Paul Couture v. Minister of National Revenue, [1986] 1 CTC 2224, 86 DTC 1183

Tremblay, T.C.J. [TRANSLATION]:—This appeal was heard on February 8, 1985, at Québec, Quebec.

1. Issue

The issue is whether the respondent is justified in having imposed on the appellant a penalty of 25 per cent on unreported income of $18,000 in assessing his tax return for the 1981 taxation year. The penalty amounts to $748.22. The respondent maintained that the sum of $18,000 paid by Les Coopérants Compagnie Mutuelle d'Assurance (Les Coopérants) was received in 1981 for services rendered and that the appellant's omission to include this sum in his income was made knowingly or under circumstances amounting to gross negligence.

The appellant maintained that he had not received a T-4 form with respect to this sum and that therefore he forgot it.

2. Burden of Proof

The burden of proving the validity of the penalty is on the respondent pursuant to subsection 162(3) of the Income Tax Act.

3. Facts

3.01 During the 1981 taxation year the appellant was chairman of the board of directors of Les Coopérants. In this capacity he received the sum of $18,000 over the year.

3.02 Les Coopérants issued a T-4 with respect to this $18,000 early in 1982. The respondent received a copy. The appellant for his part testified that he had not received the form. He did not remember it. In any event, he said, he would have placed it in the envelope where he puts all ddocuments relating to his taxes so that he can send them to his accountant.

3.03 In early April 1982, he gave the said envelope to the UPA Mauricie tax and accounting service. Using all the documents in the envelope, the said service filled out the T-1 form reporting $20,807.02 as salary income and ignoring the $18,000 in income, having no documents in this regard.

This reported salary income of $20,807.02 is substantially the same amount as was reported for 1980. The accountant therefore did not himself notice that there might have been an error.

3.04 It appears from the copy of the return filed with the respondent that the appellant did not sign the original. The accountant apparently did not give it to him for signature before mailing it. Moreover, it appears that the accountant attached a cheque for $662.07 from the appellant to the said return. According to the appellant, the accountant said to him, “You owe so much and I have paid.”

3.05 It emerges from the evidence that the appellant had never had any problems with the respondent. He always reported all his income.

3.06 For several years the appellant has been active in the Union provincial des Agriculteurs (U.P.A.). He was the president in 1979.

3.07 He also explained that during the early months of 1982 Les Coopérants was in the process of merging with Les Artisans, another insurance company. The appellant was himself caught up with the human problems involved in that merger. There was pressure with which he was preoccupied. His days were more than full, and there were his family responsibilities.

3.08 The appellant maintained that owing to all his earlier activities, he was aware of the employer's obligation to issue T-4s with a copy for the employee and a copy for the Department of Revenue and that it was unthinkable that he had tried to outwit the respondent by concealing income. If he had thought that he had not received the T-4 from Les Coopérants, he would have contacted the company himself.

3.09 The respondent taxed the appellant on the basis of the T-4 received from Les Coopérants.

4. Act, Case Law, Analysis

4.01 Act

The principal provisions of the Income Tax Act involved are subsections 163(2) and 163(3). They read as follows:

SEC 163(2)

(2) False statements or omissions. Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obliga- tion 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 . . .

SEC 163(3)

Burden of proof in respect of penalties. 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.

4.02 Case /aw

The following decisions were cited by counsel for the respondent:

1. Yves Cloutier v. The Queen, [1978] C.T.C. 702; 78 D.T.C. 6485;

2. Ernest Labelle v. M.N.R., [1983] C.T.C. 2696; 83 D.T.C. 599;

3. Paul Nowlan v. M.N.R., [1984] C.T.C. 2274; 84 D.T.C. 1250;

4.03.1 The Court rejects the part of the alternative in subsection 162(2) to the effect that the appellant knowingly omitted to report the sum in question. On the basis of his testimony, credibility and intelligence, the Court believes his version.

Moreover, the appellant was too aware of the consequences of such an act thus to voluntarily hide such a sum of income, knowing in advance that the respondent would notice this (para. 3.08).

4.03.2 The central issue is whether the failure to report $18,000 in the income for 1981 constitutes gross negligence on the part of the appellant or ordinary negligence. Gross negligence, according to Marceau, J. of the Federal Court (Cloutier (para. 4.02 (1)), is “a relatively serious act of negligence, which is difficult to explain and socially inadmissible/' Ordinary negligence, on the other hand, is easy to commit, the result of an easily explainable oversight.

4.03.3 If we consider only the sum of $18,000 that was not reported compared with the $21,000 reported, we might at first sight claim that this was clearly gross negligence. The circumstances must be taken into account, however, Is the sum of $18,000 the result of a number of repeated acts of negligence that are inexplicable or the result of a single act of negligence which occurred in inexplicable or explicable circumstances?

What are the circumstances? The T-4 form was not received by the appellant (mail thieves exist and the postal system can also have its faults), and the envelope containing the documents pertaining to 1981 tax was given to the accountant (a salaried individual cannot be required to have an accounting system). The accountant filled out the form with tax owing of $662.67. Even though he did not sign the form, the appellant certainly learned of the tax owing and wrote a cheque for that amount (para. 3.04). The return was mailed.

The evidence did not show whether or not he checked the said return at the time. It is possible that he did not since he did not sign it.

Is it ordinary or gross negligence for the appellant not to have checked his return at that precise moment or if he did check it, not to have realized that a substantial amount had to be missing? Is this an easily explainable error? There must be somewhat exceptional circumstances. In view of his work under pressure as chairman of the board of directors of Les Coopérants, described in paragraph 3.07, together with the fact that according to the evidence, no omissions of income had ever before been discovered in his returns, together as well with the fact that the respondent has the burden of proof, the Court believes that it is arriving at a legal and fair conclusion in saying that the error is easily explainable. The reassessment must be revised by eliminating the penalty.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons.

Appeal allowed.