Citation: 2009TCC121
Date: 20090226
Docket: 2007-2883(IT)G
BETWEEN:
MICHAEL OUNPUU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The issue in this appeal is
whether the capital gains deduction, to which the Appellant would otherwise be
entitled, should be denied pursuant to subsection 110.6(6) of the Income Tax
Act (the “Act”).
[2]
The Appellant is a metallurgist.
He has a Bachelor of Science degree in geological engineering. His expertise is
in separating minerals from each other.
[3]
In 1995, the Appellant worked at Lakefield
Research, which was a testing facility owned by Falconbridge. At that time
Falconbridge decided to concentrate its efforts on its nickel mining business
and to sell Lakefield Research. The Appellant was a minor participant in a
management buyout of Lakefield Research as part of which he acquired 40,000
shares of Lakefield Research Limited. In addition to these shares the Appellant
also acquired an additional 2,434 shares when another shareholder left
Lakefield Research Limited.
[4]
In 1998, Lakefield Research
Limited was proposing to expand its operations outside of Canada. The
senior managers of Lakefield Research Limited were concerned that the shares of
the company would cease to be qualified small business corporation shares as
defined in section 110.6 of the Act. Eric Steinmiller, a Chartered
Accountant, submitted a proposed plan initially to the senior managers and then
to all of the other shareholders (including the Appellant) to allow the
shareholders to crystallize their capital gains deduction. There were
approximately 12 shareholders of the company at that time. Each shareholder
formed their own company and transferred their shares of Lakefield Research
Limited to their own holding company.
[5]
The Appellant transferred his
shares to his holding company (a numbered Ontario company) in two separate transactions. He transferred
40,000 Class B common shares of Lakefield Research Limited to his holding
company for 94 common shares of his holding company. No election was made
pursuant to subsection 85(1) of the Act in relation to this transfer of
shares. The second transaction was the transfer, to his holding company, of the
2,434 Class B common shares that the Appellant had acquired from a departing
shareholder (and which he had held for less than two years as of that time). An
election was made pursuant to subsection 85(1) of the Act in relation to
this second transaction.
[6]
It is the first transaction (the
transfer of 40,000 Class B common shares to his holding company) that is
relevant in this appeal. The parties agree that the capital gain arising as a
result of this transfer of shares was $207,257 and the taxable capital gain was
$155,443 (since taxable capital gains were 75% of capital gains in 1998). The
issue is whether the Appellant is entitled to a capital gains deduction of
$155,443 pursuant to section 110.6 of the Act. The Respondent does not
dispute that if the Appellant would have filed his tax return for 1998 by April
30, 2000 and would have reported the capital gain in this return, then the
Appellant would be entitled to this deduction.
[7]
In this case, the Appellant did
not file his tax return for 1998 until 2001 and he did not report any capital
gains in this return when it was filed. An assessment of the Appellant’s tax
liability for 1998 was issued based on his tax return as filed but a subsequent
reassessment of the Appellant’s tax liability for 1998 was issued based on an
inclusion of a taxable capital gain of $155,443 in his income (with no amount
being allowed as a capital gains deduction).
[8]
The Appellant’s explanation for
his failure to file his 1998 tax return on time and to report the capital gain
was that he was busy at work and he did not fully understand the transactions
that were completed in 1998 nor did he understand how to report these
transactions on his tax return.
[9]
Subsection 110.6(6) of the Act
in 1998 provided as follows:
(6) Notwithstanding
subsections (2) and (2.1), 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 the individual's income for the year within one year after the
day on or before which the individual is required to file a return of the
individual's income for the year pursuant to section 150, or
(b) fails to
report the capital gain in the individual's 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 the
individual's taxable income for that or any subsequent taxation year and the
burden of establishing the facts justifying the denial of such an amount under
this section is on the Minister.
