Phénix v. R. – TCC: Taxpayer’s failure to report dividend income did not amount to gross negligence – penalty removed

Phénix v. R. – TCC:  Taxpayer’s failure to report dividend income did not amount to gross negligence – penalty removed

Phénix v. The Queen (October 16, 2018 – 2018 TCC 204, Boyle J.).

Précis:   The appellant operated a fair sized business (turnover of roughly $10,000,000 annually) through a corporation.  He was normally remunerated by a combination of salary and dividends in amounts determined by his internal and external accountants.  In 2013 he omitted to report a dividend he received.  CRA assessed gross negligence penalties pursuant to subsection 163(2) of the Income Tax Act.  Boyle J. found that the circumstances did not amount to gross negligence and directed that the penalty be removed.

Decision:    This was a straightforward case and Justice Boyle allowed the appeal from the Bench:

[5]  Mr. Phénix hires reliable professionals for his business and personal tax accounting. His internal auditor, who testified, has worked for the company for over 10 years. His external auditor, who also testified, began working for Mr. Phénix’s company in 2005. The accountant who prepared his tax returns initially worked at the company and continued to do so once it became associated with the same accounting firm as the auditor.

[6]  In most of the years under review, Mr. Phénix received a mix of salaries and dividends from his company. The mix was determined by the internal auditor and external auditor. Except for the omitted dividends in 2013, the evidence indicates no other error or omission in Mr. Phénix’s tax returns either before or since 2013.

[7]  Several changes occurred in 2013 that are relevant to this appeal. Firstly, 2013 was the first year that the company hired the external auditor, Mr. Audet, to prepare the T5 forms. The company’s auditor had always prepared them along with the T4s in previous years. He distributed them together, by hand, in the office. Mr. Phénix did not know about this change for T5 forms.

[8]  Secondly, the external auditor, Mr. Audet, had changed firms in 2012. He continued to work with Mr. Phénix’s company as a client, but Mr. Phénix was unaware that he had changed firms. The auditor sent the T5 form by mail to Mr. Phénix’s personal address.

[9]  Thirdly, in 2014 the company did not declare an annual dividend for Mr. Phénix.

[10]  Given these facts in particular, I cannot conclude that the omission was not the result of a reasonable error or ordinary negligence. Mr. Phénix continued to follow the same process as usual and to use the same professionals, and he had the same company as his sole source of income in each previous tax year. His external accountant who prepared his tax return had also not noticed that he may have been missing a T5 form in 2013.

[11]  Under these particular circumstances, I cannot conclude that Mr. Phénix would have made note of this omission, even if he fully read and reviewed his 2013 tax return, which he signed. For these reasons, the appeal is allowed.