Columbia Enterprises LTD v. Minister of National Revenue, [1978] CTC 3082, [1978] DTC 1783

Delmer E Taylor:—This is an appeal against the penalty imposed under subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63 as amended, which formed part of an income tax assesment for the taxation year 1973.

Facts

The appellant (hereinafter referred to as “Columbia”, “the corporation” or “the Company”) was incorporated under the laws of the Province of British Columbia. At all relevant times there were five shareholders, all brothers. A real estate holding at 122 East Pender Street, Vancouver, British Columbia (hereinafter referred to as the “property”) was sold in 1973, a profit was realized on this sale but was not reported to the taxing authorities.

Contentions

In the Notice of Appeal, the appellant asserted that:

All of the brothers have their own profession or business and do not participate in the company actively. The company is a holding company for assets it has received from their mother. There is no business office for the company and the company has no employees.

—The unreported capital gain pertains to a building which was bequeathed to the family by the mother who passed away on the 12th January, 1971. An estate was established for the period ended 30th November, 1972. In and about the first of the year 1973 the building was transferred to the company. On or about 29th March, 1973, the company sold the building to Eric Enterprises Ltd.

—In 1973 the company made an election to pay tax in the amount of approximately $7,631 for the tax on 1971 undistributed income on hand. At the Same time an election in respect of a dividend out of the 1971 capital surplus on hand.

—At the same time, the death of the mother caused a considerable amount of strife. This strife has various factions and has divided the families and at the same time made the communications and administering of the company most difficult.

—The books and records of the company show in detail the income and sale of the building in question in 1973. These same records was (sic) submitted to the company’s accountant for reporting to Revenue Canada for the year 1973.

—However by reason of the lack of understanding all of the transactions that occurred in 1973, an interim return was submitted and signed by the accountant. It was always the intention of the accountant to submit amended return, once the understanding of all the transactions was achieved. The working papers of the accountant verified this intention.

—Meanwhile several events occurred that delayed the accountant in making the amended return.

—During this time the company had no knowledge that the capital gain had not been reported in its return. As well there is no evidence that the company participated in, assented to or acquiesced in this return.

—The company will rely on the fact that gross negligence of the company’s accountant not attributable to the company was the reason why the income was not reported in 1973.

The Reply to Notice of Appeal prepared on behalf of the respondent contended that:

—On or about December 20, 1972 the appellant acquired rental property at 122 East Pender Street, Vancouver, British Columbia (“the property’’) from the estate of Butt Lim for $120,000.

—On or about March 29, 1973 the appellant sold the property to Eric Enterprises Ltd for $230,000.

—The appellant reported nil income for its 1973 taxation year and did not report any rental income or taxable capital gain in respect of the property.

—In so assessing the appellant the .espondent assumed, inter alia, that:

(a) the appellant in its 1973 taxation year earned income totalling $54,337 beyond that reported in its income tax return;

(b) in filing its income tax return as required by the Income Tax Act for the 1973 taxation year the Appellant knowingly or under circumstances amounting to gross negligence made or acquiesced in the making of omissions in the said income tax return (thereby) understating its net income . . .

Evidence

Paul Lee, chartered accountant, Vancouver, British Columbia, had prepared the Notice of Appeal, signed and submitted it as “representative” for Columbia. He acted as agent for the appellant at the hearing but was called by counsel for the respondent as the first witness. Mr Lee responded to the Minister’s request to testify, and counsel agreed that no objection would be raised by the Minister to Mr Lee resuming his role as agent when his evidence was completed. Mr On Lim, president of the corporation, gave evidence on behalf of the appellant. The following is a summary of the main evidence adduced:

—Mr Lee had been the accountant since 1959:

—he had available to him all the necessary books, records and documents from which to prepare an adequate tax return including letters dealing with the particular financial transactions pertinent to this appeal; —he had prepared the financial statements for 1973;

—he had the same tax returns for many previous years.

—it was not his custom to review the corporate tax material with any corporate officer, before filing it;

—he (or someone in his office directly responsible to him) signed the certificate on the 1973 return;

—he would mail the returns;

—On Lim had authorized these arrangements—“may be verbally. I can’t remember in writing”;

—On Lim did not see the tax return before filing;

—The return was signed ostensibly by “On Lim’’ as “Director”;

—On Lim was aware that the specific financial transaction in question had been profitable and should have resulted in a substantial income tax liability;

—On Lim was not aware the return was improper or incomplete.

