A-349-80
The Queen (Appellant)
v.
Anton J. Pongratz (Respondent)
Court of Appeal, Heald, Le Dain JJ, and Kelly
D.J.—Toronto, April 19; Ottawa, May 19, 1982.
Income tax — Penalties — Appeal from Trial judgment
allowing respondent's appeal from reassessment of penalty for
1977 — Taxpayer filed late income tax returns for 1972 to
1977 inclusive because of business demands and lack of funds
to pay taxes due — Demands to file issued in 1974 to 1977
inclusive — Taxpayer denied intention not to pay tax and
existence of scheme to evade taxes — Late-filing penalty and
amount of tax due paid when tax returns filed — Appellant
submits that civil penalties for wilful evasion of tax under s.
163(1) of Income Tax Act payable where intentional failure to
file tax return, or that Trial Judge should have inferred from
evidence that deliberate late filing amounted to wilful attempt
to evade payment — Appellant also submits that attempt to
evade payment of tax includes avoidance of tax for temporary
periods — Trial Judge awarded costs against respondent
notwithstanding that taxpayer enjoyed complete success on
merits — Taxpayer cross-appeals award of costs — Appeal
dismissed and cross-appeal allowed — Court has discretion to
infer whether wilful refusal to file return was made with intent
to evade taxes — Evidence supports Trial Judge's inference
against finding of wilful attempt to evade taxes — Appellant's
suggested construction of Act requires addition of words 'for a
time" or "temporarily" — Court limited to interpreting words
used by legislature — Also, s. 163(1) must be construed
strictly against taxing authority because it imposes penalties
— No authority for awarding costs in favour of unsuccessful
party against successful one except in relation to conduct of
lawsuit — No evidence of conduct justifying award of costs
against respondent — Income Tax Act, S.C. 1970-71-72, c.
63, ss. 162(1), 163(1), 239(1)(d)— Federal Court Rule 344.
Appeal from a decision of the Trial Division allowing
respondent's appeal with respect to his 1977 taxation year from
a reassessment of penalty made pursuant to subsection 163(1)
of the Income Tax Act. From 1972 to 1977 inclusive, taxpayer
consistently filed his income tax returns late because this was
the busiest time of year in his accounting practice and because
of a lack of funds with which to pay the tax. Demands to file
were issued in 1974-1977 inclusive. Taxpayer knew that the
Act required filing of his return and payment of any tax owing
on or before April 30 in the year next following. He denied any
intention not to pay income tax and the existence of a plan
which would result in his not paying tax. From 1972 to 1977 he
was assessed and paid the late-filing penalty prescribed by
subsection 162(1) of Income Tax Act. He also paid the amount
of tax due when he filed the returns. Subsection 163(1) imposes
civil penalties for wilfully attempting to evade payment of tax.
The Trial Judge awarded costs against the respondent notwith
standing that he enjoyed complete success in that Court in so
far as the merits were concerned. The respondent cross-
appealed the award of costs.
Held, the appeal is dismissed and the cross-appeal is allowed.
As to the submission that an intentional failure to file a return
constitutes a wilful attempt to evade tax, the reasoning in The
Queen v. Paveley, 76 DTC 6415 is persuasive. "Upon proof of a
`wilful refusal' to file an income tax return ... the Court may,
not must, infer that the accused committed the act with the
intent to evade payment of taxes." Also, the legislators did not
intend subsection 163(1) to apply automatically to every late-
filing taxpayer. Finally, Parliament has recently increased the
penalty for late filing so that it is once more an effective
deterrent. This is a further indication of Parliament's ability
and willingness to deal with any problem relating to late-filing
taxpayers other than by the serious penalties imposed in subsec
tion 163(1). As to appellant's submission that repeated deliber
ate late-filing amounted to a wilful attempt to evade payment
of tax, the circumstances entitled the trier of fact to draw an
inference against a finding of wilful attempt to evade payment
of tax: respondent filed his 1972, 1973, and 1978 returns
without the necessity of a demand for payment being issued;
respondent complied with the Minister's demands to file a
return within two months of their receipt; all returns were filed
within one year or less of the prescribed date and the tax
payable, together with the late-filing penalty, was paid when
the returns were filed; respondent denied any intention not to
pay his tax and existence of a scheme which would result in his
not paying tax; and during the past 34 years, the accuracy of
the respondent's returns had not been challenged. The inference
drawn by the Trial Judge was therefore proper. Finally, the
submission that "evade" is synonymous with the word "avoid"
is contrary to the case law which makes a distinction between
avoidance and evasion in relation to the law of taxation. The
appellant's submission requires that subsection 163(1) be inter
preted as if the words "for a time" or "temporarily" followed
the word "evade". In the construction of a statute, the duty of
the Court is limited to interpreting the words used by the
legislature and it has no power to fill in any gaps disclosed. To
do so would be to usurp the function of the legislature. The
Trial Judge did not err in the nature of the test to be applied.
