John Victor Decore (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Mahoney J.—Edmonton, Decem-
ber 10; Ottawa, December 18, 1973.
Income tax—Dividend not reported—Penalty for under
stating income—Gross negligence of professional accountant
employed by taxpayer—Liability of taxpayer—Whether 1971
amendment applicable—Onus on defendant to justify assess-
ment—income Tax Act, R.S.C. 1952, c. 148, s. 56(2), S.C.
1970-71-72, c. 63, s. 1, "163(3)"—Alberta Income Tax Act,
R.S.A. 1970, c. 181, s. 19.
A notice of appeal to the Tax Review Board from a
penalty imposed under section 56(2) of the Income Tax Act
and the corresponding penalty under section 19 of The
Alberta Income Tax Act was filed on December 23, 1971.
This was the day on which Royal Assent was given to the
amending Income Tax Act, S.C. 1970-71-72, c. 63, of which
section 163(3) provides that in an appeal from a penalty, the
burden of establishing the facts justifying the assessment of
the penalty is on the Minister.
Held, section 163(3) is applicable to the present appeal.
Whether or not this section was called to the attention of the
Tax Review Board, the appeal to this Court was instituted
January 30, 1973, and while it is an appeal from the decision
of the Tax Review Board under section 172(1) rather than a
direct appeal from the Minister's reassessment under section
172(2), it is a separate appeal and not merely a continuation
of the appeal launched December 23, 1971.
Held also, the accountant's conduct in having the plaintiff
sign a return in blank and in preparing it without having all
the material which the plaintiff thought he had, and filing the
return notwithstanding his doubts about its accuracy in
order to meet the April 30 deadline even though he knew it
was unnecessary under the former section 44(1) if there was
no tax payable, was such a marked departure from the
standard of conduct that the accountant ought reasonably to
have met that it constituted gross negligence; this is charge
able to the plaintiff whose appeal is dismissed.
Udell v. M.N.R. [1970] Ex.C.R. 176; Tuck & Sons v.
Priester (1887) 19 Q.B.D. 629; The King v. Krakowec
[1932] S.C.R. 134, considered.
APPEAL.
COUNSEL:
J. E. Coté for plaintiff.
W. J. Hobson for defendant.
SOLICITORS:
Hurlburt, Reynolds, Stevenson and Agrios,
Edmonton, for plaintiff.
Deputy Attorney General of Canada for
defendant.
MAHONEY J.—This appeal is against a deci
sion of the Tax Review Board upholding a
penalty of $215.76 under section 56(2) of the
Income Tax Act, as it then stood, and $53.78
under section 19 of The Alberta Income Tax
Act assessed in respect of the plaintiff's 1969
income tax return. The question is also raised as
to whether section 163(3) of the Income Tax
Act, as amended in 1971, applies to this appeal.
If so, the onus is on the defendant to establish
the facts justifying the assessment of the
penalty.
Dealing first with the matter of onus, the
notice of appeal to the Tax Appeal Board was
filed December 23, 1971. That same day,
December 23, 1971, Royal Assent was given to
an Act of Parliament amending the Income Tax
Act and containing, inter alia, the following
relevant provisions:
1. Parts I to IIIA and Parts V to VII of the Income Tax
Act are repealed and the following substituted therefor:
163. (3) 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.
62. (3) Subsection 163(1) of the amended Act is appli
cable in respect of any return of income required to be filed
after 1971 and subsection 163(3) thereof is applicable in
respect of any appeal instituted after the coming into force
of this Act.
I should note, parenthetically, that subsection
163(2), which came into force December 23,
1971, is identical to the section 56(2) which was
repealed the same day, being one of the sections
contained in Part I of the Income Tax Act.
