Skukan v. R., [1997] 1 CTC 2228, 96 DTC 3268 (Informal Procedure)

Bell J.T.C.C.: —

Issue

The issue in this appeal is whether the Appellant is subject to a penalty levied under subsection 163(2) of the Income Tax Act (“Act”) for his 1990, 1991 and 1992 taxation years. That subsection provides for the imposition of a penalty on any person who, knowingly or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under the Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return. Subsection 163(3) reads as follows,

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.

Facts

Although documents relevant to the assessment had been forwarded by the Department of National Revenue (“Department”) to the Court under subsection 170(2) of the Act, copies of the Notices of Reassessment were not tendered and accepted as evidence and consequently nothing in those documents constitutes evidence on any issue of fact that has been raised. [1]

The Respondent, required to meet the burden outlined above, called Ali Damji (“Damji”) as a witness. He is a senior appeals officer in the Department and is the person who, on review of the Notice of Objection, decided to confirm the assessment of the penalties. He commented upon the Department’s audit file and said,

I looked at quite a few things including the audit file, Sections 163(2) and the jurisprudence and the facts that were available for me to examine at the time. More importantly, I looked at, or I was given to understand that from the years 1989 to 1994 the appellant moved three times and his net worth increased because he moved from a middle class community where houses were valued at around $100,000 ...

Appellant’s counsel, correctly, objected to the admissibility of this evidence as being hearsay. Damji then said that he was “given to understand” this information from the audit file and since the auditor of the file had left the Department, he, Damji, was forced to rely on the report. Damji then stated that to the best of his knowledge the Appellant had moved three times from a middle class community to a high class community and that his net worth would have had to increase in order to afford the new residence. He said that he had looked at the Appellant’s income tax returns for the years in question, copies of which had been filed as exhibits. He said that “there was nothing but losses” and that there was apparently an understatement of income in each of those years. He then said,

So I based my judgment on that.

No other evidence was tendered on behalf of the Respondent.

Appellant's Submission

Appellant’s counsel submitted that because the burden of establishing the facts justifying the assessment of the penalty was on the Minister of National Revenue (“Minister”), the Minister was obliged, at least, to establish a prima facie case that the taxpayer knowingly or under circumstances amounting to gross negligence made a false statement in a return. He submitted that the Crown must prove by admissible evidence, and not attempt to prove by hearsay evidence, that the reassessments were correct. He stated that no such evidence had been adduced, that the Respondent had failed to meet the burden imposed by statute and submitted that the appeal should be allowed. In so doing, he said that he could find no rules respecting nonsuit in this Court’s rules. [2] He said that before being put to an election to call evidence, the Appellant should have the right, in the spirit of fairness, to know whether the Respondent had discharged the burden even to establish a prima facie case. [3] The Court did not require counsel to make an election respecting calling evidence and no such election was made. Counsel then submitted

It would be my submission ... that if a prima facie case has not been established by the Crown, that this appeal ought to be allowed without my client being required to give evidence.

Respondent’s Submission

Respondent’s counsel submitted that because the Appellant had appealed the penalty it was “basically an admission on his part that there was unreported income”.

She said, surprisingly, that the statements of the taxpayer in the Notice of Objection were prima facie proof of the Crown’s position together with the reassessment. Neither had been filed as evidence. She said that by reporting a loss in his income tax returns,

... the taxpayer made a statement ... for each of the three years in question, and the statement made was false because he was reassessed for those amounts and it was approximately $70,000 for each of the years and the statement was made knowingly because his net worth certainly increased over the years in question.

She then submitted that on that basis the Respondent had made a prima facie case which the taxpayer must answer.

The Court then, arising out of discussion with counsel, asked each counsel to make written submission with respect to hearsay evidence. Each went beyond the matter of hearsay to restate and expand arguments made at the hearing.

