Date: 20090605
Docket: 2006-1776(IT)G
BETWEEN:
CLAUDETTE SAINDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
AMENDED REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an
appeal from an assessment by the Minister of National Revenue (the Minister) made
after the normal assessment period under subparagraph 152(4)(a)(i) of
the Income Tax Act (ITA), concerning the 1999 taxation year.
[2]
The
appellant acknowledged that she had failed to report a capital gain of
$133,400, realized in 1999. She argues, however, that the Minister is precluded
from reassessing her after the normal reassessment period on the ground that
the Minister is unable to show that that failure was due to neglect,
carelessness or wilful default on the appellant’s part.
[3]
Indeed, the
Minister must show this in order to be able to reassess after the three-year
limitation period prescribed in subsection 152(3.1) of the ITA. The relevant statutory provisions read as
follows:
152(3.1) Definition of “normal reassessment
period” –
For the purposes of subsections (4), (4.01), (4.2), (4.3), (5) and (9), the
normal reassessment period for a taxpayer in respect of a taxation year is
(a) where at the end of the
year the taxpayer is a mutual fund trust or a corporation other than a
Canadian-controlled private corporation, the period that ends 4 years after the
earlier of the day of mailing of a notice of an original assessment under this
Part in respect of the taxpayer for the year and the day of mailing of an
original notification that no tax is payable by the taxpayer for the year; and;
(b) in
any other case, the period that ends 3 years after the earlier of the day of mailing
of a notice of an original assessment under this Part in respect of the
taxpayer for the year and the day of mailing of an original notification that
no tax is payable by the taxpayer for the year.
. . .
152(4) Assessment and reassessment
[limitation period] – The
Minister may at any time make an assessment, reassessment or additional
assessment of tax for a taxation year, interest or penalties, if any, payable
under this Part by a taxpayer or notify in writing any person by whom a return
of income for a taxation year has been filed that no tax is payable for the
year, except that an assessment, reassessment or additional assessment may be
made after the taxpayer’s normal reassessment period in respect of the year
only if
(a) the taxpayer or person filling out the return
(i) has made any misrepresentation
that is attributable to neglect, carelessness or wilful default or has
committed any fraud in filing the return or in supplying any information under
this Act, or,
. . .
[4]
The
evidence reveals that the appellant is a businesswoman who was trained in
bookkeeping, administration and accounting. In 1978, she started
working for a company called Bitumar Inc. (Bitumar). In 1981, she acquired some shares in Bitumar through the
investment company 1851-1634 Québec Inc (Québec Inc), in which she held shares
and for which was the sole director. Through that transaction, the appellant
received 1,335 preferred shares in Québec Inc for an agreed sum of $100,
pursuant to the roll-over provisions set out in subsection 85(1) of the ITA.
[5]
Following a
disagreement with her partner at Bitumar, the appellant sold all of her shares
in Québec Inc, including the 1,335 preferred shares mentioned above, in
April 1999. Since the sum agreed upon in 1981 was $100, the adjusted
cost base of those shares was $100. The
proceeds of disposition for the shares were $133,500; accordingly, the
appellant realized a capital gain of $133,400. However,
when her tax return for 1999 was being prepared in April 2000, the appellant's
accountant erroneously considered the cost of the shares as being the same as
the proceeds of disposition, namely, $133,500. As a result, no capital gain was
entered for those shares.
[6]
The
appellant now acknowledges that there was an error, but submits that it did not
result from an error on her part.
She claims that she is not a tax specialist by
training and that, during the dispute with her former partner, she was
represented by a tax accountant and a lawyer. That tax accountant had made
various calculations to assess the net amount that would be left to the
appellant after tax. On the basis of one of
those calculations (Exhibit I-1, tab 9, page 3), he established the proceeds of
disposition of the 1,335 preferred shares to be $133,500 and the adjusted cost
base to be $27,500 (according to the information on the financial statements,
Exhibit I-1, tab 9, page 1 and tab 8, page 49, note 5
"contingent liability"). This resulted in a capital gain of $106,000
on those shares. In this calculation, he added
the capital gain realized on the sale of the common shares and, after the
capital gains exemption of $500,000, was left with an estimated taxable capital
gain of $515,900.
[7]
For
unexplained reasons, that same accountant, who did not appear before the Court
to testify and who had prepared the appellant's tax return for 1999 in
April 2000, had determined that the capital gain on the sale of the
preferred shares was $0. He simply omitted the 1981 transaction, which had resulted
in the transfer of those shares for the agreed sum of $100, and assumed that
the shares had been purchased for $133,500.
[8]
The
appellant said that she had quickly read through her tax return with the
accountant before signing it in April 2000. She trusted him completely,
because he was well informed about her file. Indeed,
he had attended all the negotiations during the 1999 dispute and had made all
the calculations to determine the appellant's net income after tax. Counsel for the appellant maintains that it was difficult
for the appellant to notice that the capital gain on the preferred shares had
not been reported. Indeed, the taxable capital
gain on page 2 of her tax return (Exhibit I-1, tab 1, page 2) is $528,000,
while based on the tax accountant's calculations
performed at the time of the 1999 transaction, the taxable capital gain was
$515,900 (Exhibit I-1, tab 9, page 3). Thus, counsel for the appellant submits
that the appellant cannot be considered negligent because she had not noticed
that the capital gain of $133,400 on the disposition of the preferred shares
had not been reported.
