REASONS
FOR JUDGMENT
Archambault
J.
[1]
Jean-Yves Côté and Lise Lavoie (the Côté‑Lavoie
couple,
the couple or the two taxpayers) are appealing from an assessment made by the
Minister of National Revenue (Minister) for the 2008 taxation year. The
issue is the same in both appeals, namely, whether the Minister was justified
in assessing the penalty provided for in subsection 163(2) of the Income Tax
Act (Act).
Only the amount in issue is different.
[2]
In his income tax return for 2008, Mr. Côté reported
a business loss of $919,440.31 listed in a “Statement of Agent Activities
For: JEAN-YVES COTE.”
In that statement, a gross income of $342,717.31 was reported as “Money Collected
as Agent for Principal and reported by third parties.” Added to that amount was
an additional amount of $61,689.12 representing “Additional Money Collected as Agent
for Principal and not reported by third parties” for a total of $404,406.43.
From that amount $981,129.43 was deducted, described as an “Amount to principal
in exchange for labour,” for a net loss of $576,723. Also deducted from that
amount were the amounts collected that were reported by third parties totalling
$342,717.31, amounting to a net loss of $919,440.31. Said loss cancelled the inclusion
in the income of $200,275.35 received from employment and a taxable
dividend amount of $161,332.80, resulting in negative income of $557,523. The significance of the loss
generated in 2008 also allowed Mr. Côté to claim a loss carryback for the
previous three years, 2005, 2006 and 2007 in the amounts of $138,425, $262,097 and
$176,201, respectively.
[3]
On October 7, 2010, the Minister issued an assessment
for the 2008 taxation year whereby he increased the income of Mr. Côté by $919,440.
In addition to the income adjustment, he assessed a penalty of $93,820.97 under
subsection 163(2) of the Act. Added to that penalty is a penalty of $455.42 for
late filing.
[4]
As a result of the notice of objection filed by Mr.
Côté, the Minister confirmed the assessment, and Mr. Côté appealed to the Tax Court
of Canada. The sole issue is whether the penalty assessed under subsection 163(2)
of the Act was justified. Mr. Côté acknowledged that he was not entitled to the
loss of $919,440.31.
[5]
Ms. Lavoie took a similar approach. The amount
of the business loss that she reported was $418,185.58, which also resulted in a loss
carryback for 2005 to 2007 in the amounts of $72,178, $112,796 and $303,302, respectively. In his initial assessment, the
Minister allowed the business loss and loss carryback. Subsequently, in the
reassessment dated October 13, 2010, he also disallowed the loss of $418,185.58.
The amount of the penalty assessed under subsection 163(2) was $45,906.06, and
the sole issue is whether this penalty was justified.
[6]
With the agreement of the parties, the Chief
Justice of this Court requested that the undersigned judge render the decision based
on the transcript (transcript) of the testimony given at the hearing of
December 12, 2013, and the documents
submitted in evidence at the time before Justice Jorré, including the
transcript (discovery transcript) of the testimony given by the couple on
an examination for discovery.
[7]
As the statement of evidence will show in
greater detail, this is another one of those cases where taxpayers abused trust
and were lured into a scheme (preposterous scheme) put in place by
unscrupulous promoters who led a number of Canadian taxpayers to believe that
they could essentially claim losses for the maintenance of individuals, who, based
on this scheme, have a dual personality. Therefore, taxpayers believed that
they created losses that reduced their tax obligation to zero and entitled them
to a loss carryback for previous years. The exact role of the promoters in this
case is not very clear as the Minister, who had the burden of proof, did not call
them to testify to provide further details about this preposterous scheme. Indeed,
only the two taxpayers and the appeals officer testified at the hearing.
[8]
Armed with case law that has on numerous
occasions confirmed the penalties assessed by the Minister in cases similar to
this one—numerous decisions of this nature were reproduced in the respondent’s
book of authorities—the Minister attempted to justify the assessment of the 50%
penalty. This action of the Minister is understandable given the abusive and
preposterous nature of the scheme put in place by the promoters. The names Fiscal
Arbitrators and Frieslander Financial Inc. constantly appear in the documentation
submitted in evidence in these two appeals.
[9]
The specific issue is whether the Minister was
able to justify the assessment of the penalty under subsection 163(2) of the
Act, that is to say, whether the two taxpayers “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. . . filed or made in respect of a taxation year for the purposes
of this Act.”
[10]
It is important to note the applicable general principles
for resolving the issue raised by the two appeals. First, as stated in
subsection 163(3) of the Act, the burden of establishing the facts justifying
the assessment of the penalty is on the Minister.
[11]
It is also recognized that each case must be
considered on its own merits and that the facts must be given careful
consideration by the Court to determine whether the Minister was able to meet
his burden of proof.
