Michael B. Richards v. Minister of National Revenue, [1988] 2 CTC 2265, 88 DTC 1590

Goetz, T.C.J.:—The appellant appeals from a notice of reassessment dated May 5, 1987 with respect to his 1985 taxation year. The reassessment revised his taxable income to $2,671,624.72 and levied penalties in the amount of $353,355.43 pursuant to subparagraph 163(2)(a)(ii) of the Income Tax Act ("the Act”). In particular, the appellant appeals against the levy of penalties.

Facts

Christopher Stroether, a Senior Special Investigator with Revenue Canada, whose duties involved criminal investigations of a complex nature, was assigned to investigate the appellant as a result of the appellant filing an amended income tax return on September 14, 1986 disclosing income in the amount of $2,636,380.70. The appellant's original income tax return filed April 30, 1986 did not disclose the sum of $2,636,380.70, which was included in his amended return. Mr. Richards was interviewed on four different occasions by Mr. Stroether but refused to disclose the actual source of the undisclosed income, merely saying that it was a "consulting fee" and that it was earned between October 1984 and early 1985. The $2 million (approximate) found its way to Hong Kong, was deposited to the account of Prosperous Nations Inc. and then into the Royal Bank in Hong Kong in the name of Michael Richards. From there the money flowed into a private banking section of the Royal Bank in Vancouver, British Columbia. All documents relating to the money were in the name of Michael Richards. He first stated that he had shares in the company in Hong Kong, but later changed his story that he was not a shareholder or director of that company but that he ended up having the sole signing authority on the Prosperous Nations Inc. bank account, and thus was able to transfer it into his own name. The money was taken from the Vancouver Royal Bank account and invested into various brokerage houses in the name of Richards.

On February 20, 1985 the appellant caused to be incorporated a company known as Charybdis Enterprises Inc. ("Charybdis") in British Columbia. Its fiscal period was from March 1,1985 to February 20, 1986. Charybdis filed its income tax return covering the period from March 1, 1985 to February 28, 1986 disclosing income of $2,682,110 and expenses totalling $2,688,975.71 resulting in a net loss of $6,865.71. Included in the expenses was an item in the amount of $150,000 for management fees and wages in the amount of $2,513,000 (this was after the income had been earned by Mr. Richards).

In the course of his audit Mr. Stroether became aware that the appellant was involved in various scientific research tax credit programmes. Correspondence shows that in September 1985 Mr. Richards replied to inquiries from Revenue Canada with respect to information required regarding the scientific research tax credit obtained by Coastal Natural Resources Research Inc. for whom he acted. Until February 28, 1986, Roger Lawrence, Victor Attrill, Michael Vaz and Michael Richards each had one share of the issued capital stock of that company.

The appellant refused to give the auditor all his personal records relating to Charybdis, and when confronted with the fact that the bank account in Vancouver was in the name of Michael Richards, he told the auditor that the money really belonged to Charybdis but that the account nevertheless was in his name personally. To back up his position the appellant produced copies of minutes of a meeting of the board of directors purportedly held in Vancouver on December 30, 1985. The minutes were obviously prepared by the appellant and not by a lawyer and there was no notice or waiver of notice included with the minutes of the meeting. The gist of the minutes was to the effect that the personal bank account of Michael Richards in the Royal Bank was in fact corporate income as well as other personal accounts and deposits with the various brokerage houses.

In September 1986 the appellant sought the advice of a law firm with respect to his tax returns and those of Charybdis. He was advised to declare the $2.6 million as his personal income. He refused to give the name of the law firm or a waiver to talk tax matters with his lawyers.

