Date: 20010131

Docket: 2000-38-IT-I

BETWEEN:

PETER S. CARLISI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

For the Appellant: The Appellant himself

Counsel for the Respondent: Jocelyn Espejo-Clarke

____________________________________________________________________

Reasons for Judgment

(Delivered orally from the Bench at Toronto, Ontario, on October 3, 2000)

McArthur J.

[1]            The issue in this appeal is whether the Minister of National Revenue properly assessed the Appellant with repeated late filing penalty for the 1996 taxation year pursuant to subsection 162(2) of the Income Tax Act, which subsection reads as follows:

162(2)      Every person

(a)            who fails to file a return of income for a taxation year as and when required by subsection 150(1),

(b)            on whom a demand for a return for the year has been served under subsection 150(2), and

(c)            by whom, before the time of failure, a penalty was payable under this subsection or subsection (1) in respect of a return of income for any of the 3 preceding taxation years

                is liable to a penalty equal to the total of

(d)            an amount equal to 10% of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed and

(e)            the product obtained when 2% of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed is multiplied by the number of complete months not exceeding 20, from the date on which the return was required to be filed to the date in which the return was filed.

[2]            The following assumptions of fact relied on by the Minister are not disputed:

(a)            the Appellant's 1996 T1 return was filed on June 22nd, 1998 according to the postmark on the mailing envelope;

(b)            the initial request by TX11 was issued to the Appellant on January 12th, 1998;

(c)            the demand notice by TX14D was issued to the Appellant on February 26th, 1998; and

(d)            with reference to the Appellant's record, the Appellant's 1995 T1 return was also filed late on October the 16, 1996 and a late filing penalty of $1,539.00 was assessed.

The Appellant relies on the defence of due diligence as set out in Pillar Oilfield Projects Ltd. v. Canada, [1993] G.S.T.C. 49 (T.C.C.), and subsequently followed by numerous cases which were cited by the Appellant.

[3]            The Appellant is a 49-year old lawyer with a litigation practice in Toronto. His evidence was given in a forthright manner. Up to 1995, he had been an employee of a law firm and filed income tax returns in a timely manner. In 1995, the law firm's system of accounting changed and he was included as a partner. His tax returns were much more complex and beyond his accounting capabilities and therefore, he left it to the firm's accountant, Mr. Weisman, to complete his returns. I accept that through no fault of the Appellant, his 1995 income tax return was filed five months late.

[4]            His firm changed accountants after that date and hired BDO Dunwoody. The Appellant's situation got worse and his 1996 return was filed a year late. During this period of default, he repeatedly requested the accounting office to prepare and file his return. The Respondent met the requirements of subsection 162(1) and an initial request for his 1996 return was made by the Minister on January 12, 1998 and a demand notice sent on February 26, 1998.

[5]            In his Notice of Appeal, the Appellant did not plead due diligence because he was not aware that such a remedy was available to him until the day before this hearing. Given the late timing, he was unable to have the responsible accountant from BDO Dunwoody testify. BDO explained, somewhat arrogantly, in a letter dated August 30, 1999 (Exhibit A-5) that the delay and completion of the financial statements was as a result of the volume and complexity of transactions. In answer to this letter, Revenue Canada correctly replied, in part, in a letter dated September 9 (Exhibit A-6), as follows:

In the 1995 taxation year, it was the responsibility of your client to ensure that the income tax return was filed on time. If he was unaware the return was filed late, in the opinion of the Appeals Officer, it was because he failed to keep himself informed.

In the 1996 taxation year, pursuant to subparagraph 150(1)(d)(ii) of the Act, the return was due, on or before June 15th, 1997. In the opinion of the Appeals Officer, the filing due date allowed your client sufficient time to find a new accountant and have a return prepared regardless of the volume and complexity of transactions. Your client should have been aware, the volume and complexity of transactions would have been a problem in the preparation and completion of the financial statements. Your client should have made allowances for the problems. It is unreasonable that it would have taken until April 21st, 1998 to prepare a 1996 return, given the reasons in the fax.

[6]            Judge Bowman in Pillar Oilfield laid the foundation for the position that under similar legislation the penalty under section 280 is one of 'strict liability' rather than 'absolute liability'. He reasoned that "if the person assessed can show 'due diligence' in attempting to comply with the legislation, the penalty will not apply. It would be abhorrent for a person to be susceptible of being penalized administratively by a public servant without any possibility of exculpating himself by demonstrating due diligence. Penalties are no different from criminal or provincial offences in this respect".

[7]            In the case of Bennett v. Canada, [1995] 2 C.T.C. 2308, Judge Lamarre Proulx stated at page 2316:

... Similarly to what was found by this Court in Pillar Oilfield, supra, I thus find that the wording of subsection 162(2) of the Act allows a defence of due diligence.

                I am of the view however that, in order for this Act to accomplish its public purpose, the taxpayer should be expected to comply with the requirements of the Act with a high degree of diligence.

I agree that due diligence applies in the present case; yet a high degree of diligence is necessary to escape subsection 162(1) penalties as suggested by Judge Lamarre Proulx. The question narrows down to whether the Appellant acted with a high degree of diligence.

[8]            While this case is close to the line, I conclude that the Appellant acted with sufficient due diligence to satisfy the common law requirements. He had filed income tax returns in a timely manner for 20 years. With his firm's change in accounting and his being treated as a partner, his tax returns were beyond his grasp. The firm's accountant filed his 1995 return late through, I find, no fault of the Appellant. His firm fired the accountant and hired a large accounting firm, BDO. Despite urgings from the Appellant, BDO did not meet the filing deadlines. The Appellant as a lawyer knew his responsibility yet, understandably, he could not act without the expertise of professionals and he had to rely on their preparation of financial returns for the entire law firm. While I find BDO was far from diligent, the Appellant's actions complete the requirements of due diligence and the appeal is allowed. No order is made as to costs.

Signed at Ottawa, Canada, this 31st day of January, 2001.

"C.H. McArthur"

J.T.C.C.