http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/146045/index.do
Melman v. The Queen (July 8, 2016 – 2016 TCC 167, Bocock J.).
Précis: Mr. Melman omitted to include $15,080,000.00 in dividends (yielding $18,850,000.00 in taxable dividends) in his 2007 tax return filed in April of 2008. This resulted in an understatement of his tax payable by a factor of 12.5. The Court found that Mr. Melman was a highly educated, meticulous person who planned his tax affairs in consultation with his accountants and had set aside a reserve fund for his 2007 taxes in the amount of $4,725,000.00. However he claimed not to have reviewed his 2007 return before signing it and only paid $359,604.43 based on the return filed. The Tax Court reviewed the facts in great detail and concluded that the gross negligence penalties levied by CRA were justified under the circumstances. Costs were awarded to the Crown according to the tariff subject to the right of either party to make written submissions on costs within 30 days of the judgment.
Decision: This case essentially speaks for itself:
[3] In February 2007, two holding companies owned and controlled by Mr. Melman declared and paid him certain dividends totalling the sum of $15,080,000.00 yielding $18,850,000.00 in taxable dividends (the “dividends”). During February, March and April 2007, Mr. Melman was intimately involved in the instigation, calculation, declaration, payment and receipt of the dividends. At the time of declaration, payment and receipt, memoranda reflecting all these steps were prepared. As well, funds representing the then estimated tax liability, namely $4,725,000.00, were invested with a maturity dated coincident with the tax due date of the end of April, 2008.
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[5] Mr. Melman is and was a meticulous, correct and exacting person. He was the same with his accountants. He mandated that response times from his advisers concerning information, actions and documents be measured in minutes and hours rather than days, weeks or months as they are for most. He possesses undergraduate and graduate degrees in business and financial management: an engineering degree in chemistry and math as well as an MBA and a PhD. His education, knowledge and business background are not justly described by these facts alone. In terms of these qualities, he stands unbettered as a party before this Court. His accountants knew all of this. They did their best to serve him. Regrettably, they failed, by neither including the dividends in his 2007 tax return nor completing a T-5 and a T-5 summary reflecting his two holding companies’ taxable payment to him of the dividends. Mr. Melman holds them responsible. In other proceedings, he prosecutes a civil claim against them for compensation for this non-compliance. Relevant to this proceeding, he asserts their gross negligence is not to be ascribed to him.
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[21] Mr. Melman signed his tax return on April 21, 2008. He testified he did not review or read it in draft or final form. Although the attending junior accountant recalled little or nothing of the return or its execution during her testimony, Mr. Melman remembered executing the 2007 return at his house while the attending accountant waited for him to do so. During the execution, a taxi waited to return the accountant to her office. After returning with the executed return, it was filed by the accountants.
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[27] By contrast, the properly reported amounts would have produced very different proportional entries in the return than those reported: total income and taxable income would have been three times as large; dividends 7300 times as large; and, tax due on filing would have been 12.5 times more than that reported. In absolute terms the proper, but unreported amounts (with rounding), contrasted against those reported are as follows: taxable income of $27,000,000.00, versus $9,000,000.00; dividends of $18,850,000.00, versus $2,582.00; and, estimated tax due on filing of approximately $4,725,000.00, versus $367,000.00.
The Court`s conclusion, based on the jurisprudence, was predictable:
[49] Given the surrounding circumstances of the uniqueness, history, memorialization and familiarity of the dividends, their purpose and timing, and Mr. Melman’s background, the Court finds that the warning signs of the omitted dividends were sufficient to strongly suggest that he initiate a specific inquiry and review of the actual 2007 tax return he signed in April of 2008.
[50] Based upon a balanced application of the combined factors found in any one of Torres, Brisson, Bhatti and DeCosta, these strong amber beacons required a reasonable and attentive person, of which Mr. Melman was by a wide margin, to yield and merely ask: “Why?”. Instead, and apart from anything else, Mr. Melman averted his eyes to any possible warning: he did not read his tax return: none of a draft, a copy or the one he signed. In combination with the other suggestive signs and circumstances, this aversion was wilfully blind to a critical and mandatory act which would likely have led to detection of the omission.
The penalties were sustained and the appeal was dismissed. Costs were awarded to the Crown according to the tariff subject to the right of either party to make written submissions on costs within 30 days of the judgment.