Jose Nieto v. Minister of National Revenue, [1985] 1 CTC 2404, 85 DTC 365

Cardin, TCJ [TRANSLATION]:—By notice of reassessments, the Minister of National Revenue imposed on Jose Nieto penalties in the amount of $3,075, $235.12 and $895.45 for the 1975, 1976 and 1977 taxation years, respectively. In addition, the Minister added to the appellant’s reported income the sums of $2,018.92, $2,543 and $1,456, which the appellant was alleged to have received from Iberia Airlines in 1975, 1976 and 1977 respectively.

The appellant, a physiatrist, carried on his practice in four different pysiatric centres during the years in question. The appellant’s unreported income came exclusively from the Centre de Physiatrie Côte-des-Neiges Inc, of which he was a shareholder and one of the three directors at the time; that is one of the points material to the issue. It should be noted that with regard to that first point, the appellant did not contest the amounts of unreported income from the Centre Côte-des-Neiges. He objected solely to the imposition of penalties.

The second point had to do with professional services rendered to Iberia Airlines, for which the appellant had received, as fees, fixed monthly amounts, as well as airline tickets, totalling $2,018.92, $2,543 and $1,456 In 1975, 1976 and 1977 respectively.

I propose first of all to consider the facts surrounding the second point at issue. The respondent filed as exhibit 1-2 a declaration by Iberia International Airways, obtained by Rock Poulette, the auditor for the Minister, during a thorough investigation of the appellant’s personal income, as well as the income of the four physiatrie centres with which the appellant was associated.Exhibit 1-2 revealed that the appellant had received 2,000 pesetas a month between 1975 and 1977 inclusive. In addition, the appellant had exercised his right to a free airline ticket every year from 1975 to 1977. The appellant had had to pay the cost of the tickets, which was subsequently reimbursed to him.

In a declaration signed by Jose Nieto and filed as exhibit I-3, the appellant admitted that he was the medical consultant to Iberia Airlines and that he dealt with the medical problems of air crews and occasionally passengers. He further admitted in his declaration that the amounts recorded therein had been paid by Iberia for each of the years in question.

The appellant had not reported any of the income from Iberia. Moreover, Maurice Richard, a chartered accountant whose services had been retained by the appellant for some ten years, testified that he had never been made aware of his client’s income from Iberia.

The appellant put forth the argument that he had never been ‘‘an employee” of Iberia, which the Court accepted. However, there could be no doubt that in practising his profession, the appellant rendered medical services to Iberia, for which he was remunerated.The appellant seemed to contend that since the sums of $207.72 for 1975 and $335 for each of 1976 and 1977 represented only one- half per cent of the reported income, their omission from his tax returns did not constitute gross negligence on his part.

In my opinion, the appellant’s negligence is not measured by the amount that he had omitted to report but by his attitude toward the income which he had received each year from Iberia and which was taxable. Moreover, the appellant’s attitude was the same toward the free airline tickets which he had also received as remuneration from Iberia and the value of which was more substantial. The appellant could not have been unaware of the value of the major portion of his remuneration for professional services rendered, as agreed with Iberia. However, he had not reported it and had not even informed his accountant of its existence. In a case where there was uncertainty as to whether such a form of remuneration was taxable, the attitude of a reasonable and cautious taxpayer would have been to inform his accountant of it, and he would perhaps have been better able to find out whether the value of the tickets was taxable.

The reason given by the appellant for having omitted to report the airline tickets as income was that they had no value. He cited in his submission a part of Iberia’s declaration (exhibit 1-2), which read as follows:

The free ticket allocated a year is issued on a space available basis which means that the person is not always able to travel on a chosen date but when space is available (that is to say after all paying passengers and those holding reduced rate tickets have boarded the plane). It is to be noted that this free ticket has no value for Iberia Air Lines of Spain.

Obviously, the seat made available to the appellant was deemed to have been one which the company had not sold and from which the company derived no revenue. In that sense the tickets had no value for the appellant, who in fact did take trips. Moreover, it was Iberia that established the value of the ticket for each year in question (exhibit I-2). Normally and obviously, the value of the tickets given to the appellant and the 2,000 pesetas a month that he had been paid for services rendered had been included in Iberia’s operating expenses.

