Macdonald v. R., [1997] 3 C.T.C. 2195

Taylor T.C.J.:

1 This is an appeal heard in Toronto, Ontario, on December 3, 1996, against income tax assessments for the years 1992 and 1993. The essential elements of the Notice of Appeal, and the Reply to the Notice of Appeal are as follows:

Notice of Appeal

Material Facts

1. In 1992 and 1993 the Appellant duly reported his income for the 1992 and 1993 taxation years.

2. Pursuant to an audit of the Appellant conducted in 1995, the Minister ascertained that the Appellant had failed to report certain sales in the 1992 and 1993 taxation years.

3. The Appellant made representations that if the Minister was to increase the income of the Appellant for the 1992 and 1993 taxation years, the Appellant would be entitled to a full capital cost allowance which would reduce the net income of the Appellant for the 1992 and 1993 taxation years to nil.

4. By Notices of Reassessment dated September 13, 1995, the Appellant was reassessed in respect of his 1992 and 1993 taxation years which resulted in a decrease of the prior reported loss of the Appellant and taxable income of nil in each of the 1992 and 1993 taxation years.

5. By the aforesaid Notices of Reassessment the Minister assessed a federal penalty of $785.95 in the 1992 year, a provincial penalty of $409.90 in the 1992 year, a federal penalty of $1,222.20 in the 1993 year and a provincial penalty of $688.25 in the 1993 year. In addition, the Minister charged arrears interest for each of the 1992 and 1993 taxation years.

6. The Appellant duly objected to the aforesaid Notice of Reassessment.

7. By Notification of Confirmation dated the 17th day of January, 1996, the Minister confirmed the Reassessment of the Appellant's 1992 and 1993 taxation years. The Notification of Confirmation states in part:

Your claim for capital cost allowance under the provision of paragraph 20 (1)(a) of the Act does not reduce the amount upon which penalties are levied.

8. The Appellant hereby appeals from the aforesaid Notification of Confirmation.

9. The Appellant states the Minister made no other findings of fact or law other than those stated in the Notice of Reassessment and the Notification of Confirmation which have been communicated to the Appellant as is required.

Statutory Provisions

10. Subparagraph 163(2.1)(a)(ii).

Reasons

11. The Appellant states as there is no taxable income assessed in either the 1992 or 1993 taxation year, no penalty is properly assessable.

12. The Appellant states that the deduction of capital cost allowance is wholly applicable to the determination of taxable income in the 1992 and 1993 taxation years and is properly deductible from the amount of income to which a penalty under subsection 163(2) applies.

Reply to Notice of Appeal

4) In computing non-capital losses for the 1992 and 1993 taxation years, the Appellant claimed business losses in the amounts of $18,273.00 and $1,082.00, but in so computing the said losses, failed to report additional business income of $15,301.00 and $20,413.00.

5) By Notices of Assessment dated June 22, 1993 and May 24, 1994 the Minister assessed the Appellant's income tax returns for the 1992 and 1993 taxation years, respectively.

6) In reassessing the Appellant for the 1992 and 1993 taxation years, by Notices of Reassessment dated September 13, 1989 the Minister made the following changes to the business losses as reported:

1992	1993
BUSINESS INCOME (LOSS) AS REPORTED	($1,082.00)	($18,273.00)
ADD: UNREPORTED BUSINESS INCOME	15,301.00	20,413.00
LESS: ADDITIONAL CAPITAL COST ALLOWANCE	(15,301.00)	(20,413.00)
BUSINESS INCOME (LOSS) UNCHANGED	($ 1,082.00)	($18,273.00)

7) In reassessing the Appellant by the said Notices of Reassessment, the Minister assessed penalties on the 1992 and 1993 taxation years pursuant to subsection 163(2) of the Income Tax Act (the “Act”) as follows:

YEAR	SUBSECTION 163(2) PENALTY	SECTION IS PROVINCIAL PENALTY
1992	$ 785.95	$ 409.90
1993	$1,222.20	$ 688.25

8) In so reassessing the Appellant, the Minister made the following assumptions of fact:

a) in the 1992 and 1993 taxation years the Appellant owned a construction and trapping business (the “Business”);

b) in the 1991 and 1993 taxation years the Appellant failed to report income from the business in the amounts of $15,301.00 and $20,413.00 respectively;

c) the understated amounts were determined by the net worth method;

d) in the 1992 and 1993 taxation years the Appellant did not claim an amount of capital cost allowance (C.C.A.) available to him in computing the loss from the business;

e) the Appellant is entitled to claim additional C.C.A. in the amounts of $15,301.00 and $20,413.00 in the 1992 and 1993 taxation years respectively;

f) as a consequence of subparagraph (c) and (d) above the Appellant's loss from the Business is unchanged from the amounts reported on filing the income tax returns for the said taxation years;

g) the understatement of income within the meaning of subsection 163(2.1) of the Act is $15,301.00 and $20,413.00 in the 1992 and 1993 taxation years respectively;

h) the deduction for C.C.A. allowed to the Appellant in the 1992 and 1993 taxation years does not constitute a deduction wholly applicable within the meaning of paragraph 163(2.1)(a) of the Act;

i) in having failed to report the said partnership income the Appellant knowingly, or under circumstances amounting to gross negligence in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making or false statements or omissions in the income tax returns filed for the 1992 and 1993 taxation years, as a result of which tax that would have been payable assessed on the information provided in the Appellant's income tax returns filed for that year, was less than the tax in fact payable by the amounts of $1,571.90 and $2,444.40 or the said taxation years respectively;

j) for the purpose of determining an amount of income subject to penalty under subsection 163(2) of the Act;

k) as a consequence of subparagraphs g) and h) above the Appellant is liable for penalties of $785.95 and $1,222.20 for the 1992 and 1993 taxation years respectively in accordance with subsection 163(2) of the Act.

