The Queen v. Columbia Enterprises Ltd., 83 DTC 5247, [1983] CTC 204 (FCA)

Cowan, DJ:—This is an appeal by Her Majesty the Queen from a judgment of the Trial Division dismissing an appeal from a decision of the Tax Review Board which disallowed a penalty of $5,234.35 imposed by the Minister of National Revenue upon the respondent taxpayer for its 1973 taxation year pursuant to subsection 163(2) of the Income Tax Act.

Subsection 163(2), at the relevant time, read:

(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 statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

The respondent taxpayer is a company incorporated in 1950 under the laws of the Province of British Columbia and has a fiscal year end of December 31. Its income tax returns must be filed on or before June 30 of each succeeding year.

In December of 1972 the respondent acquired from the estate of Butt Lim rental property at 122 East Pender Street in the City of Vancouver for $120,000. In the 1973 taxation year the respondent earned rental income of $4,280 from the property and in March of 1973 it sold the property for $230,000.

The shareholders of the respondent are five brothers, sons of Butt Lim. The respondent is a holding company for assets it received from Butt Lim. The brothers had their own professions or businesses. On Lim, one of the brothers, is a mechanical engineer, employed as such by another company, and he had the responsibility for maintaining the financial records of the respondent, including a synoptic journal. In that journal were recorded all financial matters including those relating to the sale of the Pender Street property.

The corporation income tax return of the respondent with respect to its taxation year ended December 31, 1973, is dated June 28, 1974, and was filed on or before June 30, 1974. It contained a statement of affairs as at December 31, 1973 and a statement of profit and loss for the year ended December 31, 1973, including rental income from two properties other than the Pender Street property. The aggregate of the net rental income and of investment income amounting to $15,675.13 was reduced by the same amount charged as salaries so that the return showed no taxable income for the year 1973.

Neither the statement of affairs nor the schedules contained anything to show that the respondent had acquired the Pender Street property, or that it had disposed of it, or that it had received the rental income of $4,820 in respect of that property or any other property. The return did not contain any answer to the question “Has the corporation realized any capital gains (including capital gains dividends) or incurred any capital losses?”

The Minister of National Revenue reassessed the respondent on December 24, 1976, with respect to its 1973 taxation year. He added to the net income reported the unreported rental income of $4,820 and an unreported taxable capital gain of $50,875 and assessed income tax of $34,441.72 and levied a penalty of $5,234.35 under subsection 163(2) of the Income Tax Act.

The respondent filed a notice of objection to the reassessment but only with respect to the penalty. The notice read:

Facts.

The company inadvertently did not report the capital gain on a building that it was bequested by the shareholder’s late mother. It was through confusion, family strife and shock from the loss of the mother that caused this.

Reason for objection.

It is the belief of the company that the department will realize when it studies the situation that the penalty should not apply in the circumstances.

The Minister confirmed the assessment but on appeal to the Tax Appeal Board the respondent’s appeal was allowed and the assessment was varied by deleting the penalty imposed.

The appeal to the Trial Division was dismissed and the Crown now appeals.

There is no dispute as to the facts in this case. Mr Paul Lee, a chartered accountant, had been the respondent’s accountant since 1959. He had knowledge of its general operations and of its financial affairs. He was asked by On Lim, President of the respondent, to prepare the respondent’s income tax return for 1973 and was given by Mr Lim all the records pertaining to the year. He had all the documents relating to the sale of the Pender Street property and to the rental income received throughout the year. He was briefed on what was going on and sat in on conferences with the solicitor for the respondent after the sale. Mr Lee considered that he had all the necessary information. He knew that there was a capital gain on sale of the Pender Street property.

Mr Lee worked on the capital gain information and on the information with regard to the rental income but he did not include any of that information in the income tax return for the year. He gave as his reason for not disclosing this information that he had difficulty in determining the adjusted cost of the Pender Street property, that it had been acquired in a non-arm’s length transaction and that he was not sure which was the most advantageous method of reporting in order to minimize the impact of income tax. He admitted that he knew that there would be a taxable capital gain from the disposition of the property.

Mr Lee said that he did not have any difficulty with the rental income from the property but said that he did not include it in the return as he wanted to include it all at the same time as it all pertained to the Pender Street property.

Mr Lee said that he filed the return before June 30th, 1974, in order to have it filed on time, and that he intended at all times to file an amended return with the information on the capital gain and the rental income when he came to a proper conclusion. In fact no amended return was ever filed by or on behalf of the respondent.