Argument

Counsel for the respondent relied to a substantial degree on the examination of the penalty issue and the review of the earlier jurisprudence provided in Michael S Mark v MNR, [1978] CTC 2262; 78 DTC 1205, which had been allowed by the Board. Reference was also made to The Queen v Parker Car Wash Systems Limited, 77 DTC 5327. Although Parker (supra) involved a criminal charge under the Act rather than a penalty provision, in counsel’s view it nevertheless provided, at 5330, considerable support for a principle the Minister sought to establish in this appeal:

The St Lawrence Corp case was cited with approval by both counsel and rests upon a proposition succinctly cited by Schroeder, JA who gave the judgment of the court, at 281 :

While in cases other than criminal libel, criminal contempt of Court, public nuisance and statutory offences of strict liability criminal liability is not attached to a corporation for the criminal acts of its servants or agents upon the doctrine of respond at superior, nevertheless, if the agent falls within a category which entitles the Court to hold that he is a vital organ of the body corporate and virtually its directing mind and will in the sphere of duty and responsibility assigned to him so that his action and intent are the very action and intent of the company itself, then his conduct is sufficient to render the company indictable by reason thereof. It should be added that both on principle and authority this proposition is subject to the proviso that in performing the acts in question the agent was acting within the scope of his authority either express or implied.

Counsel adapted that quotation to the instant case and summarized the main points in the following manner:

. . . for the purposes of the completion of the certification, the satisfaction of the certification on the back of the return, and the filing of the return, the company appointed Mr Lee its directing mind and will.

The appellant at least tacitly and probably explicitly, had authorized the accountant not only to prepare the return, but also to sign it on the company’s behalf . . .

. . . this is a self-assessing system, which provides for a certification to the effect that the taxpayer has reviewed the return, he’s testifying as to the accuracy and veracity of its contents. Now, I don’t know what’s going to happen to such (a) system if one can turn over that duty not only to one’s accountant, but apparently to an accountant’s stenographer. Clearly the taxpayer does that sort of thing at the risk of bearing the responsibility for whatever the accountant does.

I would submit . . . in this case the company, through its directing mind, Mr Lim, could have very easily been privy to the making of the return. He chose to turn a blind eye to the making of the return to the extent where he ceded the responsibility for examining the return to Mr Lee, and in that case I would say that he has been reckless or wilfully blind to his responsibility, and that is sufficient degree of intent to constitute gross negligence in these circumstances.

Mr Lee summarized the conclusion which should be drawn from the evidence:

You. have evidence in the books, from working papers, to cover all this transaction. I don’t think you have evidence of any willful suppression, and you have evidence that the company had implicit faith in the accountant, and if you look under subsection 162(2), as you probably know. very well, it denotes that it involves a deliberate and intentional consciousness on the part of the company. In other words, in the dictionary wording of intentional, it means done with intention, design and plan, and deliberate. I don’t think this is the case that is before you, and “willful” suggests of stubborn and persistent, and I don’t think that applies. You have evidence from Mr Lim, or the company solicitor, that it’s always been the intention to pay the tax, it’s just something unfortunate . . . it’s actually embarrasing, and I don’t think the section should apply in this case.

And one reason is that Miss Williamson here has given you several cases, but there is one thing in common in all the cases, they’re all individuals, and if I may quote, and I want to quote Lord Sumner in Fisher’s Executors, [1926] AC 395; 43 TLR 340, where he says that:

“In accordance with jurisprudence, a corporation cannot have any intention in any cases of desire or intention, things of which a company is incapable.”

You see, I think all the cases which Miss Williamson has quoted, there’s Udell and Weeks and Decore and Marks (sic), they’re all individuals.

And also I think this section connotes that there is an element of knowledge of the principle and concurrence with the Act. I think you have evidence before you from Mr Lim, that Mr Lim did know it wasn’t reported, the sale, and he’stated that he would not agree with the return if he knew it was omitted. And then I believe the word, or the section reads, ‘has made’, that involves a deliberate and intentional consciousness, and the intention to evade is very important. I don’t think in this case that we have evidence of willful intention to evade. And also I don’t think that Columbia is privy to the gross negligence of its accountant, and I believe that evidence shows that there is no bad faith on the part of the company.

