Armstrong v. The Queen, 93 DTC 1043, [1993] 2 CTC 2681 (TCC)

Brulé, T.C.C.J.:—The appellant was assessed penalties with respect to his 1988 taxation year and hereby appeals the imposition of such penalties.

Facts

In 1987, the appellant purchased some farm property for an amount of $166,824. As a part of the purchase price, the appellant contracted to build a residence for the vendor for an agreed value of $76,649. This latter sum was not included in the appellant’s income reported in the 1987 taxation year, yet costs associated with the building of the house were deducted.

When the omission was discovered, the appellant paid the necessary tax. The appellant did not deny the omission to income, co-operated all along with the authorities, but denied there was any gross negligence on his part. As in the previous year, he delivered all his books and records to his accountant approximately one month before the April filing deadline. The accountant, William J. McEachern, was ill at the time and retained another person to prepare the return. This latter person did not fully understand the records, did not ask questions, and as a result the omission occurred. This was discovered before the 1988 return was assessed when Revenue Canada were conducting an audit of the appellant’s 1986 and 1987 returns. At that time the auditor said there did not appear to be any fraud or misrepresentation, although he made the assumption that information given to the accountant at the last minute, i.e., within a week of the filing deadline, was a part of gross negligence. This was refuted when it was shown that all books and records were delivered to the accountant one month before the deadline.

Subsequently Revenue Canada officials decided to levy a penalty claiming gross negligence on the part of the appellant in accordance with the provisions of subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Analysis

The relevant section of the Act is as follows:

163(2) False statements or omissions. Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of. . . .

Counsel for both parties presented certain cases to the Court for their positions in this appeal.

In the case of Morin v. M.N.R., [1988] 2 C.T.C. 2334, 92 D.T.C. 1241, counsel for the Minister referred to the following passage at page 2336 (D.T.C 1243) wherein Couture, C.T.C.C.J. said:

The mere fact that he retained the services of a chartered accountant does not exempt the taxpayer from his obligation to ensure the accuracy of his tax returns. Furthermore, an accountant's work cannot be more complete or accurate than the figures and documentation the taxpayer is prepared to provide to him.

The taxpayer's appeal was dismissed in that case but here the situation was different. The appellant is not an astute businessman, nor well informed, as was Morin, supra, nor did the accountant lack any information, having been given all books and records. It was just not properly interpreted.

Both counsel referred to the case of Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D.).

In that case the taxpayer won an appeal against imposed penalties. Some statements by Strayer, J. of the Federal Court are worth setting out. At page 234 (D.T.C. 6256), he said:

With respect to the possibility of gross negligence, I have with some difficulty come to the conclusion that this has not been established either. "Cross 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. I do not find that high degree of negligence in connection with the misstatements of business income. To be sure, the plaintiff did not exercise the care of a reasonable man and, as I have noted earlier, should have at least reviewed his tax returns before signing them. A reasonable man in doing so, having regard to other information available to him, would have been led to believe that something was amiss and would have pursued the matter further with his bookkeeper.

With respect to business income, I can more readily recognize that effective surveillance would have been difficult for the plaintiff and would have involved him making and reviewing numerous computations of revenues, expenditures, assets and liabilities. In other words the errors in business income, small in some years but very substantial in others, would not necessarily have "sprung out" at a person of the taxpayer's background and abilities. While it may have been naive for nim to trust his bookkeeper as knowing more about such matters than he did, I do not think it was gross negligence for him to fail to challenge the bookkeeper with respect to the business computations. However egregious the errors committed by the bookkeeper in this respect, it is quite conceivable that they were not in fact noticed by the plaintiff and his neglect in not noticing them fell short of constituting gross negligence.

The above could well apply to the present case except that here it was the accountant who prepared the tax return involved rather than a company bookkeeper.

In the case of Udell v. M.N.R., [1969] C.T.C. 704, 70 D.T.C.6019, penalties were considered under subsection 56(2) of the Act, now subsection 163(2). The appellant was a farmer in that case but the principles are the same as here.

Cattanach, J., of the Exchequer Court set out at page 711 (D.T.C. 6024):

The argument stressed by counsel for the appellant as to why the penalties assessed by the Minister are not properly assessable under subsection 56(2) was, as I understood it, that the circumstances under which the errors and omissions were made in the appellant's tax returns, do not amount to gross negligence” on the part of the appellant. He pointed out specifically that all of the appellant's farm transactions were carefully and scrupulously recorded in his farm account book. No attempt was made at any time to deny or hide any of such transactions. The complete and accurate record of the appellant's transactions were placed by him in the hands of a qualified professional accountant with instructions to prepare his income tax returns. The appellant considered that he did not possess the qualifications and knowledge to reconcile the figures in his farm account book with those required to be included in the income tax returns. He considered that to be the job of an accountant, not a farmer. He, therefore, employed an accountant for that purpose. This very action by the appellant, it was argued, negatived any implication of gross negligence on his part.

It was conceded by counsel for both parties that the errors and omissions in the appellant's tax returns were made by the accountant and that the accountant was grossly negligent in doing so. I readily agree with this concession.

And at pages 712-13 (D.T.C. 6025-26):

Accordingly there remains the question of whether or not subsection 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 subsection 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 this 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 statute is to be construed so as to give the party sought to be charged the benefit of the doubt.

While there may have been a degree of negligence by the appellant in dealing with his tax return there certainly was no gross negligence on his part such that would attract penalties.

The appeal is allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment.

Appeal allowed