Citation: 2012 TCC 295
Date: 20120815
Docket: 2011-555(IT)G
BETWEEN:
COLIN J. HINE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered on July 5, 2012 by conference
call)
and REASONS FOR DISMISSING APPELLANT’S
MOTION FOR ENHANCED COSTS
Hershfield J.
[1] The Appellant, Mr. Colin J. Hine, failed to
report $157,965 in business income on his 2006 income tax return. He was
assessed accordingly and, as well, the Minister of National Revenue (the “Minister”)
imposed the gross negligence penalty provided for in subsection 163(2) of the Income
Tax Act (the “Act”).
Only the gross negligence penalty is at issue in this appeal.
[2] Three witnesses
testified at the hearing: the Appellant, his common-law partner (spouse), and a former employer of
his spouse. Aside from having to assess the weight to be given to self-serving
testimony in the case of the Appellant and his spouse, I found them all to be
forthright and credible witnesses.
Background
[3] The Appellant worked as a general
contractor since the late 1990s. In 2005, the Appellant embarked on a new
business venture: purchasing a house, renovating it and selling it (“flipping
houses”). The Appellant completed much of the renovations himself but did hire
subcontractors as well.
[4] The first property flipped by the Appellant
was referred to at the hearing as the Tedwyn property which was purchased in
February 2005 and sold for a profit in June of the same year. Subsequently, in
August 2005, the Appellant purchased a second property referred to at the
hearing as the Greyrock property. The Greyrock property was sold in April 2006.
Also in April 2006, there was a third property purchased. It was referred to at
the hearing as the Pinhey property. The underreported business income is
attributed solely to the sale of the Greyrock property.
[5] I note, at this
point, that the Appellant never received any funds from the sale of the
Greyrock property. The proceeds went into his lawyer’s trust account. The
lawyer applied the proceeds received from the sale of the Greyrock property to
the purchase of the Pinhey
property. The lawyer’s trust account ledger statement (Exhibit A-1, Tab 4) shows
the closing receipt from the purchaser of the Greyrock property as $161,035.12, which is $157,965 less than the
actual sale price of $319,000. Although the lawyer did not testify, I have no
reason not to believe my understanding of the testimony at the hearing.
Specifically, that testimony was that the difference between the sale price receipt
shown in the lawyer’s statement and the actual sale price was the amount of the
mortgage encumbrance on the Greyrock property that would have been paid to the mortgagee. In this respect the statement
was said to be in error.
[6] The Appellant’s
spouse, who prepared the Appellant’s business records and tax returns,
testified that she did not receive the lawyer’s trust account statement until a
few days before the April 30, 2007 filing deadline for the Appellant’s 2006
taxation year. She relied on the statement as effectively showing the proper net
reportable amount for the sale of the Greyrock property. This was consistent,
she thought, with her understanding, based on a conversation with the Canada
Revenue Agency (the “CRA”), that the mortgage payments reduced the taxable
gain.
[7] The Appellant’s spouse, who I should
identify as Ms. Diane Prevost, has a background in financial accounting. In
addition to her full time job with the federal government, she manages the
Appellant’s business records and prepares his tax returns for the Appellant.
Ms. Prevost’s previous manager (since retired), Mr. Bruce Shorkey, testified
that Ms. Prevost was an organized, meticulous and diligent worker. He had no reservations
about her skill set in accounting and financial management and her honesty and
integrity. There is also evidence that Ms. Prevost received an award
recognizing her effectiveness and efficiency in the performance of her duties.
[8] In her testimony, she testified that she
had been doing the Appellant’s bookkeeping and tax returns for several years
prior to 2005. When the Appellant first embarked on this new business in 2005,
she had called the CRA multiple times to determine how to report the income
generated. The Appellant and Ms. Prevost also met with an accountant or
business advisor from the Business Bureau of City Hall, in addition to asking
other professionals such as their real estate agent’s accountant. However, most
people were unable to help. This is understandable, in my view, as the
questions would necessarily lead to ones directed at inventory versus capital
property questions. Direct and categorical answers to such questions might be
difficult to obtain without some recognition of grey areas depending on the
facts presented on a case by case basis. Still, her persistence paid off and
she finally was able to talk to a CRA agent, who she identified by first name.
