Citation: 2008 TCC 468
Date: 20080818
Docket: 2008-351(IT)I
BETWEEN:
WILLIAM REEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, A.C.J.
[1]
The issue in this
appeal is whether the Minister of National Revenue properly assessed
William Reel a penalty described in subsection 163(2) of the Income
Tax Act
("Act"). Mr. Reel does not dispute that he failed to
include $38,464 in his income for 2003; he is of the view, however, that he did
not do so knowingly or in circumstances amounting to gross negligence in the
carrying out of a duty or obligation imposed by the Act.
[2]
Mr. Reel left
university in 1994 after three years for a job. Most of his employment has been
in sales. In 2002 he and Joseph Quinto incorporated Intellistor Solutions
Corporation, which Mr. Reel described as a seller of computer tape back‑up.
Each owned 50 per cent of Intellistor and were its directors.
Mr. Quinto was president, Mr. Reel was vice‑president. The
company's year‑end was July 31.
[3]
The role of
Mr. Reel in the company was "strictly sales", he declared.
Mr. Quinto was also in sales but also did the bookkeeping. Mr. Reel
explained that the bookkeeping was maintained in a software program, Quick
Books, which was on Mr. Quinto's computer. Invoicing, receivables,
filings, he recalled, were all on Mr. Quinto's computer. Mr. Reel
declared that he did not know the password to gain access to what was stored in
the computer.
[4]
Mr. Reel
"regularly" reviewed the company's "sales numbers" and
other financial matters. All cheques, including all cheques payable to themselves,
were signed by both Mr. Reel and Mr. Quinto.
[5]
Intellistor did not pay
salaries to Mr. Reel and Mr. Quinto; they were paid "consulting
fees" whenever the company had sufficient funds to pay them. They
"tried to draw" $6,000 a month each but a decision on how much to pay
in any month was dependent on leaving enough money in the company to operate.
In some months, no fees were paid.
[6]
The Crown produced
copies of the cheques paid to Mr. Reel as well as print outs of a "Account
QuickReport" for Intellistor's 2003 and 2004 fiscal years. During the
period January 2003 to July 31, 2003, during the company's 2003
fiscal year, the company paid Mr. Reel consulting fees of $50,852.57.
During the period August 5, 2003 to October 23, 2003, the company's
2004 fiscal year, the company paid Mr. Reel consulting fees of $23,413.75,
a total of $74,266.32 in calendar year 2003. Business expenses were claimed by
Intellistor.
[7]
In the QuickReport,
consulting fees were described in several categories:
"Joe Quinto", "Maria Quinto",
"Will Reel" and "Other". (In fiscal years 2003 and
2004, there were additions to consulting fees in respect of amounts owed by the
two shareholders.)
[8]
In filing his 2003
income tax return, Mr. Reel reported income from Intellistor of $35,852.
Mr. Quinto "processed" the cheques. Mr. Reel acknowledged
that he knew the amount of money he was receiving on a monthly basis. He said
"we knew we had to . . . declare income and pay tax on personal income . .
."
[9]
Richard Sanders
was accountant for Intellistor and also prepared Mr. Reel's 2003 tax
return. Mr. Reel's position in the appeal is that he was not grossly
negligent in failing to include $38,414 of consulting fees in his 2003 tax
return because Mr. Sanders knew what his consulting fees from Intellistor
were and that it was Mr. Sanders who failed to include all the fees in his
2003 tax return. Mr. Reel declared that he relied on a professional
accountant who knew his affairs and the affairs of Intellistor, the payor of
the consulting fees, to prepare the returns. Any failure to report income,
Mr. Reel said, was not done on purpose. He had engaged a public accountant
to prepare his return.
[10]
Mr. Reel met with
Mr. Sanders to discuss both his personal return and the corporate return. Mr. Reel
had asked Mr. Quinto to send Mr. Sanders any material he required to
prepare tax returns but he did not know exactly what Mr. Quinto may or may
not have sent to Mr. Sanders. When he reviewed his personal return with
Mr. Sanders, Mr. Reel checked only to see how much tax he owed. There
was no discussion. He had not made any instalment payments for the year.
[11]
Mr. Sandeep
Kanvinde, an auditor with the Canada Revenue Agency ("CRA"), also testified.
During the course of a Goods and Services tax audit of Intellistor he found a
discrepancy between the consulting fees reported by the corporation and those
reported by Mr. Reel. (Apparently, Mr. Quinto did not file an income
tax return for 2003.) The discrepancy was 107 percent, i.e., the amount
not reported was 107 percent of the amount reported.