Additionally, since subsection 163(1) imposes penalties, it is to
be construed strictly against the taxing authority. As to the
cross-appeal, there is no basis for the exercise of the discretion
to award costs in favour of the unsuccessful appellant. Rule 344
provides that costs shall follow the event unless otherwise
ordered and then details circumstances relating to the conduct
of the lawsuit under which costs may be disallowed or awarded
against the successful party. There is no evidence here of
conduct by the respondent in the action itself which could
justify an award of costs against him. The Trial Judge, through
the award of costs, was punishing the appellant's conduct in
late filing over the years, which course of conduct the Trial
Judge had previously found did not contravene subsection
163(1). Such a penalty is not authorized by the Income Tax
Act nor by the Rules of the Court and the cross-appeal is
allowed.
CASES JUDICIALLY CONSIDERED
APPLIED:
The Queen v. Paveley, 76 DTC 6415 (Sask. C.A.);
Magor et al. v. Newport Corporation, [1952] A.C. 189;
Tuck & Sons v. Priester (1887), 19 Q.B.D. 629.
REFERRED TO:
Medicine Hat Greenhouses Ltd. et al. v. The Queen, 81
DTC 5100 (Alta. C.A.); The Queen v. Regehr (1968), 3
C.C.C. 72 (Y.C.A.); Ciglen v. The Queen, [1970] S.C.R.
804.
APPEAL.
COUNSEL:
W. Lefebvre and I. MacGregor for appellant.
T. E. McDonnell and D. A. Giannini for
respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Little, Reeves, Mahoney, Jarrett & Hart,
London, for respondent.
The following are the reasons for judgment
rendered in English by
HEALD J.: This is an appeal from a decision of
the Trial Division allowing the respondent's appeal
with respect to his 1977 taxation year from a
reassessment of penalty made pursuant to subsec
tion 163(1) of the Income Tax Act, R.S.C. 1952,
c. 148 as amended by S.C. 1970-71-72, c. 63,
section 1 (the Act) 1 . These reasons will also deal
with the cross-appeal by the respondent herein
from that portion of the Trial Division judgment
which awarded costs to the appellant herein.
THE APPEAL
The ratio of the judgment of the Trial Division
in so far as it relates to the appeal reads as follows:
On the evidence on this appeal, which consisted only of a
partial Agreed Statement of Facts and the evidence of the
plaintiff, the Minister has not established the facts justifying
the assessment of the penalty.
Accordingly the appeal is allowed and the matter is referred
back for re-assessment.
The following factual situation emerges from the
agreed statement of facts filed at trial: the
respondent is a public accountant currently prac
tising as a sole proprietor, having carried on busi
ness in this manner for approximately 34 years. A
portion of this practice involves tax planning and
the preparation of income tax returns for both
individual and corporate clients. He has prepared
and filed his own tax return for all of those 34
years and knew that the Act required the filing of
his return and the payment of any tax owing on or
before April 30 in the year next following. He also
knew that payments of tax were required to be
made periodically during each taxation year. The
respondent's record in respect of the taxation years
1972 through 1977 may be summarized as follows:
telnents red Date 0 and t Actual Oo 7 z a abl e e
7eexitvon pavd� Fvl ln g Date: Fvle Issued: o Filvn g Oete: Lete� p of Re q uv red
F111ng
972 None Apr11 30/73 011 Nov. 27/73 212 ]6,104.40
1973 None Apr22 30/74 011 Nov. 21/70 206 $6,420.20
1974 None 29241 30/75 3e00. 15/76 Mar. 2 / 7 6 306 17.001.60
1975 21,500 Apr31 30/70 50y. 3/76 Dec. 30/76 244 12.190.90
1976 None Apra1 30/77 Dee. 5/77 3.6. 30/70 273 17,136 00
1977 None Apral 30/70 July 26/76 Sept. 11/70 134 15.464.15
' Subsection 163(1) reads as follows:
163. (1) Every person who wilfully attempts to evade
payment of the tax payable by him under this Part by failing
to file a return of income as and when required by subsection
150(1) is liable to a penalty of 50% of the amount of the tax
sought to be evaded.
