John Victor Decore v. Her Majesty the Queen, [1974] CTC 48, 74 DTC 6051

Mahoney, J:—This appeal is against a decision of the Tax Review Board upholding a penalty of $215.76 under subsection 56(2) of the Income Tax Act, as it then stood, and $53.78 under section 19 of The Alberta Income Tax Act assessed in respect of the plaintiff’s 1969 income tax return. The question is also raised as to whether subsection 163(3) of the Income Tax Act, as amended in 1971, applies to this appeal. If so, the onus is on the defendant to establish the facts justifying the assessment of the penalty.

Dealing first with the matter of onus, the notice of appeal to the Tax Appeal Board was filed December 23, 1971. That same day, December 23, 1971, Royal Assent was given to an Act of Parliament amending the Income Tax Act and containing, inter alia, the following relevant provisions:

1. Parts I to I HA and Parts V to VII of the Income Tax Act are repealed and the following substituted therefor:

163. (3) 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.

62. (3) Subsection 163(1) of the amended Act is applicable in respect of any return of income required to be filed after 1971 and subsection 163(3) thereof is applicable in respect of any appeal instituted after the coming into force of the Act.

I should note, parenthetically, that subsection 163(2), which came into force December 23, 1971, is identical to the subsection 56(2) which was repealed the same day, being one of the sections contained in Part I of the Income Tax Act.

I do not have the reasons for judgment of the learned member of the Tax Review Board before me and do not know whether his attention was directed to this matter when he considered the appeal. In any event, the appeal to this Court was instituted January 30, 1973 and, while it is an appeal from the decision of the Tax Review Board under subsection 172(1) of the Act rather than a direct appeal from the Minister’s reassessment under subsection 172(2), it is a separate appeal and not merely a continuation of the appeal launched December 23, 1971. Accordingly, in my view, subsection 163(3) of the Income Tax Act as it stood January 30, 1973, and still stands, applies to this appeal.

The plaintiff is a barrister and solicitor practising in Edmonton in partnership with two brothers. He graduated from law school in 1960 and was admitted to the bar the following year. There is no evidence before me that he has any particular expertise in income tax law; indeed, the inference to be drawn from the evidence is that he does not. He engaged a chartered accountant to prepare the income tax return in question. The same chartered accountant had prepared the plaintiff’s 1968 return and, also, the law partnership’s financial statements. The plaintiff has never prepared his own tax returns and the error in issue is the only error in his return of which he is aware. There is no evidence of others.

In addition to his law practice, the plaintiff was a partner in Yellowhead Apartments whose year end was December 31 and which had another chartered accounting firm prepare its statements. The plaintiff was also a shareholder in Diamond Motel Ltd whose year end was October 31 and whose auditor was yet another chartered accountant. At the beginning of 1969 the plaintiff owned 50% of the shares of Diamond and acquired the balance during the year being the sole shareholder at year end. Interest on moneys borrowed by the plaintiff to invest in another private company was claimed and allowed as an expense in his 1969 return. The plaintiff’s business affairs were somewhat complex and his reliance on a chartered accountant to prepare his return was reasonable and prudent.

Prior to the plaintiff’s acquisition of the other shares in Diamond a dividend was declared and paid. The plaintiff received $12,877.27. On November 20, 1969 Diamond’s accountant forwarded six copies of its audited financial statements for its year ended October 31, 1969 to the plaintiff. The audited statements were accompanied by Diamond’s corporation income tax return, the T-5 Summary in respect of the dividend and the plaintiff’s own copies of the T-5 Supplementary. The tax return and T-5 Summary required to be filed were signed by the plaintiff as an officer of Diamond, returned to Diamond’s accountant on February 25, 1970 and were duly filed. The plaintiff’s own copies of the T-5 Supplementary found their way into a file in his law office entitled “Diamond Hotel—Financial Statements” along with the financial statements rather than into the file entitled “John Victor Decore— Income Tax” where they belonged. It was the plaintiff’s failure to report this dividend in his 1969 return that led to the penalty in question.