I do not have the reasons for judgment of the
learned member of the Tax Review Board
before me and do not know whether his atten
tion was directed to this matter when he consid
ered the appeal. In any event, the appeal to this
Court was instituted January 30, 1973 and,
while it is an appeal from the decision of the
Tax Review Board under section 172(1) of the
Act rather than a direct appeal from the Minis
ter's re-assessment under section 172(2), it is a
separate appeal and not merely a continuation
of the appeal launched December 23, 1971.
Accordingly, in my view, section 163(3) of the
Income Tax Act as it stood January 30, 1973,
and still stands, applies to this appeal.
The plaintiff is a barrister and solicitor prac
ticing in Edmonton in partnership with two
brothers. He graduated from law school in 1960
and was admitted to the bar the following year.
There is no evidence before me that he has any
particular expertise in income tax law; indeed,
the inference to be drawn from the evidence is
that he does not. He engaged a chartered
accountant to prepare the income tax return in
question. The same chartered accountant had
prepared the plaintiff's 1968 return and, also,
the law partnership's financial statements. The
plaintiff has never prepared his own tax returns
and the error in issue is the only error in his
return of which he is aware. There is no evi
dence of others.
In addition to his law practice, the plaintiff
was a partner in Yellowhead Apartments whose
year end was December 31 and which had
another chartered accounting firm prepare its
statements. The plaintiff was also a shareholder
in Diamond Motel Ltd. whose year end was
October 31 and whose auditor was yet another
chartered accountant. At the beginning of 1969
the plaintiff owned 50% of the shares of Dia
mond and acquired the balance during the year
being the sole shareholder at year end. Interest
on monies borrowed by the plaintiff to invest in
another private company was claimed and
allowed as an expense in his 1969 return. The
plaintiff's business affairs were somewhat com
plex and his reliance on a chartered accountant
to prepare his return was reasonable and
prudent.
Prior to the plaintiff's acquisition of the other
shares in Diamond a dividend was declared and
paid. The plaintiff received $12,877.27. On
November 20, 1969 Diamond's accountant for-
warded six copies of its audited financial state
ments for its year ended October 31, 1969 to
the plaintiff. The audited statements were
accompanied by Diamond's corporation income
tax return, the T-5 Summary in respect of the
dividend and the plaintiff's own copies of the
T-5 Supplementary. The tax return and T-5
Summary required to be filed were signed by
the plaintiff as an officer of Diamond, returned
to Diamond's accountant on February 25, 1970
and were duly filed. The plaintiff's own copies
of the T-5 Supplementary found their way into a
file in his law office entitled "Diamond Hotel—
Financial Statements" along with the financial
statements rather than into the file entitled
"John Victor Decore—Income Tax" where they
belonged. It was the plaintiff's failure to report
this dividend in his 1969 return that led to the
penalty in question.
The plaintiff thinks that the prospect of this
dividend being received had been discussed
between his accountant and himself prior to his
buying out the other shareholder. The account
ant does not recall that discussion. On Decem-
ber 29, 1969 the plaintiff and his accountant
again met to estimate his taxable income and tax
liability for the year. Notes made by the
accountant at the time included the following
item:
Dividends from Diamond Motel Ltd.—$ 13,100.00
The estimate concluded that the plaintiff's tax
liability would be $3,070 in addition to instal
ments paid of $1,400.
The plaintiff was in the practice of turning
over material relevant to his income tax to the
accountant as it was received during the year
and, at year end, of looking through his personal
tax file to see if any other relevant material
might be there and, if so, to turn that over. The
T-5 Supplementary was not delivered to the
accountant. On or about April 18, 1970 an
employee in the accountant's office prepared a
draft of the plaintiff's 1969 return. It did not
take the dividend into account.
The employee had been with the accountant
for seven years and had worked for another
chartered accountant four years before that. At
the time the office consisted of two chartered
accountants, a clerk trained to the intermediate
level of the R.I.A. course with some 15 years
experience, two students in articles, one for 3/
years and the other for 6 months, the employee
previously mentioned and a secretary.
