Date: 19980311
Docket: 95-3539-IT-G; 95-3541-IT-G
BETWEEN:
THE ESTATE OF THE LATE LUCIANO COLANGELO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
BETWEEN:
GIUSEPPINA COLANGELO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.T.C.C.
[1] These two appeals are concerned with the application of
the penal provisions found in subsections 163(2) and 110.6(6) of
the Income Tax Act (the Act). They arise out of the
failure of the taxpayers to disclose on their income tax returns
for the year 1989 the very substantial gain which they each
realized from the sale by them in January 1989 of a building at
1022 Danforth Avenue in the city of Toronto (the building).
[2] The relevant parts of subsections 163(2) and 110.6(6)
read:
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 ...
110.6(6) Notwithstanding subsections (2) and (2.1) and (3),
where an individual has a capital gain for a taxation year from
the disposition of a capital property and knowingly or under
circumstances amounting to gross negligence
(a) fails to file a return of his income for the year within
one year after the day on or before which he is required to file
a return of his income for the year pursuant to section 150,
or
(b) fails to report the capital gain in his return of income
for the year required to be filed pursuant to section 150,
no amount may be deducted under this section in respect of the
capital gain in computing his taxable income for that or any
subsequent taxation year and the burden of establishing the facts
justifying the denial of such amount under this section is on the
Minister.
[3] The Appellants were husband and wife. The husband is
deceased since the inception of these appeals. At the beginning
of the trial I directed, pursuant to Rule 29, that
his appeal proceed in the name of his estate.
[4] It is not in dispute that the Appellants each realized a
taxable capital gain in the order of $169,000 as a result of the
sale. Nor is it disputed that they did not disclose that in the
returns that they filed for the 1989 taxation year. Since these
appeals were begun, the tax and interest has been paid by them.
What is in dispute, and all that is in dispute, is the
application of the penalties, and the denial to them of the
benefit of the capital gains exemption under subsection 110.6(6).
What I must decide, therefore, is whether their omission of the
capital gain from their returns was made “knowingly, or in
circumstances amounting to gross negligence”.
[5] The Appellants both immigrated to Canada as children, and
have lived and worked here ever since. Mr. Colangelo was a line
worker in a bakery. His only schooling was received in Italy, and
it did not extend beyond the grade two level. Mrs. Colangelo
completed grade eight in Canada, and then went on to take a
nine-month course in hairstyling. She worked for a
hairstylist for about 18 months, and then opened her own
hairstyling salon. She was then about 19. She ran this business
for the next 25 years or so, employing part-time help to assist
her. Counsel for the Respondent took the position in argument
that this made her an experienced business person who should
recognize a capital gain as something to be disclosed when
reporting her income. In my view she has very limited
understanding of business and financial matters. When she first
began her business she took some advice from a person who
prepared tax returns for her. She had a system whereby she kept
the receipts for her expenditures in a folder which she took to
the tax preparer once a month. At the same time she told that
person what she had paid in wages, so that the appropriate
amounts could be remitted for income tax withholdings,
unemployment insurance premiums, and Canada Pension Plan
contributions. She would have told her the amount of her gross
sales as well. At the end of the year the tax preparer would
complete a statement of her income for the year to attach to the
income tax return. The person who did this for her changed
occasionally throughout the years, but the basic methodology
remained the same.
[6] Mrs. Colangelo’s business was located in the
building on Danforth Avenue. In 1969, the building came up for
sale, and she, her parents and her husband pooled their money and
bought it. The parents contributed $8,000 to the down payment,
and the Appellants $5,000. Mrs. Colangelo continued to operate
her business there, and she paid the real estate taxes on the
building, which were treated as rent for the shop by herself and
her partners. Rent from the rest of the building was sufficient
to make the mortgage payments. In 1985, Mrs. Colangelo’s
parents decided to retire, and they transferred their interest in
the building to their daughter and son-in-law, for no
consideration. The building was then worth $185,000, but the
deemed disposition was not reported by the parents. From that
point forward the two Appellants owned the building equally, and
Mrs. Colangelo continued to run her business there as before
until January 1989, when they sold the building for $475,000. The
transaction closed in early April, with net proceeds of almost
$450,000 being paid in cash to the Appellants.