[10]
When subsection 110.6(6) was added
to the Act in 1985, the capital gains deduction was available for any
capital gain arising as a result of any disposition of any capital property. As
a result, many individuals could potentially benefit from a capital gains
deduction. With the elimination of the capital gains deduction for any capital
gain arising from the disposition of any capital property in 1994, only capital
gains arising from the dispositions of qualified small business corporation
shares and qualified farm property (and now qualified fishing property) are
eligible for a capital gains deduction and hence the pool of individuals who
could utilize their capital gains deduction has been reduced significantly.
[11]
Subsection 150(1) of the Act
in 1998 stated, in part, as follows:
150 (1) A
return of income for each taxation year in the case of a corporation (other
than a corporation that was a registered charity throughout the year) and in
the case of an individual, for each taxation year for which tax is
payable by the individual or in which the individual has a taxable
capital gain or has disposed of a capital property, shall, without
notice or demand therefor, be filed with the Minister in prescribed form and
containing prescribed information,
…
(d) in the case of any other person, on or
before
(i) the following April 30…
(emphasis
added)
[12]
The Appellant did not carry on any
business in 1998. Since the Appellant disposed of capital property in 1998, his
tax return for 1998 was required to be filed by April 30, 1999.
[13]
Since the Appellant failed to file
his 1998 tax return by April 30, 2000 and also failed to report the capital
gain in this return when it was filed, subsection 110.6(6) of the Act will
apply to the Appellant if:
1.
The Appellant knowingly failed to
file his 1998 tax return by April 30, 2000;
2.
The Appellant, under circumstances
amounting to gross negligence, failed to file his 1998 tax return by April 30,
2000;
3.
The Appellant knowingly failed to report
in his 1998 tax return the capital gain arising as a result of the transfer of
40,000 Class B common shares of Lakefield Research Limited to his holding
company; or
4. The Appellant, under circumstances
amounting to gross negligence, failed to report in his 1998 tax return the
capital gain arising as a result of the transfer of 40,000 Class B common
shares of Lakefield Research Limited to his holding company.
[14]
If any one of these four
situations applies to the Appellant then the provisions of subsection 110.6(6)
of the Act will apply and the Appellant will not be entitled to claim
his capital gains deduction in relation to the capital gain arising as a result
of the disposition of these shares of Lakefield Research Limited to his holding
company.
Knowingly Failed to
File
[15]
It was the position of counsel for
the Respondent that to establish that the Appellant knowingly failed to file his
tax return, the Respondent simply had to establish that the Appellant knew that
his tax return for 1998 had not been filed by April 30, 2000. It seems obvious
to me that the Appellant knew in 1999 and in 2000 that his tax return for 1998
was not being filed and therefore the Appellant knew that his tax return for
1998 was not filed on or before April 30, 2000. However the issue is whether
this is sufficient to support the application of subsection 110.6 (6) of the Act.
[16]
In R. v. Sault Ste.
Marie [1978] 2 S.C.R. 1299, the Supreme Court of Canada
recognized three categories of offences. Justice Dickson stated as follows:
I conclude,
for the reasons which I have sought to express, that there are compelling
grounds for the recognition of three categories of offences rather than the
traditional two:
1.
Offences in which mens rea, consisting of some positive state of
mind such as intent, knowledge, or recklessness, must be proved by the
prosecution either as an inference from the nature of the act committed, or by
additional evidence.
2.
Offences in which there is no necessity for the prosecution to
prove the existence of mens rea; the doing of the prohibited act prima facie
imports the offence, leaving it open to the accused to avoid liability by
proving that he took all reasonable care. This involves consideration of what a
reasonable man would have done in the circumstances. The defence will be
available if the accused reasonably believed in a mistaken set of facts which,
if true, would render the act or omission innocent, or if he took all
reasonable steps to avoid the particular event. These offences may properly be
called offences of strict liability. Mr. Justice Estey so referred to them in
Hickey's case.
3.
Offences of absolute liability where it is not open to the
accused to exculpate himself by showing that he was free of fault.