[12]
During oral argument, counsel for the Minister
did not argue that the two taxpayers knowingly made a false statement or
omission in their returns. The sole issue before the Court is whether there
were “circumstances amounting to gross negligence.” The leading case defining
what constitutes such circumstances is Venne v. Canada (Minister of National
Revenue), [1984] F.C.J. No. 314 (QL), [1984] C.T.C. 223, 84 DTC 6247. In
that decision, Judge Strayer wrote the following:
(4) Imposition of penalties - As noted earlier, in order for
the defendant to levy penalties under subsection 163(2) of the Income Tax
Act it is necessary that the taxpayer have "knowingly, or under
circumstances amounting to gross negligence . . . participated in, assented
to or acquiesced in the making of" a false statement in a return, etc. The
similar language of sub-section 56(2) of the former Income Tax Act was
interpreted by Cattanach, J. in Udell v. Minister of National Revenue
(1969) 70 DTC 6019 (Ex.Ct.). In that case a farmer had retained a certified
public accountant to prepare his income tax returns. The accountant made
several errors in different taxation years in the process of transposing
figures from the taxpayer's account books to his working papers. In some of the
years in question the accountant signed the returns on behalf of the taxpayer
before they were seen by the latter and in other years the taxpayer reviewed
them first and then signed them. He apparently did not notice any errors. The
Minister of National Revenue assessed penalties with respect to these errors.
In interpreting the language now found in sub-section 16 3(2) of the present Income
Tax Act, Cattanach, J. said, at pages 6025-26:
Accordingly there
remains the question of whether or not section 56(2) contemplates
that the gross negligence of the appellant's agent, the professional
accountant, can be attributed to the appellant. Each of the verbs in the
language "participated in, assented to or acquiesced in" connotes an
element of knowledge on the part of the principal and that there must be
concurrence of the principal's will to the act or omission of his agent, or a
tacit and silent concurrence therein. The other verb used in section 56(2)
is "has made". The question, therefore, is whether the ordinary
principles of agency would apply, that is, that what one does by an agent, one
does by himself, and the principal is liable for the actions of his agent
purporting to act in the scope of his authority even though no express command
or privity of the principal be proved.
In my view the
use of the verb "made" in the context in which it is used also
involves a deliberate and intentional consciousness on the part of the
principal to the act done which on the facts of this case was lacking in
the appellant. He was not privy to the gross negligence of his accountant.
This is most certainly a reasonable interpretation.
I take it to be a
clear rule of construction that in the imposition of a tax or a duty, and still
more of a penalty if there be any fair and reasonable doubt the statute is
to be construed so as to give the party sought to be charged the benefit of the
doubt.
In
coming to this interpretation the learned judge had regard to the fact that the
sub-section in question is a penal provision and it must be interpreted
restrictively so that if there is a reasonable interpretation which will avoid
the penalty in a particular case that construction should be adopted. He
concluded that the erroneous information in the returns was not included with
the knowledge of the taxpayer nor could the gross negligence of the
accountant be attributed to him.
It
is also important to keep in mind in applying this sub-section that by
sub-section 163(3) the burden of proof is on the defendant in justifying the
assessment of a penalty.
I
have come to the conclusion that the defendant has not sufficiently proven
that the misstatements were made "knowingly" by the plaintiff in
his tax returns for the years in question. I should note here, as it is
relevant to the whole question of the application of penalties under
sub-section 163(2), that there seems to be a certain element of subjectivity
recognized in the case law with respect to assessing the knowledge or gross
negligence of a taxpayer with respect to misstatements in his returns: see,
e.g., Howell v. Minister of National Revenue (1981) 81 DTC 230 at 234
(T.R.B.); Joris v. Minister of National Revenue (1981) 81 DTC 470 at 472
(T.R.B.). The taxpayer here is a man with a grade five education, working
and paying taxes in a language which is not his first language nor that in
which he was educated, a man who is more at ease in a garage than in an office.
Not only do these factors militate against a finding that the misstatements in
his returns were made knowingly by him, but also his entire course of
conduct is not consistent with that of a person who had deliberately set out to
conceal large amounts of taxable income. He kept what appear to be quite
complete records of sales in his business, then turned these over to his
bookkeeper. As far as one can judge from the evidence, all or most of the
revenues from the business were deposited in the bank where the monies could
readily be traced. He also lodged all but one or two of the mortgages on which
he lent money with banks and trust companies which kept careful records of the
income earned from these "escrow mortgages". It is unlikely that a
person planning to conceal income would have handled his affairs in this manner.
Further it is hard to believe that he was consciously and effectively
supervising his bookkeepers since a number of the errors made in his returns
were to his disadvantage, even though more or them were to his advantage. I am
therefore not able to conclude that the misstatements in the returns were made
"knowingly" by the plaintiff.
With
respect to the possibility of gross negligence, I have with some difficulty
come to the conclusion that this has not been established either. "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. I do not find that high degree of negligence in connection with the
misstatements of business income. To be sure, the plaintiff did not exercise
the care of a reasonable man and, as I have noted earlier, should have at
least reviewed his tax returns before signing them. A reasonable man in doing
so, having regard to other information available to him, would have been led to
believe that something was amiss and would have pursued the matter further with
his bookkeeper.