Issue to be Decided

9) The issue is whether the Minister properly assessed penalties pursuant to subsection 163(2) of the Act for the 1992 and 1993 taxation years.

Statutory Positions, Grounds Relied on and Relief Sought

10) He relies on section 3, subsection 9(1), 152(7), 163(2) and 248(1) and paragraph 163(2.1)(a) of the Act as amended for the 1992 and 1993 taxation years.

11) He submits that the Minister properly reassessed the Appellant's 1992 and 1993 income tax returns to include in the income of the Business the amounts of $15,301.00 and $20,413.00 respectively in accordance with subsection 9(1) of the Act.

12) He submits that in having failed to report the said income amounts from the Business in the said taxation years, the Appellant knowingly, or under circumstances amounting to gross negligence, in carrying out a duty or obligation imposed under the Act, made or participated in, assented to or acquiesced in the making of false statements or omissions in the said year, pursuant to subsection 163(2) of the Act.

13) He further submits that for the purpose of determining an amount of income subject to penalty under subsection 163(2) of the Act the deduction for C.C.A. allowed to the Appellant in the 1992 and 1993 taxation years does not constitute a deduction wholly applicable within the meaning of paragraph 163(2.1)(a) of the Act.

2 The assessments were contested only with respect to the imposition of penalties — not with regard to the fact that the Appellant “failed to report additional income of $15,301.00 and $20,413.00. Both parties argued the point at issue vigorously and intelligently — and considerable case law was provided. Counsel for the Appellant relied substantially on his reading of subparagraph 163(2.1)(a)(ii) of the Act particularly the words “as were wholly applicable to the amounts -- in his return”. Essentially, his point was that the C.C.A. was “wholly applicable” to the construction business, and it had not been previously deducted - that is when filing the tax return. The position of Counsel for the Respondent was that the C.C.A. did not have an exclusive relationship “with the income that was generated from a business” and he argued that the relationship was “with the source of income, not with income itself”.

Analysis

3 Counsel for the Respondent seemed to be struggling with the meaning of the critical phrase noted above “wholly applicable”, but in my view he was diverted by a questionable interest in the term “source of income” as opposed to just “income”. I see nothing difficult or esoteric about subparagraph 163(2.1(a)(ii) as it should be applied to this matter. In the simplest language, I would suggest that the only reasonable interpretation to be placed on that section is that if there are expense amounts incurred and used solely and exclusively in the process of earning the “not reported -- income”, which expense amounts had not been previously deducted for some reason, then it would be appropriate to allow the taxpayer who had been indiscreet enough to omit the income amounts, to reduce such new income amounts by any new direct expense“wholly applicable” thereto. That situation of legitimate expenses directly and exclusively related to the unreported income, which expenses somehow had not been previously used as a deduction, would be a most unusual turn of events, but it is a possibility. There is no indication in this appeal that there should be anything allowed to reduce the impact of the penalty on the unreported income. It has not been suggested by Counsel for the Appellant that the C.C.A. amount used to offset the new net income ($15,301.00 and $20,413.00 in each case) was exclusively and mutually inter-related. He put forward only the argument that the C.C.A. applied to the entire business — and consequently to the total income — some properly reported and some not properly reported. The imposition of the penalty under subsection 163(2) is for the liability incurred by the revelation, disclosure, or determination of unreported income. That penalty liability remains and must be extinguished, whether or not the tax on the new income amount can be reduced or eliminated (as in this case) by available C.C.A. or some other means. The two liabilities — for the tax on the unreported income and the penalty for the lack of reporting it are quite separate and distinct under the Act.

4 I would only refer to one item of case law — that of Chopp v. Minister of National Revenue ((1987), 87 D.T.C. 374 (T.C.C.)) at p. 375, since it has a certain over arching relevance:

My initial reaction at the hearing was that penalties could not be levied in respect of taxation years where the reassessments are nil regarding tax payable because of a misconception that penalties under subsection 163(2) were invariably 25% of an amount related to actual tax payable. On reflection I am satisfied that penalties of the kind mentioned can be assessed even if no tax is payable in a taxation year provided, of course, that the essential requirements of subsection 163(2) are met. This rule is understandable. For obvious reasons Parliament desires that, in the preparation of their self-assessments under section 150 of the Act, taxpayers shall not knowingly or in a grossly negligent manner be involved in the making of false statements or omissions. Conduct of this kind attracts penalties per se notwithstanding that there is no liability for tax in a particular taxation year because for example, losses are carried over from another year.

5 The appeal is dismissed.