I have no hesitation in concluding that the respondent did not err in including in the appellant’s income the sums of $207.72 and $1,811.20 (reimbursement of airline tickets) for the 1975 taxation year, $335 and $2,208 (reimbursement of airline tickets) for the 1976 taxation year, and $335 and $1,121 (reimbursement of airline tickets) for the 1977 taxation year, all these amounts having been received by the appellant as remuneration for professional services rendered. On this point of the issue, the respondent discharged the burden of proof by establishing that the appellant himself had been grossly negligent in not reporting the income that had been paid to him by Iberia. The penalties, imposed proportionately to the amounts thus omitted from his tax returns, were therefore justified within the meaning of subsection 163(2) of the Income Tax Act, RSC 1952, c 148.

The question raised by the other point at issue was whether a taxpayer could be held responsible for omissions and errors in his tax returns which had been committed through the negligence or incompetence of an accountant who had been handed the task.

The appellant’s assessments for 1975, 1976 and 1977 had been made on the basis of an audit of the Centre de Physiatrie Côte-des-Neiges Inc, the Société des physiatres de Darlington and the appellant’s office, among others, made by Rock Poulette, an employee of the Department of National Revenue.

As already mentioned, this point of the appeal concerned only the income from the Centre de Physiatrie Côte-des-Neiges Inc. Since penalties had been imposed for each of the years in question, counsel for the respondent chose to lead his evidence first.

Maurice Richard, a chartered accountant who had prepared the appellant’s financial statements for the years in question, was called as a witness for the respondent. He stated that the appellant’s financial statements and tax returns had been prepared on the basis of the financial statements of the appellant’s various sources of income, supplied to him each year by the appellant or his wife (exhibit 1-4).

For 1975, the financial statement of the Centre de Physiatrie Côte-des-Neiges Inc, received from the accounting firm Blanchard,Cordeau, Lavigne, indicated that according to the billing for 1975, a sum of $15,422.92 was supposed to have been paid to the appellant (exhibit I-1, page 3). That amount was not included in the computation of the appellant’s taxable income (exhibit I-4, page 1). In addition, in 1975, a $20,000 bonus had been declared and paid to the appellant, according to the financial statement of Centre Côte-des-Neiges Inc (exhibit I-3, page 3 and exhibit I-4, page 1). However, according to the evidence, the bonus declared and paid by the Centre in 1975 was $37,000 and not $20,000. As a shareholder and director, the appellant himself had participated in the decision authorizing the Centre Côte-des-Neiges to declare and pay a $37,000 bonus to each of its three shareholders in 1975.

For 1977, the witness had compiled the appellant’s statement of income and expenses, without having had on hand the financial statement of the Centre Côte-des-Neiges Inc, and for computing purposes he had relied on a letter from the accounting firm Aubin, Cordeau et Associés, which indicated that a sum of $3,300 had been received by the appellant as fees in 1977. No steps had been taken at the time to determine whether or not the appellant had had other income from the Centre Côte-des-Neiges.

According to exhibit 1-1, page 1, entitled “Fees 1977”, as described by the firm Aubin, Cordeau et Associés, the appellant had received in 1977 from the Centre Côte-des-Neiges the sum of $12,314, which had not been included in his statement of income and expenses for the said year (exhibit I-4, page 3).

The appellant had therefore omitted to report in his income from the Centre Côte-des-Neiges in 1975 the sum of $15,422.92 as fees and a $17,000 bonus, for a total of $32,422.12. Also in 1977, fees from the Centre Côte-des-Neiges, totalling $12,314, had not been reported. In short, the appellant had omitted to report $44,736.82 in 1975 and 1977, ie 66.9 per cent (according to the evidence presented and not refuted) of the income that he had received from the Centre Côte- des-Neiges Inc for the said years.

In his submission, the appellant tacitly admitted that he had received the said amounts by objecting only (where this point of the appeal was concerned) to the imposition of penalties pursuant to subsection 163(2) of the Act. He submitted that since he was busy attending to his practice, he had entrusted his accounting and tax returns to his accountant, Maurice Richard.

In short, the appellant submitted that errors and omissions in his tax returns had been committed by his accountant. He stated that he had not in any way participated or acquiesced in the errors, omissions or negligence of Maurice Richard, a professional accountant, who was responsible for preparing his tax returns. He concluded that he could not be held responsible for the gross negligence in the preparation of his returns, and maintained that the imposition of the penalties in the circumstances could not be justified.

In support of this submission, the appellant cited the Exchequer Court decision in Cyrus C Udell v MNR, [1969] CTC 704; 70 DTC 6019. In commenting on subsection 56(2) [now subsection 163(2)] of the Act, Cattanach, J said as follows at 713-14 (DTC 6025-26):

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 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.

