[OFFICIAL ENGLISH TRANSLATION]
2001-4109(IT)I
BETWEEN:
JUSTIN SAVARD,
Appellant,
and
Her Majesty The Queen,
Respondent.
Appeals heard on August 30, 2002, at Chicoutimi, Québec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the appellant: Isabelle Simard
Counsel for the respondent: Martin Gentile
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1994, 1995, 1996 and 1997 taxation years are allowed in order to delete the penalties and interest thereon, the whole in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 10th day of December 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 20021210
Docket: 2001-4109(IT)I
BETWEEN:
JUSTIN SAVARD,
Appellant,
and
Her Majesty The Queen,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal under the informal procedure concerning the 1994 to 1997 taxation years.
[2] At issue are penalties assessed under subsection 163(2) of the Income Tax Act ("the Act"). The penalties were assessed because deductions were claimed as an allowable business investment loss on the basis of a misrepresentation.
[3] In making the reassessments, the Minister of National Revenue ("the Minister") relied on the following assumptions of fact, set out in paragraphs 2, 3 and 7 of the Reply to the Notice of Appeal ("the Reply"):
[translation]
2. In a reassessment dated May 10, 2001, the Minister disallowed the deduction of an amount of $26,960 claimed as an allowable business investment loss in the computation of the appellant's taxable income for the 1994 taxation year.
3. In reassessments dated May 10, 2001, the Minister disallowed amounts of $15,000, $15,000 and $3,040 carried forward as a non-capital loss in the computation of the appellant's taxable income for the 1995, 1996 and 1997 taxation years respectively.
...
7. In making and maintaining the reassessments dated May 10, 2001, the Minister relied on the following assumptions of fact in particular:
(a) the case originates from an internal investigation involving certain employees of the Jonquière Tax Centre, who had set up a scheme under which certain persons would benefit from fraudulent income tax refunds in exchange for a commission based on a percentage of those refunds;
(b) by means of a zero balance assessment dated January 6, 1999, the Minister allowed a total allowable business investment loss of $60,000 ($80,000 x ¾) and a related deduction of $26,960 in the computation of the appellant's taxable income for the 1994 taxation year;
(c) by means of reassessments dated January 6, 1999, the Minister allowed amounts of $15,000, $15,000 and $3,040 to be carried forward as a non-capital loss in the computation of the appellant's taxable income for the 1995, 1996 and 1997 taxation years respectively;
(d) as a result of these reassessments, on January 6, 1999, the appellant received a total income tax refund of $11,054.43;
(e) the deduction claimed as an allowable business investment loss for the 1994 taxation year and the amounts subsequently carried forward as a non-capital loss for the 1995, 1996 and 1997 taxation years were made possible by means of a fraudulent entry into the Department's computer system of a total gross business investment loss of $80,000 for the 1994 taxation year;
(f) the appellant told the Minister's investigators that he had agreed to a suggestion from an acquaintance, one Jean-Eudes Thériault, who had offered to have the appellant's income tax returns reviewed by someone working at the Jonquière Tax Centre and that he had given Mr. Thériault his Social Insurance Number for that purpose;
(g) the appellant knew neither the nature of the deduction that would be claimed on his income tax returns nor the total amount of the resulting refund;
(h) the appellant told the Minister's investigators that he had never operated a business;
(i) the appellant acknowledged to the Minister's investigators that, after he received a total refund of $11,054.13, Mr. Thériault asked him for $7,900 on behalf of the person working at the Jonquière Tax Centre, an amount the appellant gave Mr. Thériault in cash on January 27, 1999;
(j) the appellant did not approach the Minister in any way, for example:
(i) by contacting the authorities at the Jonquière Tax Centre; or
(ii) by simply returning the cheque or cheques to those authorities;
(k) the Minister considers that the neglect shown by the appellant in this case is similar to complicity;
(l) concerning each of the 1994, 1995, 1996 and 1997 taxation years, the appellant made a misrepresentation attributable to neglect, carelessness or wilful default, or committed fraud in filing the income tax returns for those years or in supplying information under the Act;
(m) concerning each of the 1994, 1995, 1996 and 1997 taxation years, the fictitious deductions claimed led the Minister to believe that the appellant knowingly or under circumstances amounting to gross negligence made a misrepresentation or omission in filing the income tax returns for those years, or participated in, assented to or acquiesced in that misrepresentation or omission, with the result that the income tax the appellant would have been required to pay according to the information supplied on the income tax returns filed for those years was less than the amount of income tax actually payable for those years.
