Harry Finkel and Lily Finkel v. Her Majesty the Queen, [1996] 3 CTC 2219 (Informal Procedure)

Tremblay J.T.C.C.: — These appeals were heard on common evidence on May 17, 1996, in Montreal (Quebec).

1. Point at issue

The point is whether the respondent is correct to levy penalties pursuant to subsection 163(2) of the Income Tax Act (the Act):

a) against Mr. Harry Finkel for the years 1988 to 1993 to the amount of $9,238.98 for not having declared $68,750 of interest income during all those years and

b) against Mrs. Lily Finkel for the years 1988 to 1993 to the amount of $7,305.83 for not having declared around $13,000 per year of interest income.

The appellants contend they had never received any documentation in respect of said interest such as a TS forms. The appellants themselves informed Revenue Canada Taxation of a part of undeclared interest income.

The respondent contends that the reassessments of the years 1988, 1989 and 1990 are well founded.

2. Burden of proof

2.01 Pursuant to subsection 163(3) of the Income Tax Act the burden of proof is on the respondent’s shoulders:

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.

2.02 In the present appeals concerning Mr. Harry Finkel, the assumed facts are described in paragraphs 11 (a) to (d) of the Reply to the Notice of Appeal as follows (95-3213(IT)I):

11. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) on October 19th 1988, the Appellant made an interest bearing loan to Mr. Robert Johnstone in the amount of $100,000; this loan was notarized. The rate of interest was established at 12.5%. [admitted]

(b) the first payment due on the loan was November 19th 1988 with monthly payments due thereafter on the 19th day of each and every month and in every year. [admitted]

(c) for the 1988 taxation year the Appellant knowingly received interest payments on the loan. [admitted]

(d) during the same taxation year the Appellant knowingly omitted to

declare on his tax return interest payments received on the loan. [denied]

In the appeal 95-3521 (IT)I, the assumed facts are described in paragraphs 15 (a) to (d) of the Reply to the Notice of Appeal as follows:

15. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) on June 26th 1988, the Appellant made an interest bearing loan to Mr. Robert Johnstone in the amount of $100,000; this loan was notarized. The interest rate was set at 12.5%. [admitted]

(b) the first payment due on the loan was November 19th, 1988 with monthly payments due thereafter on the 19th day of each and every month and in every year, [admitted]

(c) for the 1989, 1990, 1991, 1992 and 1993 taxation years the Appellant knowingly received interest payments on the loan. [admitted]

(d) during the same taxation years the appellant knowingly omitted to declare on his tax returns the interest payments received on the loan, [denied]

Concerning the appeal of Mrs. Lily Finkel (95-3134(IT)I), the assumed facts are described in paragraphs 10(a) to (d) of the Reply to the Notice of Appeal as follows:

10. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) on June 26th, 1987, the Appellant made an interest bearing loan to Mr. Robert Johnstone in the amount of $110,000; this loan was notarized. The interest rate was set at 12.5%. [admitted]

(b) the first payment due on the loan was June 26th, 1987 with monthly payments due thereafter on the 26th day of each and every month and in every year. [admitted]

(c) for the 1988, 1989, 1990, 1991, 1992 and 1993 taxation years the

Appellant knowingly received interest payments on the loan. [admitted]

(d) during the same taxation years the Appellant knowingly omitted to declare on her tax returns the interest payments received on the loan, [denied]

3. Facts

3.01 The first witness, Mr. Morton Garellek, CA, testified that he has been the accountant of the taxpayers since 1989. In 1994, Mr. Finkel asked him some questions concerning the renewal of a mortgage resulting from money they had lent in 1987 and 1988. Surprise for the witness! He had never heard about that loan nor the mortgage and nor consequently the interest income.

Mr. Finkel said they thought the witness was aware and that the interest was computed as income. “What should we do?” “Inform the Department of Revenue”.

3.02 On May 24, 1994, the following letters were sent to Revenue Canada (Exhibit A-l):

REVENUE CANADA Customs, Excise and Taxation Shawinigan, Qc GON 7W2

Re: Mr. Harry Finkel 730 Montpellier, Apt. 1004 St. Laurent, QC H4L 5B3 S.I.N. 200-805-679

Gentlemen:

The above-captioned client has accidentally omitted to include interest earned from a private mortgage, as follows:

1991:$ 13,500.00

1992: $ 13,500.00

1993: $ 12,499.98

Kindly adjust the respective tax returns accordingly.

Thanking you in advance for your immediate attention to this matter, we remain,

Yours very truly,

MORTON GARELLEK & ASSOCIATES Chartered Accountants

Morton Garellek, C.A. Partner

A letter was also sent at the same date and to the same effect on behalf of Mrs. Lily Finkel. The interest income involved is as follows:

1991: $ 13,749.96

1992: $ 13,337.46

1993: $ 12,924.96

3.03 Mr. Garellek explained why he had not informed Revenue Canada about the undeclared interest income from the years 1988 to 1990.