Offences which
are criminal in the true sense fall in the first category. Public welfare
offences would prima facie be in the second category. They are not subject to
the presumption of full mens rea. An offence of this type would fall in
the first category only if such words as "wilfully,"
"with intent," "knowingly," or
"intentionally" are contained in the statutory provision
creating the offence. On the other hand, the principle that punishment
should in general not be inflicted on those without fault applies. Offences of
absolute liability would be those in respect of which the Legislature had made
it clear that guilt would follow proof merely of the proscribed act. The
overall regulatory pattern adopted by the Legislature, the subject matter of
the legislation, the importance of the penalty, and the precision of the
language used will be primary considerations in determining whether the offence
falls into the third category.
(emphasis
added)
[17]
In Pillar Oilfield Projects
Ltd. v. The Queen [1993] G.S.T.C. 49, 2 G.T.C. 1005 Justice Bowman
(as he then was), after quoting the above passage from Sault Ste. Marie,
stated as follows:
11 Although Mr.
Justice Dickson was dealing with "offences" I can see no reason in
principle for not extending his analysis to administratively imposed penalties
as well. A penalty, as the name implies, is a form of punishment.
[18]
This analysis was adopted by
Justice Rip (as he then was) in Ross v. The Queen, [1996]
G.S.T.C. 33 4 G.T.C. 3099, at paragraph 24.
[19]
In this particular case, the denial
of a capital gains deduction is not described as a penalty in subsection
110.6(6) of the Act. However, the consequences of denying the capital
gains deduction can be severe. In this case, if the Appellant is not allowed to
claim the capital gains deduction, his income will increase by $155,443. Since
his salary for 1998 was approximately $87,000, his additional liability under
the Act (not including interest) arising from the denial of the capital
gains deduction would be in excess of $45,000 (and the Appellant would also
have an additional liability for Ontario provincial income taxes). It seems to
me that a liability of this magnitude must be a penalty.
[20]
As well the language that is used
in 110.6(6) of the Act to describe the circumstances that will result in
the application of that subsection (knowingly or under circumstances amounting
to gross negligence) is the same language used in subsection 163(2) of the Act
(knowingly or under circumstances amounting to gross negligence). Since
subsection 163(2) of the Act is clearly a penal provision (Udell v.
The Minister of National Revenue [1969] C.T.C. 704, 70 DTC 6019, at
paragraph 46), it seems to me that the provisions of 110.6(6) of the Act
should also be treated as a penal provision.
[21]
As a result, in my opinion, the
comments of Justice Dickson in Sault Ste. Marie are equally applicable
to the provisions of subsection 110.6(6) of the Act. Since this section
contains the word “knowingly”, the Crown must prove “some positive state of
mind such as intent, knowledge, or recklessness”.
[22]
The Supreme Court of Canada in The
Queen v. Canada Trustco Mortgage Company, 2005 SCC 54, 2005 DTC 5523
(Eng.), [2005] 5 C.T.C. 215, 340 N.R. 1, 259 D.L.R. (4th) 193, [2005]
2 S.C.R. 601, stated that:
10 It
has been long established as a matter of statutory interpretation that “the
words of an Act are to be read in their entire context and in their grammatical
and ordinary sense harmoniously with the scheme of the Act, the object of the
Act, and the intention of Parliament”: see 65302 British Columbia Ltd. v. R.,
[1999] 3 S.C.R. 804 (S.C.C.), at para. 50. The interpretation of a statutory
provision must be made according to a textual, contextual and purposive
analysis to find a meaning that is harmonious with the Act as a whole. When the
words of a provision are precise and unequivocal, the ordinary meaning of the
words play a dominant role in the interpretive process. On the other hand,
where the words can support more than one reasonable meaning, the ordinary
meaning of the words plays a lesser role. The relative effects of ordinary
meaning, context and purpose on the interpretive process may vary, but in all
cases the court must seek to read the provisions of an Act as a harmonious
whole.