With respect to business income, I can more readily
recognize that effective surveillance would have been difficult for the
plaintiff and would have
involved his making and reviewing numerous computations of revenues,
expenditures, assets, and liabilities. In other words the errors in
business income, small in some years but very substantial in others, would
not necessarily have "sprung out" at a person of the taxpayer's
background and abilities. While it may have been naive for him to trust his
bookkeeper as knowing more about such matters than he did, I do not think it
was gross negligence for them to fail to challenge the bookkeeper with respect
to the business computations. However egregious the errors committed by the
bookkeepers in this respect, it is quite conceivable that they were not in
fact noticed by the plaintiff and his neglect in not noticing them fell
short of constituting gross negligence. For
other examples of such a situation see Minister of National Revenue v. Weeks
[1972] C.T.C. 60 (F.C.T.D.); Mark v. Minister of National Revenue [1978]
D.T.C. 2262 (T.R.B.); Morgan et al v. Minister of National Revenue
(1973) D.T.C. 146 (T.R.B.).
With respect to most of the unreported interest income, however, I have more difficulty avoiding the
conclusion that the plaintiff was grossly negligent. . . . I can only conclude
that the plaintiff knew, or was readily able to ascertain, how much interest
income he was earning year by year from mortgages and from bank accounts, trust
company accounts, certificates of deposit and like instruments. This was not a
difficult concept and well within the plaintiff's abilities which, the evidence
demonstrates, easily included the addition of sums and the calculation of
interest. His explanation for not reporting all his interest income,
however, is that he was not concerned about possible discrepancies between
the amount of interest he knew, or could ascertain, that he was earning, and
the amount reported in his income tax returns, because he thought the T-5
issued by the banks and trust companies was the governing instrument indicating
how much of the interest was taxable. That he might have reached such conclusion
is not completely improbable because taxpayers have long been confused by a
complex system of taxation in which the taxable amount from certain sources
does not always correspond to the amount actually received.
It
is difficult to decide whether a mistake such as this is one of fact or of law.
. . . After reviewing a number of previous decisions on sub-section 163(2) or
its predecessors I have been unable to find any clear authority on whether a
mistake of law is a defense to the application of penalties thereunder. I
am inclined to think that it can be, depending on the circumstances and the
state of understanding of the taxpayer. One must keep in mind, as
Cattanach, J. said in the Udell case supra that this is a penal provision and
it must be construed strictly. The sub-section obviously does not seek to
impose absolute liability but instead only authorizes penalties where there
is a high degree of blameworthiness involving knowing or reckless
misconduct. The section has in the past been applied subjectively to
taxpayers, taking into account their intelligence, education, experience,
etc., and I believe this implies that an ignorance of the law which is
not unreasonable for the particular taxpayer in question and the particular
circumstances may be acceptable as a defence to the application of penalties.
On this basis, and having regard to the fact that the onus is on the Minister
to prove that the penalty should be applied, I find the evidence ambiguous and
therefore conclude that the penalty should not be applied even in respect of
the unreported income from interest.
I have therefore reached the conclusion that
penalties under sub-section 163(2) may not be assessed on the unreported
amounts of income arising during the years 1972 to 1978 inclusively.
[Emphasis added.]
[13]
It should be added that subsection 163(2) of the
Act provided for a 25% penalty with respect to the relevant taxation year in Venne.
If great care is necessary when the courts must interpret a penal provision, as
suggested by Judge Cattanach in Udell, cited earlier in the passage from
Venne, this is even more true and important when the penalty is 50%!
[14]
It should also be noted that, in this
last decision, Judge Strayer had to deal with not only the penalty under
subsection 163(2) but also the application of subsection 152(4) of the Act, which
allows the Minister to reopen previous assessments going back more than four years (at the time). Judge Strayer said: “It will be noted that for the penalty to be
applicable there appears to be a higher degree of culpability required,
involving either actual knowledge or gross negligence, than is the case under
sub-section 152(4) for reopening assessments more than four years old where
mere negligence seems to be sufficient.”
[15]
Although it is certainly useful
to cite case law pertaining to Canadian taxpayers who used a scheme similar to
the preposterous scheme, it is necessary to carefully apply the principles propounded
by the case law, notably Venne, to determine whether the penalty is
justified, even if the scheme is abusive and far-fetched. A meticulous analysis of the facts found at the hearing must be
carried out in the light of these principles.
[16]
As will be evident from the factual analysis in
these two appeals, the Minister failed to establish that the two taxpayers made
a false statement under circumstances amounting to gross negligence. I have not
been persuaded here that the degree
of culpability was sufficiently high for me to conclude
that the penalty was applicable. In my view, this is not a case involving greater neglect than simply a failure to use
reasonable care. There is no such high degree of negligence tantamount to intentional acting
and an indifference as to whether the law is complied with or not.
