Real Estate Agent Tests Gross Negligence Definition

The Tax Court of Canada recently allowed aspects of an appeal of one prominent real estate agent in Winnipeg from reassessments made by the Minister of National Revenue (MNR).

However, it is the argument and analysis of negligence and gross negligence penalties that makes this decision notable. 

Glen Harvey from Re/Max Real Estate was facing allegations from the MNR that he was grossly negligent in failing to fully report his income; he conceded on that front and paid the fines. He also had to establish that he incurred certain expenses for the purpose of earning income and was partially successful.  

Harvey did not dispute additional unreported income that was added by the MNR for the years in contention, and conceded that certain vehicle lease payments, traffic fines, and vehicle insurance payments were not properly deductible as initially submitted. He filed a guilty plea for the criminal charges and was sentenced to a $6,700 fine.

Mr. Harvey did challenge the gross negligence allegations though; he testified on his own behalf and Justice David Graham stated in his reasons that he did not find his testimony credible.

The classic test for the applicability of gross negligence penalties under the Income Tax Act (the Act) was stated in Venne v. The Queen, 84 DTC 6247 and has subsequently been reaffirmed in other decisions:

Gross negligence must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.

Justice Graham stated that throughout Mr. Harvey’s testimony he frequently referred to having acquiesced to pleading guilty to filing a false tax return and that it was clear that he “believed that it was important to his case that he had “acquiesced” to something”. He also attempted to lay the blame for the unreported revenue on his accountant.

Mr. Harvey’s lawyers made a crafty argument that paragraph 239(1)(a) of the Act is a strict liability offence and therefore pleading guilty to it only means that Mr. Harvey negligently acquiesced in the making of a false statement in his tax return. Therefore, since Mr. Harvey only admitted to negligence, he did not meet the much higher standard required to impose gross negligence penalties under section 163(2) of the Act.

This argument was not supported by any case law and was cast aside quickly by the court as illogical because it would mean that Parliament drafted the Act in a way that mere negligence would result in criminal fines or imprisonment while gross negligence would only result in a civil penalty. A well reasoned judgment that shouldn’t expect an appeal.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.

Source: Harvey v. Her Majesty The Queen (2013) TCC 298