[23]
Subsection 110.6(6) of the Act
refers to an individual who “knowingly” fails to file his or her tax return. If
simply the knowledge that a tax return was not being filed is sufficient for
the purposes of this subsection, then an individual who is careless or
negligent in not filing his or her tax return but who knows that the tax return
is not being filed, will be subject to the application of this subsection. It
does not seem to me that Parliament would have intended to deny an individual
his or her capital gains deduction simply because that person negligently or
carelessly failed to file their tax return even if that person knew that the
return was not being filed. Subsection 110.6(6) of the Act applies if an
individual “knowingly or under circumstances amounting to gross negligence fails
to file the individual’s return” within the specified time, not if the
individual carelessly or negligently fails to file his or her tax return within
the specified time.
[24]
Simply the knowledge that the
return is not being filed is not, in my opinion sufficient for the application
of subsection 110.6(6) of the Act. In my opinion, in order to establish
that an individual knowingly failed to file his or her tax return, it is
necessary to show that an individual intentionally (which will include an
individual who is wilfully blind) failed to file his or her tax return in
circumstances in which the individual was attempting to deceive to attain an
economic advantage. An individual might “intentionally” not file his or her
return at a particular time because that person intends to file it later but
because the person is careless or negligent, the return is not filed within the
specified time. In my opinion this type of intention is not what is required
for this subsection to apply but rather an intention to deceive in order to
realize an economic gain. The decisions of this Court that refer to deceit and
economic gain in the context of subsection 110.6(6) of the Act are
discussed below in relation to the failure to report a capital gain. If deceit
to realize an economic gain is required to establish that a person knowingly
failed to report a capital gain, then it must also be required to establish
that a person knowingly failed to file his or her tax return.
[25]
Support for the position that
simply knowing that a tax return is not being filed is not sufficient for the
purposes of subsection 110.6(6) of the Act can be found in Ragobar
v. The Queen [1995] 1 C.T.C. 2364. In that case the taxpayer did not
file his tax return within the time period referred to in subsection 110.6 (6)
of the Act. The explanation provided by the individual taxpayer was described
in paragraph 21 of that case as follows:
21 The
appellant explained his failure to file on time as follows. With respect to his
employment income the deductions made by his employer at source sufficiently
covered the taxes on that income and therefore he naively thought no return was
necessary. As to the capital gain on the sale of 32 Askin he again naively
thought that one need not report such gains until one had exhausted the capital
gains deduction limit. Of course the Act obliges taxpayers to file returns on
time. The question in the present case, however, is did the appellant
“knowingly or under circumstances amounting to gross negligence” fail to file
his return and declare the capital gain in time?
[26]
It seems clear that the individual
in that case would have known that the return was not being filed as the
explanation provided was that he believed he had a valid excuse for not filing
it. In that case Justice O’Connor held that subsection 110.6(6) of the Act
did not apply. He stated in paragraph 25 that:
25 The
Court accepts the appellant's explanation of why he failed to file on time and
finds that he did not act knowingly or under circumstances amounting to gross
negligence.
[27]
Since the explanation was accepted
and subsection 110.6(6) of the Act was not applied, simply knowing that
a tax return is not being filed is not sufficient. By accepting his excuse, it
seems to me that the finding was based on an interpretation of “knowingly” that
would require an intention to deceive to realize an economic gain.
[28]
In this case, the Appellant’s only
sources of income were employment income and some small amounts of investment
income. Each year the Appellant would make the maximum RRSP contribution and he
would receive a refund when his return was filed. This was the same in 1998
when, without taking into account the capital gain arising as a result of the
disposition of the shares of Lakefield Research Limited, the Appellant was
entitled to a refund of $1,147.
[29]
Since the Appellant was entitled
to a refund for 1998, there was no incentive for the Appellant to delay the
filing of his 1998 tax return. The information that had been provided to the
Appellant when the crystallization plan was proposed was that the Appellant’s
tax liability would not be affected by the crystallization transactions (and
hence his refund would not change). The only property that the Appellant held
in 1998 or in any subsequent year that would qualify for the capital gains
deduction (assuming that the shares of Lakefield Research Limited ceased to be
qualified small business corporation shares as anticipated by the senior
managers) were the shares of Lakefield Research Limited that he held prior to
the transfer of these shares to his holding company. The Appellant did not have
anything to gain economically by filing his return late and I find that the
Appellant did not knowingly fail to file his tax return within the specified
period of time for the purposes of subsection 110.6(6) of the Act.
