A-329-81
The Queen (Appellant)
v.
Columbia Enterprises Ltd. (Respondent)
Court of Appeal, Pratte, Le Dain JJ. and Cowan
D.J.—Vancouver, May 3 and 9, 1983.
Income tax — Penalties — Penalty imposed on company for
false return filed by accountant — Trial Division confirming
Tax Review Board decision disallowing penalty — Knowledge
of accountant that of company — Accountant directing mind
and will of company in matters assigned to him — Appeal
allowed — Income Tax Act, S.C. 1970-71-72, c. 63, s. 163(2)
— Income Tax Act, R.S.C. 1952, c. 148, s. 56(2) (as am. by
S.C. 1960, c. 43, s. 16).
The respondent's accountant knowingly prepared and filed
an incomplete income tax return for the company's 1973
taxation year. The penalty imposed on the respondent by the
Minister for having filed a false statement was disallowed by
the Tax Review Board. The Trial Division dismissed an appeal
from that decision, holding that the respondent could not be
held liable because it did not know or suspect that the return
was inaccurate and because the accountant's knowledge could
not be attributed to it for the reason that there did not exist a
master-servant relationship between the respondent and its
accountant. The issue is whether the respondent should be held
liable for the act of its accountant.
Held (Pratte J. dissenting), the appeal should be allowed.
Per Cowan D.J. (Le Damn J. concurring): The accountant
was a vital organ of the respondent and virtually its directing
mind and will for the purposes of the preparation, signing and
filing of financial statements and income tax returns. The acts
of the accountant were the acts of the respondent. The account
ant's knowledge of the 'statements and omissions is knowledge
of the respondent.
Per Pratte J. (dissenting): Subsection 163(2) of the Act
cannot be interpreted so as to make a taxpayer liable for the
offences committed by persons acting on his behalf as well as
for his own. The argument that the knowledge of the account
ant must be imputed to the respondent is based on English case
law to the effect that, a knowledge requirement in a provision
of the Licensing Act creating an offence notwithstanding, it was
held that licensees under that Act who delegate their authority
to others can be held liable for these persons' offences, their
knowledge being imputed to the licensees. That doctrine of
delegation must, however, be restricted to the interpretation of
the Licensing Act. Furthermore, the sphere of the accountant's
delegated authority was much too narrow to make him a
directing mind of the company.
CASES JUDICIALLY CONSIDERED
APPLIED:
Regina v. St. Lawrence Corp. Ltd. (and nineteen other
corporations), [1969] 2O.R. 305 (C.A.).
DISTINGUISHED:
Udell v. Minister of National Revenue, [1970] Ex.C.R.
176; [1969] C.T.C. 704; 70 DTC 6019.
CONSIDERED:
Howker v. Robinson, [1972] 2 All E.R. 786 (Q.B.).
REFERRED TO:
Vane v. Yiannopoullos, [1965] A.C. 486 (H.L.); Tesco
Supermarkets Ltd. v. Nattrass, [1972] A.C. 153 (H.L.);
Regina v. P. G. Market-place et al. (1979), 51 C.C.C.
(2d) 185 (B.C.C.A.); Regina v. Spot Supermarket Inc.
(1980), 50 C.C.C. (2d) 239 (Que. C.A.).
COUNSEL:
J. S. Gill for appellant.
Ian Pitfield for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Thorsteinsson, Mitchell, Little, O'Keefe &
Davidson, Vancouver, for respondent.
The following are the reasons for judgment
rendered in English by
PRATTE J. (dissenting): The reasons for judg
ment prepared by my brother Cowan contain a full
and accurate account of the facts involved in this
case.
It is common ground that Lee, the respondent's
accountant, knowingly filed a false income tax
return on behalf of his client. Moreover, there is
ample evidence to support the finding of the Trial
Judge that On Lim, the president of the respond
ent, did not know of the filing of that false return
and was not guilty of gross negligence. In these
circumstances, can it be said that the respondent
itself knowingly filed a false return so as to be
liable to the penalty provided for in subsection
163(2) of the Income Tax Act [S.C. 1970-71-72,
c. 63]?
