus of proof as laid down in (the case of Anderson Logging Co v The King and Johnston v MNR) is displaced in the case where the penalty has been levied under section 163. The effect of the plain words of subsec tion 163(3) is to remove from the taxpayer and place on the Minister the burden of proof of those facts which are constituent elements of the penalty levied and in issue in an appeal . . .

The Respondent’s counsel argued that any failure to discharge the burden imposed on the Minister by subsection 163(3) can entitle the Appellant to relief only from penalties . . .

The words of 163(3) are, I think, inconsistent with the assertion that Parliament intended to limit the burden placed on the Minister to some, but not all, of the facts which subsection 163(2) makes necessary to the lawful imposition of a penalty. It cannot, I think, be said that subsection 163(3) related only to those facts which tend to show the existence of knowledge or circumstances amounting to gross negligence. The burden which is the subject of subsection 163(3) is, according to the plain words employed in the Act, the burden of establishing the facts justifying the assessment of the penalty and not just some of those facts.

I can find nothing in the words of subsection 163(3) which suggests that in an appeal from an assessment of tax and penalty the burden on any one single issue of fact was intended to rest simultaneously on both parties with the result that the fact can, in some mysterious way, be found to exist for purposes of liability to tax, but not to exist for purposes of liability to penalty.

It is submitted by the Minister of National Revenue that the onus or burden of proof required to overturn the assessment for tax only is on the taxpayer. He argues that prior to the enactment of subsection 163(3) of the Act, the onus was on the taxpayer to establish that both the assessment of penalty as well as the assessment for tax were in error; as a result of the amendment, the burden of proof, only with respect to penalties, is on the Minister.

On question 2, as to who should begin the proceedings in adducing evidence, it is submitted that when the taxpayer appeals both the assessment of tax and the assessment of penalty, the onus with respect to the assessment of tax lies on the taxpayer and the onus with respect to the assessment of penalties lies on the Minister and, in accordance with the general rule of civil procedure at common law, the appellant taxpayer has the obligation to begin.

The taxpayer argues that since the Act imposes the burden of proof on the Minister when imposing penalties, he must satisfy the Court that the taxpayer wilfully and knowingly was grossly negligent in filing his return in order to impose the penalty. The Minister, having thus assumed the proof of these facts, common to the imposition of the penalty and the assessment of taxes, is required to establish in evidence the very facts that otherwise are presumed in his favour (in imposing tax only), therefore the evidence should apply as well to the assessment of tax. In other words, the common facts or elements assumed by the Minister in making the assessment are not presumed against the taxpayer in the case of penalty and therefore they should not be in the assessment of the tax itself.

The taxpayer argues that in cases where the Minister has assessed the tax and imposed a penalty, the burden is on the Minister for the imposition of the penalty. Since he must establish facts common to both the penalty and the assessment of tax, the Minister should therefore begin.

Subsection 163(3) of the Income Tax Act states as follows:

(3) Burden of proof in respect of penalties.—Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

When only an assessment for tax is imposed, it is not disputed that the Minister of National Revenue is authorized under section 152 of the Income Tax Act to assess tax, interest and penalties, if any. I am satisfied that, by virtue of subsection 152(8) of the Act, the assessment is valid and binding, subject of course to variation on appeal. Subsection 152(8) reads as follows:

(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission therein or in any proceeding under this Act relating thereto.

As I have stated, the assessment shall remain valid until it is found to be erroneous by the Court. This principle is enunciated in Morch v MNR, [1949] Ex CR 327. On an appeal, the burden is on the taxpayer to overturn the assessment. It is deemed valid because of subsection 152(8) of the Act; it is the taxpayer’s appeal and he must therefore show that the impeached assessment is an assessment which ought not to have been made; and it follows that the facts, almost to exclusivity, are within the taxpayer’s knowledge. This basic principle dates back to 1925 as was clearly set out in the case of Anderson Logging v The King [1925] SCR 45 at 50 which states as follows:

First, as to the contention of the point of onus. If, on an appeal to the judge of the Court of Revision, it appears that, on the true facts, the application of the pertinent enactment is doubtful, it would, on principle, seem that the Crown must fail. That seems to be necessarily involved in the principle according to which statutes imposing a burden upon the subject have, by inveterate practice, been interpreted and administered. But, as concerns the inquiry into the facts, the appellant is in the same position as any other appellant. He must show that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference. The appellant may adduce facts constituting a prima facie case which remains unanswered; but in considering whether this has been done it is important not to forget, if it be so, that the facts are, in a special degree if not exclusively, within the appellant’s cognizance; although this last is a consideration which, for obvious reasons, must not be pressed too far.