[4] The Notice of Appeal provides the following explanation:
[translation]
...
I object to the amount claimed because, under the circumstances, I consider that I have been victimized. I have already made a deposition to an investigator who came to see me at home. I did not deny the events and I explained to the investigator all the facts as they occurred.
In 1997, an acquaintance, Jean-Eudes Thériault, told me that he had a friend who could redo income tax returns and that I would save money; all I had to do was to give him my Social Insurance Number. I said to myself, "If I can save some money, why not?" Months went by, and I heard nothing more about this business.
In October 1997, I went through a very difficult divorce. I managed to get shared custody, but I had to go to a lawyer and that cost me money. Then a very painful time followed. I started drinking a lot; those months were really tough. Early in 1998, Mr. Thériault contacted me and told me to go and check the account in which my income tax returns are deposited because a deposit had been made. I went and checked and, to my great surprise, about $11,000.00 had been deposited. I had been expecting a lot less, say, a few hundred dollars.
I contacted Mr. Thériault to tell him the amount and to say that it wasn't possible. At that point, I realized it was illegal because he told me I had to pay him 2/3 of the amount in order that he give it to the person who did the income tax returns. I asked a few questions, but in the state of mind I was in (divorce, alcohol, depression), I was in no shape to see the situation clearly or to think about the consequences of my decision.
So, I gave him the 2/3 of the amount and had about $3,000.00 left. My life went on; I would go out and drink. Slowly I managed to pull myself together and tried to get my life back on track. During that time I remembered the mistake I had made; that mistake bothered me, until the day I got a call from the investigator. It was a relief at last, and I told the investigator the whole story.
In short, I acknowledge that I made a mistake. I believe that the amounts of money I am being asked to repay are unreasonable in the circumstances in which the event took place. I therefore ask to be discharged from paying the amounts of money, the interest and the fines.
...
[5] At the beginning of the hearing, counsel for the appellant told the Court that, contrary to what was stated in the Notice of Appeal, only the penalties assessed were being appealed from. The appellant admitted the truth of subparagraphs 7(a) to 7(e), 7(g), 7(h) and 7(j) of the Reply.
[6] The appellant works as an electrician for Hydro-Québec.
[7] The appellant stated that he did not know the nature of the claim made in order to obtain the income tax refund. One Jean-Eudes Thériault told him that he could obtain income tax refunds. As recorded at pages 7 and 8 of the transcript, the appellant related the circumstances of his meeting with Mr. Thériault as follows:
[translation]
Q. Can you explain to the Court how those deductions, the ones that are the subject of the case before us today, were applied for? Under what circumstances did that happen?
A. Well, I don't know that at all¾what deductions were applied for. I had no idea about that at all until I got the documents at home.
...
Q. How did that begin; under what circumstances were you ...
A. O.K., I was at my dad's place at a summer bonfire and, that was it, Mr. Thériault was there and at one point we were sort of standing at a distance or ...
Q. When you say Mr. Thériault, do you know his full name?
A. Jean-Eudes Thériault. Right, he told me he knew somebody, somebody who redid income tax returns and that people could get income tax refunds, like I'm going to say. And, that was it, all I had to do was to give him my Social Insurance Number. So, fine, I said, "Why not?" So I gave him my Social Insurance Number and that ended the discussion; we went on having a beer around the bonfire and that was all there was to it.
Q. How long have you known this Mr. Thériault yourself?
A. Well, I've known him, he's mainly, he's more a friend of my brother's because he plays hockey with my brother and of course, the way things go, I've only got the one brother, so at one point I ran into Mr. Thériault and everything; that's how I met him.
Q. O.K. Did ... What was explained to you about the nature of the deductions that you would obtain? Did ...
A. Well, nothing. I mean, Mr. Thériault told me about that too; briefly, it's ... That ended the discussion and then we went back to talk with the group, I'd say. Afterwards I never talked about that with anybody again, not even with Mr. Thériault. I mean, I was getting divorced at the same time, so ...
[8] The payment was made as follows, as recorded atpages 12 and 13 of the transcript:
[translation]
A. ... It was ... At one point, Mr. Thériault called to say that deposits had been made into my account. I went and checked. I said, "Nope," I said, "Nothing's been deposited into my account." And that's the way things stayed.