Being aware of subsection 152(4) of the Income Tax Act and the policy of Revenue Canada, that when a taxpayer is in good faith and declares himself undeclared income from past years, Mr. Garellek was of the view that the appellants had the right to declare only for the past three years. Moreover, Revenue Canada does not levy a penalty in this circumstance.

3.04 Mr. Harry Finkel received the following letter dated July 19, 1994:

Mr. Harry Finkel

730 Montpellier, Apt. 1004

St. Laurent, Quebec

H4L 5B3

Adriano Furgiuele

Tel: 283-3614

Attention: Mr. Finkel

July 19, 1994

Dear Sir:

Re: Mr. Harry Finkel S.I.N. # 200-805-679 Income Tax Returns for 1988 to 1993 inclusive

Following the audit of the above mentioned tax returns, we enclose herewith a schedule explaining the adjustments we propose to make to those returns. Any other businesses, if any, may be audited at some future time.

Should you wish to make representations regarding the proposed adjustments, please address your comments in writing to the undersigned before August 22, 1994.

If we do not hear from you by that date, we may be required to make a reassessment of the stated income tax returns to include or account for the proposed adjustments.

The completion of our audit should not, however, be considered as permission to destroy any books and records. In this regard, we have attached a copy of Information Circular 78-1 OR entitled “Books and Records Retention/Destruction” for your information.

Yours truly,

Audit Division

Revenue Canada

Customs, Excise and Taxation

c.c. Mr. Garellek C.A.

CLIENT: Harry Finkel

YEAR END: December 31, 1993 to 1988

AUDITOR: Adriano Furgiuele

ACCOUNT: INTEREST INCOME DATE: 7/20/94

Undeclared interest income

Year/Amount

1993: $12,000

1992: $12,500

1991: $12,500

1990: $12,500

1989: $12,500

1988: 2,083

TOTAL:$64,083

The income tax payable resulting from the proposed changes will be subject to interest at the prescribed rates. The penalty as per subsection 163(2) of the Income Tax Act will be applied to total undeclared interest of $64,083.

NOTES

1. $100,000 loan 12.5% from October 1988 to October 1993 2. $100,000 loan 9.5% from October 1993 to October 1998

3. Registered deed of loan # 4083550 at Montreal registry

4. Lender: Harry Finkel

5 See attached documentation.

3.05 Upon receiving the copy of that letter, the witness, Mr. Garellek, phoned the auditor Mr. Furgiuele to ask if he had received the aforementioned letters dated May 24, 1994. The answer was “No”.

3.06 The appellants in their testimonies confirmed they had lent money to Mr. Robert Johnstone, who was their landlord. They confirmed they had never received any T5 forms.

Also both confirmed they had been in business for over 40 years. The business was closed in 1980. However presently, they have started a small business. They import jewelry from the United States. Mrs. Finkel said that in 1977 she lent $70,000 to Mr. Johnstone. The loan was renewed in 1987.

3.07 Mr. Finkel has had health problems in the form of lung cancer for 18 months. He is no longer able to take long trips as he did when they were in big business. Now the trips are restricted to vacations.

3.08 Mrs. Josée Rodrigue, a witness for the respondent, is an agent in the Objection Division. She testified that in 1995 the Finkel’s files were transferred to her. She noticed at that time that the letters (Exhibit A-l, para. 3.02) were in the files. She explained that the letters sent to Shawinigan by Mr. Garellek in May 1994 (Exhibit A-l) took many months before reaching the appropriate files. At the time that Mr. Furgiuele studied the files in July 1994, the letters were probably not yet in the files. That is why he said to Mr. Garellek that he had not received them.

Moreover, the witness explained that the assessments of the appellants were not initiated by Mr. Garellek’s letter but by the audit of Mr. Johnstone’s business. This audit started in February 1994. The files were in the hands of Mr. Furgiuele in March 1994.

Mrs. Rodrigue said that in 1995, she called Mr. Garellek’s office. Mr. Reinhart answered on behalf of Mr. Garellek. During the conversation Mr. Reinhart admitted they were aware that Mr. Johnstone’s business had been audited.

4. Law - Cases at Law - Analysis

4.01 Law

The main sections of the Income Tax Act involved in the present cases are paragraph 12(l)(c), subsections 152(4), 163(2) and 163(3). They read as follows:

12. Amounts to be included as income from business or property.

(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(c) Interest. - any amount received by the taxpayer in the year or receivable by him in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as, on account or in lieu of payment of, or in satisfaction of, interest to the extent that such interest was not included in computing his income for a preceding taxation year;

152(4) Assessment. Subject to subsection (5), the Minister may at any time assess tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in filing the return or in supplying any information under this Act, or

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require, except, that a reassessment, an additional assessment or an assessment may be made under paragraphe (b) after the normal reassessment period for the taxpayer in respect of the year only to the extent that it may reasonably be regarded as relating to

163(2) False statements or omissions. - 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 or, 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 greater of $100 and 50% of the aggregate of

(a) 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

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 Cases at Law

The following cases were referred to by counsel for the appellants:

1. Ganne v. Minister of National Revenue (sub nom. Ganne v. Canada), [1994] 1 C.T.C. 2124, 95 D.T.C. 363 (T.C.C.);

2. Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D.);

3. Penn v. Minister of National Revenue, 71 D.T.C. 71, [1971] Tax A.B.C. 33.

4.03 Analysis

4.03.1 The point is whether the appellants have made “any misrepresentation that is attributable to neglect, carelessness or willful default or has [have] committed any fraud in filing the return or in supplying any information under this Act”.