The form of certification stating that the return including the accompanying schedules and statements had been examined by the person certifying them and was a true, correct and complete return, was completed by having typed in: “I, On Lim, of Vancouver, B.C., am an authorized signing officer of the Corporation” and by being signed “On Lim pp”.

Mr Lee’s evidence was to the effect that Mr On Lim did not sign the return and that his name was placed there by a member of Mr Lee’s staff. Mr Lim had authorized Mr Lee to sign the return for him. Mr Lee had prepared the income tax returns of the Respondent since 1959 and those returns were signed on behalf of the company by someone in his office.

Mr Lee did not tell Mr On Lim that he was going to leave out of the return some items of income nor did he send to Mr Lim a copy of the return after he had filed it. It had been his practice in other years to send to the company a copy of the return some time after it had been filed.

Mr On Lim’s evidence was to the effect that he gave all pertinent information to Mr Lee in the spring of 1974 and that he did not receive a copy of the return filed on behalf of the company with respect to the year 1973. He was concerned about payment of the capital gains tax, which he always assumed would have to be paid, and from time to time he asked Mr Lee how much tax was payable by the company on the capital gains. Lee never told him that there might be a procedure adopted which would result in no tax payable by the company. Mr Lee merely told him that he needed more time to sort it out so that he could determine the amount of tax payable. Mr Lim’s notes indicated that as late as August 6, 1974, he was asking Mr Lee about the capital gains tax.

Mr Lim said that he never asked Mr Lee for a copy of the return, that Mr Lee usually gave it to him without his asking. He said that Lee had previously done a pretty good job and that normally he left it to Lee’s discretion.

The trial judge found that On Lim, the President of the respondent corporation, did not know that Lee, the accountant, had filed the income tax return without disclosing the rental income and the capital gain realized. He was of the opinion that the knowledge of Lee, the accountant, could not be attributed to the respondent for the reason that the relationship of master and servant did not exist between the company and Lee.

The principles relating to the criminal liability of one person, including a corporation, for the acts of another person are discussed in Regina v St Lawrence Corp Ltd, [1969] 2 OR 305 at 320 where Schroeder, J A said:

While in cases other than criminal libel, criminal contempt of Court, public nuisance and statutory offences of strict liability criminal liability is not attached to a corporation for the criminal acts of its servants or agents upon the doctrine of respondeat superior, nevertheless, if the agent falls within a category which entitles the Court to hold that he is a vital organ of the body corporate and virtually its directing mind and will in the sphere of duty and responsibility assigned to him so that his action and intent are the very action and intent of the company itself, then his conduct is sufficient to render the company indictable by reason thereof. It should be added that both on principle and authority this proposition is subject to the proviso that in performing the acts in question the agent was acting within the scope of his authority either express or implied.

In the present case the respondent was under a legal duty to prepare and file income tax returns which were true, correct and complete returns of the income of the respondent for each fiscal year. The respondent maintained records of its income and expenses and all other financial information necessary for the preparation of financial statements and of its income tax return for the year 1973. It retained Paul Lee, its accountant, to prepare the financial statements and its income tax return and to sign on its behalf and file the return. The form and content of the return were left to the discretion of Paul Lee and the respondent did not require that the return be sent to it before completion and filing or even after filing. All matters relating to the return and to its contents were left to the unfettered discretion of Paul Lee without any attempt on the part of the respondent to control his actions.

Paul Lee was a vital organ of the respondent corporation and virtually its directing mind and will in the sphere of duty and responsibility assigned to him, that is, the preparation, signing and filing of financial statements and income tax returns, so that his action and intent were the very action and intent of the company itself.

The case of Udell v MNR, [1969] CTC 704; 70 DTC 6019, relied on by the trial judge, is distinguishable on its facts from the present case. There the taxpayer made faithful entries in his books of account but employed a public accountant to prepare his income tax returns. The taxpayer’s records were kept in a book designed for cost purposes and the accountant found it necessary to prepare his own work sheets from the information contained in the farm account book. In transposing the information to his work sheets the accountant made a number of inexplicable errors in substantial amounts, so that some revenue items and some expense items were reduced in amount and carried forward to the income tax return, resulting in an increase in the amount of loss reported over the actual amount lost by the taxpayer. This affected his loss carried back to previous years. The accountant also omitted certain amounts paid for cattle purchases. The Minister reassessed and imposed a penalty under subsection 56(2), the predecessor of subsection 163(2) of the Income Tax Act.

In the case of returns for two years they were signed by the accountant on behalf of the taxpayer. In the case of two returns for other years, the returns were signed by the taxpayer personally. These latter returns had been forwarded to the taxpayer by the accountant for examination and signature. Copies of the former returns were forwarded by the accountant to the taxpayer for perusal, examination and retention and the taxpayer was found to have ratified the signature by the accountant of these returns.

