Donald Engene Morgan, Maitland Almost, Carlyle a Bodkin and Frank E Cassin v. Minister of National Revenue, [1973] CTC 2192, [1973] DTC 146

The Chairman (orally):—Basically this is an appeal by Donald Eugene Morgan, but the evidence in this case is to be applied by consent in the appeals of Maitland Almost, Carlyle A Bodkin and Frank E Cassin. The appeals arise out of notices of reassessment by the Minister of National Revenue for the taxation year 1969 levying against each of the four appellants a penalty for failure to disclosure or report the sum of $4,500, being each appellant’s share of the purchase price of $18,000 worth of shares in Allview Cable Service Limited which was paid in the form of a cheque issued on the company’s own bank account

As the name indicates, Allview Cable Service Limited is what is commonly known as a cablevision company. The appellants in this case, although not the beneficial owners of all the shares of the issued capital stock of the company, are certainly, when they act in concert, the controlling shareholders of the company. The difficulty arises by virtue of the fact that apparently, in the year 1968, they had an opportunity to purchase, at a cost of some $250 per share, $18,000 worth of shares from a shareholder of the company who, for reasons not known to the Board, wished to dispose of his interest. A cheque was issued on the company’s bank account and given to the company’s lawyer in December of 1968 for the sum of $18,000. The lawyer deposited it, without endorsation, in his trust account and apparently took no further action until the calendar year 1969 when the transaction was completed and the shares were acquired. Eventually, the exact time is not clear—perhaps within a year or two afterwards —the actual share certificates were issued in the name of the individuals.

As Mr Murphy, the company accountant, testified, the $18,000 in question was charged against the shareholders as loans on January 31, 1969. The books were kept by the company’s employees at the company’s place of business, and within six months it was discovered that this amount should have been charged to wages. A corresponding journal entry was made to cancel out the shareholders’ advances and a double entry was made debiting wages to, in effect, convey the true intent and substance of the transaction on the books of the company. This is shown in Exhibit A-2. There are other transactions indicated on Exhibit A-2 that also needed correcting in order to bring the company’s books into proper order in accordance with the usually accepted principles of accounting and also to give the shareholders the maximum benefit of the provisions of the Income Tax Act.

I am impressed with the evidence of Mr Kime, whose firm had audited the books of Allview Cable Service Limited, when he said that, although the books were something less—and I am paraphrasing— than one would have hoped for from a thriving business which by 1969 was grossing $340,000, nevertheless the corrections or alterations that were required by the company did not, in the course of the auditor’s investigation, indicate any omissions of a substantial nature from the books of the company. Mr Kime’s firm did its audit at the end of the fiscal year (in July) and the usual journal adjusting entries were made, I presume, in each year. In the company’s books, no attempt whatsoever was made to hide or surreptitiously dispose of the $18,000 covered by the cheque of December 1968.

The type of operation that we are dealing with is important in this case. I think the evidence indicates that, once it was set up, it required only a small staff to ensure that the billings went out and the payments came in. I think two girls were employed for this purpose, as well as to give any counter service that was required. Three men were employed, essentially to provide repair service, which is a fundamental part of the success of a cable operation. Anyone who has had anything to do with a cable vision service knows that, when repairs are needed, they are required “at least by yesterday”. The appellants themselves, in some instances, were involved in repair work, as well as the ordinary employees.

This is not a large corporation in terms of numbers of employees, although it did generate a tremendous amount of revenue, in fact an increasing amount of revenue, between 1967 and 1970.

I think it is important to look at the people who were the company. Three of the individuals had spent most of their working lives as employees of John Labatt Limited, a well-known manufacturer of a saleable product in this city. The fourth had been a member of an electrical corporation. I think all of them, or, if not all, at least three of them, were associated with the company from its inception. By 1964 or 1965, all of them had terminated their previous employment and were, if anything, active full-time employees of the company, rather than passive shareholders. One can almost take judicial notice of the tremendous degree of success that this type of operation has had in Ontario in the past ten years.

Having been closely associated in private practice with the communications industry, I cannot help but marvel at the fact that men with the background of these individuals were able to obtain a licence for this operation in what one could guess would be a highly competitive market. None of them had a so-called “higher education”, although I suspect that their experience in life made them more knowledgeable than mere schooling would have done. They all gave evidence in this case. They all admitted, through their counsel, that it was negligent on their part not to have reported this $4,500. In all cases, for all practical purposes, none of them has had a brush with the Department of National Revenue that would weigh against him, in my view, in this -hearing.

I observed each of them in the witness box. I questioned them and I observed their demeanour and the manner in which they answered the questions. I have considered the interest that they have in the outcome of this appeal, and I have no hesitation whatsoever in finding, in all four cases, that they are credible witnesses, and I accept their evidence, as given today, without qualification. In almost all instances, the evidence is that they received T4 slips from the company, which were prepared by Mr Almost. They filed their returns, with the assistance of accountants, by merely forwarding the T4 slips to their respective accountants. The evidence discloses that these were not the same persons as the accountants for the company.