The only viva voce testimony at trial was given
by the respondent and he testified, inter alia, to
the following effect: before 1972 he did not, at all
times, file his returns on a timely basis. With
respect to his 1978 return, he filed it on June 9,
1979, approximately 70 days late and made no
instalment payments on account of the 1978 tax
payable by him. He consistently failed to file his
returns when required by the Act because this was
the busiest time of the year in his practice and
because of lack of funds with which to pay the tax.
Accordingly, he postponed the preparation and
filing of his own return to a time of the year when
it was more convenient to prepare it. He admitted,
nevertheless, that he could have prepared his own
return on time since it was not complex. He also
admitted that he deliberately chose to use avail
able funds for a farming operation in which he was
engaged, in preference to payment of his income
tax. He also agreed that he had not attempted to
borrow funds to pay the tax owing. He denied,
however, any intention not to pay his income tax
and he denied the existence of any plan or scheme
which would result in his not paying tax. He said
that during the past 34 years the correctness or the
accuracy of his returns had never been challenged
by the Department. Likewise, no criminal charge
under the Income Tax Act had ever been laid
against him. During the taxation years 1972
through 1977, he was assessed and had paid the
late filing penalty prescribed by subsection 162(1)
of the Act 2 which he accepted as a natural conse
quence of not filing his returns when they became
due. He also had paid the amount of tax due when
he filed his returns.
The initial submission by counsel for the appel
lant in his memorandum of fact and law was to the
2 Subsection 162(1), at all relevant times, read as follows:
162. (1) Every person who has failed to make a return as
and when required by subsection 150(1) is liable to a penalty
of
(a) an amount equal to 5% of the tax that was unpaid
when the return was required to be filed, if the tax payable
under this Part that was unpaid at that time was less than
$10,000 and
(b) $500, if at the time the return was required to be filed
tax payable under this Part equal to $10,000 or more was
unpaid.
effect that penalties are properly payable under
subsection 163(1) where, as in this case, there has
been an intentional failure to file a tax return as
and when required by the Act since such intention
al failure, in itself, constitutes a wilful attempt to
evade payment of tax. I do not agree with this
submission. Subsection 163(1) imposes civil penal
ties for wilfully attempting to evade the payment
of tax. The companion section of the Act which
imposes criminal penalties is paragraph 239(1)(d)
which provides that:
239. (1) Every person who has
(d) wilfully, in any manner, evaded or attempted to evade,
compliance with this Act or payment of taxes imposed by
this Act, ...
is guilty of an offence ....
Although the language used in the two subsections
is not identical, it is, in my view, substantially the
same and the word "evade" is used in both subsec
tions. Accordingly, I have found persuasive the
comments of Bayda J.A. of the Saskatchewan
Court of Appeal (as he then was) in the case of
The Queen v. Paveley 3 where he stated:
It is plain, therefore, that upon proof of a "wilful refusal" to
file an income tax return—the "manner" in which it is alleged
the offence under section 239(1)(d) of the Income Tax Act is
committed—the Court may, not must, infer that the accused
committed the act with the intent to evade payment of taxes. If
on the whole evidence the Court reaches the conclusion that it
is proper to draw that inference, then it may do so. If it reaches
the conclusion that it is not proper to do so, or is left in
reasonable doubt, then it should not draw the inference.
To the same effect is the view of Harradence J.A.
as expressed in the case of Medicine Hat Green
houses Ltd. et al. v. The Queen 4 :
Section 239(1)(d) does not make it an offence per se to
contravene a provision of the Income Tax Act. Such a contra
vention may be an ingredient to be established in a charge
under that section but to do so without more, falls far short of
3 76 DTC 6415 (Sask. C.A.) at 6421.
4 81 DTC 5100 (Alta. C.A.) at 5104.
proving a charge of wilful evasion under that section. The
contravention may or may not be wilful.
As was pointed out by counsel for the respondent,
if this submission by counsel for the appellant were
to prevail, the result would be that if a taxpayer
filed his tax return on May 1 in a given year and
such late filing was intentional, then that taxpayer
would be subject to the same basic penalty of 50%
of the unpaid tax as a taxpayer who deliberately
files his return one or two years late. It is conceded
that the Minister would not likely proceed under
subsection 163(1) against the taxpayer who filed a
day late but the result of this interpretation would
be to produce arbitrary rulings by departmental
officials as to what constitutes sufficient delay to
warrant the imposition of the very substantial
penalty required by subsection 163(1). I do not
believe that it was the intention of the legislators
that subsection 163(1) apply, automatically, to
every late-filing taxpayer.