The Trial Division answered that question in the
negative [judgment not reported, T-592-79, dated
May 13, 1981]. Counsel for the appellant argued
that it should be answered in the affirmative for
three reasons: first, because the knowledge of the
accountant was, in his view, the knowledge of the
company since the accountant was, insofar as the
preparation and filing of the income tax return
were concerned, the directing mind of the com
pany; second, because the knowledge of the
accountant was, in any event, to be imputed to the
respondent which, instead of performing its legal
duty to file an income tax return, had delegated
that task to its accountant; third, because subsec
tion 163(2) must be interpreted so as to make a
taxpayer liable not only for the offences committed
by himself, but also for the offences committed by
persons acting on his behalf.
With respect to the last argument, I need only
say that it must, in my view, be rejected because
subsection 163(2), as it is written, is not suscept
ible of being interpreted in the manner suggested.
The second argument is that, in spite of the
words used in subsection 163(2), the knowledge of
the accountant Lee must be imputed to the
respondent itself as a result of the delegation by
the respondent to its accountant of the perform
ance of its duty to file an income tax return. This
argument is based on decisions rendered in Eng-
land under provisions of Licensing Acts prohibit
ing licensees from doing certain things "knowing-
ly". The principle established by those judgments
was clearly stated by Bristow J. in Howker v.
Robinson:'
It is a general rule of English law that an accused person
cannot be convicted unless he has a guilty mind. An exception
to this rule is where Parliament by statute creates an absolute
offence. Whether Parliament has done so is to be decided on
the construction of the statutory provision concerned. An exam
ple of such an absolute offence is s 13 of the Licensing Act
1872 which made it an offence for a licensee to supply liquor to
an intoxicated person: See Police Comrs y Cartman, [1896] I
QB 655.
Where Parliament, as in s 169(1) of the 1964 Act, prohibits
someone from doing something "knowingly" it is clear that an
absolute offence has not been created, but a canon of construc
tion of the provisions of the Licensing Acts has grown up in the
courts that where the statute provides that the licensee shall not
1 [1972] 2 All E.R. 786 [Q.B.], at pp. 788-789.
do something knowingly, and he does not, as the justices found
in this case, in fact know that the thing is being done, neverthe
less if he has delegated his control of the premises to the person
who does the thing, he cannot get out of the responsibilities and
duties attached to the licence, and the knowledge of his dele
gate is imputed to him. As Lord Goddard CJ said in Linnett y
Metropolitan Police Comr, [1946] KB 290 at 294, 295, cf
[1946] I All ER 380 at 382, a case of "knowingly permitting
disorderly conduct, contrary to s 44 of the Metropolitan Police
Act, 1839":
"The principle ... depends on the fact that the person who is
responsible in law, as for example, a licensee under the
Licensing Acts, has chosen to delegate his duties, powers and
authority to another. "
As Lord Alverstone CJ put it in Emary v Nolloth, [1903] 2 KB
264 at 269, [1900-3] All ER Rep 606 at 608, the principle to
be extracted from the decisions is that if the licensee has
delegated his authority to someone else, delegating his own
"power to prevent" and the person left in charge commits the
offence, the licensee is responsible. If on the other hand there
has been no delegation of authority and the licensee is himself
controlling the business and the offence is committed by his
servant behind his back and against his orders, then he is not
responsible.
It now seems to be the prevailing view, however,
that this doctrine of delegation, which clearly
ignores the plain words of Parliament, if it is to be
retained, must be restricted to the interpretation of
the Licensing Acts. 2 For that reason I am of
opinion that the Trial Judge was right in refusing
to apply it in this case.
The other argument of the appellant is that the
respondent had in effect known that a false return
had been filed on its behalf since the knowledge of
its accountant was, in law, its own knowledge. This
argument is based on the well established principle
that, while a company is an abstraction having no
mind, knowledge or intention, the law nevertheless
treats certain persons who act for it as being the
company itself so that their state of mind becomes
that of the company. Who are those persons?