The CRA officer confirmed that the activity described was trading in inventory
properties and that the gains were business income. The CRA agent reviewed the
expenses related to this type of business and described the expenses that could
be deducted in the calculation of profit. Ms. Prevost made notes of the
conversation contemporaneous with its occurrence and referring to those notes
gave evidence of what she was told.
[9] The Appellant relied completely on his
spouse to keep proper records and prepare his returns. For each of the houses,
the Appellant kept a separate envelope with all the receipts, and other
documents relating to that project, in them. His spouse would enter everything
onto an excel spreadsheet that she had programmed on their home computer. The
excel spreadsheets detailed all the income and expenses and transactions
meticulously. Using this data she prepared both GST and income tax returns.
There were no problems with any of the prior years including 2005 when the gain
on the Tedwyn property was properly reported.
[10] The $157,965 of unreported business income in
2006 stems from the fact that the Appellant’s spouse had, according to her
records, included in the cost of the Greyrock property the total purchase price
which included the portion that was financed by way of a loan secured by a
mortgage on the property. She also used the net proceeds on the sale, which did
not include the amount applied to retire the mortgage, as shown on the lawyer’s
trust statement as the closing receipt on the sale. The net effect of this was that
she deducted the mortgage amount twice in computing the income from this sale.
This, in turn, created a loss in respect of the overall business operations of
the Appellant for the year in the amount of $131, 653.
[11] Ms. Prevost testified that this was an
innocent mistake exacerbated by the fact that she had to chase their lawyer for
months to get the paperwork, receiving it only a couple of days prior to her
having to file the Appellant’s income tax return. The rush to avoid any late
filing penalties contributed to the error.
[12] She admitted, however,
that she knew there was a sizable gain on the sale of the Greyrock property and could see that the large loss
she was reporting did not reflect that gain. However, she would not acknowledge
that it struck her as a discrepancy that should have alerted her to having made
a misstatement. She knew the Appellant’s business and earnings and had reported
the profit on the Tedwyn property properly. However, she maintained still that she thought they were in a loss
position for tax purposes. This impression arose from a combination of factors:
not having seen any money from the sale of the Greyrock property; having rolled
money from that sale into the Pinhey property; and, being confused about the
mortgage deduction that she thought was dealt with in the lawyer’s trust
account statement which she received just days before having to file the
return, leaving no time to consider the need to clarify the statement. She
thought, at the time, since the mortgage is deductible, she simply would not
deduct the mortgage as a separate expense and as such the numbers would still
work out to the same result. That is to say, she did not appreciate until
discussions with the CRA arising from an audit that she in effect deducted the
mortgage amount twice by its inclusion in the cost of the property.
[13] It is noteworthy that
Ms. Prevost testified that the
audit of
the Appellant’s 2006 taxation year started in April 2008 and in spite of her total
cooperation, a ready acknowledgment of her mistake and assurances by the CRA that
there would be no penalties, there was a long delay in the processing of the reassessment
which was issued, with penalties, in June 2009. The tax arising from the
reassessment was less than $5,200 and the gross negligence penalty was $28,111.
Issue
[14] The issue here is whether the Minister is justified in
applying the gross negligence penalty pursuant to subsection 163(2) under the
circumstances.
Respondent’s Argument
[15] The Respondent relies on the following
cases: 1) Lacroix v. The Queen, 2008 FCA 241; 2) Zhou v. The Queen,
2006 FCA 211; 3) Panini v. The Queen, 2006 FCA 224; 4) Venne v. The
Queen, [1984] C.T.C. 223 (F.C.T.D.); 5) Labow v. The Queen, 2010 TCC
408; 6) Hougassian v. The Queen, 2007 TCC 293; and 7) Brygman v.
Minister of National Revenue, [1979] C.T.C. 3117 (Tax Review Board).
[16] I will consider these
authorities as necessary in my analysis. They were discussed at the hearing as
Respondent’s counsel felt necessary. They are, needless to say, authorities
whose facts and findings are said to support the Respondent’s position that the Minister has discharged the burden placed
on the Crown by the Act to warrant the penalty being imposed.
