Martin E. Gordon v. Her Majesty the Queen, [1995] 2 CTC 2001

Christie A.C.J.T.C.C.:—This appeal is governed by the informal procedure prescribed by section 18 and following sections of the Tax Court of Canada Act.

The issue is whether the appellant is liable to a penalty under subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ’’Act") in respect of his 1990 taxation year.

The notice of appeal reads:

Please accept this letter as my official request for an appeal hearing by the Tax Court of Canada, under the informal procedure method.

This case involves some unpaid taxes for the taxation year 1990. This discrepancy was identified to me by the audits division of Revenue Canada in February 1994. Since that time I have attempted to explain this matter, from my perspective, so that the issue can be resolved as quickly as possible, but to no avail and I must now seek your assistance in this matter.

You must understand that an individual such as myself does not have a lawyer or accountant on retainer to look after my affairs, consequently all of my knowledge of procedures are the result of directions given me by staff at Revenue Canada. The details concerning this case from my point of view are as follows.

During the period when 1990 tax returns were being prepared (spring 1991) I was out of the country on an extended vacation. Knowing this I asked Revenue Canada just what does one do about his income tax. I was advised that it MUST be submitted and it MUST be signed. As I was ’’moving around’’ on vacation I would not be able to collect all the necessary forms to complete my return. Therefore I left all of the details with another member of the family-plus a signed tax form-as directed by Revenue Canada.

After waiting a reasonable length of time, close to filing date, they assumed that all of the necessary forms (T4, T5 etc.) had been received and therefore completed my return and submitted same. They were unaware that a T4 would not be issued for the missing amount and although the cheque stubs were available the person did not know the correct procedures and therefore missed submitting them. The individual was inexperienced in this area. After receiving the notice of assessment which agreed with the original tax return it was assumed that everything was "OK".

That omission was solely the result of inexperience and not the result of GROSS NEGLIGENCE nor was there a KNOWING attempt to avoid paying taxes. In retrospect my signing the document before hand, as directed by Revenue Canada, seems to be the major cause of the problem. Revenue Canada position is that I signed it then I’m responsible for the detail.

My personal opinion at this stage of the proceedings is that Revenue Canada having discovered the omission has deemed me "guilty" and the onus is on me to prove my innocence. The decision to stand by this new assessment was made prior to any discussion with me. Having made this decision it is difficult for Revenue Canada to "change" it. I initially submitted my objection to the fairness committee only to be advised that my particular case cannot be handled by the committee. This original submission to the fairness committee was also done at the direction of Revenue Canada.

Information Circular 92-2 contains some guidelines pertaining to cases such as this and my appeal is based on some of the detail contained in that circular.

(1) My record of meeting my tax obligations is excellent.

(2) I quickly tried to resolve the discrepancy by submitting the missing amount immediately.

(3) I did not KNOWINGLY allow this oversight to exist.

(4) I have always exercised reasonable care and have not been negligent or careless in conducting my affairs under the self- assessment system.

My track record speaks for itself and I feel this should be given the utmost consideration.

Paragraphs 1 to 5 inclusive of the reply to the notice of appeal read:

1. He denies all allegations of fact in the notice of appeal.

2. In computing income for the 1990 taxation year, the appellant failed to include income in the amount of $8,050 (the "amount").

3. The Minister of National Revenue (the "Minister") assessed the appellant for the 1990 taxation year by notice of assessment mailed on May 2, 1991.

4. In reassessing the appellant for the 1990 taxation year, by notice of reassessment mailed on April 18, 1994, the Minister of National Revenue (the "Minister") included the amount in income, and imposed a penalty pursuant to subsection 163(2) of the Income Tax Act.

5. In so reassessing the appellant, the Minister made the following assump-

tions of fact:

(a) the amount was received by the appellant in the 1990 taxation year;

(b) the amount was received by the appellant in respect of contract work he performed in the 1990 taxation year for Bell Canada International Inc.;

(c) the amount is substantial in relation to the appellant’s other income in the 1990 taxation year;

(d) the appellant knowingly, or under circumstances amounting to gross negligence, in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in the income tax return filed for the 1990 taxation year, as a result of which the tax that would have been payable assessed on the information provided in the appellant’s income tax return filed for that year, was less than the tax in fact payable by the amount of $2,197.70.

Subsections 163(2) and (3) of the Act provide:

163(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, 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 as required by or under this Act or a regulation, is liable to a penalty of

[the method of calculating the penalty follows]

(3) Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

The only witness to testify at the hearing was the appellant. He was called to the witness stand by counsel for the respondent. His evidence is that he knew he would be in the United States at the time when his return of income should be filed so he signed a return in blank and requested his son, Steven, an adult, to complete and file the return. The return is dated March 11, 1991, which is well before the filing deadline. A T4 in respect of the $8,050 had not been received by Steven and this is why that amount was not included in the return.

In Farm Business Consultants Inc. v. Canada, [1994] 2 C.T.C. 2450, 46 D.T.C. 200 (T.C.C.), Bowman J.T.C.C. said at page 2457 (D.T.C. 205):

A Court must be extremely cautious in sanctioning the imposition of penalties under subsection 163(2). Conduct that warrants reopening a statute- barred year does not automatically justify a penalty and the routine imposition of penalties by the Minister is to be discouraged. Conduct of the type contemplated in subparagraph 152(4)(a)(i) may in some circumstances also be used as the basis of a penalty under subsection 163(2), which involves the penalizing of conduct that requires a higher degree of reprehensibility. In such a case a court must, even in applying a civil standard of proof, scrutinize the evidence with great care and look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established. Moreover, where a penalty is imposed under subsection 163(2) although a civil standard of proof is required, if a taxpayer’s conduct is consistent with two viable and reasonable hypotheses, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted.

Using this approach I have concluded that the burden of establishing the facts justifying the assessment of the penalty has not be discharged.

The appeal is allowed and the penalty imposed in respect of 1990 is vacated. The appellant is entitled to party-and-party costs if he has incurred any.

Appeal allowed.