He called me back a week later to tell me again that deposits had been made, and that I should go and check. I said, "No," I said, "There aren't any." Anyway, the next week he called me back and said to me, "Yeah," he said, "But do you have another account? Do you have ... " "Well," I said, "Yes, I do; when I was with my wife who's now my ex, actually, the income tax, the tax refunds were deposited into a separate account that was hers. So, well, I said, "I'm going to go and see her and ask if we can go and see if any deposits were made."
...
A. After that, well, I did see that deposits had in fact been made. So then I called Mr. Thériault to tell him that a deposit had been made.
...
A. And that was when he told me I had to pay back two-thirds.
Counsel ISABELLE SIMARD:
Q. What was your reaction to that?
A. Well, I thought it was a lot. I said, "That's huge," I said, "Look, two-thirds ... " Well, he said, "That's what it costs to get income tax returns redone ... " So I said, "O.K., in any case they're deductions that H & R Block, say, didn't see, and nobody else saw either. So much the better," I said; that was all.
Q. And how did you pay him that amount?
A. Well, the time it took for me to ...
Q. But how did you pay it?
A. Oh, in cash, just plain cash.
[9] The notes of the attending physician were adduced as Exhibit A-1. These notes show that on October 28 and November 4, 1997, the appellant consulted a psychiatrist because of difficulties he had adjusting as a result of the separation from his spouse.
[10] The conversation with Mr. Thériault apparently took place in the summer of 1998.
[11] At pages 24 to 26 of the transcript, the appellant provided the following explanation under cross-examination concerning the payment of two-thirds of the amount of the refund to the persons who had engineered the refund:
[translation]
Q. I presume that you were also very surprised that he asked you to give him two-thirds of the amount.
A. Yes. That two-thirds, I said, "That's a lot, you know." But I said, "O.K., if that's the way it works." I didn't ask him a whole bunch of questions. I said, "O.K., fine, that's huge, but that's the way it is." And, like I say, at the time, it would have been, what do I know, twice as much or three times less or ... O.K., fine, that's the way it is. That's the way it is, fine.
Q. But, tell me, when he asked you for that amount, what explanation did he give you for saying that you had to give him $7,900 or nearly $8,000?
A. Oh, it was to pay the person who had done the income tax returns. That's what he told me.
Q. But you knew yourself it cost $100 to have an income tax return done at H & R Block.
A. Yes, yes, yes.
Q. But there, it cost $8,000.
A. Yes, but those were deductions I certainly never thought of; I never thought I would get even a cent. And then he told me, "It's for somebody else." I mean, I didn't ... "
Q. But did it cross your mind that this business might be, shall we say, illegal or fraudulent?
A. Not at the time when ...
Q. No?
A. No. No, that's the way it was. That's the way ... That's the way it is. I mean, it's like, I buy a pound of butter and that's the price. O.K., fine, you know ... O.K., that's the way it is.
Q. But how many years had you been working, by 1999? At least nine years?
A. Nine years, yes.
Q. As an electrician?
A. Yes, yes.
Q. O.K. And each year, you filed your income tax return?
A. Yes.
Q. Did someone do it for you?
A. Yes, yes, that's right, there was H & R Block, my dad at first, and then ...
Q. Now then, I'm going to ask you once again, because I'm trying to understand. You see nothing odd in the fact that H & R Block charges you $100 while a guy you don't even know charges you $8,000?
A. Well, no, I mean, to me, money, deductions. Listen, I don't know him; I have it done, I didn't know.
Q. But did you think that money belonged to you? Did you think you were entitled to those deductions?
A. Well, I guess if they gave them to me, it's income tax I had overpaid.
...
[12] The appellant's solemn declaration was adduced as Exhibit I-1. With respect to the payment, the following two passages are quoted:
[translation]
...
Then I withdrew in cash the 2/3 of the refund issued on January 6, 1999, in order to give it to Jean-Eudes Thériault so that he could give it to the person who looked after my refund.
I do not know the name of the person who processed my income tax return so that I would obtain the refund of $11,054.43.
...
[13] Counsel for the appellant submitted to the Court that each case stands on its own merits. She referred to the decision of Tardif J. of this Court in Houle v. Her Majesty the Queen, [2002] T.C.J. No. 24 (Q.L.), and in particular to paragraphs 8, 10, 15, and 17:
To heighten interest, Highway prepared the prospect's income tax return, claiming fictitious and ludicrous expenses. The tax refund thus considerably reduced the amount of the outlays required. To obtain the tax refund quickly, Highway, through its own personnel, antedated the contract so as to produce effects for the previous fiscal year.
...