The principle stated by the learned judge was conceived and expressed in the context of the facts of the case that he had before him. Cattanach, J was satisfied that Udell, a farmer who scrupulously recorded all transactions of his farm operations, had placed in the hands of his accountant a complete and accurate record of all his income and expenses. In preparing the appellant’s returns for 1962, 1963 and 1965, the accountant committed a number of errors and omissions, and reported a large operating loss for 1962, the effect of which was to reduce unduly the amount of tax payable for 1961 and 1963. Although intelligent and meticulous, Udell was unable to prepare his own tax returns. In fact, he had checked his returns before signing them and had assumed that the large loss that the accountant had reported for 1962 was largely attributable to the inclusion of the capital cost allowance in the computation of his farm losses.

Cattanach, J accepted Udell’s testimony, and it was in those circumstances that the learned judge stated the principle that before the provisions of subsection 56(2) [now subsection 163(2)] can be applied to a taxpayer and before it is found that he “participated in’’, “assented to’’ or “acquiesced in’’ false tax returns, it must first be ensured that the taxpayer knew that there were omissions and was aware of the existence of errors in his returns but that, tacitly or otherwise, he let the errors pass without correcting them.

In allowing Udell’s appeal, Cattanach, J was of the opinion that the relationship between Udell and his accountant had been that of a principal and his agent, that the errors committed by the accountant in preparing Udell’s tax returns constituted gross negligence on the accountant’s part, and that Udell was not aware of the errors committed by his accountant, and therefore the errors did not constitute gross negligence on his part. In fact, after checking his returns, Udell had no reason to suspect that his returns, prepared by his accountant, might contain errors or omissions.

In John Victor Decore v The Queen, [1974] CTC 791; 74 DTC 6695, also cited by the appellant, the Federal Court of Appeal reversed a decision of the Federal Court, Trial Division ([1974] CTC 48; 74 DTC 6051). John Decore, a barrister and solicitor who was involved in a number of business ventures, received a $13,000 dividend from one of his companies in 1969. Inadvertently, Decore’s accountant had no document indicating receipt of that dividend. Decore, who had to be out of town, signed a blank tax return form, and the accountant completed the return without including the $13,000 dividend. By notice of reassessment for 1969, the Minister of National Revenue added to Decore’s income the amount of the dividend, ie $13,000, and imposed a penalty on him.

Decore objected to the imposition of penalties, but the Federal Court, Trial Division, dismissed the appeal. While admitting that the $13,000 dividend in the 1969 return had not been omitted knowingly, by either Decore or his accountant, the Court held that the error constituted gross negligence on the part of Decore’s accountant because he had filed a return while having doubts as to the accuracy of the said return. The penalty was therefore imposed on Decore.

Decore appealed from that decision to the Federal Court of Appeal, which allowed the appeal since the facts did not establish that by omitting to include the dividend, the accountant had acted in circumstances amounting to gross negligence. The Court, however, stated that it was not deciding that the appellant would have been liable to pay a penalty if the circumstances under which the dividend was omitted had amounted to gross negligence on the part of the accountant.

The third case cited by the appellant was The Queen v Columbia Enterprises Ltd, [1981] CTC 180; 81 DTC 5133. In this case, the company omitted to declare rental income and a capital gain in 1971. In addition to including the amounts omitted from the company’s return, the Minister of National Revenue imposed a penalty on the company pursuant to subsection 163(2). The company appealed therefrom to the Tax Review Board (now the Tax Court of Canada), which allowed Columbia’s appeal. The Minister of National Revenue appealed to the Federal Court, Trial Division, which dismissed the appeal. The Court held that the conduct of the company, through that of its president, did not constitute gross negligence. Cattanach, J held that the company (Mr On Lim, president) did not know that the return was inaccurate and had no ground for suspecting that it might be so. At 183 (DTC 5135), the learned judge said:

The accountant, in this particular instance, by his deliberate decision and act, without the knowledge of the defendant, omitted income from the defendant’s return. In accordance with the practice of the accountant the signature of On Lim as a director of the defendant, was affixed to the inaccurate return by an employee of the accountant. The defendant did not know that the return was inaccurate and had no ground whatsoever for suspecting this might be so. Had either circumstance prevailed any tacit understanding that the accountant was authorized to sign the return would most likely be revoked but On Lim was not given that opportunity.

Upon the facts I have concluded that the defendant was not grossly negligent.

