Docket: 2011-477(IT)I
BETWEEN:
PAUL HESS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals
heard and Reasons for Judgment delivered from the Bench
on July 15, 2011 at Winnipeg, Manitoba
Before: The Honourable
Justice J.E. Hershfield
Appearances:
|
For the Appellant:
|
The
Appellant himself
|
|
Counsel for the Respondent:
|
Larissa Benham
|
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for
the 2002, 2003, 2004, 2005 and 2006 taxation years are allowed, without costs,
and the assessments are referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that, and for the reasons
set out in the attached Reasons for Judgment, the Appellant was not required to
file an information return form T1142 for any of those years.
Signed at Ottawa, Canada this 22nd day of July 2011.
"J.E. Hershfield"
Citation: 2011 TCC 360
Date: 20110722
Docket: 2011-477(IT)I
BETWEEN:
PAUL HESS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Edited from Reasons Delivered from the
Bench on July 15, 2011
at Winnipeg, Manitoba)
Hershfield J.
[1] The Appellant
received income distributions from a U.S. resident trust that arose from the Last Will and Testament
of his great uncle. That is, he was an income beneficiary of a non-resident
testamentary trust. The Appellant was assessed penalties for failure to timely
file an information return form T1142 in respect of each of his 2002, 2003,
2004, 2005 and 2006 taxation years.
[2] The distributions
in Canadian funds were as follows:
·
$34,797
in 2002
·
$18,728
in 2003
·
$18,835
in 2004
·
$24,114
in 2005
·
$16,575
in 2006
[3] The Appellant did
not file income tax returns for any of these years until demands to file were
made in respect of his 2005 and 2006 years. The demand to file an income tax
return for the 2005 year was issued in June 2008 and for 2006 it was issued in
March 2008.
[4] Returns were filed
for 2002, 2003 and 2004 on April 15, 2008 even though no demands to file were
made in respect of these years.
[5] With respect to the
2005 and 2006 years, returns were filed in July 2008. That is, the return for
2005 was filed approximately one month after the demand was made and for 2006
the return was filed approximately three months after the demand was made. No
evidence was offered as to the times stipulated in such demands that returns were
required to be filed. Respondent’s counsel did not dispute that the returns for
those years were filed within a reasonable time after the demands were made. No
late filing penalties were assessed in respect of general T1 returns for any of
the subject years even those in respect of which demands were made. There was
no tax payable in respect of any of the subject years. But for the demands
there was no requirement to file Part I returns pursuant to subparagraph
150(1.1) of the Income Tax Act (the “Act”).
[6] The Appellant, a
visual artist and a university art professor, testified that between 2002 and
2004 he suffered a detached retina that required several surgical procedures
during that period and that resulted in his having to take two leaves of absence
from the university. The recovery period from the various surgeries was
protracted going into 2005 and 2006 and it included periods where he suffered a
loss of vision of up to 85% in one eye. Although I gather that his vision was
substantially restored, the problem resulted in his having to change the nature
of his professional artistic endeavours and his teaching. His personal issues
were compounded by a theft at his art studio and a serious car accident, both occurring
during this difficult period.
[7] Still, well before
the demands for returns were made, he had gathered his income tax information
for all of the subject years and delivered them to his accountant for
processing and filing. His accountant, however, sat on such materials for some
period and the returns were not filed until after the demands were made.
[8] Shortly after
filing the returns the Minister of National Revenue (the “Minister”) assessed
penalties under subsection 162(7) of the Act. That section imposes a
penalty for failure to file a required information return on time.
[9] As noted, the
information return in question here is not the T1 return but rather the T1142 information
return form required to be filed pursuant to section 233.6 of the Act.
That section sets out that a specified Canadian entity (defined by subsection
233.3(1)) must file a prescribed form on the entity’s filing-due date for the
particular year where the entity is beneficially interested in a non-resident trust
in the year and received a distribution of property from that trust.
[10] If the prescribed
form required in section 233.6 is not filed by the entity’s filing-due date for
the particular year, the late filing penalty under subsection 162(7) is $25 a
day for each day that the prescribed form is late to a maximum of 100 days. The
Minister calculated the penalty as being the maximum amount for each of the
years in question on the basis that the filing-due date was June 15 of the year
following each taxation year in question as determined under subsection 150(1).
The forms were not filed at that time but rather were filed later with the T1
returns which themselves were not late filed.
[11] At this point, I
note that considerable time was spent at the hearing trying to determine the
nature of the trust. Based on the evidence, I concluded that the trust was
formed in the United States as a consequence of the death of the Appellant’s great uncle who lived in
the United
States. It
was administered in the United States by a U.S. trustee. It was not a discretionary
trust. There was a fixed invested capital amount of the estate that gave rise
to income and it was the income that was required to be distributed to the
income beneficiary each year.