Those who do not only act for or on behalf of the
company but also constitute its "directing mind
2 See: Vane v. Yiannopoullos, [1965] A.C. 486 [H.L.], at pp.
487, 500, 510-512; Tesco Supermarkets Ltd. v. Nattrass,
[1972] A.C. 153 [H.L.], at pp. 173, 202 and 203; Glanville
Williams, Criminal Law (1978 ed.), pp. 943-944.
and will and control what it does". 3 Here, it is said
that the accountant, though he was not an officer
of the respondent and did not control its activities,
was nevertheless the directing mind of the
respondent insofar as the preparation and filing of
the income tax returns were concerned. I cannot
agree with that assertion. The sphere of the
accountant's delegated authority, limited as it was
to the making and filing of the income tax returns,
was, in my opinion, much too narrow to make him
a directing mind of the company. In my opinion,
the Trial Judge was right in deciding that his
knowledge could not be attributed to the respond
ent. I am aware that this conclusion is difficult to
reconcile with the decision of the British Columbia
Court of Appeal in Regina v. P. G. Market-place
et al. 4 and that of the Quebec Court of Appeal in
Regina v. Spot Supermarket Inc. 5 However these
two decisions appear to me to have considered as
the "directing minds" of companies persons who,
in effect, were simply their servants or agents.
For those reasons, I would dismiss the appeal
with costs.
* * *
The following are the reasons for judgment
rendered in English by
COWAN D.J.: This is an appeal by Her Majesty
the Queen from a judgment of the Trial Division
dismissing an appeal from a decision of the Tax
Review Board which disallowed a penalty of
$5,234.35 imposed by the Minister of National
Revenue upon the respondent taxpayer for its 1973
taxation year pursuant to subsection 163(2) of the
Income Tax Act.
Subsection 163(2), at the relevant time, read:
3 Tesco Supermarkets Ltd. v. Nattrass, at pp. 171, 187, 190,
199; Regina v. St. Lawrence Corp. Ltd. (and nineteen other
corporations), [1969] 2 O.R. 305 [C.A.], at p. 320.
^ (1979), 51 C.C.C. (2d) 185 (B.C.C.A.).
5 (1980), 50 C.C.C. (2d) 239 (Que. C.A.).
163. ...
(2) Every person who, knowingly, or under circumstances
amounting to gross negligence in the carrying out of any duty
or obligation imposed by or under this Act, has made, or has
participated in, assented to or acquiesced in the making of, a
statement or omission in a return, certificate, statement or
answer filed or made as required by or under this Act or a
regulation, as a result of which the tax that would have been
payable by him for a taxation year if the tax had been assessed
on the basis of the information provided in the return, certifi
cate, statement or answer is less than the tax payable by him
for the year, is liable to a penalty of 25% of the amount by
which the tax that would so have been payable is less than the
tax payable by him for the year.
The respondent taxpayer is a company incorpo
rated in 1950 under the laws of the Province of
British Columbia and has a fiscal year end of
December 31. Its income tax returns must be filed
on or before June 30 of each succeeding year.
In December of 1972 the respondent acquired
from the estate of Butt Lim rental property at 122
East Pender Street in the City of Vancouver for
$120,000. In the 1973 taxation year the respond
ent earned rental income of $4,820 from the prop
erty and in March of 1973 it sold the property for
$230,000.
The shareholders of the respondent are five
brothers, sons of Butt Lim. The respondent is a
holding company for assets it received from Butt
Lim. The brothers had their own professions or
businesses. On Lim, one of the brothers, is a
mechanical engineer, employed as such by another
company, and he had the responsibility for main
taining the financial records of the respondent,
including a synoptic journal. In that journal were
recorded all financial matters including those
relating to the sale of the Pender Street property.
The corporation income tax return of the
respondent with respect to its taxation year ended
December 31, 1973, is dated June 28, 1974, and
was filed on or before June 30, 1974. It contained
a statement of affairs as at December 31, 1973
and a statement of profit and loss for the year
ended December 31, 1973, including rental income
from two properties other than the Pender Street
property. The aggregate of the net rental income
and of investment income amounting to
$15,675.13 was reduced by the same amount
charged as salaries so that the return showed no
taxable income for the year 1973.
Neither the statement of affairs nor the
schedules contained anything to show that the
respondent had acquired the Pender Street prop
erty, or that it had disposed of it, or that it had
received the rental income of $4,820 in respect of
that property or any other property. The return did
not contain any answer to the question "Has the
corporation realized any capital gains (including
capital gains dividends) or incurred any capital
losses?"