Prior to the enactment of subsection 163(3) of the Income Tax Act, the onus was on the taxpayer to establish not only that the assessment, but also, the penalty was in error. Following the amendment, the burden with respect to any penalty assessed shifted to the Minister.

It is submitted by counsel for the Minister of National Revenue that the burden imposed by subsection 163(3) applies exclusively to penalties. In cases concerning tax evasion, the Minister must show that a false statement was made knowingly or under circumstances amounting to gross negligence.

He argues that the assessment of tax and the assessment of penalties are separate and distinct and bring about different burdens. His authority for the proposition is the case of Elchuk v MNR, [1970] Ex CR 493. This was an appeal from a decision of the Tax Appeal Board dismissing the taxpayer’s appeal from a reassessment made against him. The Minister cross-appealed stating that he was justified under the Act in assessing penalties against the appellant. The appellant’s appeal and the Minister’s cross-appeal were both dismissed. Jackett, then President of the Court, found the evidence regarding the appellant’s reassessment unconvincing and was satisfied that the figures used by the Minister were accurate. On the other hand, he also found that the penalties could not be imposed since the proof necessary to establish a penalty was not properly made.

It is submitted by the Minister that subsection 163(3) is not of general application but applies only to the assessment of penalty; that it has no application with respect to the assessment of tax. Parliament purposely excluded the phrase “as- sessment of tax” from the provision. Accordingly he submits that subsection 163(3) does not affect the deemed validity of the assessment of tax. In order for a penalty to be assessed pursuant to this section, there must be: (1) liability for tax;

(2) a failure to file a return, or the making of a false statement or omission; (3) the intent of knowingly or grossly having withheld information.

In other words, states the Minister, the Act requires him to prove the amount of the tax evaded and to show that the taxpayer had knowledge or was grossly negligent in reporting his income to support any assessment of penalty. This does not affect the onus on the taxpayer to establish the facts to show that the assessment of the tax is erroneous. He submits that each party has a burden and that the failure by either party to satisfy the burden placed upon them could result in a finding against them on that particular issue as Jackett did in Elchuk v MNR, (supra), and this result should prevail even when the facts are common to both assessments.

I am satisfied that subsection 163(3) is not of general application and arises only in cases of the imposition of a penalty. Parliament, when it enacted this subsection, purposely excluded the phrase “assessment of tax” from the provision. It was not their intention to limit the deemed validity of the assessment of tax imposed under section 152 or they would have so stated. The jurisprudence and the Act are quite clear, the burden is on the taxpayer when there is an assessment with respect to the tax. If one accepts the submissions of the taxpayer, that if the Minister is not successful in imposing a penalty based on a finding of fact with respect to moneys owing, then the same finding should apply to the assessment of tax only. Though there is some validity to the argument, I disagree with the submission and the finding of the Tax Review Board. In Canada, we are dealing with a taxation system wherein the knowledge and the facts, almost to exclusivity, are possessed by the taxpayer. It is his responsibility to disclose all of his income. In a case of penalty, the Minister does not only have the burden of proving the amounts, he has the additional burden of establishing the facts that lead to gross negligence.

