T-1859-81
The Queen (Plaintiff)
v.
Wellington Taylor (Defendant)
Trial Division, Rouleau J.—Windsor, Ontario,
June 13; Ottawa, August 14, 1984.
Income tax — Penalties — Whether burden, imposed on
Minister by s. 163(3), of establishing facts justifying assess
ment of penalty includes burden of establishing facts justifying
assessment of tax on which penalty based — Income Tax Act,
S.C. 1970-71-72, c. 63, ss. 152 (as am. by S.C. 1973-74, c. 14,
s. 53), (8), 163(2),(3).
Income Tax — Practice — Obligation to first adduce evi
dence — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 152 (as
am. by S.C. 1973-74, c. 14, s. 53), (8), 163(2),(3) — Federal
Court Rules, C.R.C., c. 663, R. 494.
The Minister reassessed the defendant with respect to the
latter's 1974 and 1975 taxation years, alleging unreported
income in both years, and assessed penalties in respect thereof
pursuant to subsection 163(2) of the Act. The defendant
appealed both the assessment and the penalties. The Tax
Review Board allowed the appeal on the ground that the
Minister had failed to prove his case, based on an interpretation
of the burden of proof imposed on the Minister pursuant to
subsection 163(3) of the Act.
This is an application on a special case for the determination
of two questions: 1) Does the burden imposed on the Minister
under subsection 163(3) of the Act include the burden of
establishing facts justifying the assessment of income and tax
upon which the penalty was based? 2) To what extent does that
burden affect the order of presentation of evidence in a tax
appeal and, specifically, upon whom lies the obligation to first
adduce evidence and as to what issues?
Held, 1) The burden imposed on the Minister under subsec
tion 163(3) does not, in cases where the taxpayer attacks an
assessment and a penalty based on the same elements, relieve
the taxpayer of the burden of proving the assessment wrong; 2)
the obligation to first adduce evidence in a tax appeal rests with
the taxpayer.
Assessments are deemed valid pursuant to subsection 152(8)
of the Act. On appeal from an assessment, the burden is on the
taxpayer to overturn it; the facts, almost to exclusivity, are
within the taxpayer's knowledge.
With respect to penalties, subsection 163(3) is not of general
application and arises only in cases of the imposition of a
penalty. The phrase "assessment of tax" was purposely exclud
ed from the provision. If Parliament had wanted to limit the
deemed validity of tax assessments, it would have included it.
A finding against the Minister under subsection 163(2) or
163(3) was not intended to eliminate the duty imposed on a
taxpayer under section 152. Subsection 152(8) deems assess
ments valid and binding "subject to being varied or vacated on
an objection or appeal under this Part". However, a finding
under subsection 163(3) is not a finding under the "Part"
referred to in subsection 152(8).
As for the procedural question, the argument that the Minis
ter should be the first to adduce evidence because the onus
created by section 163 and the imposition of penalties practical
ly made the proceedings quasi-criminal, cannot stand. Such
proceedings can no more be classified as "quasi-criminal" than
could an action to recover a penalty under a contract, or for
exemplary damages in a defamation suit.
The Privy Council in the case of Arumugam Pillai and the
United States Court of Appeal in the Snell Isle case both found
that where there is an onus on each party, the taxpayer shall
begin first. Furthermore, the taxpayer is a plaintiff and Rule
494 of the Federal Court states that in income tax disputes, the
plaintiff begins.
CASES JUDICIALLY CONSIDERED
APPLIED:
Reg. v. Special Commissioners of Income Tax (ex parte
Martin) (1971), 48 T.C. 1 (Q.B. Div.), affirmed 48 T.C.
8 (C.A.); Arumugam Pillai v. Director General of Inland
Revenue, [1981] STC 146 (P.C.); Snell Isle v. Commis
sioner of Internal Revenue, 90 F.2d 481 (5th Cir. 1937),
certiorari denied 302 U.S. 734 (1937); Anderson Logging
Co. v. The King, [1925] S.C.R. 45; Morch v. Minister of
National Revenue, [1949] Ex.C.R. 327.