The Minister of National Revenue reassessed
the respondent on December 24, 1976, with
respect to its 1973 taxation year. He added to the
net income reported the unreported rental income
of $4,820 and an unreported taxable capital gain
of $50,875 and assessed income tax of $34,441.72
and levied a penalty of $5,234.35 under subsection
163(2) of the Income Tax Act.
The respondent filed a notice of objection to the
reassessment but only with respect to the penalty.
The notice read:
Facts.
The company inadvertently did not report the capital gain on
a building that it was bequested by the shareholder's late
mother. It was through confusion, family strife and shock from
the loss of the mother that caused this.
Reason for objection.
It is the belief of the company that the department will
realize when it studies the situation that the penalty should not
apply in the circumstances.
The Minister confirmed the assessment but on
appeal to the Tax Appeal Board the respondent's
appeal was allowed and the assessment was varied
by deleting the penalty imposed.
The appeal to the Trial Division was dismissed
and the Crown now appeals.
There is no dispute as to the facts in this case.
Mr. Paul Lee, a chartered accountant, had been
the respondent's accountant since 1959. He had
knowledge of its general operations and of its
financial affairs. He was asked by On Lim, presi
dent of the respondent, to prepare the respondent's
income tax return for 1973 and was given by Mr.
Lim all the records pertaining to the year. He had
all the documents relating to the sale of the Pender
Street property and to the rental income received
throughout the year. He was briefed on what was
going on and sat in on conferences with the solici
tor for the respondent after the sale. Mr. Lee
considered that he had all the necessary informa
tion. He knew that there was a capital gain on sale
of the Pender Street property.
Mr. Lee worked on the capital gain information
and on the information with regard to the rental
income but he did not include any of that informa
tion in the income tax return for the year. He gave
as his reason for not disclosing this information
that he had difficulty in determining the adjusted
cost of the Pender Street property, that it had been
acquired in a non-arm's length transaction and
that he was not sure which was the most advanta
geous method of reporting in order to minimize the
impact of income tax. He admitted that he knew
that there would be a taxable capital gain from the
disposition of the property.
Mr. Lee said that he did not have any difficulty
with the rental income from the property but said
that he did not include it in the return as he
wanted to include it all at the same time as it all
pertained to the Pender Street property.
Mr. Lee said that he filed the return before June
30, 1974, in order to have it filed on time, and that
he intended at all times to file an amended return
with the information on the capital gain and the
rental income when he came to a proper conclu
sion. In fact no amended return was ever filed by
or on behalf of the respondent.
The form of certification stating that the return
including the accompanying schedules and state
ments had been examined by the person certifying
and was a true, correct and complete return, was
completed by having typed in: "I, On Lim, of
Vancouver, B.C., am an authorized signing officer
of the Corporation" and by being signed "On
Lim PP ".
Mr. Lee's evidence was to the effect that Mr.
On Lim did not sign the return and that his name
was placed there by a member of Mr. Lee's staff.
Mr. Lim had authorized Mr. Lee to sign the
return for him. Mr. Lee had prepared the income
tax returns of the respondent since 1959 and those
returns were signed on behalf of the company by
someone in his office.
Mr. Lee did not tell Mr. On Lim that he was
going to leave out of the return some items of
income nor did he send to Mr. Lim a copy of the
return after he had filed it. It had been his practice
in other years to send to the company a copy of the
return some time after it had been filed.
Mr. On Lim's evidence was to the effect that he
gave all pertinent information to Mr. Lee in the
spring of 1974 and that he did not receive a copy
of the return filed on behalf of the company with
respect to the year 1973. He was concerned about
payment of the capital gains tax, which he always
assumed would have to be paid, and from time to
time he asked Mr. Lee how much tax was payable
by the company on the capital gains. Lee never
told him that there might be a procedure adopted
which would result in no tax payable by the com
pany. Mr. Lee merely told him that he needed
more time to sort it out so that he could determine
the amount of tax payable. Mr. Lim's notes
indicated that as late as August 6, 1974, he was
asking Mr. Lee about the capital gains tax.