[17]
This case involves taxpayers with little education
and little experience in taxation matters. On his examination for discovery, Mr.
Côté indicated that he only had a Grade 6 education. At page 52 of the
transcript, Mr. Côté described himself as being [translation] “uneducated.” Ms. Lavoie completed Secondary 1. In addition, neither of them was
knowledgeable enough to read and understand an English text, except for Ms.
Lavoie in the limited context of her work. Mr. Côté’s low level of education became
evident in his examination for discovery when his lawyer asked him to address counsel
for the Minister using the French “vous,” and he did not know what that meant.
(See Exhibit I-3, page 33.)
[18]
It is true that Mr. Côté and Ms. Lavoie were involved
in the management of their corporations. Indeed, Mr. Côté had two, as did Ms.
Lavoie. The corporations had significant sales figures (approximately 10
million dollars)
for the type of business they ran, namely, the transportation of bulk material. However, for the corporations
to be successful, Mr. Côté had to invest a huge amount of time. The evidence shows that Mr.
Côté had to devote all his energy to ensuring the business success of his corporations. It should also be borne in
mind that Ms. Lavoie, who, essentially, assisted her husband in the operation of their
corporations, had previously acted as a representative for companies distributing
hazardous materials used in welding, notably at GM plants.
[19]
Counsel for the respondent attempted to increase
Ms. Lavoie’s level of contribution to that of an accountant who was capable of
understanding accounting concepts and appreciating the importance of numbers. However,
her work entailed data entry, including data from invoices. She was also
responsible for sending submissions and managing contracts.
[20]
The two taxpayers had to use the services of
professionals, especially individuals with proficiency in accounting, to assist
them with filing their income tax returns
and managing the business of their corporations. In particular, the two used
the services of a bookkeeper.
[21]
In legal matters, Mr. Côté had been using, for
him or his corporations, the services of a lawyer, Ferdinand Roy, for about
thirty years. That lawyer had expertise in transportation law and made a
significant contribution to the business operations of the corporations.
[22]
He is also the same lawyer who convinced Mr.
Côté to participate in the preposterous scheme. He began to raise doubts in Mr.
Côté’s mind by insinuating that he was paying too much tax. He convinced him to
provide him with his income tax returns to be able to, in all likelihood,
persuade Mr. Côté. That lawyer advised him to use the services of tax
specialists (also known as the promoters in these reasons) who could advise him
on how to reduce his taxes. This was not about evading the payment of taxes
illegally.
[23]
Since he was overly involved in the business
operations of his corporations, Mr. Côté asked his wife, Ms. Lavoie, to attend
an information meeting during which the representatives of the promoters likely
explained the preposterous scheme. I say “likely” because it is not known
exactly what was discussed at that meeting. It should also be noted that most
of the meeting was conducted in English and that Ms. Lavoie did not understand
English. She was accompanied by Mr. Roy, who provided her with the
highlights of what was said. They described a way of paying lower taxes that
was unknown to many accountants!
[24]
Because he had been using the services of Mr.
Roy, not only as his lawyer, but also as a lawyer for his corporations, for
about thirty years and considered him a friend and honest man, Mr. Côté relied
on the advice of that lawyer. Since the preposterous scheme was proposed by tax
specialists based in either Toronto or Ottawa and everything was conducted in
English, the two taxpayers, on the advice of their lawyer, agreed to sign
income tax returns in which they indicated English as the language of
correspondence and in which the aforementioned Statement of Agent Activities
was inserted.
[25]
Furthermore, the two taxpayers signed their
income tax returns without reviewing the content thereof. The following is an
excerpt from the testimony of Mr. Côté, at pages 27 to 29, which describes his
approach:
[translation]
MR.
VINCENT: Have you seen this document before? Have you gone through it, have
you looked at it?
MR.
CÔTÉ: Well, I signed it. I’ve seen it of course.
MR.
VINCENT: Did you read it before you signed it?
MR. CÔTÉ: I couldn’t read it, it’s entirely in English. Besides,
I’ve never filed income tax returns in my life.
MR. VINCENT: So, what you are saying to us is that you don’t read
English?
MR. CÔTÉ: Me, I don’t speak English.
MR. VINCENT: So, you signed the income tax return despite the fact
that it was in English and that you didn’t understand it?
MR. CÔTÉ: That’s right. We, when it comes to machinery, we buy
machinery in Toronto, in Ontario, call it whatever you want, sign below
and make arrangements to take care of your payments.
We can’t speak with them, we don’t speak English. Now, I’m equipped. I have lots of people who speak English at our
work. I have two people.
MR. VINCENT: So you don’t speak English, but did you at least go
through it to see what the numbers looked like, because numbers, you can
visibly understand them?
MR. CÔTÉ: Yes, numbers, I understand them.