[7] As in the past, the Appellants had their tax returns for
1989 prepared by an individual who worked for a travel agency,
and whose only qualification was having taken a course offered by
H. & R. Block which purported to qualify her to prepare an
income tax return. The fact of the sale, and the resulting
capital gain, were, as I have said, not disclosed in the returns.
Mrs. Colangelo said in her evidence that she and her husband did
not know that they were required to report the proceeds of sale
of a building. Their only other selling transaction in real
estate was the sale of their residence some years before; they
had not reported that, and nothing had happened to them as a
result. Mrs. Colangelo testified that she did not understand this
sale to have any different requirements attached to it for income
tax purposes. She said that she looked at her return before she
signed it, but I conclude that she did so rather cursorily, not
out of carelessness, but because she really knew nothing about
it, and put all her trust in the person who prepared it for her.
It is significant, I think, that her 1989 return did disclose,
for the first time ever, a very significant amount of investment
income, some $23,650. If she had intended to hide the fact of the
sale of the building, she must surely have known that the
disclosure of this rental income would cause some questions to be
asked about the source of it. I did not understand counsel for
the Respondent to submit in argument that her evidence was not
credible, and I accept it in its entirety. I find that the reason
the Appellants did not make disclosure of the capital gain in
their returns was that they were unaware that they were legally
obliged to do so.
[8] This conclusion is borne out by the fact that the
Appellants, after they were contacted by an official of Revenue
Canada in May 1993, and it was made apparent to them that they
were going to be subject to the assessments of tax and penalties
which resulted, went to both the tax preparer and the lawyer who
had acted for them on the sale, and asked why they were now in
this difficulty. Counsel for the Respondent did not call either
of these people to testify, and so the only account I have before
me is that of Mrs. Colangelo. She said that neither of them
advised her of the tax consequences of the sale. I accept that
evidence as being true, although it must have been obvious, at
least to the lawyer, that a taxable capital gain was involved.
His response to their inquiries seems to have been to the effect
that they did not ask for tax advice, and so he did not give them
any.
[9] Counsel for the Respondent takes the position that the
Appellants were obliged by the law to report the gain, that
ignorance of the law does not relieve them of its consequences,
and that in any event, there was an obligation upon them, having
come into such a large sum of money for the first time in their
lives, to at least obtain advice as to whether or not there were
tax consequences, and a need to report the gain. Failure to do
so, he submits, is at least gross negligence, if not wilful
blindness.
[10] Counsel for the Appellants points out that if they had
known about the tax consequences of the sale of the property then
Mrs. Colangelo’s parents and the Appellants would have
delayed the conveyance of the parents’ interest to the
Appellants; if they had deferred this until 1989, then the sale
would have resulted in a capital gain which, split four ways,
would have been $1,071 each. Therefore, he says, there was
nothing to be accomplished by them failing to disclose which
could not have been quite legitimately accomplished otherwise.
This submission loses much of its force when it is remembered
that the decision not to disclose, if there was one at all, was
made not in 1985, but in 1989. The tax involved as a result of
the 1989 sale is significant, so I do not think it can be said
that there would have been no economic benefit to be obtained
through concealment. However, as I have said above, I do not
believe that there was any deliberate concealment in this
case.