It is interesting to note that Exhibits A-2 and A-3 were prepared by Mr Kime from information obtained from the books of the company. These were prepared only last night, and one wonders ‘how the highly qualified, and highly skilled, and highly educated people in his firm would have missed this point, if they did in fact do so.

But I am not dealing with highly educated or highly qualified people when I deal with these four appellants. They knew that they had bought shares. They knew that there was a bonus to be paid to them. There was no formal meeting held. If one were to look at the minute book of the company—not now, but when the reassessment was made

—I dare say that it would be no different from thousands of minute books to be found in lawyers’ offices across this country—and particularly in this province—which are far from up-to-date. The minute book was kept, either by Mr Almost or, in any event, by one of the appellants, none of whom had any experience, as I have said, with limited companies other than as employees of a large international corporation of which they were not officers.

As I have also said, there is no question in my mind that they did not intend to pocket this money or to deceive the protectors of the public treasury in any way. However, because of the length of time between the iling. of their calendar year requirements in the spring of 1970 and the end of the company’s fiscal year in July of the previous year, although bonuses had been discussed on a casual basis early in 1969, they neglected to include the $4,500. Although this was a relatively large sum in relation to their total income, I cannot overlook the fact that the income of all of these people in the year 1969 was. substantially more than they had ever earned before, and it was therefore understandable that its omission might in that year pass unnoticed. They struck me as people who were happy at their good fortune and would not be the type, in my estimation and under the conditions I have previously outlined, who would go to the trouble or run the risk of withholding anything from the income tax Department which was duly payable at the material time.

As I have said, that they were negligent goes without question. However, Parliament in its wisdom saw fit, under subsection 56(2)—I believe the new subsection is subsection 163(2)—to impose a penalty, but the offence, if I may use that term, has been broken down into two sections. First of all, anyone who knowingly withholds information is guilty and liable to a penalty. It is very clearly admitted by Mr Dollinger that this is not the case in this instance. Secondly, a penalty is levied in circumstances that amount to gross negligence.

So the real question I have to decide, in the light of the evidence I have heard and the assessments that I have made of the individuals giving that evidence, is whether or not the negligence that is admitted is gross negligence within the meaning of the words of the section providing for the penalty. It was stated at the opening of the hearing that, under the new tax reform legislation, the onus of proving that the penalty is properly levied is on the Minister of National Revenue. This is a change, perhaps, in the codification, but I think that the cases have indicated that the Board and the courts have always taken that approach to this type of penalty.

Notwithstanding the fact that this is a quasi-criminal section, I think the onus of the Minister is no greater than it is on the taxpayer under any other section of the Act, and that all he need do is prove, by a preponderance of evidence, not “beyond reasonable doubt”, that the taxpayer has been grossly negligent. Once he has given an explanation, as he did through his witness Mr Murphy, as to why the penalty was levied, the onus, if it shifts, shifts to the taxpayer to explain, again by a preponderance of evidence and not beyond a reasonable doubt, that the negligence was not gross negligence. So I have now gone the full circle and have to determine whether or not what is before me in this case amounts to gross negligence or just inadvertent negligence, that is, something less than the legislators envisaged in forming the provisions of subsection 56(2).

The question of gross negligence has long bothered judges, lawyers and members of quasi-judicial bodies when trying to define just what is meant by this expression. One can go back even to the year 1952 and the case of Regina v Beauchamp, [1953] O.R. 422, where it was decided that even ordinary negligence, where it was sought to convict a driver for careless driving under the motor vehicle law, must amount to more than a mere error in judgment.

In subsequent years, the term “gross negligence” was dropped from the provincial statute until some years ago, when it was brought back, particularly in order to deal with the liability of car owners with respect to gratuitous passengers, where such liability applies only in the case of gross negligence. Under the Criminal Code, in instructing juries, I think it is a generally accepted principle to distinguish between ordinary, everyday negligence and whatever is covered by that nebulous term “gross negligence”.

From time to time the courts have paid lip service to the distinction between negligence and gross negligence, but if one reads the cases decided in the last five or six years on this point, it is hard to distinguish just where the line is drawn. I can only assume that when Parliament chose to insert the words “gross negligence” in subsection 56(2), the expression was intended to mean something more than ordinary inadvertence on the part of a taxpayer. It means, to my mind, very great negligence: something that has been spelled out by Mr Weldon in his very learned and lengthy judgment in Penn v MNR, [1971] Tax ABC 33; 71 DTC 71. Without trying to match that very learned analysis of the subject, it seems to me that the question in this case is: was there very great and unusual negligence on the part of these applicants? In my opinion, there was not. There was negligence; they were careless; but they did not have, in my mind, the intent to deceive or to defraud or withhold to the degree that would take their actions out of the category of ordinary negligence and placa them in the category of gross negligence.

For these reasons, I would therefore allow the appeals and refer the matter back to the respondent for reassessment in order that the penalty levied against each of these appellants be deleted.

Appeals allowed.