In these three cases, as well as in the decision of Bonner, J of the Tax Court of Canada in David I Guttman v MNR, [1979] CTC 223; 79 DTC 243 (also cited by the appellant), the principle set out by Cattanach, J in Udell (supra), was applied since the evidence was unable to establish that the taxpayers were aware or that they might even have suspected that their respective agents had committed errors in preparing their tax returns. The taxpayers therefore could not have participated in, assented to or acquiesced in the false statements or omissions in their returns. Having found no gross negligence on the part of the taxpayers, with respect to the preparation of the returns, the Courts were not able to conclude that the agents’ errors could in any way have been attributed to the taxpayers personally, as required under subsection 163(2).

However, the principle stated by Cattanach, J in Udell (supra) in no way changes the statutory obligation of every taxpayer to file or have an agent file an accurate income tax return. The taxpayer has the fundamental responsibility to ensure that the return filed on his behalf is as accurate as possible — an obligation which the taxpayer, in my view, can easily fulfil. The converse of the principle stated in Udell (supra) is equally valid — when a taxpayer knowingly but tacitly accepts omissions or errors committed by a competent or incompetent agent, or suspecting that his return is incorrect, does not bother to check and clarify it, he is obviously not meeting his responsibility to file or arrange for the filing of accurate returns. That would surely be gross negligence on his part.

Considering the cases cited by both the appellant and the respondent, it becomes obvious that when an agent has committed errors in a taxpayer’s returns, the taxpayer is not automatically relieved of his own obligations, as the appellant seems to think. As always, it is on the facts and circumstances of each case that it can be determined whether the taxpayer participated or acquiesced in the errors contained in his returns, and whether he is liable to the penalties provided in subsection 163(2).

In the case at bar, there is no doubt that the appellant alone committed the error by omitting to include in his income the amounts received from Iberia. At no time was the accountant made aware of that source of his client’s income.

With regard to the income the appellant received from the Centre Côte-des- Neiges Inc, the Court accepts that the appellant devoted all his time to his practice in the four physiatric centres, and that he left the preparation of his financial statements and tax returns to his accountant, Maurice Richard.

However, the evidence revealed that the appellant’s wife helped the accountant, Mr Richard, in the preparation of the financial statements of the Centre de Physiothérapie des Laurentides and her husband’s office. In addition, on page 3 of the appellant’s submission and authorities, it said “the wife, together with the accountant, was responsible for collecting from other chartered accountants the financial statements of the various centres where the appellant worked, more particularly, those of the Centre de Physiatrie Côte-des-Neiges Inc of the Société des Physiatres de Darlington”. The appellant’s accountant was not the only one looking after his client’s accounting; the appellant’s wife was also directly involved.

The appellant stated in his testimony that he worked at the Centre Côte-des- Neiges Inc every week on a regular basis. For 1975, no fees from the Centre were reported by the appellant, despite the fact that he had actually received $15,422.92 in fees. In 1977, fees totalling $2,115 from the Centre Côte-des-Neiges Inc were reported when in fact the appellant had, according to the evidence presented, received $14,429 in fees from that same source.

In his return for 1975, a $20,000 bonus was reported whereas, as a shareholder and director of the Centre, the appellant had voted that the sum of $37,000 be declared and paid to the directors, as a bonus.

The accountant, Mr Richard, testified under oath that after obtaining the financial statements from the appellant’s various sources of income and after preparing the returns, he always had a discussion with his client before the latter signed his tax returns.

It is possible that the accountant committed errors in the preparation of the appellant’s tax returns, but on the evidence, it is impossible for the appellant (and even less for his wife, who was involved in the said accounting) not to have noticed that 66.9 per cent of the income actually received from the Centre Côte- des-Neiges Inc had not been reported for the 1975 and 1977 taxation years.

I therefore conclude that the appellant knew that his accountant had not reported all the income that he had earned, either at Iberia or the Centre Côte-des- Neiges Inc, in 1975 and 1977. In taking no action to correct the omission of substantial amounts of income, the appellant demonstrated gross negligence and knowingly participated in, assented to and acquiesced in the errors and omissions appearing in his returns for each of the years 1975, 1976 and 1977, within the meaning of subsection 163(2) of the Act.

The respondent did not err in adding to the appellant’s reported income the sums of $2,018.92, $2,543 and $1,456, from Iberia airlines for the years 1975, 1976 and 1977 respectively. The penalties imposed for each of the years in question are, in the circumstances, justified.

The appeal is dismissed.

Appeal dismissed.