As was also pointed out by the respondent's
counsel, Parliament has recently substantially
increased the penalty for late filing by amending
subsection 162(1) [S.C. 1980-81-82, c. 48, s. 89]
so as to remove the former ceiling of $500 on the
5% penalty and by increasing that penalty by
adding thereto an amount equal to 1% of the
unpaid tax for each month the return is late, to a
maximum of 12 months. Parliament has, by this
amendment, increased the late-filing penalty so
that, once more, it would appear to be an effective
deterrent. This is a further indication of Parlia
ment's ability and willingness to deal with any
problem relating to late-filing taxpayers outside of
and apart from the serious penalties imposed in
subsection 163 (1) for attempted wilful evasion.
Accordingly and for all the above reasons, I would
reject this initial submission.
In the alternative to the initial submission dealt
with supra, the appellant submitted that, on this
record, the Trial Judge could and should have
inferred from the evidence and respondent's course
of conduct that respondent's wilful late filing in
1977 amounted to a wilful attempt to evade pay
ment of tax so as to justify the imposition of the
penalty specified in subsection 163(1). In this
regard, the appellant relies on the respondent's
repeated deliberate failures to file timely tax
returns in respect of prior as well as subsequent
years. The problem with this submission is that it
does not take into account the totality of the
evidence before the Trial Judge. The uncontradict-
ed evidence of the respondent at trial detailed the
following circumstances which, in my view, would
entitle the trier of fact to draw an inference in
favour of the respondent and against a finding of
wilful attempt to evade payment of tax: the
respondent filed his 1972, 1973 and 1978 returns
without the necessity for a demand being issued; in
respect of the returns for 1974, 1975, 1976 and
1977, the respondent complied with the Minister's
demand to file a return—the return being filed in
each of those years within two months of receipt
by the respondent of the demand; all of the
respondent's returns for the years 1972 through
1978 were filed within one year or less of the
prescribed date and the tax payable together with
the late-filing penalty was paid by the respondent
when the returns were filed; the respondent specifi
cally denied any intention not to pay his tax and he
also denied the existence of a scheme which would
result in his not paying tax; during the past 34
years, the correctness or accuracy of his returns
had never been challenged by the Department nor
had any criminal charges under the Income Tax
Act ever been laid against him. While the reasons
of the Trial Judge are very short, his statement to
the effect that: "On the evidence ... the Minister
has not established the facts justifying the assess
ment of the penalty" is an indication that he did
draw that contrary inference on the evidence
adduced. That being so, I am not persuaded that
the inference which he drew from the total evi
dence was improper or not reasonably open to him.
For these reasons, I would reject the alternative
initial submission made by the appellant.
I come now to what I perceived to be the
principal submission made by counsel for the
appellant in his oral argument before us. This
submission was to the effect that the Trial Judge
erred in law in respect of the nature of the test
which he applied to the factual circumstances of
this case. In the view of appellant's counsel, the
attempt to evade payment of tax envisaged in
subsection 163(1) encompasses an evasion or
avoidance of tax for a temporary period of time
and it is not necessary that the attempt to evade
embody the concept of avoiding the payment of
tax for all time. In support of this view, counsel
refers to a comment by Brownridge J.A. in the
Paveley case supra where he said (page 6417):
"Likewise, I am not persuaded that there is no
such thing as a temporary evasion." I would
observe, initially, that the above comment was
dicta because of the factual situation in that case.
The respondent had been charged under paragraph
239(1)(d) of the Act on the basis of his failure to
file returns for three taxation years, notwithstand
ing formal demands to do so—that is, Paveley was
a case of non-filing whereas the present case is one
of filing but filing late. My other comment would
be that the above statement does not appear to
express a concluded opinion. For these reasons I
find the statement to have little persuasive value
here since the factual situation in the case at bar is
quite different to that in the Paveley case (supra).