Gross Negligence –
Failure to File
[30]
The next issue is whether the
Appellant, under circumstances amounting to gross negligence, failed to file his
tax return for 1998 by April 30, 2000. Justice Strayer of the Federal Court Trial
Division, in Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C.
6247, made the following comments on the meaning of gross negligence for the
purposes of penalties imposed under subsection 163(2) of the Income Tax Act:
“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.
[31]
In Maltais v. The Queen [1991]
2 C.T.C. 2651, 91 DTC 1385, Justice Bowman (as he then was) in dealing with a
penalty imposed pursuant to subsection 163(1) of the Act stated as
follows:
7. …Mr. Ghan on behalf of
the respondent contended that subsection 163(1) in the form which is applied to
1989 did not require that there be a wilful intention to evade tax. In support
of this position he pointed to the wording of the former 163(1) which referred
to “Every person who wilfully attempts to evade the payment of tax payable by
him” and to the wording of subsection 163(2) which uses the expression
“knowingly or under circumstances amounting to gross negligence”. These
provisions require a mens rea of intent or of recklessness.
(emphasis
added)
[32]
While the comments of Justice
Bowman in relation to subsection 163(2) of the Act were obiter in
that case, these comments were adopted by Justice Hamlyn in Dunleavy v. The
Queen [1993] 1 C.T.C. 2648, 93 DTC 417.
[33]
In Boileau v. The
Minister of National Revenue, [1989] 2 C.T.C. 2001, 89 DTC 247, Justice Lamarre
Proulx stated that
20. …It
is true that by virtue of subsection 163(2), there is no accused nor is there a
criminal charge. It would thus appear that it is not, as such, a criminal
proceeding and that it remains a civil proceeding. However, the application
of that subsection requires the evidence of mens rea or culpable conduct
(emphasis
added)
[34]
It seems to me that in order for
the Respondent to establish that the Appellant, under circumstances amounting
to gross negligence, failed to file his 1998 tax return by April 30, 2000, the Respondent
would have to show some culpable conduct on the part of the Appellant. In this
case, it seems to me that the Appellant did not have any intent to deceive or
mislead. He simply had the mistaken understanding that, as long as he was
receiving a refund, that there was no particular time period within which he
had to file a tax return and that any delay was costing him money as he would
not receive his refund until his tax return was filed. Therefore, as a result,
I find it that the Appellant did not, under circumstances amounting to gross
negligence, fail to file his 1998 tax return by April 30, 2000.
Knowingly Failed to
Report the Capital Gain
[35]
The Appellant also did not report
the capital gain in his tax return for 1998 when he finally filed this return. The
next issue is whether the Appellant knowingly failed to report this capital
gain. For the reasons stated above, in order for the Respondent to establish
that the Appellant knowingly failed to report the capital gain, the Respondent
would have to establish that the Appellant intentionally failed (or was wilfully
blind in his failure) to report this capital gain to deceive the Canada Revenue
Agency in order to attain some economic advantage.
[36]
The Appellant was part of a group
of shareholders who participated in the crystallization transactions. The
accountant who designed the plan would attend group meetings of the
shareholders and explain the proposed plan to the shareholders. The Appellant
stated that these explanations were simply over his head. He did not retain the
accountant to prepare his tax return.
[37]
At the time that the transactions
were being proposed, the accountant sent correspondence to the Appellant. In a
letter dated January 27, 1998 the accountant stated that:
You will sell your shares to Holdco,
report the capital gain (being the excess of the value of the shares over your
cost) that arises thereon on your tax return and claim the capital gains
exemption to shelter the capital gain from income tax.
[38]
There was also a letter from the
accountant dated February 12, 1998 to the Appellant confirming that the capital
gain that would arise on the transfer of the shares will be sheltered by the
Appellant’s capital gains deduction and the Appellant would not have an
alternative minimum tax liability.