What happened is that, Ms. Juneau has always filed my income tax
returns. I have a lawyer who handles transportation matters, a very good
lawyer who is recognized by the ACQ, Commission des transports. A man in
his sixties, who – at one point told me, maybe a year ago, he said "Who
does your income tax returns?" He said, "Is it Diane, upstairs
here?"
He said, "Let me take a look at it." He said, "I’m
sure, you have corporations and staff, you’re going to look for money."
I don’t handle that stuff.
At one point, he insisted. He looked at it and said "Leave it
with me."
I said, "I don’t have time for this."
I’m the guilty one. I sent my wife who is Lise Lavoie, I sent her to
a session here in town. She came back with this and
– my wife didn’t even want to go. I’m the one who got her –excuse the
expression – in deep trouble.
She went. She signed below too. That’s why we’re here.
MR. VINCENT: I’m going to ask the same question again.
MR. CÔTÉ: Yes.
MR. VINCENT: Did you go through your income tax return?
MR. CÔTÉ: Listen, sir, you know, he told me to sign there. He
could have told me to go to the slaughterhouse and I would have signed there.
It’s lack of skill and ignorance.
MR. VINCENT: I’m going to ask you my question for a third time. Did
you go through your income tax return?
MR. CÔTÉ: No. Where he told me to sign, like I told you maybe
for the second or third time, I signed. I didn’t know what I was signing. I
relied on Ferdinand Roy.
[Emphasis
added.]
[26]
To not read an income tax return when signing it
is not appropriate conduct and constitutes negligence. Does this, however, represent
a high degree of negligence constituting a type of wilful blindness and
constituting a high degree of negligence amounting to gross negligence? I do
not believe that to be the case here. First, it should be noted that the
document is in English, a language Mr. Côté does not understand. Because of
this, Mr. Côté normally signs important contracts in English, such as when
purchasing machinery, without reading them: he only signs below. It is Mr. Roy
who made him sign his tax return prepared by Ontario tax specialists, and he
relied on his lawyer. He was negligent, but this conduct does not suggest
wilful blindness regarding the fact that he was evading his taxes. As in Venne,
even if he had read his income tax return, chances are that this would not have
changed anything because his lawyer, in whom he had complete trust, had already advised him on
the preposterous scheme and had convinced him of its legality. The following is
the testimony that Mr. Côté gave at the hearing on this issue, at pages 31 and
33 of the transcript:
[translation]
MR. VINCENT: I’ll be more specific, Mr. Côté. Did you know in
signing your income tax return that what you were essentially asking was not to
pay tax for 2008 and to recover all the taxes you paid for the three previous years.
Were you aware of this when you signed the income tax return?
MR. CÔTÉ: Yes.
MR. VINCENT: You knew?
MR. CÔTÉ: Yes.
MR. VINCENT: So what justified him, in your view, in making such
a request?
MR. CÔTÉ: Ferdinand told me that because I operated a business I
was entitled to do so.
MR. VINCENT: So Ferdinand Roy comes to see you and tells you that
you are entitled to recover the taxes you paid for the last three years and
that as for the tax that you would have had to pay for that year, you would
not pay anything. That’s what he told you?
MR. CÔTÉ: Yes, and he said that I was within my rights
to do so, but I said – I didn’t want to. I didn’t have time for this.
. . .
MR. VINCENT: I’m going to ask my question again; did you have any
doubts?
MR. CÔTÉ: No, because these days, there are laws that come
out that we don’t know about.
[Underlining
and boldface added.]
[27]
Ms. Lavoie stated the same thing at page 101 of
the transcript:
[translation]
MS. LAVOIE: Well,
he’s my lawyer. I trust him, and if it’s not right, he knows what to do. I
never imagined he would be involved in something like that. From where I stood,
all of this was legal.
[28]
During the examination for discovery, at page 18
of his transcript, Mr. Côté’s response to counsel for the respondent was as
follows:
[translation]
[MR. VINCENT:] Didn’t you find that a little odd?
[MR. CÔTÉ] Well, I think he went back four years, something like
that. And he said: there were things you were entitled to, I forget now, you
never got that, you pay far too much tax. But I said: it seems to me that
all of this doesn’t make any sense. But he said: look, just trust me.
[Underlining
and boldface added.]
[29]
And Mr. Côté trusted Mr. Roy, a man he described
as honest, who worked for the government: [translation]
“But he has the reputation of an honest man. I listened to him, and I signed
documents that were—and I didn’t know what I was signing. It’s like a finance contract,
you know.” (See pages 36 and 37 of the transcript. See also pages 64-68 of the
transcript and page 16 of the discovery transcript (Exhibit I‑3).) Even
Mr. Côté’s accountant trusted Mr. Roy. Mr. Côté’s response to counsel for the
respondent, who asked him whether he had consulted his accountant was as follows:
[translation] “She [Diane Juneau] said, ‘I find this a little odd.’ But she
added, ‘Ferdinand Roy, he knows where he’s going. I’ll wait and see.’”[26]
Ms. Lavoie confirmed Mr. Roy’s good reputation at page 115 of the transcript.