[17] Respondent’s counsel argues that the loss
in 2006 is substantial and stands in sharp contrast against the previous year
and he submits that it is hard to accept the assertion of an innocent mistake in
2006 given that the Appellant’s spouse was able to file his 2005 tax return
correctly. They both knew they had a large gain in 2006 and reporting a large
loss should have, must have, alerted Mr. Hine and/or Ms. Prevost that there was
something wrong. They acknowledged in testimony that they knew they had a very
profitable year in 2006 and that the very profitable sale of the Greyrock property was a transaction that you do not forget –
it “stays with you”.
[18] Also, when 2005 and 2006 are compared, what
transpired in each of the two years is relatively the same. In 2005, two houses
were purchased, but only one was sold. Similarly, in 2006, the Greyrock
property was sold and another property was purchased but again was not sold in
2006. The 2006 sale was even more profitable than 2005. Yet, the 2005 profit
was properly reported while in reporting a similar more profitable transaction
the next year, they reported a significant loss. This could not be innocent –
they either knew they were misrepresenting the income from the sale of the Greyrock
property, ought to have known, or, wilfully turned a blind eye to circumstances
that demanded further clarification, if not correction.
[19] It is argued that while Mr. Hine may have relied on Ms. Prevost,
he needs to take responsibility. He knew his affairs and he knew he had a good
year in 2006. Further, this is not complicated tax planning. The Canadian tax
system is a self-assessing system; if one person does not pay their fair share,
then someone else will be paying for it. That Mr. Hine’s spouse was meticulous
in her record keeping raises a red flag in this case. The import of
Respondent’s counsel’s point is that Ms. Prevost’s spreadsheet reporting for
2006, unlike that for 2005, does not reflect the proceeds of sale. How can such
a meticulous person not see that the difference in the way almost identical
events are recorded will lead to a false statement on a tax return? This adds
grave doubt as to the incredulous assertions that this was an innocent mistake.
[20] In conclusion, the Respondent submits that
Mr. Hine was privy to Ms. Prevost’s gross negligence. In the alternative, it is
submitted that there was, at least, wilful blindness in this case. That is Mr.
Hine was wilfully blind for not further inquiring into the loss. The big
picture is that they made a profit in 2006, and it should have been common
sense that they would not have generated a big loss. While the individuals may
be sympathetic, they knew what they were doing. The gross negligence penalty is
imposed to keep the taxation system together by making taxpayers pay for such
misstatements of their income.
Appellant’s Argument
[21] The Appellant argues that this was a new
venture in 2005 and they tried to be very detailed and organized. They even
started doing their research on how this income was to be reported by phoning
the CRA and the Business Bureau at City Hall. Consequently, they were able to
file the 2005 tax return correctly. How can they have gone from caring so much
in one year to completely not caring in the next, such that it would warrant
the gross negligence penalty?
[22] Also, while the Respondent submits that by
looking at the return, the substantial loss should have jumped out at them, Appellant’s
counsel argued that when looking at the income tax return (Exhibit R-12), the net
income line, line 236, did not show a net loss at all; it was blank suggesting
nil income. Consequently, suspicions aside, no flags would have been raised. Even
the correct tax that was ultimately assessed went from nil, as reported, to only
$5,200. The suggestion is that if the Appellant was looking for red flags he
might not have seen one.
The amount in issue might not have jumped out as does the $131,000 loss shown
elsewhere on the return.
[23] It was argued, as
well, that the trust ledger statement
from their lawyer caused a lot of the confusion. That statement showed sale
receipts net of the mortgage as the total receipts on closing. Ms. Prevost honestly
believed that reporting that amount gave the same result as showing the full
proceeds and deducting the same amount separately.
[24] The import of the
argument is that while hindsight makes matters look obvious, the sale proceeds from the Greyrock
property went to pay the Pinhey property. It did not go through their bank
account. The loss would seem to be attributed to the fact that the money went
to the Pinhey property which was not sold yet. The comparison with the previous
year’s reporting did not jump out at them given the confusion arising from the
last minute receipt of the trust ledger statement which seemed only to confirm
that the mortgage was deductible. The Appellant’s spouse testified that she honestly
believed at the time of filing the subject return that the effect of reporting
the sale proceeds as net of the mortgage as shown on the trust ledger statement
would be the same as reporting the gross sale price less the mortgage which she
thought was deductible. At the time, she did not appreciate in the confusion
that that would create a double deduction of the amount of mortgage financing on
the subject property. As Mr. Shorkey testified, Ms. Prevost had always been
honest and was not someone that would not do her best to pay proper attention
to detail.