So, like all the others, the appellant went to Highway's place of business. After hearing the convincing pitch, she accepted the proposal that was made, signing all the required documents for becoming a distributor.
...
All the appellants that the common evidence concerned, including, obviously, this appellant, were persons without experience in the business world. All had their tax returns completed by third parties, and all were interested in the Highway concept, in which they saw first and foremost an opportunity to improve their financial situation by earning additional income. I have no doubt that the appellants' motivation in this regard was sound, reasonable and normal.
...
The false and untruthful information sent for and on behalf of the appellant was forwarded by a Highway employee, who did this electronically so that, as a result, in most cases those concerned did not know the exact content of the information transmitted. As to the conventionally processed returns, copies were given to them, and when they asked questions, they were told that everything was in order, proper and legal, that they now had their own business and that they were accordingly entitled, as self-employed workers, to deduct the stated expenses.
...
The burden of proof with respect to the assessment of penalties under subsection 163(2) of the Act is a heavy one. In Farm Business Consultants Inc. v. Canada, [1994] T.C.J. No. 760 (Q.L.), Judge Bowman (now Associate Chief Judge) set out a highly interesting approach to penalties. I think it helpful to reproduce a passage from that judgment:
... In such a case a court must, even in applying a civil standard of proof, scrutinize the evidence with great care and look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established. Moreover, where a penalty is imposed under subsection 163(2) although a civil standard of proof is required, if a taxpayer's conduct is consistent with two viable and reasonable hypotheses, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted. I think that in this case the required degree of probability has been established by the respondent, and that no hypothesis that is inconsistent with that advanced by the respondent is sustainable on the basis of the evidence adduced.
[14] Counsel for the respondent argued that there can be no question of naivety if a taxpayer gives two-thirds of the amount refunded by the Minister to the person who obtained that refund for the taxpayer or to the person through whom the refund was obtained. A taxpayer who felt entitled to that refund or believed the refund was legal would not have paid out that colossal amount of money.
[15] Counsel for the respondent referred to a decision I rendered in Lévesque Estate v. Canada, [1995] T.C.J. No. 469 (Q.L.), and in particular to paragraph 13 of the English version:
Ignorance or failure to obtain adequate information could in certain circumstances be a sufficient element to constitute gross negligence, particularly in cases where there is an economic interest in remaining ignorant. Here, the element that tilts the scales in favour of accepting the taxpayer's position is that there was no economic interest in this omission or in this failure to obtain adequate information.
[16] Counsel for the respondent also pointed out that the payment was made in January 1999, not November 1997, which was the date on the notes of the attending physician (Exhibit A-1).
[17] Counsel for the respondent further pointed out that a person can choose what to do or what not to do. The appellant had the choice of not paying the amount of $8,000; he chose to pay it.
[18] Counsel for the appellant argued in reply that the payment was a condition of the refund and that the appellant learned about that condition after the refund was deposited. She also pointed out that, at the time the payment was made, the appellant received Notices of Reassessment providing an official version of the refund.
Analysis and conclusion
[19] The assessments being appealed from were not adduced in evidence. I had asked counsel for the respondent to send me a chart illustrating the computation of the income tax payable, the interest owing on that tax, the amount of the penalties, and the interest on those penalties. I received approximately 30 pages of computerized statements establishing the amounts at issue. Unfortunately, these data are too detailed to be helpful to me. I shall indicate only the total figure: as at September 12, 2002, the balance is $28,123.03.
[20] However, I do consider it worth reproducing some paragraphs from the letter accompanying those computerized statements:
[translation]
We point out that, in issuing the reassessments cancelling the fraudulent refunds and assessing the penalties under subsection 163(2) of the Income Tax Act, the Minister computed the interest on the penalties starting on the eligibility date for each taxation year at issue, but the interest on the amount of the fraudulent refund starts to accrue from the date the refund was issued.
...
In the case of Justin Savard (2001-4109(IT)I), an error appears to have been made in computing the penalties for the 1995, 1996 and 1997 taxation years: apparently incorrect amounts were used as a basis for computing the penalties.
|
1995 |
$1,686.25 instead of $2,284.30 |
|
1996 |
$1,686.75 instead of $2,349.77 |
|
1997 |
$ 341.13 instead of $2,105.38 |
Please take these new amounts into account in reaching your decision, following which the appropriate changes will be made. The interest on the penalties will, of course, be adjusted accordingly.
