Khalil v. The Queen, docket 2001-2792(IT)I (Informal Procedure)

Date: 20021011

Docket: 2001-2792-IT-I

BETWEEN:

NASRIN KHALIL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Mogan J.

[1]            In her 1999 income tax return, the Appellant omitted a certain amount of employment income. Because of that omission, the Minister of National Revenue assessed a penalty under subsection 163(1) of the Income Tax Act. The Appellant has appealed from that assessment claiming that she is not liable for the penalty. The only issue is whether the Appellant is required to pay the penalty assessed under subsection 163(1) of the Act for her 1999 taxation year. The Appellant has elected the informal procedure.

[2]            The Appellant was born in Afghanistan in 1962. She came to Canada as a single woman in 1993. She had difficulty finding full-time employment in Canada and, in her first few years here, she did casual work (frequently as a translator/interpreter) within the Toronto Afghanistan community. She was always paid in cash for such casual work with no source deductions and no T4 slip. She wanted to comply with the laws of Canada and so she filed a tax return each year reporting the full amount of the cash income she earned. Prior to 1998, she had never received a T4 slip.

[3]            In 1998, the Appellant had an arrangement with an employment agency which sent her to work at the Bank of Montreal for a short term. The Bank of Montreal paid a fee to the employment agency which, in turn, paid a lesser amount to the Appellant. At the end of 1998, the employment agency sent a T4 slip to the Appellant showing her earnings but no source deductions because there were none. Also in 1998, the Appellant found full-time employment with Symcor Services Inc. (referred to hereafter as "Symcor"). At the end of 1998, Symcor sent a T4 slip to the Appellant showing her gross earnings and the usual source deductions including income tax.

[4]            When the Appellant filed her 1998 income tax return, she reported her earnings from the employment agency as shown on its T4 slip because there were no source deductions; but she omitted her earnings from Symcor ($17,658) because she saw from its T4 slip that income tax had been withheld, and she assumed that Symcor would report her earnings and remit her tax. As a result, the Appellant omitted her Symcor earnings ($17,658) for 1998 on her income tax return for that year but those earnings were in fact tax-paid through the source deductions.

[5]            In 1999, the year under appeal, the same thing happened. The Appellant was a full-time employee of Symcor in 1999 and had gross earnings of $27,626. That amount was shown on her T4 slip for 1999 with the usual source deductions including income tax. In 1999, the Appellant also operated a part-time business as a translator. In her 1999 income tax return, she reported gross earnings of $3,618.25 from her translator business and net income of $3,018.23. Again, as in 1998, she omitted her Symcor earnings ($27,626) for 1999 because she saw from the Symcor T4 slip that income tax had been withheld, and she assumed that Symcor would report her earnings and remit her tax.

[6]            In 1999, the Appellant failed to report interest income from the Royal Bank of Canada in the amount of $320.12. Therefore, the total amount of income which the Appellant omitted in her 1999 income tax return was $27,946 being the total of her earnings from Symcor ($27,626) plus her interest from the Royal Bank ($320.12). The Minister assessed a penalty of $2,794 under subsection 163(1) of the Act. The amount of the penalty is 10% of the total income which the Appellant omitted in her 1999 income tax return. Subsection 163(1) of the Act states:

163(1)      Every person who

(a)            fails to report an amount required to be included in computing the person's income in a return filed under section 150 for a taxation year, and

(b)            had failed to report an amount required to be so included in any return filed under section 150 for any of the three preceding taxation years

is liable to a penalty equal to 10% of the amount described in paragraph (a), except where the person is liable to a penalty under subsection (2) in respect of that amount.

[7]            Counsel for the Respondent accepted the burden of proof imposed by subsection 163(3) of the Act and called the Appellant as the only witness. The Appellant is one of those persons who, as a witness, leaves no doubt as to her credibility. She is 100% believable. She was asked why she omitted on her 1998 and 1999 income tax returns her earnings from Symcor which are so clearly shown on a T4 slip. She gave the following answer:

A.             As I have told you before, I thought that because on every pay that I was getting from Symcor the money was already deducted to Revenue Canada from my pay cheques. I had the understanding that that money has already been paid to the government, to Revenue Canada, therefore I didn't send it.

                But the money which I had cash, $3,000.00, that was the money that every year I was filing and I wrote that.

                                                                                                                                (Transcript page 14)

[8]            The Appellant's answer quoted above is refreshingly candid. She had lived her first 30 years in Afghanistan. She was new to Canada in 1993. The Canadian way of doing things was new and different to her. Before 1998, she had earned only cash income on a casual basis with no source deductions and no T4 slip. She had always reported that cash income because she wanted to comply with Canada's laws. She said that she used her T4 slip from the employment agency in 1998 to report her earnings from the agency because she could see that no income tax had been deducted at source. By the same standard, she could see that income tax had been deducted at source from her Symcor earnings and so she omitted her Symcor earnings. She thought that Symcor would report her earnings and remit to Revenue Canada the income tax deducted at source.

