Date: 20020118
Docket: 2000-4251-IT-I
BETWEEN:
J0SÉ MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Tardif, J.T.C.C.
[1]
This is an appeal from an assessment for the 1997 taxation year.
The reassessment, to which a penalty was added, was made on the
basis of facts and circumstances similar to those noted in the
following cases:
MARLENNE HOULE (2000-3526(IT)I);
RAYNALD TURCOTTE (2000-4627(IT)I);
MARIO THERRIEN (2000-4773(IT)I);
DONALD BENOIT LAFLÈCHE (2000-4792(IT)I);
and
GUILLERMO ISAZA (2000-4820(IT)I).
[2]
All the appellants thus agreed that the evidence brought by all
parties would be common to all the appeals. All the appellants,
without exception, also admitted that the reassessments issued
against them were correct, but they continued to dispute the
validity of the penalties added to the assessments.
[3]
Thus, the issue in this appeal, as in all the others, is whether
the Minister of National Revenue (the "Minister") was
justified in assessing a penalty against the appellant for the
1997 taxation year pursuant to subsection 163(2) of the
Income Tax Act (the "Act").
[4]
In this appeal, the respondent made the following assumptions of
fact in justifying the reassessment and penalty:
[TRANSLATION]
(a)
during the taxation year in issue, the appellant was an employee
of Bombardier Inc.;
(b)
the appellant earned employment income of $30,996 from his
employment with Bombardier Inc. and also received a sum of $9,689
as an allowance for the 1997 taxation year;
(c)
in his return of income for the taxation year in issue, the
appellant reported, inter alia, gross business income of
$1,050 and claimed a net business loss of $6,029.25;
(d)
an initial audit was conducted by a Revenu Québec
auditor;
(e)
the following facts were noted in the course of the audit
conducted by Revenu Québec:
(i)
the appellant was a member of a group of individuals each of whom
acquired a computer and a distributor's licence from
Ordinateurs Highway Inc. (hereinafter the
"Corporation");
(ii)
in theory, the distributor's licence was to authorize those
individuals to sell the Corporation's computer products and
also distribution licences in order to receive commissions;
(iii)
according to the Corporation's representatives, the
individual thus became a "self-employed worker" from a
tax standpoint and could enjoy numerous benefits;
(iv)
being able to claim a business loss and receive a sizeable income
tax refund were among those benefits;
(v)
as a self-employed worker, the individual could buy a
microcomputer which, according to the Corporation, would be paid
for out of the tax refund generated by the purported business
loss incurred by the individual in his so-called first year
of operation;
(vi) the
Corporation also made it possible for an individual to enjoy
no-interest financing through a financial institution for a
period not exceeding one year;
(vii) this
method of financing the acquisition of a computer was called the
"Highway Concept";
(viii) the contract
for the sale to the appellant by the Corporation of the licence
and computer, as well as the document entitled
"Distributor's Contract", indicate that the
transaction took place on December 22, 1997;
(ix)
the appellant's application to join a credit plan with the
National Bank of Canada is dated April 3, 1998;
(x)
the Distributor's Contract and the application for financing
were signed by the appellant;
(xi)
the appellant kept no books or records;
(xii)
the appellant was unable to provide relevant supporting documents
to justify a number of expenses claimed;
(xiii) there
is no indication that the appellant carried on any activity
whatever related to the sale of computers or licences or took
steps to start up a business activity in 1997;
(xiv) the appellant
paid the sum of $1,675.00, including sales taxes, to acquire a
distributor's licence;
(xv) the cost
of the licence included a commission to the vendor of the licence
of approximately $500, a commission to the vendor's sponsor
of approximately $300 and the balance was retained by the
Corporation;
(xvi) at the time he
acquired his distributor's licence, the appellant received,
inter alia, a kit which included the following items: a
video cassette, a binder containing information on the
"Highway Concept" and ten or so personalized business
cards;
(f)
in light of the above, the Minister concluded that the appellant
had not operated a business nor had he started up a business
activity during the 1997 taxation year;
(g)
the appellant knowingly, or under circumstances amounting to
gross negligence, made or participated in, assented to or
acquiesced in the making of, a false statement or omission in the
income tax return filed for the taxation year in issue, as a
result of which the tax he would have been required to pay based
on the information provided in that return was $1,355.95 less
than the amount of tax actually payable for that year;
(h)
consequently, in the notice of reassessment of March 11,
1999, for the taxation year in issue, the Minister assessed the
appellant a penalty of $677.97 under subsection 163(2) of
the Act.