[25] It was said that the Court should also consider mitigating
factors as done in Venne. Mr. Hine and Ms. Prevost did not conduct
themselves as if they were deliberately trying to hide income. Their records
were an open book and they cooperated fully with the CRA auditor. As Justice
Strayer (then of the Federal Court Trial Division) said, for the gross
negligence penalty to apply, there must be greater neglect than simply the
failure to use reasonable care. And a reasonable man not noticing a mistake
does not make for gross negligence.
[26] And as Justice
Bowman (as he then was) pointed out in Farm Business Consultants Inc. v. Canada,
1994 CarswellNat 1107, one should be extremely cautious in imposing penalties. As
well, he noted what appears to be true today: it is accepted by this Court in
subsection 163(2) penalty cases, a higher standard of proof is required than a
mere probability of misconduct. The taxpayer should get the benefit of any
doubt. I note here, however, that the validity of employing a higher standard
of proof might arguably be put in doubt given the Supreme Court of Canada’s decision
in F.H. v. McDougall, 2008 SCC 53. In that case the Supreme Court of
Canada made it clear that in civil cases there is only one standard of proof –
namely a balance of probability. That case was not raised by the
Respondent. In fact, the Respondent expressly accepted the standard of proof
expressed in Farm Business Consultants. Still, it might be worth mention
that it strikes me that there are distinctions to be made with respect to the
standard of proof applicable to subsection 163(2). It is arguably a quasi
criminal provision that should be viewed differently and, in any
event, requires that a distinction be made between negligence and gross
negligence. As such, it may be less a question of changing the standard of
proof than changing the focus. The focus is on determining the sufficiency of
evidence to establish whether conduct of an appellant is “gross”. It strikes me
that the subsection 163(2) cases underline little more than the obvious which
is that the Crown needs better evidence to come within the scope of this
penalty provision than it would to establish mere negligence. In that context,
I will not depart from the manner in which this Court has consistently viewed
subsection 163(2) – namely that it requires a greater standard of proof.
[27] In any event, failure
to report a large amount, does
not in itself mean there has been gross negligence as demonstrated in Hyndman
v. R., 2004 TCC 641 and Gallery v. R., 2008 TCC 583. In Hyndman,
Justice Angers held that there was no intentional omission and that there was
no wilful blindness even though the taxpayer failed to make inquiries. In contrast
to that case, Mr. Hine and Ms. Prevost did make many inquiries in this case.
[28] In a case like this
where an appellant relies on a tax preparer it must first be held that there was gross negligence
on the part of the tax preparer. The Appellant submits there was no gross negligence
on the part of Ms. Prevost and even if there was the Appellant submits that an
agent’s gross negligence cannot be attributed to the taxpayer. Reliance is
placed on Findlay v. R., 2000 DTC 6345 (FCA) and Gallery.
[29] The Appellant also cited Down v.
Minister of National Revenue, [1993] 2 C.T.C. 2027 (T.C.C.), as being very
similar to the current case in that it also dealt with the flipping of houses.
In Down, the taxpayer had an accountant prepare his income tax return
and merely signed it when it was done. The taxpayer’s failure to study and
understand his return is merely negligent conduct and not grossly negligent.
Consequently, the penalty pursuant to subsection 163(2) did not apply.
[30] Cases
such as Hougassian relied on by the Crown were distinguished. In that
case, for example, the taxpayer was found not only to be careless (which would
not have been sufficient to warrant imposition of the penalty) but was
indifferent with respect to whether he complied with the Act. It was the
indifference that condemned that taxpayer. No indifference was proven here.
[31] The Appellant seeks
judgment in his favour and if the appeal is allowed asks for the opportunity to
speak to costs.
Analysis
[32] For the reasons below, I would allow the
appeal.
[33] Respondent’s counsel
successfully and competently painted a picture that raised logical suspicions about
whether the Appellant’s spouse and the Appellant himself, knew what they were doing when they
misrepresented the income in the subject year. Based on such logical suspicions
it was submitted that the misrepresentation was knowingly made or that obvious
questions that needed to be asked were purposely not asked. However, I am not
satisfied that those logical suspicions are sufficient to offset the evidence I
have that leads me to believe that Appellant’s counsel’s submissions are
correct. I accept that neither Appellant’s spouse nor the Appellant himself
were indifferent with respect to reporting the Appellant’s income in 2006.