CONSIDERED:
Elchuk v. Minister of National Revenue, [1970] Ex.C.R.
492.
COUNSEL:
Ian S. MacGregor and Michael D. Templeton
for plaintiff.
James K. Ball for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Gignac, Sutts, Windsor, Ontario, for defend
ant.
The following are the reasons for judgment
rendered in English by
ROULEAU J.: This is an application on a special
case for the specific purpose of deciding two
questions:
1. Does the burden imposed upon the Minister
of National Revenue pursuant to subsection
163(3) of the Income Tax Act [R.S.C. 1952, c.
148 (as am. by S.C. 1970-71-72, c. 63, s. 1)],
namely, "the burden of establishing the facts
justifying the assessment of the penalty",
include, as was found by the Tax Review Board,
the burden of establishing the facts justifying
the assessment of (the underlying income and)
tax upon which the penalty was based? [i.e.
Since the Minister must prove the amounts (the
constituent elements) evaded to justify the
penalty, why should the burden shift to the
taxpayer for the imposition of the tax pursuant
to an assessment under section 152, when the
same elements are involved.]
2. To what extent does the burden imposed by
subsection 163(3) of the Act as so determined in
question 1, affect the order of presentation of
evidence in a tax appeal. Specifically upon
whom is the obligation to first adduce evidence
and, in this regard, in what issues need evidence
be led?
An agreed statement of facts was filed with the
Court to determine the two questions. Particulars
as to the amounts in question are not relevant but
a brief summary is necessary to explain the cir
cumstances giving rise to these questions.
The defendant taxpayer was in the scrap metal
business and in computing his income for the years
1974 and 1975, certain amounts of sales were
reported, together with expenses related thereto.
The Minister reassessed the defendant in respect
of both taxation years, alleging unreported income
in amounts of approximately $30,000 and $20,000,
respectively, and assessed penalties in respect
thereof, pursuant to subsection 163(2) of the Act.
The defendant objected to the reassessments by
filing notices of objection and appealed the assess-
ments of tax and penalties. These matters came
before the Tax Review Board in October, 1980.
Counsel for the Minister of National Revenue
commenced and adduced evidence in support of
the reassessments. The taxpayer did not call any
evidence and the decision was as follows:
(The) prima fade assumption (that the findings or assumptions
of fact made by the Minister on assessment as to the quantum
of revenue and expenses are factually correct) is made in an
appeal where the sole issue is liability for tax ...
The common law rule as to burden or onus of proof as laid
down in (the case of Anderson Logging Co. v. The King and
Johnston v. M.N.R.) is displaced in the case where the penalty
has been levied under section 163. The effect of the plain words
of subsection 163(3) is to remove from the taxpayer and place
on the Minister the burden of proof of those facts which are
constituent elements of the penalty levied and in issue in an
appeal...
The Respondent's counsel argued that any failure to discharge
the burden imposed on the Minister by subsection 163(3) can
entitle the Appellant to relief only from penalties ...
The words of 163(3) are, I think, inconsistent with the assertion
that Parliament intended to limit the burden placed on the
Minister to some, but not all, of the facts which subsection
163(2) makes necessary to the lawful imposition of a penalty. It
cannot, I think, be said that subsection 163(3) related only to
those facts which tend to show the existence of knowledge or
circumstances amounting to gross negligence. The burden
which is the subject of subsection 163(3) is, according to the
plain words employed in the Act, the burden of establishing the
facts justifying the assessment of the penalty and not just some
of those facts.
I can find nothing in the words of subsection 163(3) which
suggests that in an appeal from an assessment of tax and
penalty the burden on any one single issue of fact was intended
to rest simultaneously on both parties with the result that the
fact can, in some mysterious way, be found to exist for purposes
of liability to tax, but not to exist for purposes of liability to
penalty.
It is submitted by the Minister of National
Revenue that the onus or burden of proof required
to overturn the assessment for tax only is on the
taxpayer. He argues that prior to the enactment of
subsection 163(3) of the Act, the onus was on the
taxpayer to establish that both the assessment of
penalty as well as the assessment for tax were in
error; as a result of the amendment, the burden of
proof, only with respect to penalties, is on the
Minister.