[12] As well, I note that
while there is no question that the subject non-resident trust is a
testamentary trust, there is no basis to necessarily conclude that the trust
was not an estate. The assumptions in the Reply to the Notice of Appeal
(“Reply”) are that the trust was an ongoing testamentary trust. That assumption
stands unshaken and, in any event, I am satisfied that it was indeed, a
testamentary trust. However, I note that a testamentary trust as defined in
subsection 108(1) of the Act
means a trust or estate that arose on and as a consequence of the
death of an individual. That is to say, an assumption that a trust is a
testamentary trust does not preclude such trust from being part of the estate
of the Appellant’s deceased great uncle. Further, there is nothing in the
assumptions that would direct me to believe that there was an assumption made
by the Minister which paralleled the assumption of counsel for the Respondent.
The assertion or assumption of counsel for the Respondent was that the estate
had been wound up and that the testamentary trust was not an estate but was
rather something else. The assumptions in the Reply, however, only state that
distributions were first being made to the Appellant’s father and on his
father’s death the distributions continued to be paid to him in accordance with
the terms of the testamentary trust. There is no assumption that the estate had
been wound up or that the testamentary trust was a distinct trust administered
separate and apart from the estate by, say, for example, being administered by
trustees that were not executors.
Analysis
[13] These appeals presented several problems. Since neither
the terms of the Appellant’s great uncle’s will nor the status of his great
uncle’s estate are in evidence, it is difficult to determine the status of the
trust. As I said, there is no assumption made regarding the status of the
Appellant’s great uncle’s estate. I find then that the Respondent should not be
able to rely on the argument that the assumed testamentary trust in question is
not an estate. As such the subject testamentary trust should be allowed the
benefit of the exemption afforded to an estate pursuant to section 233.6 of the
Act and is accordingly exempt from the filing requirement in that
section. Subsection 233.6(1) specifically provides that the Appellant, as a
specified Canadian entity who received a distribution from a non-resident trust
in which he was beneficially interested, only need file the subject form if the
non-resident trust is;
… (other than a trust that was an excluded trust in
respect of the year or period of the entity or an estate that arose on and
as a consequence of the death of an individual) … [Emphasis Added.]
[14] Affording the Appellant the benefit of this provision is
reason enough to allow the appeal in this case. I have no reason to believe that
the Appellant did not receive the subject distributions from his great uncle’s
estate that arose as a consequence of that great uncle’s death. As noted, the
assumptions of the Minister did not suggest otherwise and as such the Appellant
has satisfied the only burdens imposed on him in this case.
[15] At the hearing and in my reasons given from the bench,
I also suggested that the filing of the prescribed forms required to be filed
pursuant to section 233.6 in respect of each of the subject years were not late
filed. This was based on the filing-due date in section 233.6 being determined by
subsection 150(1) as pleaded in the Reply. However, subsection 150(1.1)
provides that there is no due date in respect of a year where no tax is payable
for the year. That would appear to have saved the Appellant from a late filing
penalty. However, section 248 defines the filing-due date as “… the day on or
before which the taxpayer’s return of income under Part I for the year is
required to be filed or would be required to be filed if tax under that Part
were payable by the taxpayer for the year.” Given that definition of the
filing-due date, it does not assist the Appellant to have filed the subject
forms with his timely filed T1 returns. I cannot ignore such an express
provision in the Act even though it was not relied on by the Respondent.
[16] While it is not necessary for me to consider the
Appellant’s due diligence defense argument I wish to note, as I did in my
reasons from the bench, that while the due diligence defense does not protect
failures resulting from honest mistakes, some latitude might arguably apply in
this case. There was a voluntary disclosure in respect of the 2002, 2003 and
2004 taxation years and there would have been a voluntary disclosure in respect
of 2005 and 2006 had the accountant acted more diligently as instructed by the
Appellant. Indeed, in Leclerc v. R., this
Court referred to voluntary disclosures being mitigating under the Canada
Revenue Agency’s own administrative practices.
[17] Further, I question whether a prudent person acting
reasonably would have taken greater care or acted more diligently in a case such
as this where the distributions so clearly arose as a consequence of a death. Should
beneficiaries under a will be presumed to know that even though it is true that
all estates are trusts, not all testamentary trusts are estates? I am of the
view that the distinctions are not so readily apparent in these circumstances
to persons of similar background and experience as the Appellant. While
ignorance of the law is no excuse, in this case the degree of difficulty
associated with compliance lowers the bar somewhat in respect of the
application of the due diligence defense in my view. Accordingly, if it were
necessary for me to apply that defense in this case, I might have been inclined
to do so.
[18] However, for the reason stated
above, that is not necessary. The appeals are allowed, in any event, by virtue
of my finding that the filing of the subject forms was not required by the
terms of the Act.
Signed at Ottawa, Canada
this 22nd day of July 2011.
"J.E. Hershfield"
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