Date: 20001205
Docket: 2000-2649-IT-I
BETWEEN:
DEAN ARCHIBALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Campbell, J.
[1] By a reassessment dated March 1, 1999, the Minister reassessed the Appellant's 1995 tax return by adding $55,165.00 to his income from capital gains. A penalty was imposed under section 163 of the Act for failure to report this amount of gain in filing his 1995 return.
[2] The Appellant appealed the assessment of this penalty. The sole issue before me is whether the penalties were properly assessed against the Appellant in respect to his 1995 taxation year.
[3] Counsel for the Appellant and for the Respondent submitted a common Exhibit Book. The facts leading to the imposition of the penalty were basically agreed upon. A company called Tomara Realty Limited was incorporated by the Appellant's brother a number of years prior to 1995. The Appellant was never actively involved in the company. He was a director but never attended directors' meetings. The share structure of the company was as follows:
Dean Archibald 22.22%
Martha Archibald 77.78%
[4] The second shareholder, Martha Archibald, was the wife of the Appellant's brother. By the fall of 1994, tension and conflict had developed between the two brothers and the Appellant stated that he "wanted out of the mess".
[5] The Appellant's shares were valued at $78,306.00. It was agreed he would receive this amount and withdraw from the company.
[6] The Appellant's accountant, Ross Casey, gave evidence that the Appellant's wife delivered correspondence dated November 1, 1994 (Tab 22 of Exhibit Book 2) from Gary Bickerton, the company's accountant, addressed to the Appellant. This correspondence listed the various scenarios and Mr. Bickerton's analysis of how the taxable portion of the monies owed to the Appellant in the amount of $55,165.00 could be paid to him. Attached to this correspondence in the Exhibit Book were Mr. Casey's handwritten notes in response to the contents of this letter. Mr. Casey testified that after he reviewed this letter he had one telephone conversation with Mr. Bickerton in which he discussed the methodology by which the Appellant could receive these monies and minimize the tax implications. Mr. Bickerton was to review the matter again and contact Mr. Casey but at this point in time there was no resolution on how payment would be accomplished for the Appellant. There was no further contact between these accountants as Mr. Bickerton never got back to Mr. Casey on these issues. Mr. Casey had no involvement on behalf of the Appellant with Tomara Realty Limited prior to receipt of the November 1994 correspondence. He and the Appellant had never discussed this company previously in their business relationship. Mr. Casey, according to his evidence, lost track of the matter and no one brought it to his attention again until 1998.
[7] After the correspondence of November 1, 1994 from the company's accountant to the Appellant (which was reviewed by the Appellant's accountant), Gary Bickerton again wrote to the Appellant on January 9, 1995 (Tab 6 of Exhibit Book 2) advising that the Appellant's share of the company surplus was $78,306.00. The letter goes on to state:
"...Of this amount $23,141 will be tax free and the balance of $55,165 will be taxable in your hands."
At the date of this correspondence, the company had paid the Appellant a total of $60,000.00 in December 1994. He eventually was paid the balance of $18,306.00 in March 1995, at which time he surrendered his share certificates and resigned as a director of the company.
[8] Of the total amount of $78,306.00 owing to the Appellant the company filed a capital dividend election for $23,141.00, which amount was non-taxable in the Appellant's hands. The balance of $55,165.00 was shown on the books of the company as payment of director's fees in 1995. The Appellant did not include $55,165.00 in income for 1995.
[9] A letter of inquiry by Revenue Canada dated June 23, 1998 was forwarded to the Appellant advising that directors' fees claimed by the company and paid to the Appellant in the amount of $55,165.00 had not been reported. It was at this stage that the Appellant felt he again needed the advice of his accountant in respect to this potential tax liability. A T1 adjustment form was filed. Upon determination that the sum of $55,165.00 was reportable as a taxable capital gain rather than a director's fee, a re-classification was accepted by Revenue Canada on November 9, 1998 and the corresponding tax was immediately paid. This is not at issue.
[10] The Appellant did not dispute that he received these monies for the disposition of his shares of Tomara Realty Limited. Clearly, however, the Appellant did not report these amounts. The failure to report in 1995 gave rise to the imposition of a penalty under section 163 of the Act.
[11] The relevant portion of subsection 163(2) states:
"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 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 ..."
[12] Subsection 163(3) establishes that the burden of proof is on the Minister and states:
"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."
[13] Counsel for the Respondent relied on the evidence of two Revenue Canada officials who had been involved with the Appellant's case. The first witness, Patricia McCann, stated that the decision to impose a penalty was based on two factors:
(1) the amount of $55,165.00 not included in income in 1995 was such a significant amount in comparison to the Appellant's other income for that year, that it should have been obvious to the Appellant to include it in income; and
(2) the Appellant knew about this amount, had received it but purposely ignored it.
[14] The second witness, Carla Thoms, also stated that the Appellant received this money and should have known as an experienced businessperson that it was to be included in income.
[15] The inclusion of this amount in his 1995 return would have increased his income by approximately 45% for that year. The evidence also showed that he did not dispose of shares frequently. Respondent's counsel therefore categorized this transaction as a unique one and yet no further steps were taken by the Appellant to report it as income. At the very least, I would expect that the Appellant should have contacted his accountant as a follow-up to his initial inquiry in 1994. He had knowledge that there would be tax implications after the November 1, 1994 letter and as a result had his wife deliver a copy of it to the accountant. Even if he did forget about this after he received $60,000.00 in December 1994, he received the second letter of January 9, 1995 from the company's accountant advising him that $55,165.00 would be taxable. However you categorize this amount, there would be some tax implications. Then he is paid the final amount of $18,306.00 in March 1995. Still he did nothing further. In fact he took no further action to deal with these amounts until Revenue Canada contacted him three years later.