[39]
A copy of the fax dated February
13, 1998 that was obtained from the files of the accountant was also introduced
into evidence. This fax included the letter dated February 12, 1998 and two
additional schedules that the Appellant was not able to locate among his files.
These schedules show excerpts from two tax returns - one in which the capital
gain and capital gains deduction amounts are claimed and one in which no
capital gain is reported. In both cases, the amount of the income tax payable is
exactly the same - $24,437.04.
[40]
The Appellant stated that when he
filed his tax return for 1998 he knew that something should be reported in
relation to the crystallization transaction but he did not know how to report
it. He indicated that he was mainly concerned with the bottom line. He wanted
to ensure that the amount of taxes that was owing was accurately stated. It was
his understanding that no taxes would arise as a result of the 1998 crystallization
transaction.
[41]
In my opinion, the Respondent has
failed to show that the Appellant had knowingly failed to report the capital
gain in his 1998 tax return for the purposes of subsection 110.6(6) of the Act.
There was no indication that the Appellant had any intention of deceiving the
Canada Revenue Agency. The Appellant had no reason to not report the capital
gain as he had no other opportunity to utilize his capital gains deduction
(which in 1998 was only available for qualified shares of a small business corporation
or qualified farm property).
Gross Negligence –
Failure to Report the Capital Gain
[42]
As noted above, there is also an
element of mens rea required for gross negligence. In Colangelo
Estate v. The Queen [1998] 2 C.T.C. 2823, 98 DTC 1607, Justice Bowie,
in finding that subsection 110.6(6) of the Act did not apply in the
circumstances of that case, stated as follows:
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.
[43]
Justice Hershfield in Sidhu
v. The Queen, [2004] 2 C.T.C. 3167, 2004 DTC 2540 held that subsection
110.6(6) of the Act did apply in the circumstances of that case. He made
the following comments on subsection 110.6(6) of the Act:
23 The
Appellant relies on the decision in Venne v. R. (1984), 84 D.T.C. 6247 (Fed.
T.D.) and argues that the bar for finding gross negligence has been raised to
require a finding of a high degree of negligence tantamount to intentional
acting. While some support may be found to argue otherwise, the decision in
Venne does not raise the bar to require the Minister to establish actual intent
to deceive or willful misconduct. If that were the test, the subject provision
of the Act need only have referred to “knowingly” failing to report a gain.
Actions “tantamount” to intentional actions are actions from which an imputed
intention can be found such as actions demonstrating “an indifference as to
whether the law is complied with or not”.* The non-reporting of the gain in the
circumstances of this case is a gross self-serving indifference to compliance.
Not to mention such a significant gain to one's accountant upon whom you rely
to ensure appropriate shelter for employment income from property and business
losses, on the facts of this case which have shown the Appellant to be
untrustworthy, is as tantamount to intentional acting as I might imagine. The
burden here is not to prove, beyond a reasonable doubt, mens rea to evade
taxes. The burden is to prove on a balance of probability such an indifference
to appropriate and reasonable diligence in a self-assessing system as belies or
offends common sense. Beyond this, I note that the evidence in this case that
suggests an attempted cover-up of the Appellant's initial non-reporting only
enhances the Respondent's position.
[44]
Justice Hershfield did not refer
specifically to whether there was any economic gain that the taxpayer could
realize in that case by not reporting the capital gain. However in paragraph 9
of that case, Justice Hershfield referred to a “gain of some $160,000”. Since
the property in that case was a rental property, a gain of this amount would
exceed any available capital gains deduction that the taxpayer may have had
available to him. The economic gain would be the avoidance of the tax liability
on the portion of the taxable capital gain that would be in excess of the
capital gains deduction available to the taxpayer pursuant to section 110.6 of
the Act in 1993 (which was the year in which the taxpayer disposed of
the rental property).