Cattanach, J, found that the accountant had made the errors and omissions in the taxpayer’s returns and that he was grossly negligent in doing so. He also found that the taxpayer had not knowingly made or participated in or assented to, or acquiesced in the making of the errors and omissions in his tax returns and that, in the circumstances, the taxpayer was not personally guilty of gross negligence rendering him liable to penalty under subsection 56(2).

Cattanach, J, then considered the submission of the Minister that the gross negligence of the accountant could be attributed to the taxpayer. He found that the relationship between the taxpayer and his accountant was that of principal and agent, that the omissions and errors of the accountant in preparing the tax returns constituted gross negligence on the part of the accountant and that the taxpayer did not know of these omissions and errors on the part of the accountant. He said (at 712-714 CTC; 6025-6026 DTC):

In general, a person is not personally responsible for infractions of a penal nature committed by another in the position of an agent, but this rule is not absolute. A principal may be involved in penal responsibility for the act or omission of his agent by the effect of the statutory enactment.

Whether the appellant has been properly assessed to penalties is, therefore, dependent upon the interpretation of Section 56(2). Does that section contemplate that a taxpayer shall be personally responsible for the gross negligence of his agent in the making of a statement or omission in a return? The language of the section is clear that the penalty is to be imposed, if the circumstances contemplated by the section are present, on the taxpayer and not upon a person who made the statement or omission on the taxpayer’s behalf. The person, who is liable to penalty, is the person by whom the tax is payable. Therefore, in the present case, the person who may be liable to penalty is the appellant, not his agent, the accountant. It is conceivable that the appellant might have a cause of action against the accountant for any loss arising out of the preparation of the returns, but that matter does not concern me in the present action.

There is no doubt that Section 56(2) is a penal section. In construing a penal section there is the unimpeachable authority of Lord Esher in Tuck & Sons v Priester (1887), 19 QBD 629, to the effect that if the words of a penal section are capable of an interpretation that would, and one that would not, inflict the penalty, the latter must prevail. He said at page 638:

We must be very careful in construing that section because it imposes a penalty. If there is a reasonable interpretation which will avoid the penalty in any particular case, we must adopt that construction.

The circumstances of this case, as I have found them to be, do not constitute personal gross negligence on the part of the appellant for the reasons I have previously outlined.

Accordingly there remains the question of whether or not Section 56(2) contemplates that the gross negligence of the appellant’s agent, the professional accountant, can be attributed to the appellant. Each of the verbs in the language “participated in, assented to or acquiesced in” connotes an element of knowledge on the part of the principal and that there must be concurrence of the principal’s will to the act or omission of his agent, or a tacit and silent concurrence therein. The other verb used in Section 56(2) is “has made”. The question, therefore, is whether the ordinary principles of agency would apply, that is that what one does by an agent, one does by himself, and the principal is liable for the actions of his agent purporting to act in the scope of his authority even though no express command or privity of the principal be proved.

In my view the use of the verb “made” in the context in which it is used also involves a deliberate and intentional consciousness on the part of the principal to the act done which on the facts of the case was lacking in the appellant. He was not privy to the gross negligence of his accountant. This is most certainly a reasonable interpretation.

I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty, if there be any fair and reasonable doubt the statutute is to be construed so as to give the party sought to be charged the benefit of the doubt.

In my opinion the reasoning in the Udell case does not apply in the present case. In the present case the acts of Paul Lee, the accountant, were the acts of the respondent company. It had retained him to prepare and file financial statements and income tax returns, using his discretion as to what was to be contained in those documents without any reference to the respondent company for approval in advance of the filing or even after the filing. The relationship between him and the respondent was very different from that between the accountant and the taxpayer in Udell.

The respondent must be taken to have made the statements and the omissions in the income tax return for the year 1973 prepared and filed on its behalf by Paul Lee and his knowledge of the statements and omissions is knowledge of the respondent. Subsection 163(2) therefore applies. The appeal should be allowed with costs to the appellant in this court, and the assessment of penalty against the respondent should be restored.

Pratte, J.:—The reasons for judgment prepared by my brother Cowan contain a full and accurate account of the facts involved in this case.

It is common ground that Lee, the respondent’s accountant, knowingly filed a false income tax return on behalf of his client. Moreover, there is ample evidence to support the finding of the trial judge that On Lim, the president of the respondent, did not know of the filing of that false return and was not guily of gross negligence. In these circumstances, can it be said that respondent itself knowingly filed a false return so as to be liable to the penalty provided for in subsection 163(2) of the Income Tax Act?