[30]
It is also important to note that the couple did
not fail to report all of its income. It is all there. This was even
acknowledged by the auditor in his report recommending the penalty (Exhibit
I-1, Tab 7, p. 5). The false statement in the return is the loss concocted by
the alleged tax specialists that the couple’s lawyer bonded. As seen in the
passage quoted above, Mr. Côté was not looking for a scheme to evade his taxes
at all costs. At page 57 of the discovery transcript, he made a statement that
clearly describes, in my opinion, his good faith: [translation] “. . . I don’t want any trouble with the government. I said: I
pay my bills, I pay my taxes. . . . ” He did not have time for this
because his work for his corporations kept him very busy. A legal professional
told him he could report the loss and he did so based on that advice. The words
of Judge Strayer in Venne are entirely appropriate and applicable here.
For ease of reference, I reproduce them again:
. . . The taxpayer here is a man with
a grade five education, working and paying taxes in a language which is not his
first language
nor that in which he was educated, a man who is more at ease in a garage
than in an office. Not only do these factors militate against a finding
that the misstatements in his returns were made knowingly by him, but also
his entire course of conduct is not consistent with that of a person who had
deliberately set out to conceal large amounts of taxable income. . . .
[Emphasis
added.]
[31]
The evidence amply shows that the subsequent
correspondence between the tax authorities and the Côté-Lavoie couple was in
English. With no knowledge of the English language, the couple submitted it to
Mr. Roy, whom the two completely trusted. Even if they had been able to
understand the scope of the documentation, their knowledge in tax matters was
so limited that they would have, in any event, acted in the same manner because
they placed all their trust in Mr. Roy regarding all legal matters.
[32]
The email exchange between Ms. Lavoie and Mr.
Roy can be found at Exhibit A-1, Tab 8. The exchange is from October 19, 2009,
to December 24, 2011, as is clear from the table at the beginning of Tab 8. As
shown in the analysis of this extensive documentation (about 130 pages long),
the Côté-Lavoie couple relied entirely on the legal advice given to them by
their lawyer, and there is no evidence in the email exchange of bad faith, such
as an intention by the couple to evade payment of its taxes, for instance, by
claiming a deduction in respect of losses to which it was not entitled.
[33]
On the contrary, what can be seen from the
evidence is that the two taxpayers are fair-minded people who kept their lawyer
informed of any communication from the tax authorities and who were constantly
told that their lawyer and the tax specialists in Ontario were handling the
situation and they had to trust them! Rather, the testimonies provided above
reveal taxpayers concerned about paying any amounts owing to the tax
authorities. If the two taxpayers claimed the deduction of an alleged loss, it
is because their lawyer made them believe that they were entitled to it.
[34]
As evidenced by a number of excerpts taken from
the email exchange between the couple and Mr. Roy, Mr. Roy either deliberately
misguided his clients and friends or was so gullible that he believed in the
preposterous scheme and convinced the couple to get involved.
[35]
Such trust can be seen not only before the
adoption of the preposterous scheme, but also after, in the conduct of the
opposition that followed the issuance of the assessments by the Minister. The
Minister did not accept the income tax return filed by Mr. Côté for 2008 or the
loss carryback claimed in respect of 2005 to 2007, because, from the outset, he
disallowed the taxpayer’s repayment claim.
[36]
It is clear from the description of
the Statement of Agent Activities provided above that it was a
preposterous claim. First, the amounts claimed were enormous for taxpayers who
did not operate any businesses in the previous years. The income reported by
Mr. Côté for 2008 is essentially income from employment and dividend income
from his corporations. The only amount indicated as a business loss by Mr. Côté
is the loss of $919,440. The evidence does not reveal the nature of the income
claimed for 2005 to 2007. However, it is plausible that the only businesses
operated were those of the corporations.
[37]
Moreover, a mere reading of the Statement of
Agent Activities by the Minister was very telling of the preposterous nature of
the losses reported by the Côté-Lavoie couple. It is not at all surprising that
the Minister disallowed a loss as high as $919,440 in such circumstances.
What is rather surprising is that the Minister allowed the loss of
$418,185.58 claimed by Ms. Lavoie in her 2008 income tax return, when she
only reported primarily income of $118,213 from employment and interest income
of $11,878. It should be said that it seems that the initial assessment was
made expeditiously without a thorough review of the return filed with the
Minister. As soon as a thorough review was initiated, the Minister determined,
of course, that the loss of $418,185 claimed by Ms. Lavoie should be
disallowed.
[38]
It should be noted that the return at Tab 1 of
the respondent’s Exhibit I-2 does not include the income statement known as the
Statement of Agent Activities. For affirmation that the statement was included
in Ms. Lavoie’s return, one must refer to the report entitled “Office Audit -
Shawinigan Tax Centre Penalty Recommendation Report” at Tab 7 of Exhibit I-2. The
second paragraph of that report reads as follows:
The file was identified following her spouse’s file that shows an
important business loss related to “questionable business loss” (it was
intercepted before assessment). Therefore we found important to question
madam’s business loss. This taxpayer included a “Statement of AGENT
activities” and therefore shows the particular words used by these people
involved in this scheme. The business loss was allowed at initial assessing without
audit.