On question 2, as to who should begin the
proceedings in adducing evidence, it is submitted
that when the taxpayer appeals both the assess
ment of tax and the assessment of penalty, the
onus with respect to the assessment of tax lies on
the taxpayer and the onus with respect to the
assessment of penalties lies on the Minister and, in
accordance with the general rule of civil procedure
at common law, the appellant taxpayer has the
obligation to begin.
The taxpayer argues that since the Act imposes
the burden of proof on the Minister when imposing
penalties, he must satisfy the Court that the tax
payer wilfully and knowingly was grossly negligent
in filing his return in order to impose the penalty.
The Minister, having thus assumed the proof of
these facts, common to the imposition of the penal
ty and the assessment of taxes, is required to
establish in evidence the very facts that otherwise
are presumed in his favour (in imposing tax only),
therefore the evidence should apply as well to the
assessment of tax. In other words, the common
facts or elements assumed by the Minister in
making the assessment are not presumed against
the taxpayer in the case of penalty and therefore
they should not be in the assessment of the tax
itself.
The taxpayer argues that in cases where the
Minister has assessed the tax and imposed a penal
ty, the burden is on the Minister for the imposition
of the penalty. Since he must establish facts
common to both the penalty and the assessment of
tax, the Minister should therefore begin.
Subsection 163(3) of the Income Tax Act states
as follows:
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.
When only an assessment for tax is imposed, it
is not disputed that the Minister of National Reve
nue is authorized under section 152 of the Income
Tax Act to assess tax, interest and penalties, if
any. I am satisfied that, by virtue of subsection
152(8) of the Act, the assessment is valid and
binding, subject of course to variation on appeal.
Subsection 152(8) reads as follows:
152....
(8) An assessment shall, subject to being varied or vacated
on an objection or appeal under this Part and subject to a
reassessment, be deemed to be valid and binding notwithstand
ing any error, defect or omission therein or in any proceeding
under this Act relating thereto.
As I have stated, the assessment shall remain valid
until it is found to be erroneous by the Court. This
principle is enunciated in Morch v. Minister of
National Revenue, [1949] Ex.C.R. 327. On an
appeal, the burden is on the taxpayer to overturn
the assessment. It is deemed valid because of
subsection 152(8) of the Act; it is the taxpayer's
appeal and he must therefore show that the
impeached assessment is an assessment which
ought not to have been made; and it follows that
the facts, almost to exclusivity, are within the
taxpayer's knowledge. This basic principle dates
back to 1925 as was clearly set out in the case of
Anderson Logging Co. v. The King, [1925] S.C.R.
45, at page 50 which states as follows:
First, as to the contention of the point of onus. If, on an
appeal to the judge of the Court of Revision, it appears that, on
the true facts, the application of the pertinent enactment is
doubtful, it would, on principle, seem that the Crown must fail.
That seems to be necessarily involved in the principle according
to which statutes imposing a burden upon the subject have, by
inveterate practice, been interpreted and administered. But, as
concerns the inquiry into the facts, the appellant is in the same
position as any other appellant. He must shew that the
impeached assessment is an assessment which ought not to have
been made; that is to say, he must establish facts upon which it
can be affirmatively asserted that the assessment was not
authorized by the taxing statute, or which bring the matter into
such a state of doubt that, on the principles alluded to, the
liability of the appellant must be negatived. The true facts may
be established, of course, by direct evidence or by probable
inference. The appellant may adduce facts constituting a prima
facie case which remains unanswered; but in considering
whether this has been done it is important not to forget, if it be
so, that the facts are, in a special degree if not exclusively,
within the appellant's cognizance; although this last is a con
sideration which, for obvious reasons, must not be pressed too
far.
Prior to the enactment of subsection 163(3) of
the Income Tax Act, the onus was on the taxpayer
to establish not only that the assessment, but also,
the penalty was in error. Following the amend-
ment, the burden with respect to any penalty
assessed shifted to the Minister.