Facts
[5]
After learning of the existence of an entity known and carrying
on business as Ordinateurs Highway Inc. ("Highway"),
the appellant became interested in that company's concept.
What was involved was a scheme under which anyone wishing to
acquire a computer and computer equipment could do so from
Highway. The company offered as well the possibility of obtaining
a distributorship at substantial cost.
[6]
To convince interested persons, Highway explained to them that,
by becoming distributors, they would receive generous commissions
through the recruitment of other buyers and would also be
entitled to all the tax benefits accruing to self-employed
workers. In other words, they would thus be creating a small
business which would give them the opportunity to earn additional
income and to deduct a large number of otherwise non-deductible
expenses from their total income.
[7]
Those interested generally acquired a computer and computer
equipment as well as a licence entitling them to carry on
business as self-employed workers.
[8]
To heighten interest, Highway prepared the prospect's income
tax return, claiming fictitious and ludicrous expenses. The tax
refund thus considerably reduced the amount of the outlays
required. To obtain the tax refund quickly, Highway, through its
own personnel, antedated the contract so as to produce effects
for the previous fiscal year.
[9]
Once they had signed on, people could also receive a commission
by recruiting a new prospect. Indeed, the appellant was recruited
by someone in his circle in whom he had complete trust.
[10] So, like
all the others, the appellant went to Highway's place of
business. After hearing the convincing pitch, he accepted the
proposal that was made, signing all the required documents for
becoming a distributor.
[11] The
Highway representative answered all questions and reassured all
those who had concerns. The greatest concern appears to have been
the fact that the date on the contract was earlier than the
actual date of signature. People thus feared that it was illegal
and improper to date the contracts December 22, 1997, when
they were actually entered into later, in 1998.
[12] Each time
this apparently very worrying question was raised, the same
answer was given: according to Highway, the arrangement involved
the same principle as that for registered retirement savings
plans. To make the answer even more credible, it was said that
the membership contract had to be signed in the first four months
of the year in order to have some of its effects in the previous
fiscal year. Highway further stated that this was the same
deadline as that given taxpayers to file their income tax
returns, that is to say, the end of April.
[13] For the
more sceptical, the Highway representatives added that the
arrangement was quite normal since, before signing, people
reflected on, thought about and thoroughly analyzed their planned
participation during the last months of the year preceding the
transaction.
[14] As an
additional persuasive element, those interested watched a video
in which a known and credible artist added his voice and
arguments to those of the Highway people.
[15] All the
appellants that the common evidence concerned, including,
obviously, this appellant, were persons without experience in the
business world. All had their tax returns completed by third
parties, and all were interested in the Highway concept, in which
they saw first and foremost an opportunity to improve their
financial situation by earning additional income. I have no doubt
that the appellants' motivation in this regard was sound,
reasonable and normal.
[16]
Considering their lack of experience and their limited knowledge
and financial resources, they made fairly serious progress,
although, I admit, they were not an example to be followed. One
thing is certain, however: the appellant's behaviour cannot,
on the evidence, be characterized as careless, thoughtless and
grossly negligent.
[17] The false
and untruthful information sent for and on behalf of the
appellant was forwarded by a Highway employee, who did this
electronically so that, as a result, in most cases those
concerned did not know the exact content of the information
transmitted. As to the conventionally processed returns, copies
were given to them, and when they asked questions, they were told
that everything was in order, proper and legal, that they now had
their own business and that they were accordingly entitled, as
self-employed workers, to deduct the stated expenses.
[18] Some
contacted Revenue Canada, Revenu Québec and the consumer
protection bureaus to check whether the scheme was legal or
whether it was under investigation or known to be likely to bring
trouble.
[19] All such
steps produced negative results, showing no irregularity or
abnormality in the scheme's legitimacy.