[39]
As mentioned earlier, no one came to the hearing
to provide details of the preposterous scheme proposed by the promoters.
However, it can be understood by inference, on the basis of the documentation
filed with the income tax return, notably the Statement of Agent Activities
and the comments in the reports of the Minister’s auditors, and given that the
scheme was amply described in other decisions regarding the same promoters,
that this is a scheme based on the concept of the dual personality of
individuals and that, as part of this scheme, the expenses incurred by said
individuals for the benefit of a fictional person, who is the individual
represented by a social insurance number,
can be deducted when they are expenses that would be described by tax
specialists as clearly personal expenses and, thus, non-deductible.
[40]
There are other mitigating circumstances that
militate against the Minister’s position. First, it should be recalled that Mr.
Côté did not attend the meeting with the promoters and that he only obtained
information about its scope through what Ms. Lavoie or Mr. Roy told him.
Second, the session was conducted in English and, therefore, neither of the two
taxpayers was able to appreciate the nuances. Third, even if the meeting had
been held in French, these people did not have the necessary tax knowledge to
make a judgment on the preposterous nature of the scheme.
[41]
The Court takes some comfort in the fact that
even the Minister’s officials, including his own lawyer, became confused by the
dual personality of the shareholders and their corporations. If such competent
people can confuse these legal concepts, it is easy to see why people with low
education levels and no legal or tax knowledge would become lost!
[42]
There is at least one passage in the transcript
of the testimony given at the hearing and in the transcripts of the examination
for discovery where it is clear that counsel for the respondent confused the
business of the corporations and the two taxpayers’ business. That confusion is also present
in the penalty reports when the auditor states that he informed the two
taxpayers that they had experience operating their business when it was the
business of their corporations.
[43]
In some decisions cited by counsel for the
respondent involving taxpayers who used schemes similar to the preposterous
scheme, a finding of wilful blindness was made when the taxpayers believed the
information provided by the promoters to explain to them, in all likelihood,
the basis of the scheme. As for the two taxpayers in these appeals, a finding
of wilful blindness on their part cannot be made as they always sought advice
from their legal counsel, Ferdinand Roy, a lawyer who was a member of a
reputable professional association, the Bar, at the relevant time, that is, the
period leading up to and including the date their 2008 income tax returns were
filed.
[44]
It should be noted that, during the examination
for discovery, counsel for the respondent sought permission from both taxpayers
to question Mr. Roy on the events surrounding their participation in the
preposterous scheme. It is apparent from the examination for discovery of Ms.
Lavoie that she gave said permission to counsel for the respondent. However,
counsel for the respondent did not deem it appropriate to have him testify at
the hearing as to the legality or illegality of the scheme. As a result, I draw
a negative inference against the respondent, as was done in Huneault v.
The Queen, 98 DTC 1488 (T.C.C.) by my colleague Judge Lamarre (as she
then was) who, at page 1491, referred to some of the observations made by
Sopinka and Lederman in their treaty The Law of Evidence in Civil Cases,
cited by Judge Sarchuk of this Court in the following passage from Enns v.
Minister of National Revenue, T.C.C. File No. APP-1992(IT), February 17,
1987, at pages 3 and 4, 87 DTC 208 at page 210:
In The Law of Evidence in Civil Cases, by
Sopinka and Lederman, the authors comment on the effect of failure to call a
witness and I quote:
In Blatch v.
Archer, (1774), 1 Cowp. 63, at p. 65, Lord Mansfield stated:
“It is certainly a maxim that all evidence is to be weighed
according to the proof which it was in the power of one side to have produced,
and in the power of the other to have contradicted.”
The application of
this maxim has led to a well-recognized rule that the failure of a party or a
witness to give evidence, which it was in the power of the party or witness to
give and by which the facts might have been elucidated, justifies the court in
drawing the inference that the evidence of the party or witness would have been
unfavourable to the party to whom the failure was attributed.
In the case of a
plaintiff who has the evidentiary burden of establishing an issue, the effect
of such an inference may be that the evidence led will be insufficient to
discharge the burden. (Lévesque et al. v. Comeau et al. [1970] S.C.R.
1010, (1971), 16 D.L.R. (3d) 425))
[45]
As a result, one cannot find on the basis of those
facts that the couple acted with a high degree of culpability that could
justify the application of the 50% penalty provided for in subsection 163(2) of
the Act.
[46]
In his questioning and oral argument, counsel
for the respondent attempted to cast doubt on the reasonableness of the conduct
of the Côté-Lavoie couple in relying on the advice of their legal counsel, Mr.