It is submitted by counsel for the Minister of
National Revenue that the burden imposed by
subsection 163(3) applies exclusively to penalties.
In cases concerning tax evasion, the Minister must
show that a false statement was made knowingly
or under circumstances amounting to gross
negligence.
He argues that the assessment of tax and the
assessment of penalties are separate and distinct
and bring about different burdens. His authority
for the proposition is the case of Elchuk v. Minis
ter of National Revenue, [1970] Ex.C.R. 492.
This was an appeal from a decision of the Tax
Appeal Board dismissing the taxpayer's appeal
from a reassessment made against him. The Minis
ter cross-appealed stating that he was justified
under the Act in assessing penalties against the
appellant. The appellant's appeal and the Minis
ter's cross-appeal were both dismissed. Jackett,
then President of the Court, found the evidence
regarding the appellant's reassessment unconvinc
ing and was satisfied that the figures used by the
Minister were accurate. On the other hand, he also
found that the penalties could not be imposed since
the proof necessary to establish a penalty was not
properly made.
It is submitted by the Minister that subsection
163(3) is not of general application but applies
only to the assessment of penalty; that it has no
application with respect to the assessment of tax.
Parliament purposely excluded the phrase "assess-
ment of tax" from the provision. Accordingly he
submits that subsection 163(3) does not affect the
deemed validity of the assessment of tax. In order
for a penalty to be assessed pursuant to this sec
tion, there must be: (1) liability for tax; (2) a
failure to file a return, or the making of a false
statement or omission; (3) the intent of knowingly
or in a grossly negligent manner having withheld
information.
In other words, states the Minister, the Act
requires him to prove the amount of the tax evaded
and to show that the taxpayer had knowledge or
was grossly negligent in reporting his income to
support any assessment of penalty. This does not
affect the onus on the taxpayer to establish the
facts to show that the assessment of the tax is
erroneous. He submits that each party has a
burden and that the failure by either party to
satisfy the burden placed upon them could result
in a finding against them on that particular issue
as Jackett did in Elchuk v. Minister of National
Revenue (supra), and this result should prevail
even when the facts are common to both
assessments.
I am satisfied that subsection 163(3) is not of
general application and arises only in cases of the
imposition of a penalty. Parliament, when it enact
ed this subsection, purposely excluded the phrase
"assessment of tax" from the provision. It was not
their intention to limit the deemed validity of the
assessment of tax imposed under section 152 or
they would have so stated. The jurisprudence and
the Act are quite clear, the burden is on the
taxpayer when there is an assessment with respect
to the tax. If one accepts the submissions of the
taxpayer, that if the Minister is not successful in
imposing a penalty based on a finding of fact with
respect to monies owing, then the same finding
should apply to the assessment of tax only. Though
there is some validity to the argument, I disagree
with the submission and the finding of the Tax
Review Board. In Canada, we are dealing with a
taxation system wherein the knowledge and the
facts, almost to exclusivity, are possessed by the
taxpayer. It is his responsibility to disclose all of
his income. In a case of penalty, the Minister does
not only have the burden of proving the amounts,
he has the additional burden of establishing the
facts that lead to gross negligence.
I can readily imagine a situation involving the
imposition of a penalty where three different and
distinct constituent elements may or may not be
before the Court: amounts may not be in evidence;
there may be some confusion with respect to the
amounts; or, the Minister may be incapable of
showing that the false statements were made
knowingly or under circumstances amounting to
gross negligence. In the event that the Court
makes a finding that the onus has not been dis
charged, because of a sufficient doubt having been
created in the mind of the Court, it would follow
that no penalty could be imposed. It may well be
that the constituent element upon which they have
refused to allow the imposition of the penalty may
be that the Minister was unable to satisfy it that
the taxpayer was knowingly grossly negligent; or,
the evidence with respect to the amounts claimed
caused considerable confusion. Since no penalty
could then be imposed, as I have already stated, it
would follow that the assessment under section 152
would fail because of a constituent element under
subsection 163(3) not having been proved. The
payment of tax would be avoided. The validity of
the assessment for tax under section 152 would be
set aside without it having been particularly chal
lenged on appeal and varied under subsection
152(8).