[20] The
appellants' attitude and conduct were certainly not a model
of prudence. They were of course negligent, imprudent and,
indeed, even somewhat naive, but I do not believe that the
evidence showed—and the burden of proof in this regard was
on the respondent—that this particular appellant crossed
the threshold or the fine line separating negligence and gross
negligence.
[21] The
evidence does not show any recklessness, carelessness,
indifference or lack of concern tantamount to gross negligence.
On the contrary, it was shown on a balance of probabilities that
the appellant had been cautious and had had a concern for the
honesty of the procedure. One thing is certain: there was no
evidence that the appellant knowingly chose to make a false
return. He of course confirmed by his silence the information
communicated by Highway, as he believed that everything was
consistent with his new status as a self-employed worker.
[22] The
evidence showed that the Highway concept had been formulated and
introduced by one or more persons with little concern for
compliance with tax laws. They prepared a kit entitled
[TRANSLATION] "Highway to Success", containing a series
of documents and including, in particular, a video cassette, a
binder with information on the Highway concept and ten or so
personalized business cards.
[23] To
reinforce the seriousness, quality and credibility of the
concept, they got a well-known artist involved, thus giving the
swindle an even greater aura of authority and morality and even
wider scope.
[24] In the
circumstances, given that one was dealing with novices who,
although not reckless, were prepared to do what was necessary to
increase their modest incomes, it was relatively easy to recruit
and enlist them by taking advantage of the vulnerability of
persons already influenced by a previous victim (their
recruiter).
[25] Instead
of prosecuting the victims and teaching them a lesson by
assessing a penalty against them, I believe the Minister should
instead turn his efforts toward prosecuting those who designed
the scheme and took advantage of the taxpayers'
naiveté and assessing highly deterrent penalties against
them.
[26] In the
instant case, it was not shown or established—and the
burden was on the respondent to do so—that the
appellant's negligence was so great as to constitute gross
negligence justifying the assessment of a penalty.
[27] The
statutory provisions regarding the penalties that the respondent
wishes to assess against the appellant are to be found in
subsection 163(2) of the Act, which provides as
follows:
163(2) False statements or
omissions. Every person who, knowingly, or under
circumstances amounting to gross negligence, 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
for the purposes of this Act, is liable to a penalty of the
greater of $100 and 50% of the total
of . . . .
[28] Counsel
for the Minister cited the judgments in Udell v.
M.N.R., [1970] Ex. C.R. 176, Venne v. Canada,
[1984] F.C.J. No. 314 (Q.L.) and Findlay v.
Canada, [2000] F.C.J. No. 731 (Q.L.).
[29] The term
"gross negligence", as used in subsection 163(2)
of the Act, was defined in Venne, supra, by
Strayer J. of the Federal Court of Canada, at page 10
of the judgment, as follows:
. . . "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. 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.
[30] In
Udell, supra (followed by Strayer J. in
Venne), the matter involved penalties assessed under
subsection 56(2) of the Act, now
subsection 163(2). Having found that the taxpayer was not
guilty of gross negligence, the Court had to determine whether
the negligence of the taxpayer's agent could be attributed to
the taxpayer. The Court held as follows at page 192:
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 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.
[31] The Court
held that the accountant's gross negligence could not be
attributed to the taxpayer since the taxpayer was not privy to
his accountant's gross negligence.
[32] The
principles established in Udell were echoed by the Federal
Court of Appeal in Findlay, in paragraphs 17 and 18.
In that judgment, Isaac J.A. held that the Tax Court of
Canada judge had erred in concluding that the gross negligence of
the tax preparer could be attributed to the taxpayer.
Isaac J.A. wrote as follows in paragraph 27 of his
judgment:
His answer to the third question is inconsistent with his
answer to the second question. If the respondent did not, for the
purpose of the second question, show on a balance of
probabilities that the appellant had knowledge of the omission by
the tax preparer and did nothing about it, then, in our
respectful view, it is difficult to understand how it could be
said that the gross negligence of the tax preparer could be
attributed to the appellant. There was no evidence that the
appellant was privy to the actions or omissions of the tax
preparer. The Tax Court Judge referred to the decision of
Cattanach J. in Udell v. The Queen, but he misapplied
the principles laid down in that case. Similarly, although
referring the decision of Strayer J., as he then was, in
Venne v. The Queen, he misapplied the definition of
gross negligence laid down in that case. A failure to apply the
correct test amounts to an error of law which warrants
intervention by an appellate court. Furthermore, contrary to
subsection 163(2) of the Act, the learned Tax Court Judge
appears to have shifted to the appellant the burden of showing
that he was not liable for the gross negligence of the tax
preparer. Subsection 163(2) imposes that burden on the
Minister; but the Tax Court Judge based his conclusion as to
liability not on a proof by the respondent of gross negligence on
a balance of probabilities, but on the absence of a reasonable
explanation by the appellant or the tax preparer. This is, as I
have already said, contrary to the provisions of
subsection 163(2) of the Act.