And in the cases referred to, of the company, by Miss Williamson, that that is under section 239(1)(d), we are only dealing with a Notice of Reply. She was relying on 163(2).

And also since the case is before you, I think that Udell has some similar circumstances to this case. It’s a professional accountant who made the omissions, and I believe gross negligence did occur. But I think in 163, the most important thing is, “deliberate and intentional”, and also I don’t believe it’s present in this case, and also I believe that if there is gross negligence on the accountant’s part, then the company is not a privy to it.

Findings

Counsel for the Minister, with the responsibility for sustaining the penalty imposition, in effect has put forward two bases upon either one of which the Board might find against the appellant. One of these is that the voluntary system for declaration of income tax liability would break down if a taxpayer could avoid responsibility for certification of a tax return, by delegating that task to an agent; the second is that Lee should be regarded as the “directing mind and will” of the corporation—axiomatically his actions were those of Columbia, and his gross negligence that of the Company.

Paul Lee has admitted gross negligence in fulfilling his functions as an accountant, and proposed as the essence of the case for the appellant: “I don’t think that Columbia is privy to the gross negligence of its accountant”.

It is not for the Board to consider whether or not such a collapse of the taxing system might occur. In order to support the underlynig proposition—that the gross negligence of the accountant should be attributed to the taxpayer—counsel must confront and overcome the signal decision in Cyrus C Udell v MNR, [1969] CTC 704; 70 DTC 6019, to which substantial reference was made in Mark (supra). The arrangement between On Lim and Paul Lee by which Lee performed his functions did not include a procedure for restraint or review of Lee’s conduct by the Company’s officers, and that might be viewed, according to counsel, as the appellant not merely delegating, but abandoning its legislated role in filing tax return information. Counsel may be dismayed at an agent fulfilling such a total role with impunity, but that does not alter in any way the principle which must govern the Board’s view. It is clear from Udell (supra) that a taxpayer and his agent may legitimately take maximum comfort in establishing their respective realtionships and duties, secure in the knowledge that the statutory enactment providing for penalty imposition under the Income Tax Act does not involve the principal in penal responsibility for the act or omission of his agent.

With respect to the Minister’s second point, the evidence is convincing that Lee was totally responsible for the functions associated with the determination and disclosure of the corporation’s income tax liability. However, l' find no justification for extrapolating from that limited, although critical, obligation for Lee, a sphere of influence that would implicate him as the directing mind and will of the corporation in all of its endeavours. There is no evidence that Lee decided to make the purchase or the sale of the property involved, determined the general business role of the corporation, established rental rates or expense allocations for property, made investment decisions or divided the profits among the brothers. I am unable to see in the Parker decision (supra) support for a division of the ‘‘directing mind and will” into several separate directing minds and wills, each fulfilling a distinct and identifiable function on behalf of the corporation. In clarification of the quotation from Parker (supra) given by counsel, I would point out the validity of a further quotation from the same judgment at the same page 5330:

it seems to me that the clarity of this statement must not be blurred by the use of such terms as “alter ego’’ in describing the “directing mind and will’’ (an expression of Lord Haldane’s) which the learned justice of appeal allowed himself to use—in company be it said with many judges in other courts—and which Lord Reid condemned in the following terms in Tesco Supermarkets v Nattrass, [1971] 2 All ER 127 at 132-3:

“In some cases the phrase alter ego has been used. I think it is misleading. When dealing with a company the word alter is I think misleading. The person who speaks and acts as the company is not alter. He is identified with the company. And when dealing with an individual no other individual can be his alter ego. The other individual can be a servant, agent, delegate or representative, but I know of neither principle nor authority which warrants the confusion (in the literal or original sense) of two separate individuals.”

Even if the literary sense of intimate friend or ‘‘other self” the expression seems inappropriate to the concept of identity between the corporation and the human instrument through which its directing mind and will are expressed.

If there was a “directing mind and will” in Columbia who spoke and acted for the company, it was On Lim and not Paul Lee. Confidence, implicit confidence, even injudicious confidence by a principal in an agent, does not of itself transform the recipient of such trust from the agent into the principal—he remains the agent.

Decision

The appeal is allowed and the assessment is varied in order to delete the penalty imposed.

Appeal allowed.