Armin C Kornfeld v. Minister of National Revenue, [1972] CTC 2556

The Chairman:—This is an appeal from assessments to income tax for the taxation years 1965, 1966, 1967 and 1968 in which unreported income was added to the income previously assessed for each of the respective years involved. The taxpayer has paid the additional tax applicable, together with interest, and this appeal deals strictly with the penalty assessed in connection with the omissions of income for each of the years in question.

The hearing took place at the City of Saskatoon in the Province of Saskatchewan on October 15, 1971 before J O Weldon, Esquire, QC, then a member of the Tax Appeal Board, and no decision had been delivered before Mr Weldon’s retirement from the Tax Review Board in March of 1972.

The parties have agreed in writing that the decision in this case shall be rendered by one of the members of the Tax Review Board on the basis of the transcript of the evidence and the argument filed, without further submissions to the Board.

lt seems to me that this appeal can be dealt with very briefly because, throughout the appeal, the indications are that the presiding member intended to allow the appeal, and counsel on behalf of the Minister of National Revenue very fairly and honestly admitted that this was not one of the strongest cases that the Minister has had to present.

Basically, the facts are that the appellant is a lawyer who as a youth was caught in the Nazi occupation of his homeland during the Second World War. He emigrated to this country after the war and, after some difficulty in finding employment, obtained a job in a Hebrew school in Saskatoon. He managed to attend university, where he obtained a Bachelor of Commerce degree and subsequently graduated in law in 1962. He immediately went into practice. 1965, the first of four years under appeal, would have been his third year in practice and, prior to this, he had really been just getting himself established.

The evidence further indicates that he had difficulty in retaining secretary-bookkeepers, perhaps because of the wages he was able to pay. In any event, during the period in question, each secretary that he had also acted as a bookkeeper under the supervision of his accountant Mr John Szalay.

Mr Szalay gave evidence and stated that it was his practice to instruct each secretary-bookkeeper to deposit moneys, where applicable, in the Trust Account, make the necessary disbursements, then transfer the portion attributable to fees to the General Account, and make out a receipt in the General Receipt Book showing the transfer.

One of the difficulties was that the secretaries did not stay long and at least eight secretaries had worked for the appellant over a comparatively short period of time.

What would happen, apparently, was that on many occasions moneys were transferred from the Trust Account into the General Account for fees and disbursements without any receipt being made out, and therefore these entries from time to time escaped Mr Szalay’s notice when he was doing the appellant’s books. Apparently the cheque stubs indicated where the moneys had gone, but the accountant seems to have shown a lack of interest in these cheque stubs, because he did not discover the errors until after the Department of National Revenue moved in to examine the books.

The evidence also shows that the appellant was engaged in apartment building, was a teacher at the Hebrew School, a cantor, a part- time rabbi, and was generally “on the go” a large part of the time. In fact, from his evidence, one gathers that his practice of law certainly did not occupy the full amount of his time, and perhaps even less of his time than one would expect to be necessary in those early stages of his career.

In any event, the first indication of difficulty was when the Department of National Revenue reassessed him after a “spot-check” of his books and as a result of their discovery of the errors in the income reported for the four years in question. Immediately thereafter a proper set of books was set up by Mr Szalay on a double-entry system which made it possible readily to detect any errors or omissions that might have been made by the secretary of the moment.

The evidence is that the appellant scanned the returns prepared by his auditor rather quickly, and undoubtedly was negligent in not delving deeper into them. However, the tenor of the presiding member’s remarks throughout the proceedings indicates that he believed the evidence of the appellant that his many “side businesses”, if I may refer to them as such, did not give him much opportunity to readily recognize any discrepancies in the office accounts of his legal practice.

Both parties have cited the case of Udell v MNR, [1969] CTC 704; 70 DTC 6019 (an appeal to the Exchequer Court of Canada) and the tests set out therein by Mr Justice Cattanach. Many other cases have also been cited but, as has been said on many occasions, each case must depend upon its material facts. Not having had the opportunity of observing the witnesses in this case, and being forced to render judgment from the transcript alone, I am impressed by the comments of the presiding member which appear from time to time throughout the transcript of the hearing.

At page 93, Mr Weldon says:

What is the Minister’s position, Mr. Hynes, in a position where the taxpayer has adduced evidence that’s very impressive as to his activities and he can’t be everywhere at once and he had undoubtedly been negligent in not back- checking and knowing that these girls were inexperienced and so on? It’s at least a borderline case, isn’t it?

It is therefore my impression that it was the presiding member’s view that, although there was a great negligence on the part of the auditor in not discovering these errors and omissions, there is no evidence to suggest that the appellant acquiesced or participated in any way in these errors. This was further emphasized by Mr Weldon where he says, at p 98, line 10:

If there’s something that’s untoward about a matter, it’s up to you to find out where it breaks down — right? But I can’t see anything in this taxpayer where he was put on his guard.

He then referred to the fact that, although a substantial amount of money, $6,000, had been omitted in one of the years involved, the errors in all four years had come to light at the same time with no previous warning. At line 10 of page 99 he says:

I mean, these are not repeaters; these are the result of a four-year audit.

Then, at line 16 of page 104, the following exchange took place with regard to the actions of the appellant:

MR. WELDON: I’ve made it quite clear that that would be my approach.

But gross negligence has to be of a wanton nature.

The situation was corrected by the appellant and his accountant immediately upon its discovery by the Department, and it is conceded throughout that it is the system in this country to leave each person to assess himself and for him to bear the responsibility of improperly doing so. I cannot help agreeing with the presiding member when he says, at page 106:

I think this is a case where I should give it very careful thought, and your client hasn’t tried to brazen the thing out. If he had, that would have ended it. And that’s why I think there is some doubt about gross negligence.

Therefore, in the light of all the evidence, the comments of the presiding member after reviewing the witnesses and considering the interest of the appellant in the case, the actions of the accountant, the class of help that was available to the appellant when he began his practice, and the fact that as soon as he was made aware of the situation he immediately corrected the system of bookkeeping used in his legal practice, leads me to the conclusion that the appeal should be allowed and the matter referred back to the Minister for deletion of the penalties imposed.

Appeal allowed.