Mr. Lim said that he never asked Mr. Lee for a
copy of the return, that Mr. Lee usually gave it to
him without his asking. He said that Lee had
previously done a pretty good job and that normal
ly he left it to Lee's discretion.
The Trial Judge found that On Lim, the presi
dent of the respondent corporation, did not know
that Lee, the accountant, had filed the income tax
return without disclosing the rental income and the
capital gain realized. He was of the opinion that
the knowledge of Lee, the accountant, could not be
attributed to the respondent for the reason that the
relationship of master and servant did not exist
between the company and Lee.
The principles relating to the criminal liability
of one person, including a corporation, for the acts
of another person are discussed in Regina v. St.
Lawrence Corp. Ltd. (and nineteen other
corporations) 6 where Schroeder J.A. said:
While in cases other than criminal libel, criminal contempt
of Court, public nuisance and statutory offences of strict liabili
ty criminal liability is not attached to a corporation for the
criminal acts of its servants or agents upon the doctrine of
respondeat superior, nevertheless, if the agent falls within a
category which entitles the Court to hold that he is a vital
organ of the body corporate and virtually its directing mind and
will in the sphere of duty and responsibility assigned to him so
that his action and intent are the very action and intent of the
company itself, then his conduct is sufficient to render the
company indictable by reason thereof. It should be added that
both on principle and authority this proposition is subject to the
proviso that in performing the acts in question the agent was
acting within the scope of his authority either express or
implied.
In the present case the respondent was under a
legal duty to prepare and file income tax returns
which were true, correct and complete returns of
the income of the respondent for each fiscal year.
The respondent maintained records of its income
and expenses and all other financial information
necessary for the preparation of financial state
ments and of its income tax return for the year
1973. It retained Paul Lee, its accountant, to
prepare the financial statements and its income tax
return and to sign on its behalf and file the return.
The form and content of the return were left to the
discretion of Paul Lee and the respondent did not
require that the return be sent to it before comple
tion and filing or even after filing. All matters
relating to the return and to its contents were left
to the unfettered discretion of Paul Lee without
any attempt on the part of the respondent to
control his actions.
Paul Lee was a vital organ of the respondent
corporation and virtually its directing mind and
will in the sphere of duty and responsibility
assigned to him, that is, the preparation, signing
and filing of financial statements and income tax
returns, so that his action and intent were the very
action and intent of the company itself.
The case of Udell v. Minister of National
Revenue' relied on by the Trial Judge, is distin
guishable on its facts from the present case. There
the taxpayer made faithful entries in his books of
6 [1969] 2 O.R. 305 (C.A.), at p. 320.
7 [[1970] Ex.C.R. 176]; [1969] C.T.C. 704; 70 DTC 6019.
account but employed a public accountant to pre
pare his income tax returns. The taxpayer's
records were kept in a book designed for cost
purposes and the accountant found it necessary to
prepare his own work sheets from the information
contained in the farm account book. In transposing
the information to his work sheets the accountant
made a number of inexplicable errors in substan
tial amounts, so that some revenue items and some
expense items were reduced in amount and carried
forward to the income tax return, resulting in an
increase in the amount of loss reported over the
actual amount lost by the taxpayer. This affected
his loss carried back to previous years. The
accountant also omitted certain amounts paid for
cattle purchases. The Minister re-assessed and
imposed a penalty under subsection 56(2) [R.S.C.
1952, c. 148, as am. by S.C. 1960, c. 43, s. 16] the
predecessor of subsection 163(2) of the Income
Tax Act.
In the case of returns for two years they were
signed by the accountant on behalf of the taxpay
er. In the case of two returns for other years, the
returns were signed by the taxpayer personally.
These latter returns had been forwarded to the
taxpayer by the accountant for examination and
signature. Copies of the former returns were for
warded by the accountant to the taxpayer for
perusal, examination and retention and the tax
payer was found to have ratified the signature by
the accountant of these returns.
Cattanach J. found that the accountant had
made the errors and omissions in the taxpayer's
returns and that he was grossly negligent in doing
so. He also found that the taxpayer had not know
ingly made or participated in or assented to, or
acquiesced in the making of the errors and omis
sions in his tax returns and that, in the circum
stances, the taxpayer was not personally guilty of
gross negligence rendering him liable to penalty
under subsection 56(2).