The plaintiff thinks that the prospect of this dividend being received had been discussed between his accountant and himself prior to his buying out the other shareholder. The accountant does not recall that discussion. On December 29, 1969 the plaintiff and his accountant again met to estimate his taxable income and tax liability for the year. Notes made by the accountant at the time included the following item:

Dividends from Diamond Motel Ltd—$13,100.00

The estimate concluded that the plaintiff’s tax liability would be $3,070 in addition to instalments paid of $1,400.

The plaintiff was in the practice of turning over material relevant to his income tax to the accountant as it was received during the year and, at year end, of looking through his personal tax file to see if any other relevant material might be there and, if so, to turn that over. The T-5 Supplementary was not delivered to the accountant. On or about April 18, 1970 an employee in the accountant’s office prepared a draft of the plaintiff’s 1969 return. It did not take the dividend into account.

The employee had been with the accountant for 7 years and had worked for another chartered accountant 4 years before that. At the time the office consisted of two chartered accountants, a clerk trained to the intermediate level of the RIA course with some 15 years’ ex- perience, two students in articles, one for 3 /2 years and the other for 6 months, the employee previously mentioned and a secretary.

The plaintiff had arranged to call at the accountant’s office on April 30 to sign his return. On April 29, he learned that he had to be away from Edmonton for a trial on April 30 and he phoned the accountant. The final return had not been typed and the accountant asked him to call in and sign a blank return. He did so and, for the first time, learned that instead of paying the additional tax estimated in December to be payable he was claiming a refund of the entire $1,400 already paid. He was not surprised at the direction or magnitude of the change because his share of the loss of Yellowhead Apartments had been $12,220 rather than the $5,725 estimated in December and allowable interest expense of $6,444.67 had not been taken into account in the December calculation at all.

The meeting at the accountant’s office took less than an hour. The employee who prepared the draft return was not present. Neither the plaintiff nor the accountant recall what matters aside from the additional expense items were discussed. Both are definite that the draft return was not reviewed in detail. Indeed, the plaintiff does not recall seeing it and the accountant does not remember whether it was in front of him at the time. The plaintiff did not like the idea of signing a blank return but did not think it would do any harm and he did feel that since the return had to be filed the next day, he had no real choice.

The plaintiff was not aware that, since there was no tax payable, the return did not have to be filed April 30; however, I cannot accept the proposition that a sense of urgency stemming from a mistake of law is any less a sense of urgency in fact. The accountant says he was aware of the effect of subsection 44(1) on the necessity of filing on April 30 but says also that he and his employees were processing several hundred personal tax returns and conditions in the office at the time were “hectic”.

Each return was reviewed either by himself or the other chartered accountant before filing. The accountant recalls noting the omission of the dividend and recalls discussing it with the employee who prepared the draft. It is not clear whether this occurred before or after the draft was transcribed to the signed form but it was after the April 29 meeting. As far as the accountant was concerned the plaintiff was not available and no effort was made to contact him. The accountant concluded, in the absence of a T-5 Supplementary, that there must have been some change in plan since the December discussion and that the dividend had not been paid. In the result, the draft was transcribed without change to the signed form and it was filed April 30.

The error was not discovered by the plaintiff or his accountant at all but by the Department of National Revenue in its assessment process. The reassessment was issued March 25, 1971. It is suggested that the failure to discover the error is material to the issue however the act giving rise to the penalty is the making of the return and I cannot see that a subsequent course of conduct, consisting entirely of omissions to take opportunities to review the return and to clarify the doubts that should have existed about it, can alter the quality of the act itself.

The reassessment related solely to the inclusion in income of the unreported dividend and resulted in a taxable income of $9,406.39 and federal and provincial taxes of $1,078.81 and $268.91 respectively. The notice stated:

Federal tax assessed includes $215.76 penalty under Section 56(2) of the Income Tax Act. Provincial tax assessed includes $53.78 penalty under Section 19 of The Alberta Income Tax Act.

