Citation: 2008TCC302
Date: 20080514
Docket: 2007-3331(IT)I
BETWEEN:
PATRICIA O'LEARY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal from notices
of reassessment dated July 20, 2006 and February 3, 2006,
in respect of the 2003 and 2004 taxation years, in which the Minister of
National Revenue ("the Minister") assessed penalties of
$1,565.08 and $1,120.55, respectively, for gross negligence pursuant to
subsection 163(2) of the Income Tax Act, R.S.C. 1985, c.
1 (5th Supp.) as amended ("the Act").
[2]
The issue in this
appeal is whether the Minister was entitled to impose penalties on the Appellant
under subsection 163(2) of the Act because, in her returns for the years in
question, she claimed rental expenses roughly 75% of which were disallowed. Specifically,
the overstated rental expenses on which the penalties for gross negligence were
assessed amounted to $14,418 for the 2003 taxation year and $12,197 for the
2004 taxation year, and were based on $9,900 in rental income for 2003, and
$8,750 in rental income for 2004.
[3]
The overstated rental
expenses consisted, for the most part, of personal expenses, such as expenses
associated with the Appellant's principal residence, the purchase of clothing, decorating
materials and garden accessories, as well as motor vehicle expenses.
[4]
The Minister determined
that the Appellant had knowingly, or under circumstances amounting to gross
negligence, made a false statement or omission in the returns filed in respect
of the 2003 and 2004 taxation years, or had participated in, assented to or
acquiesced in the making of this false statement or omission based on the
following items set out in paragraph 6 of the Reply to the Notice
of Appeal:
[TRANSLATION]
(i)
the Appellant herself looked after the budget
and the administration of the buildings (rent, taxes, maintenance,
insurance, etc.);
(ii)
the Appellant was therefore aware of the size of
the expenses;
(iii)
the overstated rental expenses were of a
personal nature and the Appellant herself provided the accountant with
the invoices or documents;
(iv)
the Minister is of the opinion that the
Appellant was unquestionably negligent in this case: the Appellant
should have noticed that the rental expenses established by the
accountant were far too high;
(v)
the Appellant signed the returns for the taxation
years in issue.
[5]
At the objection stage,
the Appellant disputed her liability in connection with the imposition of penalties
for gross negligence for having overstated her rental expenses, citing her mental
state during this period, and the fact that she considered herself a victim of
her accountant's breach of trust.
Background
[6]
Ms. O'Leary testified
and explained that, from 1996 to 2002, her tax returns had been prepared by chartered
accountants. She usually reported a small net rental income but no rental loss
for the two single-family residences that she owned, one in Notre-Dame-du-Lac (Témiscouata County) and the other in Baie-Comeau. In 2003, she
moved from Sept‑Iles to Delson, and on April 11, 2003, she started her new position as a
secretary at the head office of Hydro-Québec in Montréal.
[7]
In April 2004, on the
advice of her brother Carol O'Leary, the Appellant asked Serge Cloutier
to prepare her tax return for the year 2003. Mr. Cloutier agreed to do so,
and asked the Appellant to provide him with all her invoices, saying
that he would tally them up. Accordingly, the Appellant provided him with all
her invoices for the 2003 tax year for electricity, telephone, municipal and
school taxes, mortgages, insurance, cable and internet for all of her residences
(Baie‑Comeau, Notre‑Dame‑Du‑Lac and Delson). As
requested, the Appellant also provided the residual value of her vehicle, a
1995 Jeep Cherokee Sport, which she had obtained from Club Automobile. The same
scenario was repeated for the 2004 tax year: the Appellant gave
Mr. Cloutier all her invoices and supplied the information described
above.
[8]
The Appellant signed
the returns for each taxation year in issue and she acknowledges having been
informed by Mr. Cloutier of the refunds that she would be receiving.
Despite the substantial difference from previous years, the Appellant did not check
her tax returns after they were filed and did not ask Mr. Cloutier for the
reason there was such a large difference from previous years. The Appellant
felt secure because she was dealing with a chartered accountant. The fee of $1,092.74
charged by this professional seemed reasonable to her, and the rental losses
claimed did not overly surprise her given the sums that she had spent on
renovations to her income properties.
[9]
The accountant Serge Cloutier
also testified, and described the procedure that was followed in all his files.
He said that he had met with the Appellant when he first accepted the work, and
explained to her the requirements of paragraph 18(1)(a) of the Act,
which states that rental expenses are not deductible except to the extent that
they are made for the purpose of gaining or producing income from a business or
property, as well as the requirements of paragraph 18(1)(h) of the
Act, which states that personal and living expenses are not deductible, and
section 67 of the Act, which provides that an expense is only
deductible if it is reasonable. Upon receipt of the Appellant's invoices, Mr.
Cloutier had passed them on to Johanne Roy, a subcontractor, so that she
could do the accounting and prepare a spreadsheet. Ms. Roy contacted
clients if invoices were missing or if additional information was required.
Mr. Cloutier confirmed that he always checked Ms. Roy's work and he
often had to redo or modify the spreadsheet that she had prepared.
[10]
The Appellant's spreadsheet
could not be produced at the hearing because it was lost after the Canada
Customs and Revenue Agency conducted a search of Mr. Cloutier's offices in
August 2004. Mr. Cloutier was prosecuted criminally for tax evasion on the
basis that he unduly inflated his clients' expenses. However, he was acquitted of
those charges on June 11, 2007. On the other hand, 25 of Mr. Cloutier's
250 clients are currently involved in litigation with the tax authorities.