Appellant's Written Submission

In his written submission Appellant’s counsel referred to R. v. Khan, [1990] 2 S.C.R. 531, 113 N.R. 53 and R. v. Smith, [1992] 2 S.C.R. 915, 139 N.R. 323. In these cases the Supreme Court of Canada expanded the circumstances in which hearsay evidence may be admissible where it could be established that the elements of necessity and reliability were present. He then submitted that Damji’s hearsay evidence was not necessary to prove any fact in issue. He submitted that it was not established that the auditor who had left the Department was not available to give evidence. He pointed out that the Respondent could have, by subpoena, required the Appellant to attend at the hearing to give evidence and that the Respondent could have applied to the Court under section 18.11 of the Tax Court of Canada Act to have the appeal moved to the “General Procedure”, thereby entitling him to an examination for discovery of the Appellant. He submitted that other forms of direct evidence, such as bank statements and land transfer records could have been presented as evidence. He also said that the Respondent had not provided any evidence that would support the reliability of the statements made in the auditor’s report.

Appellant’s counsel referred to Boileau v. Minister of National Revenue, [1989] 2 C.T.C. 2001, 89 D.T.C. 247, where this Court allowed an appeal with respect to penalties on the basis that the Minister had failed to meet its burden of proving the mens rea element of gross negligence. He said that while Boileau had also appealed the assessment giving rise to the penalty and had failed to meet the burden of proof to contradict that assessment, this Court noted that that fact alone was insufficient to discharge the burden of proof that lay on the Minister. He quoted from pages 2005-06 (D.T.C. 250) as follows,

There is no doubt that the mens rea or the gross negligence may be established by circumstantial evidence, as either can seldom be established by direct proof of the taxpayer’s intention. However, that evidence should be clear and convincing, for example: the course of conduct of the taxpayer, what it is that ought to have been done that was not done, what led the respondent to assess the penalty, discussions that took place with the taxpayer in respect of the assessment of the penalties and other matters pertinent to the decision leading to the assessment of the penalty under subsection 163(2).

I am of the view that in the present case, the respondent did not adequately discharge his burden of proof in that he relied almost exclusively on the fact that the appellant was unable to reverse the net worth assessments. In effect, subsection 163(3) requires evidence of the intent or gross negligence of the contravenor. This, in my view, should be done in a structured, clear and convincing manner. I do not find that the evidence was adequate in this respect and therefore, the penalties cannot be maintained.

Respondent’s Written Submission

In her written submission, Respondent’s counsel said,

It is submitted that the best evidence is as was presented to this Court.

She then said that Damji was a senior appeals officer with the Department and as such had access to files and information kept in the usual course of business by the Department. She said that he made his decision based on his own and other information set out in a file by an employee who at the time was with the Department and which formed part of the writings and notes made in the usual course of business. She then referred to Ares v. Venner, [1970] S.C.R. 608, 14 D.L.R. (3d) 4, presumably as authority for the proposition that the auditor’s file could be admitted. However, that audit file was not tendered as evidence. In any event the audit file appears not to be a business record, there being no evidence of a requirement to keep it pursuant to a duty. Having regard to that fact and the potentially subjective element of an auditor’s views in a “onetime” report the circumstantial guarantee of trustworthiness may not exist. [4]

Respondent’s counsel wrote that the Appellant had not appealed the reassessments. In spite of the fact that copies of the reassessments were not in evidence, she also wrote that

It is submitted that the Crown has proven that:

The amount of the tax evaded is ...

(See reassessments)

Discussion and Conclusion

As stated above, under subsection 163(2) the Appellant, in order to be subject to a penalty must have knowingly or under circumstances amounting to gross negligence ... made a false statement or omission in a return.

The Respondent had the burden of establishing the facts justifying the assessment of the penalty. In Johnson v. R., (sub nom. Johnson v. Canada) [1994] 1 C.T.C. 2025, 94 D.T.C. 1009, at page 2027 (D.T.C. 1010) Beaubier J., with respect to subsection 163(3) said,

To establish facts in Court is to prove those facts, not merely to assume them.

To justify means to “corroborate, prove, verify”; to “show to be in the right; to vindicate” or to “show the justice or reasonableness”. [5] Accordingly, the Respondent must prove those facts which demonstrate, on the balance of probabilities, that the Minister’s assessment of penalties was correct.