This appeal is concerned only with the penalty.

Since the sections are, in all material particulars, identical, I will deal with the penalty as if it were a single penalty of $269.54 under subsection 56(2) of the federal Act:

56. (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 statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

The plaintiff’s own participation in the filing of Diamond’s T-5 Summary negates any imputation of wrongdoing on his part. He and the accountant are entitled to be exonerated from any implication that, whatever occurred, there was anything “fishy” about it. What was done or omitted was not done or omitted knowingly and so, the burden is on the defendant to show that the circumstances amounted to gross negligence.

In so far as the plaintiff himself is concerned, the material facts in support of that contention are his signature of the return in blank, per se, and his failure, particularly when alerted by the substantial shift in tax liability since the December estimate, to look into the matter in detail.

The misplacing of the T-5 Supplementary was a mistake, pure and simple. The plaintiff had a system for getting his tax information into his accountant’s hands. It was a workable system but, because of the misplacement of the T-5 Supplementary, it did not work in this case. The plaintiff’s explanation for his calm acceptance of the good news that he was going to get a refund rather than pay the $3,070 tax estimated in December is, in my view, reasonable. Realities also dictate to me that even a lawyer, at least one who is not working with the Income Tax Act on a regular basis, has as much right as any layman to rely on a professional who holds himself out as a tax expert whom he has good reason to believe competent. The signature of a return in blank is not, at least where such a relationship exists, itself a negligent act.

A mistake was made; it was a serious mistake. With the benefit of hindsight it is apparent that the plaintiff’s reliance on his accountant was unwarranted because the accountant did not have the facts and material that the plaintiff thought he had and both ran out of time without taking a proper opportunity for consultation. I cannot find on the evidence before me that the plaintiff was personally grossly negligent.

The matter cannot end there however.

In Udell v MNR, [1969] CTC 704 at 713-14; 70 DTC 6019 at 6025, my brother Cattanach, J dealt with the question of the liability of a taxpayer for the penalty assessed under subsection 56(2) as a result of the alleged gross negligence of the chartered accountant who prepared his return. He held that:

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.

and later (at p 714 [6025]):

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 . . .

Subsection 56(2) is clearly a penal section. Lord Esher in Tuck & Sons v Priester (1887), 19 QBD 629 at 638, is authority for the proposition that:

If there is a reasonable interpretation (of a penal section) which will avoid the penalty in any particular case, we must adopt that construction.

However, the interpretation must be reasonable. The Supreme Court of Canada held in The King v Krakowec et al, [1932] SCR 134 at 142, that:

. . . even penal statutes must not be construed so as to narrow the words of the statute to the exclusion of cases which those words, in their ordinary acceptation would comprehend.

In signing the return in blank, the plaintiff certified:

. . . that the information given in this return and in any documents attached is true, correct and complete in every respect and fully discloses my income from all sources.

He then delivered it to the accountant to complete. In other words, the appellant committed to the accountant the fulfilment of his certification and that, in my view, can only reasonably be construed as an acquiescence in, if indeed it is not a participation in, whatever the accountant did in fulfilling the certification. The plaintiff cannot therefore dissociate himself from the conduct of the accountant from the time he signed and delivered the return in blank until the return was filed.

With a single exception all that transpired could, I think, be explained in the light of the pressures that exist in such an office with such a practice in the dying hours of April and again, whatever view one may take of the accountant’s failure to follow up the matter with the plaintiff, subsequent events cannot alter the nature of the act that is the basis of the penalty. The exception is the deliberate filing of the return notwithstanding actual doubt about its accuracy and actual knowledge that, if it was accurate, there was no urgency about the filing. I should emphasize that the accountant testified that he actually knew the import of subsection 44(1) in so far as it bears on the necessity of filing a personal income tax return on April 30 where no tax is payable.

This one act, in my view, was a marked departure from the standard of conduct that the accountant ought reasonably [to] have met and I find it to be gross negligence. The appeal is dismissed with costs.