[9]            In my opinion, the Appellant is completely innocent of any wrongdoing or negligence. She always intended to pay income tax on all of her earnings in both 1998 and 1999. She simply did not understand how the system works. She said that she paid an accountant or similar person $40 each year to prepare her income tax returns for the years prior to 1998. For 1998 and 1999, she decided to save the $40 each year by doing her own returns. As luck would have it, 1998 and 1999 were the first two years after her arrival in Canada when she had full-time employment, source deductions, and a T4 slip showing the relevant amounts of gross earnings and income tax withheld.

[10]          At the conclusion of the hearing, I reserved my decision and asked counsel for the Respondent to send to the Court by mail a photocopy of three documents: (i) the Appellant's income tax return for 1999; (ii) the first Notice of Assessment for 1999 dated March 30, 2000; and (iii) the Notice of Reassessment dated December 18, 2000 which is under appeal. I wanted to determine the amount (if any) by which the Appellant's amount actually owing under the reassessment (excluding interest and penalty but recognizing the tax withheld and remitted by Symcor) exceeded her amount owing under the first assessment.

[11]          When the Appellant filed her income tax return for 1999 showing net income and taxable income of $3,018.25, she claimed certain refundable tax credits and a refund of $422.00 which was credited to her balance owing pursuant to the Notice of Assessment dated March 30, 2000. In the Notice of Reassessment for 1999 dated December 18, 2000 which is the assessment under appeal, the relevant amounts are shown as follows:

Net federal tax	$3,922.60
Net Ontario tax	1,553.80
Canada Pension Plan	211.20
Total Payable	5,698.60
Tax deducted at source per T4	4,641.61
Subtotal	1,056.99
Add refund from first assessment	422.00
Amount actually owing before interest and penalty	1,478.99
Arrears interest	242.41
Penalty - subsection 163(1)	2,794.00
Balance owing	$4,515.40

As I read the above amounts, the basic difference between what the Appellant owed under her 1999 income tax return as filed and the Notice of Reassessment under appeal is only $1,478.99 excluding arrears interest ($242.41) and the penalty in dispute ($2,794). That basic difference may be summarized as follows:

Total tax plus CPP	$5,698.60
Less: tax deducted per T4	4,641.61
Subtotal	1,056.99
Add back prior refund	422.00
Basic difference	$1,478.99

In other words, because the Appellant's Symcor earnings were in fact tax-paid through source deductions, Revenue Canada was out-of-pocket only $1,478.99 according to the way in which the Appellant filed her 1999 return.

[12]          In my view, having regard to all of the facts in this case, it is not equitable to assess a penalty of $2,794 under subsection 163(1) when the amount of the penalty is almost twice the basic difference ($1,478.99) between the refund which the Appellant claimed in her return ($422) and the increased amount owing ($1,056.99) after giving full credit for the tax deducted at source. The Appellant's case cries out for equity but there is an abundance of law which states that equity has no place in determining a person's liability for tax under a statute. There may, however, be a place for equity or due diligence in the assessment of a penalty.

[13]          I cannot conclude that a person has "failed to report an amount" within the meaning of subsection 163(1) when the person knows (i) that the amount was payable to her as income by a particular payor; (ii) that the payor withheld a certain portion of the amount as income tax to remit to Revenue Canada; (iii) that the payor actually paid to the person only the balance remaining after deducting the tax withheld; and (iv) that the payor was required to report to Revenue Canada on a form prescribed by Revenue Canada the gross amount payable to the person and the portion withheld and remitted as tax. Accordingly, I will allow the appeal. If I should be correct in my interpretation of subsection 163(1), there is no prior "failure to report" with respect to the interest of $320.12 received from the Royal Bank of Canada.

[14]          If I should be wrong in my interpretation of subsection 163(1), then I would respectfully ask the Minister to consider exercising the discretion permitted in subsection 220(3.1) of the Act to waive or cancel all or most of the penalty imposed relating to the Symcor earnings.

Signed at Ottawa, Canada, this 11th day of October, 2002.

"M.A. Mogan"

J.T.C.C.

COURT FILE NO.:                                                 2001-2792(IT)I

STYLE OF CAUSE:                                               Nasrin Khalil and Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           February 13, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge M.A. Mogan

DATE OF JUDGMENT:                                       October 11, 2002

APPEARANCES:

For the Appellant:                                                 The Appellant herself

Counsel for the Respondent:              P. Tamara Sugunasiri

COUNSEL OF RECORD:

For the Appellant:                

Name:                                N/A

Firm:                  N/A

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-2792(IT)I

BETWEEN:

NASRIN KHALIL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on February 13, 2002, at Toronto, Ontario, by

the Honourable Judge M.A. Mogan

Appearances

For the Appellant:                                                                 The Appellant herself

Counsel for the Respondent:                              P. Tamara Sugunasiri

JUDGMENT

                The appeal from the reassessment of tax made under the Income Tax Act for the 1999 taxation year is allowed and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the penalty assessed under subsection 163(1) of the Act shall be cancelled.

Signed at Ottawa, Canada, this 11th day of October, 2002.

"M.A.Mogan"

J.T.C.C.