There is sufficient evidence that they meant to be diligent and accurate in the
way they reported the income from the sale of their properties. No indifference
was proven here. A mere probability is not
sufficient. While the suspicions raised are logical
and perhaps not even unreasonably drawn, that is not sufficient in this case. I
accept that an honest confusion existed in this case and that a mistake was
made in the wake of that confusion.
[34] That said, there are
aspects of this case that beg for further comment.
[35] One of the main issues in this case is the
fact that Mr. Hine relied completely on Ms. Prevost to keep the proper records
and to correctly report his income on his tax return. The cases cited by
counsel on both sides dealt with taxpayers and their agents who were
professional tax preparers. The obvious distinctions are: 1) the existence of a
spousal relationship; and 2) Ms. Prevost does not hold herself out as a
professional tax preparer. Therefore, while the cases proffered are helpful,
they do not take into account the unique circumstances of this case.
[36] Before delving into how the analysis should
differ in this case, some brief mention of the cases dealing with taxpayers and
their agents in the context of subsection 163(2) can be made. The relevant
cases cited by the Respondent are: Panini, Hougassian and Brygman;
and by the Appellant are: Findlay, Gallery and Down.
[37] In each of the Respondent’s cases, while
the taxpayer may have relied on his tax preparer, the taxpayer was still found
to be grossly negligent such that the penalty applied. Brygman is a
relatively older case (1979) and was especially critical of the taxpayer
abdicating his responsibility to his accountant in filing an accurate tax
return.
[38] In Panini,
the Federal Court of Appeal upheld the trial judge’s decision to dismiss the
appeal. One of the key factors in finding for the Minister was described at
paragraph 44 where the trial judge’s finding that there could only be one
explanation for the appellants’ failure to discuss the matter with their
accountants, was accepted. That explanation was that they did not want to know
whether taxes were payable in respect of the receipt in question.
[39] I have already
referenced the Respondent’s reliance on Hougassian as well as the factual
distinctions made by the Appellant in respect of that case.
[40] Turning to the cases cited by the
Appellant, these all held that the taxpayers were not grossly negligent. Findlay was an appeal at the Federal Court of Appeal, which discussed whether 1)
the taxpayer was grossly negligent on his own; and 2) could the taxpayer’s
agent’s gross negligence be attributable to the taxpayer. The Court found the
trial judge had misapplied, inter alia, the principles from Udell v.
Minister of National Revenue, (1969), 70 DTC 6019 (Can. Ex. Ct.). The
relevant passage from Udell which was quoted at paragraph 18 in Findlay, in short, says attributing the gross negligence of an agent to a taxpayer involves a deliberate and intentional consciousness on
the part of the principal to the act done. On the facts of that case such
consciousness was lacking in the appellant as he was not privy to the gross
negligence of his accountant. Further, there should be no doubt that the
statute is to be construed so as to give the party sought to be charged with
the penalty, the benefit of the doubt.
[41] Gallery and Down have been previously noted in these
Reasons under the heading “Appellant’s Argument”. Nothing more need be said.
[42] Clearly, all these
cases are fact specific. Critical findings tend to concern whether the taxpayer
had knowledge of the negligence of his tax preparer or whether it was
reasonable to find that the taxpayer should have made further inquiries. Here,
the property flipping business was effectively being carried on by both the
Appellant and his spouse. At least one of the properties mentioned at the
hearing showed both their names on an offer of purchase and sale. That said,
and acknowledging that it is not in issue that it is his business, they each
had distinct roles in the operation of the business. She had full knowledge of
the business while he relied on her keeping proper books and records and
properly preparing his tax returns. In such case, should there be more or less
attribution of her negligence, if any and if gross, to the Appellant?
[43] My view is that the attribution question must be applied
no differently in a case like this than it does when the taxpayer and the tax
preparer are not so closely tied. I say “in a case like this” because I see no
circumstances on the facts of this case that beg for a different answer and
importantly, the Respondent did not argue otherwise.