[45]
In the present case, the Appellant
did not attempt to cover up his failure to report the capital gain and in fact,
the Appellant retained an accountant in 2004 to rectify any filing errors that
he may have made. His accountant tried to make a voluntary disclosure of the
failure to file in early 2004, but this voluntary disclosure was rejected by
the Canada Revenue Agency.
[46]
In Carlson v. The Queen,
[1998] 2 C.T.C. 2476, 98 D.T.C. 1373,
Justice Hamlyn stated as follows in finding that the provisions of subsection
110.6(6) of the Act did not apply in that case:
33 I
found the Appellant to be a straight-forward, credible witness who mistakenly
thought he did not have to report the share gain disposition because he
concluded, from the advice he received from his associates in the other
company, that the capital gain would be exempt from tax and did not have to be
reported.
34 It
is clear, the Appellant did not understand the whole basis and the need to
report that is fundamental to the self-reporting tax system that applies to
taxpayers in this country. And while he did his own return, beyond the advice
that he did receive, he did not seek the assistance of the Revenue Canada Tax
Guide as to how the gain should have been dealt with. But I did conclude he did
receive some advice, albeit not good, or not fully complete.
35 Notwithstanding
this finding, I conclude from the evidence he was not attempting to
deceive Revenue Canada. His mistaken belief was an
honest held belief, and from that point of view, there was no economic
consequence for him to hide the gain. Albeit, this also was a mistaken
view because from Revenue Canada's point of view he still had available the
enhanced capital gain deduction. This economic gain would only be if the
Appellant attempted to use this unused enhanced capital gain deduction in a
future disposition. But from his evidence, and my assessment of the Appellant,
this was not, nor is it now - from what I conclude from his evidence - his
intent.
36 The
amount of the omission is large, that is true. The failure to report is an
indicia of negligence, I agree with that, but I cannot conclude that the action
of the Appellant was to be a point of indifference as to whether the law was
complied with or not. He believed he was complying with the law.
(emphasis
added)
[47]
Justice Hamlyn refers to an
attempt to deceive and a lack of economic consequences. In this case, I find
that the Appellant was not attempting to deceive the Canada Revenue Agency and
he had no economic gain since he did not own any other qualifying property.
[48]
Justice Lamarre Proulx also refers
to an economic interest as being an important element in relation to subsection
110.6(6) of the Act in Estate of Paul Lévesque v. The Queen
96 DTC 3250 when she stated that:
11 In
analyzing this issue, I must say that this lack of knowledge of the Act is
surprising and raises doubt. However, the evidence did not reveal any tax
interest on the taxpayer's part in hiding this disposition of his shares to his
son from the Minister. It therefore seems to me in these circumstances that it
must be accepted that the taxpayer acted in the manner in which he did out of
ignorance of this fiction of the Act whereby, at the time of a gift of a
property to one's son, there is a deemed disposition of that property at its
fair market value and that the proceeds of that disposition must be included in
computing the taxpayer's income.
12 Ignorance
or failure to obtain adequate information could in certain circumstances be a
sufficient element to constitute gross negligence, particularly in cases where
there is an economic interest in remaining ignorant. Here, the element
that tilts the scales in favour of accepting the taxpayer's position is that
there was no economic interest in this omission or in this failure to obtain
adequate information.
(emphasis
added)
[49]
In Foisy v. The Queen
[2001] 1 C.T.C. 2606, 2000 DTC 2225, Justice Lamarre Proulx dealt with a case
where an accountant (who was both a CA and a CMA and who had previously
correctly reported capital gains), failed to report a capital gain of
approximately $185,410. The issue in that case was whether the provisions of
subsection 110.6(6) of the Act should apply to deny the capital gains
deduction because the taxpayer had failed to report the capital gain in his tax
return.