In Farm Business Consultants Inc. v. R., (sub nom. Farm Business Consultants Inc. v. Canada) [1994] 2 C.T.C. 2450, 95 D.T.C. 200, Bowman J. cautioned against imposing penalties under subsection 163(2) too readily at page 2457 (D.T.C. 205),

A court must be extremely cautious in sanctioning the imposition of penalties under subsection 163(2) ... and the routine imposition of penalties by the Minister is to be discouraged ... 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.

Damji’s reference to the audit file was hearsay and, not being within any exception to the hearsay rule, was inadmissible. The elements of necessity and reliability simply do not exist in this case. Included in Damji’s hearsay evidence was a reference to increase in the Appellant’s net worth by virtue of changed residence. This combination of hearsay and hypothesis was no foundation for submissions made by counsel for the Respondent. The submission of Respondent’s counsel that the best evidence was presented to the Court was not accurate. No statement was made to the Court that the Respondent had attempted to seek out the auditor in this matter and bring him to Court. The Respondent could have subpoenaed the Appellant to give evidence in this informal hearing. [6] The Respondent could have applied to this Court to have the appeal moved to the “General Procedure”' [7] thereby enabling her to examine the Appellant for discovery and to call the Appellant as a witness and cross-examine him at the hearing [8] . The reassessments were not presented and accepted as evidence. [9] The Respondent presented no other direct evidence such as bank statements, et cetera. Indeed, no evidence was adduced to support any statements that may have been made in the auditor’s report upon which Damji relied.

The Respondent’s evidence falls far short of that required to meet the burden of establishing the facts justifying the assessment of the penalty - namely, that the Appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his returns of income. The motion for nonsuit, which is, in effect, the motion made by Appellants’ counsel, poses the question of whether the Appellant has a case to meet. Sheppard J.A. speaking for the British Columbia Court of Appeal in Active Construction Ltd. v. Routledge Gravel Ltd., 27 W.W.R. 287, said

The motion for nonsuit raises the issue whether the plaintiff has a case to be met; that is the sole issue. It follows that if the judge holds that there is no case to be met, his finding will determine the motion and also the action as against the plaintiff. On the other hand, the refusal of the motion does not permit judgment in the action to be given against the defendant because it does not follow that there is no defence. That issue has not been raised by the motion. Accordingly, upon the motion being refused the defendant should be afforded an opportunity of calling evidence to establish his defence unless he has waived his right of doing so: Yuill v. Yuill [1945] P 15, 114 LJP 1, per Lord Greene, M.R. at page 3. No doubt the trial judge has a discretion to refuse to entertain the motion for nonsuit unless the defendant elects not to call evidence: Martin v. C.P.R. [1932] OR 571, 40 CRC 144, per Riddell, J.A. at 574; Hayhurst v. Innisfail Motors Ltd. [1935] 1 W.W.R. 385, per Harvey, C.J.A. at 390; a practice usually followed: Protopappas v. B.C. Elec. Ry. and Knap [1946] 1 W.W.R. 232, 62 BCR 218, per Robertson, J.A. at 235 (varied on another point by the S.C. of Can. 1946 60 CRTC 28). But this defendant was not called upon so to elect and it follows that the learned judge, upon refusing the nonsuit, should have given the defendant an opportunity then requested by the defendant, of calling evidence to establish a defence: Yuill v. Yuill, supra. That was not done. Hence the appeal should be allowed and the action referred back so that the trial may proceed in the usual course.

The Respondent’s evidence consisted of the income tax returns of the Appellant for each of the 1990, 1991 and 1992 taxation years in each of which the Appellant declared net losses. Other facts established by the pleadings are irrelevant to this proceeding. The Appellant chose not to appeal from the reassessments for each of the three years but appealed the assessment of penalty only. As I stated at the hearing and restate here, even if the reassessments had been accepted as evidence, which they were not, they would not constitute evidence of the accuracy of their content. They were not evidence and should not have been referred to by Respondent’s counsel in her written submission. Further, the use by counsel of the word evaded in relation to a case where the issue is whether civil penalties are properly assessed, is inappropriate.

On the basis of the foregoing I conclude that the Respondent failed to meet the burden imposed upon it by subsection 163(3) of the Act.

Accordingly, the appeal is allowed with costs. Appeal allowed.