The plaintiff had arranged to call at the
accountant's office on April 30 to sign his
return. On April 29, he learned that he had to be
away from Edmonton for a trial on April 30 and
he phoned the accountant. The final return had
not been typed and the accountant asked him to
call in and sign a blank return. He did so and,
for the first time, learned that instead of paying
the additional tax estimated in December to be
payable he was claiming a refund of the entire
$1,400 already paid. He was not surprised at the
direction or magnitude of the change because
his share of the loss of Yellowhead Apartments
had been $12,220 rather than the $5,725
estimated in December and allowable interest
expense of $6,444.67 had not been taken into
account in the December calculation at all.
The meeting at the accountant's office took
less than an hour. The employee who prepared
the draft return was not present. Neither the
plaintiff nor the accountant recall what matters
aside from the additional expense items were
discussed. Both are definite that the draft return
was not reviewed in detail. Indeed, the plaintiff
does not recall seeing it and the accountant does
not remember whether it was in front of h:m at
the time. The plaintiff did not like the idea of
signing a blank return but did not think it would
do any harm and he did feel that since the
return had to be filed the next day, he had no
real choice.
The plaintiff was not aware that, since there
was no tax payable, the return did not have to
be filed April 30; however, I cannot accept the
proposition that a sense of urgency stemming
from a mistake of law is any less a sense of
urgency in fact. The accountant says he was
aware of the effect of section 44(1) on the
necessity of filing on April 30 but says also that
he and his employees were processing several
hundred personal tax returns and conditions in
the office at the time were "hectic".
Each return was reviewed either by himself
or the other chartered accountant before filing.
The accountant recalls noting the omission of
the dividend and recalls discussing it with the
employee who prepared the draft. It is not clear
whether this occurred before or after the draft
was transcribed to the signed form but it was
after the April 29 meeting. As far as the
accountant was concerned the plaintiff was not
available and no effort was made to contact
him. The accountant concluded, in the absence
of a T-5 Supplementary, that there must have
been some change in plan since the December
discussion and that the dividend had not been
paid. In the result, the draft was transcribed
without change to the signed form and it was
filed April 30.
The error was not discovered by the plaintiff
or his accountant at all but by the Department
of National Revenue in its assessment process.
The re-assessment was issued March 25, 1971.
It is suggested that the failure to discover the
error is material to the issue however the act
giving rise to the penalty is the making of the
return and I cannot see that a subsequent course
of conduct, consisting entirely of omissions to
take opportunities to review the return and to
clarify the doubts that should have existed
about it, can alter the quality of the act itself.
The re-assessment related solely to the inclu
sion in income of the unreported dividend and
resulted in a taxable income of $9,406.39 and
federal and provincial taxes of $1,078.81 and
$268.91 respectively. The notice stated:
Federal tax assessed includes $215.76 penalty under Section
56(2) of the Income Tax Act. Provincial tax assessed
includes $53.78 penalty under Section 19 of The Alberta
Income Tax Act.
This appeal is concerned only with the penalty.
Since the sections are, in all material particu
lars, identical, I will deal with the penalty as if it
were a single penalty of $269.54 under section
56(2) of the federal Act:
56. (2) Every person who, knowingly, or under circum
stances 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 statement or omission in a return, certifi
cate, statement or answer filed or made as required by or
under this Act or a regulation, as a result of which the tax
that would have been payable by him for a taxation year if
the tax had been assessed on the basis of the information
provided in the return, certificate, statement or answer is
less than the tax payable by him for the year, is liable to a
penalty of 25% of the amount by which the tax that would
so have been payable is less than the tax payable by him for
the year.
The plaintiff's own participation in the filing
of Diamond's T-5 Summary negates any imputa
tion of wrongdoing on his part. He and the
accountant are entitled to be exonerated from
any implication that, whatever occurred, there
was anything "fishy" about it. What was done
or omitted was not done or omitted knowingly
and so, the burden is on the defendant to show
that the circumstances amounted to gross
negligence.