[44] Applying the normal test as described by the
authorities, I do not find that the
conduct of the Appellant in not questioning the return prepared by his spouse
constituted gross negligence. His confidence in her was justified. His belief
she had reported his income properly was not unreasonable. The circumstances of
this case do not make even blind faith in his wife, unreasonable. Further, while
this finding gives the Appellant the benefit of any doubt, my decision to allow
the appeal is not dependent on it as I have not found his spouse’s actions to
have amounted to gross negligence or wilful blindness. As I said, I have
accepted Ms. Prevost’s testimony that this was a simple mistake.
[45] In making that finding, I have also accepted that the Appellant’s
counsel’s arguments, as I have summarized or portrayed them in these Reasons,
are sound and sufficient to support my allowing the appeal. Ms. Prevost made diligent inquiries and kept diligent records.
The double counting of the mortgage deduction was not recognized by her and given
her confusion and the rushed circumstances relating to the lawyer’s trust
ledger statement I do not find that not making further inquiries before filing
the said return constitutes gross negligence. There was no wilful blindness.
Further, there was full cooperation with the auditor and forthright
acknowledgement and acceptance of the mistake. I have not assessed her as a
person who would deliberately try to hide income or that she suddenly became so
careless in reporting income so as knowingly distorting the true picture.
[46] In conclusion, I
would hold that the Minister was not justified in imposing the gross negligence
penalty pursuant to subsection 163(2) of the Act. I am satisfied that the
Respondent has not met the burden of proof imposed by the Act to warrant
a finding that the Appellant intended to make a false statement or in
circumstance amounting to gross negligence made such a false statement.
[47] Before closing, I
wish to note that there is no express requirement in the Act that the
person who knowingly makes a false statement must intend or understand that the
consequences of making that false statement will result in a tax savings. So, for
example, if I overstate expenses on one line of a return and then effectively
eliminate that line by subtracting it out on another line as, say, a personal
expense, then strictly speaking there has been a misrepresentation in my
return. However, there will be no penalty since there will be no difference
between the tax that would have been payable had the misrepresentation not been
made and the tax payable if the return had been accepted as filed.
[48] Still, if one does
not intend a reduction in tax then it might be harder for the Crown to
establish that the misrepresentation, if not intentional, was made under
circumstances that amount to gross negligence. This aspect of the present case
troubles me.
[49] The misrepresentation
here, made by the Appellant’s spouse in the preparation of the Appellant’s
return, did save some tax. However, it is a relatively small amount compared to
the amount of the imputed tax saved amount against which the penalty is
assessed. The misrepresentation is, on the other hand, a very large amount,
creating a large loss and thereby seemingly creating a “shelter” to protect
large amounts of taxable income in other years by virtue of loss carry-backs
and carry-forwards. However, there is no evidence the losses were ever used in
this way. Although the assessment in question was done relatively quickly there
is no evidence that the Appellant made any attempt to use that shelter. The
Crown’s burden of proof might, arguably, include bringing evidence, if it
exists, that the shelter was more than a simple mistake as shown by other tax
returns such as amended prior years’ returns and/or subsequent years’ returns,
that demonstrate the avarice resulting from the so-called “mistake”. However,
it is possible in this case that any avarice intent, if it existed, would not have
been acted upon given that the subject audit started in April 2008.
[50] That being the case,
I do not draw any inference from the Crown’s failure to bring evidence on this
aspect of this case. However, I simply want to draw attention to the point that
the provision in the Act (subsection 163(2.1)) that deems that reported
income cannot be less than nil is there to ensure that the penalty is assessed as
if the full loss had been available to save tax in the year the false
statement was made. The policy and wisdom of that penalty is not questionable. Setting
up losses that were not incurred by reporting false costs or false proceeds
might well best be prevented by not giving any weight to whether there was any
attempt to use the loss. But surely the absence of evidence that the taxpayer
intended the reduction in tax afforded by the creation of a loss might properly
inform the question of whether the circumstance of the case were such that the
making of the false statements amounted to gross negligence or to turning a
blind eye to the truth of the statement.
[51] Those comments aside,
I have accepted the Appellant’s testimony and that of his spouse that they did
not knowingly make a false statement. The Appellant trusted that the proceeds
of disposition from the sale of the Greyrock property were, for tax purposes, reported
properly. He relied on his wife to prepare his return and I am satisfied that
such reliance in the circumstances of this case did not amount to gross
negligence or wilful blindness.