[12]
The fact of the large
discrepancy between the amounts reported and not reported and that
Mr. Reel had signed all of the cheques paid to himself influenced
Mr. Kavinde to recommend a subsection 163(2) penalty. In his view, the
directors were in charge of the funds disposed of and had personal knowledge of
the payments.
[13]
When Mr. Kavinde
interviewed Mr. Reel, Intellistor had ceased to be active. He acknowledged
Mr. Reel's cooperation in the corporate and personal audits. Documents
were "freely" provided to the CRA.
[14]
The Crown acknowledges
that Mr. Reel did not knowingly make any false statements or omission in
his 2003 tax return. There was no deliberate intention to deceive the CRA.
[15]
The issue is whether,
on the facts before me, Mr. Reel's failure to report income was due to his
gross negligence.
[16]
Counsel for the respondent
submitted that Mr. Reel was wilfully blind in failing to recognize that
his income was far greater than what he reported. Mr. Reel had worked for
various businesses and had a post‑secondary education. Intellistor
carried on a small business and Mr. Reel was one of its two shareholders
and directors. Mr. Reel had only one source of income. He signed cheques
for the corporation. He deposited the cheques he received as consulting fees in
his personal bank account. He was, or should have been, aware of his income.
[17]
Mr. Reel, counsel
explained, appears to have been more interested in generating income for
Intellistor than paying his personal tax liability.
[18]
In his testimony, Mr. Reel
emphasized his lack of access to Intellistor's books of account, in particular
the information on Mr. Quinto's computer. However, counsel distinguished
the corporation's books of account from Mr. Reel's personal books and
records. Counsel suggested that some other person may have been at fault with
respect to Intellistor's accounts but Mr. Reel knew "what was coming
in" as far as he was personally concerned. He knew how much he was
spending and ought to have known the amount of income he was earning to support
the expenditures.
[19]
Strayer J.
explained in Venne v. The Queen
that "'gross negligence' must be taken to involve greater neglect then
simply a failure to use reasonable care. It must involve a high degree of
negligence tantamount to intentional acting on indifference as to whether the
law is complied with or not."
[20]
Mr. Reel was not
overly concerned with the income to be reported. When he met with
Mr. Sanders, he was only interested in how much tax he owed for 2003. He
obviously was content with the relatively little tax he had to pay. Apparently,
he did not review the tax return nor did he query Mr. Sanders about the
information on the return. Mr. Reel was indifferent as to what was
included in his tax return.
[21]
In DeCock v. M.N.R., I stated that a
businessman who knows his sources of income cannot exculpate himself from
liability of a subsection 163(2) penalty by handing over his tax affairs
to a professional and blindly, without question, accept what the professional
has done.
[22]
Mr. Reel is
placing the blame for the failure to report income on his accountant
Mr. Sanders. Mr. Reel did not know what information Mr. Sanders
requested and what information he may have provided to him directly or through
Mr. Quinto.
[23]
Mr. Kavinde
testified that the audit of Mr. Reel was triggered by the fact that
Intellistor was claiming deductions of consulting fee payments in excess of
what Mr. Reel reported. Is this, based on Udell v. M.N.R.,
sufficient for me to find that Mr. Reel provided Mr. Sanders with the
required information?
[24]
In Udell, the
appellant habitually made faithful entries in his pre‑printed account
book and entrusted a public accountant to prepare his tax returns. In
transposing Mr. Udell's figures to his working papers, the accountant made
a number of errors conceded to be the result of gross negligence.
[25]
There is no evidence as
what triggered the failure to report the income in question. Was the failure
due to Mr. Sanders' gross negligence or was the information provided to
him tainted? Mr. Sanders did not testify. I informed Mr. Reel that I
was prepared to adjourn the trial of his appeal if he wished to call
Mr. Sanders to testify; Mr. Reel replied he wished to continue with
the trial.
[26]
Bowman C.J. wrote
that:
In drawing the line between "ordinary"
negligence or neglect and "gross" negligence a number of factors have
to be considered. One of course is the magnitude of the omission in relation to
the income declared. Another is the opportunity the taxpayer had to detect the
error. Another is the taxpayer's education and apparent intelligence. No single
factor predominates. Each must be assigned its proper weight in the context of
the overall picture that emerges from the evidence.
[27]
In the appeal at bar,
we have an intelligent person who fails to disclose 107 percent of his
income, income that was paid to him by cheques signed by him. As
Bowman C.J. said in DaCosta, an appellant cannot "nonchalantly
sign his return and turn a blind eye to the omission" of amounts, that
in this appeal, he was instrumental in paying to himself. This is more than
simple neglect.
[28]
The appeal is
dismissed.
Signed at Ottawa, Canada, this 18th day of August 2008.
"Gerald J. Rip"
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