In so far as the plaintiff himself is concerned,
the material facts in support of that contention
are his signature of the return in blank, per se,
and his failure, particularly when alerted by the
substantial shift in tax liability since the Decem-
ber estimate, to look into the matter in detail.
The misplacing of the T-5 Supplementary was
a mistake, pure and simple. The plaintiff had a
system for getting his tax information into his
accountant's hands. It was a workable system
but, because of the misplacement of the T-5
Supplementary, it did not work in this case. The
plaintiff's explanation for his calm acceptance
of the good news that he was going to get a
refund rather than pay the $3,070 tax estimated
in December is, in my view, reasonable. Reali
ties also dictate to me that even a lawyer, at
least one who is not working with the Income
Tax Act on a regular basis, has as much right as
any layman to rely on a professional who holds
himself out as a tax expert whom he has good
reason to believe competent. The signature of a
return in blank is not, at least where such a
relationship exists, itself a negligent act.
A mistake was made; it was a serious mis
take. With the benefit of hindsight it is apparent
that the plaintiff's reliance on his accountant
was unwarranted because the accountant did
not have the facts and material that the plaintiff
thought he had and both ran out of time without
taking a proper opportunity for consultation. I
cannot find on the evidence before me that the
plaintiff was personally grossly negligent.
The matter cannot end there however.
In Udell v. M.N.R. [1970] Ex.C.R. 176 my
brother Cattanach J. dealt with the question of
the liability of a taxpayer for the penalty
assessed under section 56(2) as a result of the
alleged gross negligence of the chartered
accountant who prepared his return. He held [at
page 192] that:
Each of the verbs in the language "participated in, assented
to or acquiesced in" connotes an element of knowledge on
the part of the principal and that there must be concurrence
of the principal's will to the act or omission of his agent, or a
tacit and silent concurrence therein.
and later:
In my view the use of the verb "made" in the context in
which it is used also involves a deliberate and intentional
consciousness on the part of the principal to the act
done....
Section 56(2) is clearly a penal section. Lord
Esher in Tuck & Sons v. Priester (1887) 19
Q.B.D. 629 at p. 638 is authority for the propo
sition that:
If there is a reasonable interpretation [of a penal section]
which will avoid the penalty in any particular case we must
adopt that construction.
However, the interpretation must be reasonable.
The Supreme Court of Canada held in The King
v. Krakowec [1932] S.C.R. 134 at p. 142 that:
... even penal statutes must not be construed so as to
narrow the words of the statute to the exclusion of cases
which those words, in their ordinary acceptation would
comprehend.
In signing the return in blank, the plaintiff
certified:
... that the information given in this return and in any
documents attached is true, correct and complete in every
respect and fully discloses my income from all sources.
He then delivered it to the accountant to com
plete. In other words, the appellant committed
to the accountant the fulfilment of his certifica
tion and that, in my view, can only reasonably
be construed as an acquiescence in, if indeed it
is not a participation in, whatever the account
ant did in fulfilling the certification. The plain
tiff cannot therefore dissociate himself from the
conduct of the accountant from the time he
signed and delivered the return in blank until the
return was filed.
With a single exception all that transpired
could, I think, be explained in the light of the
pressures that exist in such an office with such
a practice in the dying hours of April and again,
whatever view one may take of the accountant's
failure to follow up the matter with the plaintiff,
subsequent events cannot alter the nature of the
act that is the basis of the penalty. The excep
tion is the deliberate filing of the return notwith
standing actual doubt about its accuracy and
actual knowledge that, if it was accurate, there
was no urgency about the filing. I should
emphasize that the accountant testified that he
actually knew the import of section 44(1) in so
far as it bears on the necessity of filing a per
sonal income tax return on April 30 where no
tax is payable.
This one act, in my view, was a marked
departure from the standard of conduct that the
accountant ought reasonably to have met and I
find it to be gross negligence. The appeal is
dismissed with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.