[52] Accordingly, the
appeal is allowed.
[53] As to costs, a motion
was made by Appellant’s counsel after my delivering my Judgment and Reasons by
conference call, that enhanced or substantial indemnity costs be awarded.
Written submissions on the motion were received.
[54] The basis for the motion
is that an offer to settle the appeal was made in writing on March 12, 2012,
and reliance is placed on paragraph 147(3)(d) of the Tax Court of
Canada Rules (General Procedure). That provision allows the Court
discretion in determining the amount of costs to be awarded to a party involved
in the proceedings. One of a number of factors that the Court may consider in
exercising that discretion is, pursuant to the paragraph relied on by the
Appellant, “any offer of settlement made in writing”.
[55] At issue at the
outset is whether there was in fact an “offer of settlement”. The
correspondence purporting to be an offer of settlement, dated March 12, 2012,
sets out factual submissions and arguments and states that the case for the
assessments of penalties is unsupported by the evidence and should be waived.
The correspondence then offers to settle the matter, without costs, if the
Minister agrees to vary the assessment accordingly. Failing acceptance of the
offer, the correspondence states that solicitor and client costs would be
sought if the Appellant is successful at trial.
[56] The Minister declined
the offer on March 19, 2012. On June 26, 2012 Appellant’s counsel wrote urging
a reconsideration of the Minister’s position and reiterating an intention to
seek solicitor and client costs if the Appellant won at trial.
[57] The Respondent argues
that the essence of the “offer” was to abdicate the appeal. I agree. An “offer”
that the other party to the litigation withdraw in order to avoid a threat of
enhanced costs cannot, in these circumstances, be considered to be an “offer of
settlement”.
[58] Further, and more
importantly, my caveat “in these circumstances”, is meant to underline that
even if the said correspondence might otherwise be considered to be an offer of
settlement, which is dubious,
it was not open here to the Respondent to accept it as such.
[59] It was acknowledged
that the only issue at trial was whether Mr. Hine was grossly negligent. That
question fits into the “yes-no” category described by Justice Stratas in CIBC
World Markets Inc. v. R., 2012 FCA 3. There are no degrees of gross negligence.
Objective considerations supported the Respondent’s view that showing a loss as
opposed to disclosing a substantial gain warranted a hearing to assess the
weight and probability of self-serving evidence.
[60] The assessment at
issue was not a routine imposition of penalties. Indeed, based on the case
presented by Respondent’s counsel, I am satisfied that the assessment was based
on a thoughtful and not unreasonable belief that the Appellant must have known
of the misrepresentation in question. To have “settled” the case as offered by
the Appellant would have been to abdicate the responsibilities imposed on the
Department of Justice. There was, in these circumstances, an impediment to
settlement tantamount to a legal impediment. There is nothing in the authorities,
including my decision in Potash Corporation of Saskatchewan Inc. v. R.,
2012 TCC 235, to suggest otherwise. Determining whether the Appellant’s conduct
in this case was wilful or wonton or grossly negligent could not be conceded in
this case on the basis of what a court was likely to find on a balance of
probability. The objective evidence pointed in a different direction.
[61] As well, I note that
none of the other factors in subsection 147(3) warrant my awarding enhanced
costs in this case. The amount at issue, the tariff versus the fees incurred
and the circumstances of the case are not such to cause me any alarm that a
grave injustice has been suffered by the Appellant in terms of a cost award
governed by the applicable tariff. The law is well settled in this area.
Further, its importance is singular to this appeal and there are no
complexities that warrant special consideration. There was nothing in the time
required by Appellant’s counsel (some 30 hours) that would suggest that the
volume of work was such to create an expectation that an enhanced cost award
would be justified. As to the conduct of the parties, the Respondent did not
require examinations for discovery and the Appellant did not request same. The
Respondent did not oppose the Appellant filing an amended list of documents
some 45 days prior to the hearing. There was nothing denied that ought to have
been admitted. There was no conduct that could, in any way, be described as
inappropriate and the Appellant has not demonstrated any exceptional
circumstance that would justify an enhanced cost award.
[62] Accordingly, the
Motion for enhanced costs is dismissed.
Signed at Winnipeg, Manitoba this 15th day of August 2012.
"J.E. Hershfield"
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