In making this submission, appellant's counsel
contended that the word "evade" as used in sub
section 163 (1) is synonymous with the word
"avoid". This submission is, in my view, contrary
to the jurisprudence which makes a distinction
between avoidance and evasion when related to the
law of taxations. It is also central to this submis
sion that subsection 163(1) be interpreted as
though it contained after the word "evade" there
in, the words "for a time" or "temporarily" or
other words of similar import. This would necessi-
5 See for example: The Queen v. Regehr (1968), 3 C.C.C. 72
(Y.C.A.); Ciglen v. The Queen, [1970] S.C.R. 804 at 812.
tate adding words to the subsection that are not
there. In the case of Magor et al. v. Newport
Corporation 6 , the House of Lords held that in the
construction of a statute the duty of the Court is
limited to interpreting the words used by the legis
lature and it has no power to fill in any gaps
disclosed and that to do so would be to usurp the
function of the legislature. In dealing with this
matter Lord Simonds said at page 191:
The duty of the Court is to interpret the words that the
legislature has used; those words may be ambiguous, but, even
if they are, the power and duty of the Court to travel outside
them on a voyage of discovery are strictly limited ....
Lord Simonds goes on to express disapproval of
the view of Denning L.J. in the Court of Appeal to
the effect that the Court, having discovered the
intention of Parliament and Ministers, must pro
ceed to fill in the gaps. Also on page 191, Lord
Simonds said of this view:
It appears to me to be a naked usurpation of the legislative
function under the thin disguise of interpretation. And it is the
less justifiable when it is guesswork with what material the
legislature would, if it had discovered the gap, have filled it in.
If a gap is disclosed, the remedy lies in an amending Act.
I have accordingly concluded that this submission
by the appellant must also fail and that the Trial
Judge did not err in respect of the nature of the
test to be applied.
As above stated, it is my view that the wording
of subsection 163(1) is clear and cannot be inter
preted in the manner suggested by the appellant.
If, however, it could be said that the interpretation
advanced by the appellant is a reasonable one, the
appellant would still not succeed by reason of the
fact that since subsection 163(1) imposes penal
ties, it is to be construed strictly against the taxing
authority. As was stated by Lord Esher M.R. in
the case of Tuck & Sons v. Priester 7 [at page
638]:
If there is a reasonable interpretation which will avoid the
penalty in any particular case we must adopt that construction.
If there are two reasonable constructions we must give the more
lenient one.
6 [1952] A.C. 189.
(1887), 19 Q.B.D. 629.
For all of the above reasons, it is my opinion that
the appeal should be dismissed and the reassess
ment of penalty pursuant to subsection 163(1) in
respect of the respondent's 1977 taxation year
should be vacated.
THE CROSS-APPEAL
The learned Trial Judge awarded costs in the
Trial Division against this respondent notwith
standing the fact that the respondent enjoyed com
plete success in that Court in so far as the merits
were concerned. The reasons given by the Trial
Judge for this disposition concerning costs read as
follows:
In view of all the circumstances as detailed in evidence and the
conduct of the plaintiff, this is a proper case for awarding costs
against the plaintiff. Therefore the defendant shall have judg
ment against the plaintiff and be entitled to recover costs of this
appeal from the plaintiff.
With respect, I am unable to find any proper basis
for the exercise of the discretion to award costs in
favour of this unsuccessful appellant against this
successful respondent. Federal Court Rule 344(1)
provides that:
Rule 344. (1) The costs of and incidental to all proceedings
in the Court shall be in the discretion of the Court and shall
follow the event unless otherwise ordered ....
The various other subsections of Rule 344 detail
circumstances under which costs may be disal
lowed or awarded against the successful party.
However, those circumstances, without exception,
relate to the conduct of the lawsuit, not to conduct
which occurred prior to the commencement of the
litigation. In this case, there is no evidence of any
conduct by the respondent in the action itself
which could possibly justify an award of costs
against him. The respondent cooperated complete
ly in the conduct of the action, agreed to a state
ment of facts filed at trial and testified at trial
notwithstanding that the burden of proof was on
the Minister throughout. It is clear from the state
ment of the Trial Judge (supra) that the conduct
he was punishing through the award of costs was
the course of conduct of the respondent in late
filing over the years, which course of conduct the
Trial Judge had previously found did not contra
vene subsection 163(1). The effect of the award of
costs in this case was to impose a different kind of
penalty upon the respondent, a penalty not author
ized by the Income Tax Act nor by the Rules of
this Court.
I would therefore allow the cross-appeal with
costs and set aside the award of costs to the
appellant against the respondent in the Trial Divi
sion. I would also award costs to the respondent
against the appellant both here and in the Trial
Division.
LE DAIN J.: I agree.
KELLY D.J.: I concur.
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.