I do not accept that a finding against the Minis
ter under subsection 163(2), or more particularly
under the onus subsection 163(3), could have been
intended by Parliament to eliminate the duty
imposed on a taxpayer under section 152. Subsec
tion 152(8) is quite clear and precise, "subject to
being varied or vacated on an objection or appeal
under this Part ...". A finding under subsection
163(3) is not a finding under "this Part", subsec
tion 152(8).
On the procedural question, it was submitted by
the Minister that tax appeals are civil proceedings,
there being no provisions for examination for dis
covery, and since the facts are within the almost
exclusive knowledge of the taxpayer, he should be
the first to adduce evidence. It was argued by the
taxpayer that because of the onus created by sec
tion 163, and the imposition of penalties, this was
tantamount to quasi-criminal proceedings and the
Minister should begin. I disagree and I choose to
follow the reasoning of Lord Widgery C.J. who
dealt with taxation and fraud in the case of Reg. v.
Special Commissioners of Income Tax (ex parte
Martin) (1971), 48 T.C. 1 (Q.B. Div.), affirmed
48 T.C. 8 (C.A.). At pages 7-8 he states:
The other alternative ground upon which Mr. Marcus Jones
says the Commissioners were wrong in this case is that he says
that these proceedings are quasi-criminal in nature. From that
he draws the conclusion, and asks us to draw the conclusion,
that the election rule should not apply to them. If the phrase
"quasi-criminal proceedings" is given a very wide meaning it
may be that these proceedings could be embraced within it. It is
a flexible expression not precisely defined, and it may not be
wholly inappropriate if one gave it a sufficiently wide meaning
to use it in that context. But when one gets down to the fact of
the matter it is quite clear that penalties which can be exacted
on proof of fraud or wilful default do not spring from any
criminal offence. The Acts do not provide that the taxpayer
guilty of fraud or wilful default shall commit an offence and
shall be punished as such. It is merely provided that financial
penalties may be exacted, and that these penalties may be
recovered in civil proceedings in the High Court. There is not
so far, in my judgment, any close relationship between such
proceedings and criminal proceedings. Of course any proceed
ings involving a penalty are in some measure penal, but it seems
to me that these proceedings are no nearer to the criminal law
and no better qualified for the description of "quasi-criminal
proceedings" than would be an action to recover a penalty
under a contract, or an action to recover exemplary damages in
a suit for defamation.
When there is an onus on each party, the tax
payer shall begin first. This was the ruling by the
Privy Council in the case of Arumugam Pillai v.
Director General of Inland Revenue, [19811 STC
146 (P.C.). In addition, U.S. cases of similar
nature, though not binding, but persuasive, follow
this procedure and in particular the Minister
referred to the case of Snell Isle v. Commissioner
of Internal Revenue, 90 F.2d 481 (5th Cir. 1937)
(United States Court of Appeal), certiorari denied
302 U.S. 734 (1937) (United States Supreme
Court).
I am satisfied that the taxpayer is a plaintiff,
even though he is called an appellant (defendant).
Income tax disputes taken before the Federal
Court are by way of trial de novo and, pursuant to
Rule 494 of this Court [Federal Court Rules,
C.R.C., c. 663], the plaintiff begins:
The plaintiff shall begin to adduce evidence unless
otherwise ordered.
The answers to the two questions are as follows:
1. The burden under subsection 163(3) of the
Income Tax Act, namely, "the burden of estab
lishing the facts justifying the assessment of
penalty" imposed on the Minister of National
Revenue does not relieve the taxpayer of the
burden imposed pursuant to an assessment
under section 152 when the same elements are
involved in the event that the taxpayer has been
reassessed under section 152 of the Act and
penalties imposed pursuant to section 163.
2. The obligation to first adduce evidence in a
tax appeal rests with the taxpayer since he is the
plaintiff and almost to exclusivity possesses the
facts.
Costs to the plaintiff, Her Majesty the Queen.
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