[9]
I note,
however, that, according to the spreadsheet with the accountant’s calculations,
the total capital gain was $1,015,900 and that, after it was reduced by
$500,000 through the capital gains exemption, a taxable capital gain of
$515,900 was obtained. If we look at the tax return, the capital gain amount of
$528,000 on page 2 does not take into account the capital gains exemption.
That exemption is taken into account later on in the
calculation of the taxable income, in the same section as the capital losses
deduction (on page 25 of the tax return, Exhibit I-1, tab 1). The total
deductions are $383,100. Therefore, there is a
difference of about $500,000 between the total approximate capital gain on the
tax accountant's spreadsheet and the amount he entered on the appellant's tax
return.
[10]
In my view,
that difference should have alerted the appellant. It was not that difficult
for her to notice, when she read through her tax return, that her accountant
had entered on page 5 of the return a gain of $0 on the sale of the 1,335
preferred shares. As the sole director of Québec Inc, she signed its financial
statements every year. On those statements, a note to financial statements was
written about transferring shares at the cost of $27,000 by roll-over under the
heading "contingent liabilities" (Exhibit I-1, tab 8). Her accountant also took that into account when he made his
calculations at the time of the 1999 transaction (Exhibit I-1, tab 9, pages 1 and 3).
[11]
Counsel for
the appellant cited Bondfield Construction Co, [2005] T.C.J. No. 239 (QL), in
which Justice Campbell of this Court defined the phrase "due
diligence" to establish the standard of care required of a taxpayer by
subparagraph 152(4)(a)(i) of the ITA. It
is explained as follows at paragraph 95:
[95] The term due diligence was again
described by Justice Bowman in Wong (E) v. Canada, [1996] G.S.T.C. 73-1
(T.C.C.) at 73-5, as follows:
. . . Due diligence is nothing more than the
degree [of] care that a reasonable person would take to ensure compliance with
the Act. It does not require perfection or infallibility. It does, however,
require more than a casual inquiry of an official in the Tax Department.
[12]
In that
decision, Justice Campbell found as follows:
[104] . . . Therefore, the Minister could not
satisfy the second part of the test even if I found a misrepresentation. The
Appellant implemented many systems to ensure proper compliance with this new
legislation. It retained a full-time internal auditor who was a chartered
accountant, accounting staff typical of a business the size of the Appellant,
and a top rated external accounting firm. A premier accounting and software
system was maintained and the highest level of audit was employed. . . .
[13]
On this
point, counsel for the respondent cited Nesbitt v. Canada, [1996] F.C.J.
No. 19 (QL), affirmed by [1996] F.C.J. No. 1470 (QL), in which Justice
Heald of the Federal Court of Canada, Trial Division, stated as follows at
paragraphs 25 and 26:
[25] In my view, the Plaintiff's actions do
not establish that he exercised reasonable care in the completion of his
return. The Plaintiff, like all other taxpayers under the Income Tax Act,
is required to sign the income tax return after certifying "... that the
information given in this return and in any documents attached is true, correct
and complete in every respect and fully discloses my income from all
sources". It is no answer for a taxpayer to blame any miscalculations or
errors on the preparer of his income tax return. In my view, this record
establishes that the Plaintiff was neglectful in respect of the preparation and
filing of his 1981 tax return.
[26] The error relating to the calculation
of the Plaintiff's capital gains was in the order of approximately $300,000.00.
An error of this magnitude should have been clearly apparent to the Plaintiff
had he taken reasonable care in reviewing the return. A similar situation was
present in the Venne case supra. In that case,
Mr. Justice Strayer stated at page 6252:
The errors in the income tax returns
should have been sufficiently obvious that a reasonable man of even limited
education and experience, especially one who was apparently a very successful
businessman and inventor, should have noticed. ... I think it is apparent from
the order of magnitude of these amounts of unreported income, even (with the
exception of 1974) as estimated by the taxpayer, that a reasonable taxpayer
would have suspected that there was something deficient in the income tax
returns which he was signing during this period.
[14]
In my view,
the respondent has established that the appellant had been negligent because
she had not questioned her accountant more thoroughly in regard to the 1999
transaction when she signed her tax return in April 2000. If she had read
her tax return carefully, she would have noticed a significant difference
between the capital gain reported on page 2 of her return and the gain that her
accountant had calculated before the $500,000 exemption. She would have been
able to see that no capital gain had been reported on her preferred shares on
page 5 of her tax return. She could have
easily made the connection with the calculations her accountant had provided at
the time of 1999 transaction. Those calculations showed a capital gain of
$106,000 on the preferred shares (Exhibit I-1, tab 9, page 3).
[15]
The
appellant was an experienced businesswoman, who knew how to play her game well
at the time of the dispute with her former partner. Although a taxpayer is not
required to be perfect when preparing his or her tax return, it is sufficient
for the Minister, in order to exercise the power provided for in subparagraph
152(4)(a)(i), to show that the appellant has not exercised reasonable
care (Venne v. Canada, [1984] F.C.J No. 314 (QL)).
[16]
In this
case, I find that the appellant has not exercised reasonable care. She had in hand
her accountant's calculations that he had made the previous year, and they did
not correspond to the amounts reported in her tax return. She had only to raise the question, and her accountant
would typically have verified the income reported one more time.
[17]
For these
reasons, I would dismiss the appeal with costs.
Signed at Montréal, Quebec, this 5th day of June
2009.
"Lucie Lamarre"
on this 31st day
of March 2010
François Brunet,
Revisor
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