[33] The onus
was on the Minister to show that the appellants had knowledge of
the acts committed by the agents who prepared their tax returns,
and that onus must be discharged in order for the appellants to
be able to be penalized for the acts committed by those
agents.
[34] In the
instant case, the Minister admits that the appellants did not
knowingly make a false statement in their income tax returns.
[35] The
respondent argues that the appellants were highly negligent and
careless. In the Minister's view, a reasonable person would
have shown greater prudence and especially would have done more
thorough research to ensure that the work done by Highway's
agents was consistent with the law.
[36] The
burden of proof with respect to the assessment of penalties under
subsection 163(2) of the Act is a heavy one. In
Farm Business Consultants Inc. v. Canada, [1994]
T.C.J. No. 760 (Q.L.), Judge Bowman (now Associate
Chief Judge) set out a highly interesting approach to penalties.
I think it helpful to reproduce a passage from that judgment:
28
A court must be extremely cautious in sanctioning the imposition
of penalties under subsection 163(2). Conduct that warrants
reopening a statute-barred year does not automatically justify a
penalty and the routine imposition of penalties by the Minister
is to be discouraged. Conduct of the type contemplated in
paragraph 152(4)(a)(i) may in some circumstances also
be used as the basis of a penalty under subsection 163(2),
which involves the penalizing of conduct that requires a higher
degree of reprehensibility. In such a case a court must, even in
applying a civil standard of proof, scrutinize the evidence with
great care and look for a higher degree of probability than would
be expected where allegations of a less serious nature are sought
to be established. Moreover, where a penalty is imposed under
subsection 163(2) although a civil standard of proof is
required, if a taxpayer's conduct is consistent with two
viable and reasonable hypotheses, one justifying the penalty and
one not, the benefit of the doubt must be given to the taxpayer
and the penalty must be deleted. I think that in this case the
required degree of probability has been established by the
respondent, and that no hypothesis that is inconsistent with that
advanced by the respondent is sustainable on the basis of the
evidence adduced.
[37] When it
comes to assessing penalties under subsection 163(2) of the
Act, the taxpayer must be given the benefit of the doubt.
In the instant case, there is no doubt in my mind, based on the
evidence, that the appellant was not guilty of gross negligence
within the meaning of subsection 163(2) of the Act.
At most, he was imprudent, negligent and indeed somewhat naive,
which is not sufficient grounds for assessing a penalty.
[38]
Consequently, the appeal is allowed, essentially with respect to
the penalty, which is cancelled. As to the assessment, it is
confirmed on the basis of the appellant's consent and
admission.
Signed at Ottawa, Canada, this 18th day of January 2002.
"Alain Tardif"
J.T.C.C.
Translation certified true on this 28th day of February
2002.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2000-4251(IT)I
BETWEEN:
JOSÉ MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the
appeals of
MARLENNE HOULE (2000-3526(IT)I),
RAYNALD TURCOTTE (2000-4627(IT)I),
MARIO THERRIEN (2000-4773(IT)I),
DONALD BENOIT LAFLÈCHE
(2000-4792(IT)I)
and GUILLERMO ISAZA (2000-4820(IT)I)
on December 4, 2001, at Montréal,
Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Alain Gareau
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1997 taxation year is allowed with respect to the
penalty, which is cancelled. As to the assessment, it is
confirmed on the basis of the appellant's consent and
admission in accordance with the attached Reasons for
Judgment.
Signed at Ottawa, Canada, this 18th day of January 2002.
J.T.C.C.
Translation certified true
on this 28th day of February 2002.
Erich Klein, Revisor
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