Michael Richards gave evidence on his own behalf declaring his occupation to be that of an accountant specializing in income tax matters. He was a chartered general accountant and was employed by Revenue Canada from 1972 to 1979 as a Field Auditor and Group Supervisor of Auditors. He joined an accounting firm with whom he was associated between 1982 and 1985 and he specialized in tax matters. On behalf of the partnership he prepared all the relevant income tax returns and stated that he believed the income in the hands of Prosperous Nations Inc. could be paid to Charybdis for the 1985-1986 taxation year. He says he sought legal advice because he had the feeling that possibly the $2.6 million was in fact his own personal income and explained his refusal to name his lawyers or to give a waiver “because it could affect some of my clients”. He says that Charybdis was incorporated and received income from consulting services and that he had full control of the company as of March 1985, explaining that the minutes referred to would reflect that the company owned the assets. His explanation for depositing the money with Charybdis as a buffer between Prosperous Nations Inc. and himself personally was to gain a tax deferral. He explained that the bonus and wages payable disclosed in Charybdis' income tax return would be paid out to him in future years. He felt that if Charybdis reported the income he was safe, although he had no signing authority in that company until March 1986. The $2.6 million was his share of commission on the sale of tax credits by Mr. Vaz and Mr. Attrill and was "to prevent me from withdrawing services so my men would get their commissions”. He acted as financial advisor to several so-called resource and research companies who obtained the tax credits which were in turn sold by his partners. The agreement was filed by the Minister as Exhibit R-4 and is self-explanatory:

This Agreement dated August 15th 1984

We, the undersigned, acting as a group acknowledge that we are engaged in the sale of SRTC' Notes of Pacific Western Research Inc. and 7892345 Holdings Inc. and do hereby collectively agree to divide the proceeds due to the group equally between the four parties of the group or at their individual direction. i.e.

We further appoint Lawrence and Company, Barristers and Solicitors of Vancouver, B.C. to receive in trust on our behalf all monies due. These funds then to be divided amongst the four parties as described above by way of Cashiers Cheque or Bank Draft on closing of the sale or sales of said SRTC Notes or Notes.

Proceeds shall be recognized as '/2 (one-half) of the cash value received by either of the two companies known respectively as Pacific Western Research Inc. and 7892345 Holdings Inc.,

The partnership was to split approximately $8 million U.S. in commissions as a result of the sale of tax credits. He says this amount of money was taken to Hong Kong without his knowledge by a Mr. Wilder and Mr. Lawrence, who was one of his partners and his solicitor. Wilder was the owner of the various so-called scientific research companies and paid the $8 million U.S. to Lawrence who deposited it in Hong Kong, to the account of Prosperous Nations Inc. with the view that they would not have to pay income tax. The appellant incorporated Charybdis for the purpose of getting the money from Prosperous Nations Inc. His amended income tax return was filed 14 days after Charybdis filed its corporate return in August 1986. The so- called bonus payable by Charybdis to the appellant in the amount of $2,513,000 was set up so that he would get a tax deferral.

Findings

The penalties imposed by the Minister of National Revenue under paragraph 163(2)(a) are severe and substantial. The subsection reads as follows:

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

(a) 25% of the amount, if any, by which

(i) the amount, if any, by which

(A) the tax for the year that would be payable by him under this Act exceeds

(B) the amount that would be deemed by subsection 120(2) to have been paid on account of his tax for the year

if his taxable income for the year were computed by adding to the taxable income reported by him in his return for the year that portion of his understatement of income for the year that is reasonably attributable to the false statement or omission

exceeds

(ii) the amount, if any, by which

(A) the tax for the year that would have been payable by him under this Act

exceeds

(B) the amount that would have been deemed by subsection 120(2) to have been paid on account of his tax for the year

had his tax payable for the year been assessed on the basis of the information provided in his return for the year,

It is a penal section and hence must be strictly construed and the conduct of the appellant carefully scrutinized.

There are a number of unanswered questions as a result of this series of events set out above and there are no credible explanations by the appellant. On the contrary, the appellant's whole course of action points rather to a calculated course of conduct designed to avoid or evade tax. This is not a situation where the taxpayer is uneducated, unsophisticated or naive. The appellant is an expert on tax matters and was in a position to know exactly what he was doing when he prepared his tax returns.

There was a very marked departure from what a reasonable man (with his explicit knowledge of tax matters) would have done under the circumstances.

I find that the appellant knowingly or under circumstances amounting to gross negligence in filing his 1985 return failed to report income as a result of which the taxes that would be payable if computed under subparagraph 163(2)(a)(i) of the Act exceed the taxes that would be payable if computed under subparagraph 163(2)(a)(ii) of the Act and that the penalties have been properly levied.

I dismiss the appeal.

Appeal dismissed.