[21] Concerning the penalty assessed under subsection 163(2) of the Act, in Jean-Marc Simard, [2002] T.C.J. No. 265 (Q.L.), I concluded that the Court had discretion to assess the amount of the penalty on the basis of the taxpayer's ability to pay, extent of criminal intent, and previous behaviour. The respondent has appealed from that decision.
[22] For the moment, while awaiting a decision by the Federal Court of Appeal, I consider it more cautious to follow the approach that Court recently took in Chabot v. Canada, [2001] F.C.J. No. 1829 (Q.L.). In that decision, that Court did not assess the taxpayer's extent of criminal intent but completely exonerated the taxpayer from any application of subsection 163(2) of the Act on the ground that the taxpayer had been caught in an ambush. That decision dealt with a taxpayer who claimed income tax credits for charitable donations. In 1992, he claimed a charitable donation of $10,000 for a gift for which he had actually paid $2,800; in 1993 and 1994 he claimed charitable donations of $15,000 and $8,000 for gifts for which he had paid a total of $2,500.
[23] Paragraphs 40 and 41 of the decision in Chabot are quoted:
40. I also note that Denis Lemieux, an investigator with Revenue Canada, explained to the Court that no action had been taken against the foundations involved themselves because, in the Department's view:
[TRANSLATION]
... they had been caught in an ambush. It had grown completely out of proportion for them. They were genuinely ... they are not specialists when it comes to artwork. They found the offer very appealing ...
These are foundations; there was no criminal intent on the part of these people. They realized themselves that they were in the wrong.
(Appendix 6, pages 25 and 26)
In his own way, Mr. Chabot too "got caught in an ambush" and, in his own way, he too "found the offer appealing".
41. In these circumstances, I find it difficult to understand why Revenue Canada would assess penalties against such small taxpayers who, in good faith, tried to benefit from a tax credit that Revenue Canada itself dangled in front of their eyes and which, according to the guide, seemed so easy to obtain.
(Emphasis added.)
[24] I believe that the appellant, too, was caught in an ambush. He was not the one who concocted the scheme. The proposition came to him through a person acting as an intermediary for employees of a federal institution. The appellant was not told that fraudulent acts were involved. He was told that it was possible that he had not claimed all the income tax refunds he was entitled to. That is an argument that many persons of good faith are tempted to believe. The appellant received a substantial amount of money, which surprised him. He was told that he had to pay back two-thirds of that amount to the persons who had engineered the refund. He hesitated but agreed without taking the time to think it through carefully. There were difficulties in his personal life. He was in no condition to see the situation clearly. He then became embroiled in a situation from which it was difficult to extricate himself. That error haunted him until the day he received the call from the investigator. He was relieved to tell the investigator everything.
[25] The respondent pointed out that a person has the option of choice and that, even after the appellant made a choice, he could still have asked to have his situation straightened out with the tax authorities. Although the appellant did make a shady, dubious choice and was not open with the tax authorities despite the considerable anxiety that choice caused him, it was conceivably difficult for him to consult those authorities. He paid back too much money to the persons who engineered the income tax refund. He vaguely felt that he could not recover that share of the money and would have to repay that share, along with his own share, to the tax authorities. The appellant may conceivably have hoped that the operation was legitimate. The situation was confused and feelings were unclear, but the situation appears to resemble an ambush much more than a deliberate decision by the appellant to contravene the Act.
[26] Unless an occurrence is purely accidental, individuals always have some share of responsibility for their acts. Paying money back to government employees who are performing their duties is a serious act.
[27] That said, according to subsection 163(2) of the Act, the misrepresentation or omission must have been made knowingly or under circumstances amounting to gross negligence. In other words, according to this subsection, there must have been criminal intent. In my view, the Court must be all the more certain of criminal intent when the amount of the resulting penalty is extremely high and particularly burdensome for the taxpayer, as is the case here.
[28] Although the appellant has a good trade, he is neither an accountant nor a legal practitioner. According to his testimony, he always filed his annual income tax returns and always intended to comply with the Act. The respondent has not contradicted that statement.
[29] I consider that initially the appellant's act was the result of a lack of thought, a lack of awareness or an error of judgement, not the result of criminal intent, and that he then became embroiled in an ambush. In circumstances like those of the present case, the greater a person's education, the more difficult it will be for that person to avoid the application of subsection 163(2) of the Act on the ground of an error of judgment. Here, however, I consider that the appellant did not form the wrongful intent required for subsection 163(2) of the Act to apply.
[30] The appeal is therefore allowed in order to delete the penalties and interest thereon.
Signed at Ottawa, Canada, this 10th day of December 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.