[50]
Justice Lamarre Proulx made the
following comments in Foisy:
25 As
we have just read, the penalty for failing to report a capital gain is a harsh
one. Not only is the exemption for the unreported capital gain lost and the
taxable portion of the capital gain for the year in question required to be
included in the individual's income, but an exemption to which the individual
is supposed to be entitled throughout his or her life is lost forever. In
my view, in the context of section 110.6, it is necessary that the words
“knowingly or under circumstances amounting to gross negligence” mean more than
an intention not to report the capital gain. If the exemption provided for in
subsection 110.6(2) of the Act did not exist, proving such an intention would
be sufficient for a finding of gross negligence, since the purpose of not
reporting would be to evade taxes. However, in the specific case where an
exemption is granted for a capital gain, the failure to report the gain must
occur in circumstances in which there is an intention to evade taxes, a
malicious intent not to comply with the Act's requirements or an intention to
deceive the Minister.
…
30 The
Minister's officer said that one reason for the decision to apply subsections
110.6(6) and 163(2) of the Act was that the appellant knew he had to report
capital gains since he had already reported some. I have trouble seeing a
connection between that fact and the existence of malicious intent to deceive
the Minister. Rather, I see it as evidence that the appellant acted properly
with regard to the Act, as was argued by his counsel.
31 To
satisfy me that there was malicious intent or gross negligence on the part of
the appellant, it would have been necessary to show me how it was in the
appellant's interest to hide the capital gain or prove to me that his behaviour
was habitually negligent or wrongful. For example, if I had been shown that the
appellant was about to pass the $500,000 exemption limit or that purchasing
qualified small business corporation shares was a common occurrence for him, I
could have seen that the appellant had a culpable interest in hiding
information from the Minister. (On the contrary, the evidence showed that the
appellant had purchased shares in public corporations, not qualified small
business corporation shares, with the proceeds of disposition of the shares
that gave rise to the capital gain.) If it had been proved to me that the appellant
usually tried to deceive the Minister in his tax returns, I could have seen in
the taxpayer's conduct a malicious intent to deceive.
32 It
is my view that the evidence has not shown that, when he committed the wrongful
act of not reporting the capital gain, the appellant intended to deceive the
Minister or evade some liability to pay tax, or that there were circumstances
amounting to gross negligence. The appellant was negligent to some extent but,
in view of the reasons for which and the circumstances in which it occurred,
that negligence is not serious enough for subsection 110.6(6) of the Act to
apply. Consequently, subsection 163(2) of the Act does not apply either.
(emphasis
added)
[51]
In this case as well, there was
evidence that the Appellant had previously correctly reported capital gains and
had, in one year, previously reported the capital gains deduction. However, the
1998 transaction was different from the previous transactions. In the previous
transactions the Appellant had sold shares for cash but in the 1998 transaction
he sold shares of Lakefield Research Limited for shares of his own holding
company. When the initial letters were being written, the fair market value of
the shares of Lakefield Research Limited had not been determined. If a previous
correct reporting of capital gains was not sufficient to support the
application of section 110.6(6) of the Act to an accountant, then in my
opinion it should not support the application 110.6(6) of the Act to a metallurgist.
[52]
There was no evidence in this case
that the Appellant had any intention of deceiving the Minister or evading taxes
or any malicious intent not to comply with the Act. The Appellant had
nothing to gain by not reporting the capital gain. In order for the Appellant
to have failed to report the capital gain under circumstances amounting to
gross negligence his conduct would have had to have been tantamount to an
intentional failure to report the capital gain in an attempt to deceive the
Canada Revenue Agency in order to realize an economic gain.
[53]
Therefore since there was no
evidence of such culpable conduct on the part of the Appellant, in the present
case, he did not fail to report the capital gain arising from the disposition
of the shares of Lakefield Research Limited in his 1998 tax return under
circumstances amounting to gross negligence.
[54]
As a result, the appeal is allowed
with costs, and the matter is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the provisions of
subsection 110.6(6) of the Act do not apply in relation to the claim for
a capital gains deduction in computing the taxable income of the Appellant for
1998 and the Appellant is entitled to claim, in computing his taxable income
for 1998, a deduction of $155,443 pursuant to subsection 110.6(2.1) of the Act.
Signed at Toronto, Ontario, this 26th day of February 2009.
“Wyman W. Webb”
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