The Trial Division answered that question in the negative. Counsel for the appellant argued that it should be answered in the affirmative for three reasons: first, because the knowledge of the accountant was, in his view, the knowledge of the company since the accountant was, in so far as the preparation and filing of the income tax return were concerned, the directing mind of the company; second, because the knowledge of the accountant was, in any event, to be imputed to the respondent which, instead of performing its legal duty to file an income tax return, had delegated that task to its accountant; third, because subsection 163(2) must be interpreted so as to make a taxpayer liable not only for the offences committed by himself, but also for the offences committed by persons acting on his behalf.

With respect to the last argument, I need only say that it must, in my view, be rejected because subsection 163(2), as it is written, is not susceptible of being interpreted in the manner suggested.

The second argument is that, in spite of the words used in subsection 163(2), the knowledge of the accountant Lee must be imputed to the respondent itself as a result of the delegation by the respondent to its accountant of the performance of its duty to file an income tax return. This argument is based on decisions rendered in England under provisions of Licensing Acts prohibiting licensees from doing certain things “knowingly”. The principle established by those judgments was clearly stated by Bristow J. in Howker v Robinson, [1972] 2 All ER 786, at 788-789:

It is a general rule of English law that an accused person cannot be convicted unless he has a guilty mind. An exception to this rule is where Parliament by Statute creates an absolute offence. Whether Parliament has done so is to be decided on the construction of the statutory provision concerned. An example of such an absolute offence is s 13 of the Licensing Act 1872 which made it an offence for a licensee to supply liquor to an intoxicated person: see Police Comrs v Cartman.

Where Parliament, as in s 169(1) of the 1964 Act, prohibits someone from doing something “knowingly” it is clear that an absolute offence has not been created, but a canon of construction of the provisions of the Licensing Acts has grown up in the courts that where the statute provides that the licensee shall not do something knowingly, and he does not, as the justices found in this case, in fact know that the thing is being done, nevertheless if he has delegated his control of the premises to the person who does the thing, he cannot get out of the responsibilities and duties attached to the licence, and the knowledge of his delegate is imputed to him. As Lord Goddard CJ said in Linnett v Metropolitan Police Comr, a case of “knowingly permitting disorderly conduct, contrary to s 44 of the Metropolitan Police Act, 1839”:

The principle . .. depends on the fact that the person who is responsible in law, as for example, a licensee under the Licensing Acts, has chosen to delegate his duties, powers and authority to another.

As Lord Alverstone CJ put it in Emary v Nolloth [1903] 2 KB 264 at 269, the principle to be extracted from the decisions is that if the licensee has delegated his authority to someone else, delegating his own “power to prevent” and the person left in charge commits the offence, the licensee is responsible. If on the other hand there has been no delegation of authority and the licensee is himself controlling the business and the offence is committed by his servant behind his back and against his orders, then he is not responsible.

It now seems to be the prevailing view, however, that this doctrine of delegation, which clearly ignores the plain words of Parliament, if it is to be retained, must be restricted to the interpretation of the Licensing Act.* [1] For that reason I am of opinion that the trial Judge was right in refusing to apply it in this case.

The other argument of the appellant is that the respondent had in effect known that a false return had been filed on its behalf since the knowledge of its accountant was, in law, its own knowledge. This argument is based on the well established principle that, while a company is an abstraction having no mind, knowlege or intention, the law nevertheless treats certain persons who act for it as being the company itself so that their state of mind becomes that of the company. Who are those persons? Those who do not only act for or on behalf of the company but also constitute its “directing mind and will and control what it does”.f [2] Here, it is said that the accountant, though he was not an officer of the respondent and did not control its activities, was nevertheless the directing mind of the respondent in so far as the preparation and filing of the income tax returns were concerned. I cannot agree with that assertion. The sphere of the accountant’s delegated authority, limited as it was to the making and filing of the income tax returns, was, in my opinion, much too narrow to make him a directing mind of the company. In my opinion, the trial judge was right in deciding that his knowledge could not be attributed to the respondent. I am aware that this conclusion is difficult to reconcile with the decision of the British Columbia Court of Appeal in Regina v P G Market-Place and McIntosh, 51 CCC (2d) 185, and that of the Quebec Court of Appeal in Regina v Spot Supermarket, 50 CCC (2d) 239. However these two decisions appear to me to have considered as the “directing minds” of companies persons who, in effect, were simply their servants or agents.

For those reasons, I would dismiss the appeal with costs.