Roy, as, in the words of counsel for the respondent, he placed himself in a
conflict of interest by providing advice on a scheme in which he himself may
have had a financial interest.
[47]
First, evidence of Mr. Roy’s compensation was
never established with sufficient certainty since the Côté-Lavoie couple was
unable to determine what Mr. Roy’s compensation from the promoters was. All Mr. Côté and Ms. Lavoie
stated was that they believed their lawyer must have been compensated by the
promoters as they themselves did not pay any fees for the legal advice provided
by Mr. Roy.
The respondent should have had Mr. Roy testify.
[48]
However, while it is entirely plausible that Mr.
Roy was indeed compensated by the promoters and that he had a financial
interest in the scheme, I do not believe that it was unreasonable for the Côté‑Lavoie
couple to believe in their lawyer’s professionalism and not to have doubted the
value and quality of the legal advice he provided. It is important to remember
that a thirty-year relationship existed between Mr. Roy and Mr. Côté. Mr. Côté
considered him his friend, as Mr. Roy attended his mother’s funeral, and there
was no reason to believe he was dishonest. He did business with a lawyer who
had been giving him advice, seemingly effectively, for such a long time on
transportation matters, and therefore, it is entirely unreasonable to submit,
as counsel for the respondent does, that the couple demonstrated a high degree
of culpability as required by the doctrine of gross negligence propounded in Venne
or to conclude that they demonstrated wilful blindness by relying on the advice
of their lawyer. Here, I accept the approach adopted by the Federal Court of
Appeal in Zsoldos, cited above in footnote 12: “A taxpayer may avoid these penalty provisions
where he or she has relied on the erroneous advice of a tax advisor” (para. 21).
[49]
During oral argument, counsel for the respondent
impugned the couple’s credibility by submitting as follows (transcript, pages
163 and 164):
[Translation]
They did not trust
those people to give them money, to manage their money, but they were willing
to trust them to prepare their income tax return. And not only the 2008
return, if we rely on what Ms. Lavoie told us at the very end of her testimony,
but also the subsequent income tax returns.
And speaking of the income tax returns after for 2009, for instance,
the preparation continued until 2010.At that point, they already had enough
doubt not to trust him, Mr. Joanisse, with their money. I think that these
are clear indications, Your Honour, that the penalty was fully justified
in this case.
[Emphasis added.]
[50]
This is the passage on which he relies to
support his allegation (transcript, pages 128 and 129):
[Translation]
MR. VINCENT: I have one last question for you, Ms. Lavoie, is it accurate
that after the 2008 income tax return, you did not use those people for the
2009, 2010, 2011 returns? For the subsequent returns ---
MS. LAVOIE: Yes.
MR. VINCENT: --- did you go back to see them, Mr. Joanisse, Mr. Roy?
MS. LAVOIE: Yes, they sent them.
MR. VINCENT: So they prepared 2009, 2010, 2011?
MS. LAVOIE: They sent them but we did not get anything.
MR. VINCENT: So what happened with that?
MS. LAVOIE: Well, I don’t know. They had them.
[Emphasis
added.]
[51]
That passage reveals much confusion. Ms. Lavoie
confirms that it is accurate that the couple did not use the promoters for
their 2009 to 2011 returns. Thereafter, counsel forgets the scope of his
question and believes he understands the opposite of what Ms. Lavoie said. He
asks her to confirm that the couple used the promoters for 2009 to 2011. I
believe she only confirmed that she used the promoters for the 2008 taxation
year, as was indeed the case, and that she did not say that the couple used the
preposterous scheme for the subsequent years, as counsel for the respondent
believed. If he had seen in the Minister’s records that the two taxpayers filed
returns for subsequent years, it would have been in his interest to adduce them
in evidence to show the taxpayers’ bad faith. However, he did not do so. The best
evidence would have been the returns received by the Minister for the
subsequent years. If said evidence had been presented, there would not have
been any ambiguity. The respondent’s argument is without merit, in my opinion.
[52]
I believe the two taxpayers were egregiously
manipulated by Mr. Roy and the promoters in this preposterous scheme and that
they were actually victims of that scheme as they spent significant amounts of
money. When the two taxpayers realized that they had been ill-advised by their
lawyer and that he had lured them into a sleazy business, they cut all ties
with him. Mr. Côté stated as follows: [translation]: “Never in my life do I want
to speak with that guy again.”
It would be entirely unfair to uphold a 50% penalty in such circumstances.
[53]
For all these reasons, I conclude that the
Minister failed to justify the application of the penalty, as required by
subsections 163(2) and 163(3) of the Act and, therefore, the appeals of both
taxpayers are allowed with costs. Thus, the assessments are referred back to
the Minister for reconsideration and reassessment on the basis that the
penalties assessed under subsection 163(2) of the Act are cancelled.
Signed at Vancouver, British Columbia,
this 24th day of September 2015.
“Pierre Archambault”
Translation certified true
on this 25th day of May 2016.
François Brunet, Revisor
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