[16] The burden of proof is on the Minister to justify the assessment of a penalty. As stated by Cattanach, J. in Udell v. M.N.R. [1969] C.T.C. 704, this section is a penal provision and must be construed strictly. The case of Venne v. The Queen [1984] C.T.C. 233 (F.C.C.) confirmed that this section authorizes penalties only in those cases where there exists a "high degree of blameworthiness involving knowing or reckless misconduct".
[17] It was not unusual that Mr. Casey never spoke directly to the Appellant concerning this matter. Over the course of a thirteen-year relationship with his accountant, he routinely permitted his wife to conduct most dealings with the accountant on his behalf. The Appellant testified that he could not remember discussing the matter with his accountant but that he probably would have discussed it with his wife. The usual practice had always been for the Appellant's wife to handle all financial matters, tax returns, investments, etc. on behalf of the Appellant. Mr. Casey routinely dealt with the Appellant's wife who had a bookkeeping background and who, according to Mr. Casey's evidence, was extremely competent. The Appellant's evidence also supported this fact. The Appellant stated that he delegated these responsibilities to her and entrusted his accountant and his wife to look after his financial affairs. That may be the case but the Appellant is the taxpayer and he is the person who received the money and is ultimately responsible for tax liability. The accountant could only attend to the Appellant's financial affairs if he was supplied with correct information. The Appellant received the money. All correspondence concerning the money was addressed to him. He stated in his evidence that he could not recall if in 1995 he knew or did not know that $55,165.00 would have to be reported. As an experienced businessman who received money from various sources over the years, he should have been aware that there was going to be tax implications. In fact the correspondence of January 5, 1995 informed him of that fact. The letter was silent as to how it could be taxable but the reasonable person would be prompted to get some accounting advice after being so advised.
[18] The wording of this section imports a requirement of intent to conceal a taxable transaction. The penalty does not exist for a mere mistake or omission. To uphold the assessment of this penalty, I must find that the conduct of the Appellant had a higher degree of reprehensibility than would otherwise be the case. The Appellant omitted to report the income. He stated that he was waiting for someone to tell him what steps had to be taken to see it was reported as income. He went on to say that he "simply forgot about it until it came up again. No T4s or T5s were issued by the company but the letter of January 9, 1995 from the company's accountant to the Appellant states that "$55,165.00 will be taxable". This was a clear written directive to the Appellant that he either report or get some accounting advice and finish off what he started in November 1994. He was an experienced businessperson who continued to blithely ignore what any other person would consider a red flag. The accountant stated that he himself might have picked up on the payments if circumstances had been different but the Appellant's 1995 return would have been completed in 1996 over a year after receipt of the monies. I do not know how the accountant might have done so without the Appellant providing him further information as to the payments. If the accountant had been dealing with Tomara Realty prior to the one incident in November 1994, it might have re-surfaced for some other reason and been caught. However that was not the case. The responsibility here was for the Appellant to report receipt of these amounts to his accountant and get some further advice. This is not a case where the accountant made a bookkeeping error.
[19] The accountant testified that the Appellant was a well-to-do businessman who was involved in different businesses and as he put it "used to shuffling money around". The accountant felt it would be easy for the Appellant to lose track of this $55,165.00 as that figure would not represent a significant amount of money to the Appellant. He also stated that this type of share transaction would be unique to the type of business dealings in which the Appellant was generally involved. The facts however and his returns disclosed that in prior years, his income represented amounts from various sources such as investment income, dividends, capital gains, etc. As an experienced businessman with income from such sources, even if the amount was insignificant to him, he would still have to know that the receipt of $55,165.00 would have some tax implications. I would think that being an astute businessman had he not received the final payment of $18,306.00 in March 1995, he never would have signed away his shares in the company. That by analysis makes the much smaller amount of $18,306.00 received by the Appellant a significant one.
[20] The facts support the imposition of a penalty under section 163 of the Act. The Appellant knowingly made an omission in his return. It was not a simple oversight. He knew he received monies that would be taxable by some method. The company's accountant advised him what portion of those monies would be taxable. He thought this important enough in November 1994 to initiate one contact with the accountant. He was a businessman experienced with the receipt of money from various sources. His accountant testified that the taxable portion in the amount of $55,165.00 would not be a significant amount to the Appellant in comparison to receipts of money in former tax years. But in the year under appeal the receipt of this amount would have increased income by 45%, according to the submissions of counsel for the Respondent. In that year, it would have been a significant amount. The Appellant testified that he did not recall if he knew or did not know that the $55,165.00 would be taxable. He clearly knew as he was informed by the company in writing. He simply chose to ignore the fact for some three years on the pretext that he was waiting for someone to tell him what to do with it. He knowingly made this omission in his return and is therefore liable for the penalty.
[21] Appellant's counsel argued that the company or its officers deliberately attempted to mislead the Appellant by withholding information respecting categorizing the $55,165.00 payment as a director's fee thereby imposing the greatest tax burden on the Appellant. I am not making any finding in respect to these allegations as my decision is based on findings of fact respecting the Appellant's conduct.
[22] These facts of his case also support a finding of gross negligence. The conduct of the Appellant was reckless and wilful or at a minimum his conduct displayed an indifference to the consequences of his actions. It is more than mere inadvertence here. Whichever way one chooses to view this conduct the end result is the same. The Appellant's conduct warrants the imposition of a penalty under section 163 of the Act.
[23] The appeal is dismissed.
Signed at Ottawa, Canada, this 5th day of December 2000.
"Diane Campbell"
J.T.C.C.