I can readily imagine a situation involving the imposition of a penalty where three different and distinct constituent elements may or may not be before the Court: amounts may not be in evidence; there may be some confusion with respect to the amounts; or, the Minister may be incapable of showing that the false statements were made knowingly or under circumstances amounting to gross negligence. In the event that the Court makes a finding that the onus has not been discharged, because of a sufficient doubt having been created in the mind of the Court, it would follow that no penalty could be imposed. It may well be that the constituent element upon which they have refused to allow the imposition of the penalty may be that the Minister was unable to satisfy it that the taxpayer was knowingly grossly negligent; or, the evidence with respect to the amounts claimed caused considerable confusion. Since no penalty could then be imposed, as I have already stated, it would follow that the assessment under section 152 would fail because of a constituent element under subsection 163(3) not having been proved. The payment of tax would be avoided. The validity of the assessment for tax under section 152 would be set aside without it having been particularly challenged on appeal and varied under subsection 152(8).

I do not accept that a finding against the Minister under subsection 163(2), or more particularly under the onus subsection 163(3), could have been intended by Parliament to eliminate the duty imposed on a taxpayer under section 152. Subsection 152(8) is quite clear and precise, “. . . subject to being varied or vacated on an objection or appeal to this Part . . .”. A finding under subsection 163(3) is not a finding under “this Part”, subsection 152(8).

On the procedural question, it was submitted by the Minister that tax appeals are civil proceedings, there being no provisions for examination of discovery, and since the facts are within the almost exclusive knowledge of the taxpayer, he should be the first to adduce evidence. It was argued by the taxpayer that because of the onus created by section 163, and the imposition of penalties, this was tantamount to quasi-criminal proceedings and the Minister should begin. I disagree and I choose to follow the reasoning of Lord Widgery, CJ who dealt with taxation and fraud in the case of Regina v Special Commissioners of Income Tax (ex parte Martin) (1971), 48 TC 1 (QB Div)aff 48 TC 9(CA). At 7 he states:

The other alternative ground upon which Mr Marcus Jones says the Commissioners were wrong in this case is that he says that these proceedings are quasi-criminal in nature. From that he draws the conclusion, and asks us to draw the conclusion, that the election rule should not apply to them. If the phrase “quasi-criminal proceedings” is given a very wide meaning it may be that these proceedings could be embraced within it. It is a flexible expression not precisely defined, and it may not be wholly inappropriate if one gave it a sufficiently wide meaning to use it in that context. But when one gets down to the fact of the matter it is quite clear that penalties which can be exacted on proof of fraud or wilful default do not spring from any criminal offence. The Acts do not provide that the taxpayer guilty of fraud or wilful default shall commit an offence and shall be punished as such. It is merely provided that financial penalties may be exacted, and that these penalties may be recovered in civil proceedings in the High Court. There is not so far, in my judgment, any close relationship between such proceedings and criminal proceedings. Of course any proceedings involving a penalty are in some measure penal, but it seems to me that these proceedings are no nearer to the criminal law and no better qualified for the description of “quasi-criminal proceedings” than would be an action to recover a penalty under a contract, or an action to recover exemplary damages in a suit for defamation . . .

When there is an onus on each party, the taxpayer shall begin first. This was the ruling by the Privy Council in the case of Arumugam Pillai v Director General of Inland Revenue, [1971] STC 156 (PC). In addition, US cases of similar nature, though not binding, but persuasive, follow this procedure and in particular the Minister referred to the case of Snell Isle Incorporated v Commissioner of Internal Revenue (1937), 9 F (2d) 481 (United States Court of Appeal) cert den 302 US 734 (United States Supreme Court).

I am satisfied that the taxpayer is a plaintiff, even though he is called an appellant (defendant). Income tax disputes taken before the Federal Court are by way of trial de novo and, pursuant to Rule 494 of this Court, the plaintiff begins:

The plaintiff shall begin to adduce evidence unless otherwise ordered.

The answers to the two questions are as follows:

1. The burden under subsection 163(3) of the Income Tax Act, namely, “the burden of establishing the facts justifying the assessment of penalty” imposed on the Minister of National Revenue does not relieve the taxpayer of the burden imposed pursuant to an assessment under section 152 when the same elements are involved in the event that the taxpayer has been reassessed under section 152 of the Act and penalties imposed pursuant to section 163.

2. The obligation to first adduce evidence in a tax appeal rests with the taxpayer since he is the plaintiff and almost to exclusivity possesses the facts.

Costs to the plaintiff, Her Majesty the Queen.