The Appellant's position
[11]
The Appellant claims
that Mr. Cloutier committed professional misconduct by not sorting out the
bills that were deductible for income tax purposes and by unduly inflating the
expenses claimed. At the hearing, the Appellant supplied examples of expenses
that were clearly unjustified, such as expenses incurred in travelling to
Notre-Dame-du-Lac and to Baie‑Comeau.
[12]
Furthermore, the
Appellant claims that she is not comfortable with numbers and is not capable of
completing her tax returns by herself.
[13]
Finally, the Appellant
claims that she never had any intention of defrauding the tax authorities because
the figures provided were completely transparent and genuine.
The Respondent's position
[14]
The Respondent submits
that the penalties assessed under subsection 163(2) of the Act should stand
because the Appellant knew that the bills and personal expenses were not
deductible but nevertheless submitted them to the accountant without checking
them.
[15]
In her submission, there
is no doubt that when the Appellant signed the returns, she realized the major
difference from the returns of previous years and she abstained from asking the
accountant any questions. In addition, she did not check her tax returns after
they had been filed to ensure that everything was correct and in keeping with
applicable standards.
Analysis
[16]
Subsection 163(2)
of the Act imposes a penalty on 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
filed in respect of a taxation year. More specifically, the part of subsection 163(2)
of the Act which precedes the methods by which penalties are computed reads 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 …
Under subsection 163(3) of the
Act, the burden of establishing the facts that justify the assessment of a penalty
is on the Minister, not the taxpayer. Subsection 163(3) of the Act reads
as follows:
163(3) Burden of proof in respect of penalties
Where, in an appeal under this Act, a penalty assessed
by the Minister under this section or section 163.2 is in issue, the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
[17]
As Dussault J. put
it in Prud’homme v. The Queen, 2005 TCC 423, at paragraph 47:
Obviously, the
facts on which the imposition of a penalty for gross negligence under
subsection 163(2) of the Act is based must be analysed
having regard to their particular context, which means that drawing a
comparison with the facts of another situation would be a purely random
exercise, if not patently dangerous.
[18]
The concept of "gross
negligence" established by case law is the concept that was defined by
Strayer J. in Lucien Venne v. The Queen, 84 DTC 6247 at
page 6256:
. . . '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. . . .
[19]
Furthermore, in Canada (Attorney General) v. Villeneuve, 2004 FCA 20, the Federal Court of
Appeal clarified that the term "gross negligence" may include willful
blindness in addition to intentional acting and wrongful intent. In this
regard, Létourneau J.A. stated at paragraph 6:
With respect, I think the judge failed to consider the concept of
gross negligence that may result from the wrongdoer's willful blindness. Even a
wrongful intent, which often takes the form of knowledge of one or more of the
ingredients of the alleged act, may be established through proof of willful
blindness. In such cases the wrongdoer, while he may not have actual knowledge
of the alleged ingredient, will be deemed to have that knowledge.
[20]
The application of the
concept of "willful blindness" to tax cases was, in fact, confirmed
by the Federal Court of Appeal in Panini v. Canada, 2006 FCA 224.
[21]
Even though the taxpayer
gets the benefit of the doubt with respect to the application of penalties
under subsection 163(2) of the Act, this is a case in which there is no
doubt in my mind that the Appellant committed gross negligence within the
meaning of subsection 163(2) of the Act.
[22]
Given the facts, it is clear
to me that that Appellant knew, when she signed her tax returns, that the
rental expenses claimed had been overstated by the accountant. She also
confirmed that Mr. Cloutier had told her the amounts of the refunds that
she should be receiving.
[23]
Moreover, the Appellant
was not inexperienced. She had a very good idea of which expenses were
deductible for tax purposes and which were not, because her returns for the
years 1996 to 2002 had been prepared by two different chartered accountancy
firms. She was by no means a novice in these matters, even though she might
not have been capable of preparing her own returns.
[24]
This finding is
confirmed by Exhibit I‑2, a document produced at the hearing, entitled
[translation] "Small note to
accountant", which was included with a bundle of invoices that the
Appellant sent to Mr. Cloutier in connection with the preparation of her
2003 return, and with which she sent an excerpt from the Income Tax Act
dealing with moving expenses. The document clearly shows that the Appellant
knew the provisions of the Act that applied to her situation
[25]
When she signed her
2003 and 2004 returns, the Appellant knew full well that the situation was very
different from previous years in which she had not reported rental losses.
Despite this, the Appellant did not even question the public accountant to find
out the reason for such a large difference from her previous tax returns. This constitutes,
in my opinion, an indication of willful blindness, if not deliberate conduct
amounting to gross negligence.
[26]
The Appellant also knew
with whom she was doing business when she entrusted Mr. Cloutier with the
preparation of her tax returns. Mr. Cloutier already looked after the preparation
of the returns of the Appellant's brother Carol. The Appellant's brother
certainly told her about the accountant's reputation for being aggressive in
claiming expenses, since he wished her a good refund in an e‑mail that he
sent her on March 9, 2004 (Exhibit I-1) to let her know that
the accountant in question had agreed to prepare her tax returns.
[27]
The amount of the
disallowed rental expenses in relation to the reported rental income, and the
repetition of this conduct two years in a row, clearly demonstrate that the
Appellant's involvement in the establishment of the scheme went well beyond mere
negligence.
[28]
Consequently, the
appeal is dismissed.
Signed at Ottawa, Canada, this
14th day of May 2008.
"Réal Favreau"
Translation certified
true
on this 2nd day of
July 2008.
Brian McCordick,
Translator
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