[11] It is trite, of course, that ignorance of a penal law
does not excuse the breach of it. The mental element is directed
to the doing of the act; it does not require knowledge of the law
that is breached. Although the provisions in issue here are penal
in their nature, I am not persuaded that Parliament intended them
to apply in such a way that a person who fails to report a gain
because of ignorance of the requirement in the Act to do
so must in every case suffer the penal consequences. Counsel for
the Appellants does not contest that liability for the tax cannot
be avoided by pleading ignorance of the law, and the taxpayers
have, consistent with this submission, paid the tax, and interest
on it, although not until after they began these appeals and, for
the first time, got competent legal advice. The consequences of
failure to report a capital gain found in subsection 110.6(6) are
written in absolute terms, and are potentially very severe
indeed. If it were intended that they apply to someone in the
position of these Appellants, I would have thought that
Parliament would have provided for the exercise of some
discretion where there was no intention to evade tax, but merely
ignorance of its incidence. The purpose of the provision, after
all, is to discourage larcenous evasion, not to require that
unsophisticated individuals become familiar with the provisions
of a statute whose bulk and complexity are notoriously
intimidating to many lawyers.
[12] In my opinion, these provisions do not require an
automatic imposition of the penal provisions in a case such as
this one, but only that I consider whether or not it was grossly
negligent, or wilfully blind, for the Appellants to file their
returns without obtaining specific advice as to the tax
consequences of their capital gain from someone qualified to give
it. Otherwise, there would be no defence for a taxpayer who seeks
advice, but is wrongly advised. This result accords with common
sense. It is also consistent with the result in
Lévesque Estate v. The Queen,[1] a judgment of Lamarre Proulx J,
who held that failure to report the gain on a deemed disposition
was not subject to the consequence in subsection 110.6(6),
because the taxpayer was unaware of the deeming provision, and
was not grossly negligent.
[13] The statement which is generally accepted as defining
gross negligence, in the context of the Act, is that of
Strayer J., as he then was, who said in Venne v. The
Queen:[2]
“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.
[14] I agree with the submission of counsel for the Appellants
that this test must be applied in a way that includes both
subjective and objective elements. Counsel for the Respondent
points to the very large amount of the gain, relative to the
previous economic situation of the Appellants, and to the fact
that Mrs. Colangelo has run a business for 25 years. I agree that
the amount of the gain is large, and to many people it would have
prompted them to get advice. I do not believe that it had that
effect on these Appellants. If they asked for advice from either
the tax preparer or the lawyer, then there would have been
evidence of that. There was no suggestion that they were
unavailable to testify, and the tax preparer was interviewed by
one of the officers of Revenue Canada who testified.
[15] Counsel for the Respondent referred me to a number of
authorities in support of the proposition that where the amount
not reported is substantial, this tends to show that the taxpayer
has been wilfully, or grossly negligent. Most of these cases deal
with the failure to include in income amounts which clearly had
an income character about them. Of these cases, Holley v.
M.N.R.[3] is
the only one where the circumstances resemble those here, but in
that case the result was driven by Judge Kempo’s factual
finding that “the Appellant was no neophyte in the business
world of income and taxation”, on the basis of which she
found him to have been wilfully blind, and so culpable. I find
quite the opposite to be the case here.
[16] Were the Appellants indifferent as to whether or not they
complied with the law? Their limited education, and the
relatively simple, unsophisticated lives that they have led, lead
me to conclude that they were not indifferent. I believe that it
simply did not cross their minds that they should be concerned
about the Income Tax Act in the context of this sale. Mrs.
Colangelo has had her own business for most of her working life,
but it was not a business that required her to deal with
financial matters. She did not even have a bookkeeping system,
but simply kept her receipts in an accordion folder until month
end. She did not do any financial planning; she simply did
hairstyling. Perhaps she was negligent not to give the matter any
thought, but it was simple negligence, not wilful blindness, nor
indifference to her responsibility, that led her to omit mention
of the gain in her return. Mr. Colangelo had less education than
his wife. He worked for wages all his life. I am satisfied that
he would be even less likely than she to consider the tax
implications of the transaction.
[17] The appeals are allowed, to the extent that the
Appellants are not subject to the penalties imposed, nor to the
provisions of subsection 110.6(6). The Appellants are entitled to
one set of costs.
Signed at Ottawa, Canada, this 11th day of March, 1998,
"E.A Bowie"
J.T.C.C.
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