The taxpayer was found in the Tax Court not to be liable for a gross negligence penalty under s. 163(2) regarding her filing an amended return which claimed large fictitious losses because she “was essentially passive in the exercise and gave the tax preparers and her husband free rein without any oversight on her part” (para. 1).
Regarding its costs award, the Tax Court noted that the taxpayer’s counsel had offered to settle on the basis of the Minister vacating the penalty assessed against the taxpayer under s. 163(2) and instead “assess a penalty in the amount of $2,500 under paragraph 162(7)(b) of the Act in respect of the [taxpayer’s] failure to comply with her duty or obligation under the Act to prevent the filing of the Amended Return” (para. 38). The taxpayer’s counsel had proposed in the alternative that the Minister cancel the penalty under s. 220(3.1).
In reversing the Tax Court’s finding that this settlement offer was a factor tending to increase the costs award in the taxpayer’s favour, Pelletier JA first found that in light of the noscitur a sociis principle and “the specific context of paragraph 162(7)(a) dealing with the failure to file information returns,” that “the general language of paragraph 162(7)(b) would be limited to instances of failure to file returns or to provide information not specifically enumerated in the balance of section 162” (para. 49), so that s. 162(7) “would not apply to the case of returns that were filed when required but were negligently prepared” (para. 53). Furthermore, there was no penalty in the Act “for negligently making a false statement in an income tax return" (para. 54). Accordingly, on the basis of the Galway principle, the “settlement proposal was not one which the Minister could have accepted as the lower penalty under paragraph 162(7)(b) was not available” (para. 53). Since the settlement offer could not have been accepted by the Minister in accordance with Galway, it was irrelevant to the quantum of the costs award.