Cattanach J. then considered the submission of
the Minister that the gross negligence of the
accountant could be attributed to the taxpayer. He
found that the relationship between the taxpayer
and his accountant was that of principal and
agent, that the omissions and errors of the
accountant in preparing the tax returns constituted
gross negligence on the part of the accountant and
that the taxpayer did not know of these omissions
and errors on the part of the accountant. He said: 8
In general, a person is not personally responsible for infrac
tions of a penal nature committed by another in the position of
an agent, but this rule is not absolute. A principal may be
involved in penal responsibility for the act or omission of his
agent by the effect of the statutory enactment.
Whether the appellant has been properly assessed to penal
ties is, therefore, dependent upon the interpretation of section
56(2). Does that section contemplate that a taxpayer shall be
personally responsible for the gross negligence of his agent in
the making of a statement or omission in a return? The
language of the section is clear that the penalty is to be
imposed, if the circumstances contemplated by the section are
present, on the taxpayer and not upon a person who made the
statement or omission on the taxpayer's behalf. The person,
who is liable to penalty, is the person by whom the tax is
payable. Therefore, in the present case, the person who may be
liable to penalty is the appellant, not his agent, the accountant.
It is conceivable that the appellant might have a cause of action
against the accountant for any loss arising out of the prepara
tion of the returns, but that matter does not concern me in the
present action.
There is no doubt that section 56(2) is a penal section. In
construing a penal section there is the unimpeachable authority
of Lord Esher in Tuck & Sons v. Priester ((1887) 19 Q.B.D.
629) to the effect that if the words of a penal section are
capable of an interpretation that would, and one that would
not, inflict the penalty, the latter must prevail. He said at page
638:
We must be very careful in construing that section,
because it imposes a penalty. If there is a reasonable inter
pretation which will avoid the penalty in any particular case
we must adopt that construction.
The circumstances of this case, as I have found them to be,
do not constitute personal gross negligence on the part of the
appellant for the reasons I have previously outlined.
Accordingly there remains the question of whether or not
section 56(2) contemplates that the gross negligence of the
appellant's agent, the professional accountant, can be attribut
ed to the appellant. Each of the verbs in the language "par-
ticipated in, assented to or acquiesced in" connotes an element
of knowledge on the part of the principal and that there must
be concurrence of the principal's will to the act or omission of
his agent, or a tacit and silent concurrence therein. The other
verb used in section 56(2) is "has made". The question, there
8 At [pp. 190-192 Ex.C.R.]; pp. 712-714 C.T.C.; pp. 6025-
6026 DTC.
fore, is whether the ordinary principles of agency would apply,
that is, that what one does by an agent, one does by himself,
and the principal is liable for the actions of his agent purporting
to act in the scope of his authority even though no express
command or privity of the principal be proved.
In my view the use of the verb "made" in the context in
which it is used also involves a deliberate and intentional
consciousness on the part of the principal to the act done which
on the facts of this case was lacking in the appellant. He was
not privy to the gross negligence of his accountant. This is most
certainly a reasonable interpretation.
I take it to be a clear rule of construction that in the
imposition of a tax or a duty, and still more of a penalty if there
be any fair and reasonable doubt the statute is to be construed
so as to give the party sought to be charged the benefit of the
doubt.
In my opinion the reasoning in the Udell case
does not apply in the present case. In the present
case the acts of Paul Lee, the accountant, were the
acts of the respondent company. It had retained
him to prepare and file financial statements and
income tax returns, using his discretion as to what
was to be contained in those documents without
any reference to the respondent company for
approval in advance of the filing or even after the
filing. The relationship between him and the
respondent was very different from that between
the accountant and the taxpayer in Udell.
The respondent must be taken to have made the
statements and the omissions in the income tax
return for the year 1973 prepared and filed on its
behalf by Paul Lee and his knowledge of the
statements and omissions is knowledge of the
respondent. Subsection 163(2) therefore applies.
The appeal should be allowed with costs to the
appellant in this Court, and the assessment of
penalty against the respondent should be restored.
LE FAIN 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.