4.03.2 Subsection 152(4)

Concerning the application of subsection 152(4), it seems to me obvious that the reason given by the appellants that they thought the interest was included in the computation of the income is not a good one. This would mean that they signed their returns without verifying them.

In my view, the appellants have made misrepresentation attributable to negligence. Therefore it is open to the respondent to reassess their taxes for the taxation years 1988, 1989 and 1990 in both appeals. Even if in the Notices of Appeal this point was not brought up, it was however brought up during Mr. Garellek’s testimony.

4.03.3 Imposition of penalties (163(2)

In the case of Venne, at pages 233 (D.T.C. 6255-6256), Mr. Justice Strayer studied subsection 163(2) of the Act:

(4) Imposition of penalties — As noted earlier, in order for the defendant to levy penalties under sub-section 163(2) of the Income Tax Act it is necessary that the taxpayer have “knowingly, or under circumstances amounting to gross negligence … participated in, assented to or acquiesced in the making of” a false statement in a return, etc. The similar language of subsection 56(2) of the former Income Tax Act was interpreted by Cattanach, J. in Udell v. Minister of National Revenue (1969), 70 D.T.C. 6019 (Ex. Ct.). In that case a farmer had retained a certified public accountant to prepare his income tax returns. The accountant made several errors in different taxation years in the process of transposing figures from the taxpayer’s account books to his working papers. In some of the years in question the accountant signed the returns on behalf of the taxpayer before they were seen by the latter and in other years the taxpayer reviewed them first and then signed them. He apparently did not notice any errors. The Minister of National Revenue assessed penalties with respect to these errors. In interpreting the language now found in subsection 163(2) of the present Income Tax Act, Cattanach, J. said, at pages 6025-26:

Accordingly there remains the question of whether or not subsection 56(2) contemplates that the gross negligence of the appellant’s agent, the professional accountant, can be attributed to the appellant. 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 subsection 56(2) is “has made”. The question therefore, is whether the ordinary principles of agency would apply, that is, that that 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 a 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.

In coming to this interpretation the learned judge had regard to the fact that the subsection in question is a penal provision and it must be interpreted restrictively so that if there is a reasonable interpretation which will avoid the penalty in a particular case that construction should be adopted. He concluded that the erroneous information in the returns was not included with the knowledge of the taxpayer nor could the gross negligence of the accountant be attributed to him.

It is also important to keep in mind in applying this subsection that by subsection 163(3) the burden of proof is on the defendant in justifying the assessment of a penalty.

4.03.4 In the present case, the appellants neglected to declare interest income of roughly $13,000 per year during six years. They are experienced business people, having been in business for 40 years (para. 3.06). Their argument is that they had not received any TS forms from Mr. Johnstone.

On the other hand, during the years involved, each appellant received over $1,000 of interest every month from Mr. Johnstone.

Is it possible that in computing their income they forgot that interest? If it is simple forgetfulness it is pardonable. If not, it is gross negligence.

Another fact is that Mrs. Finkel had lent $70,000 to Mr. Johnstone in 1977 (para. 3.06). During all those years from 1977 until 1987, she received interest income. Probably she received TS forms and therefore she declared around $7,000 of interest. Therefore they knew, after the renewal of the mortgage in 1987, that the new interest resulting from the renewal should also be computed in the income.

If from 1977 to 1987, the interest was not included in the income either, how is it possible that for 16 years (from 1977 to 1993) the appellants had not been aware that it was for gaining interest that they had lent money and that interest was taxable, with or without TS forms?

In the case Cloutier v. R. (sub nom. Cloutier v. Queen), [1978] C.T.C. 702, 78 D.T.C. 6485 (F.C.T.D.), Mr. Justice Marceau described what constitutes gross negligence. His opinion is summarized as follows:

The question before the Court is whether the circumstances in which the omission occurred are such that gross negligence may be attributed to the taxpayer: “gross negligence” being taken to mean a relatively serious act of negligence, which is difficult to explain and socially inadmissible. The factual circumstances in themselves do not present a problem, they are all established; it is the way in which they should be regarded which is at issue, namely, what can be deduced from them concerning the acts of plaintiff which are at issue. This is not a question of fact in the sense of a question regarding an earlier factual circumstance or an event which took place at an earlier point in time, but a question of legal appraisal and judgment on the actions, which is not subject to proof but depends on the personal conviction of the individual making the decision.

[Translation.]

In my opinion, it appears from the evidence that the appellants committed gross negligence.

Indeed the appellants’ business experience, the amounts of interest involved each year and the number of years involved cannot convince the Court that it is only a case of simple forgetfulness. The penalties must be maintained.

5. Conclusion

The appeals are dismissed.

Appeals were dismissed.