By Johan van der Walt (DLA Cliffe Dekker Hofmeyr Tax Alert)
South African tax cases abound with examples where taxpayers shrug their shoulders and point to their (often erstwhile) accountants when accused of tax evasion: "The bean counter is the cause of all the tax trouble...". The intent to evade, negligence or incompetence are pinned solely on the accountant that failed to accurately file the tax return from all relevant, readily available information.
KBI v Mabotsa 55 SATC 98set the principle that it's the taxpayer’s obligation to ensure that his accounting records and tax filings are done by an appropriately qualified person. InITC 1576 56 SATC 225, the Tax Court held that the intent of the taxpayer himself had to be ascertained and not that of the person entrusted with his tax affairs. This case involved an experienced businessman and the Court, understandably, attributed some negligence to the taxpayer because he had failed to question certain dubious accounting entries by his accountant. InITC 1577 56 SATC 236the taxpayer left his tax affairs completely in his accountant's hands. It was held that he, at least, haddolus eventualis, that is in light of his abdicating responsibility, he should have foreseen that tax evasion was possible. InITC 1489 53 SATC 99the Court expected of "a shrewd and successful businessman" (professing not to understand the intricacies of accounting) to inquire, nevertheless, why trading stock was only reflected in the accounts at half its value. The court felt that his culpable failure to ask indicated "he wished not to acquire the knowledge". His degree of care was measured against that which a businessman in his position would normally have displayed.ITC 1430 50 SATC 51is another example where an 'intelligent' businessman was not allowed to shelter behind his accountant.
Where the accountant, of his own accord, is the author of the taxpayer's tax evasion stratagem (supposedly without any knowledge on the part of the benefitting taxpayer), the question is whether such accountant's intent or negligence could potentially be 'attributed' to the taxpayer. The then Appellate Division (AD) left this issue open inCIR v Da Costa 1985(3) SA 768 (AD). Here the taxpayer had no more than five years' schooling and had engaged a firm of accountants to draw up tax returnsfrom rough cash books provided. The accountants' 'short-cut' bookkeeping drastically reduced the true income. There was no evidence that the taxpayer himself was aware of his accountants' failure to maintain proper books and to submit accurate returns. There was also no collusion between the accountants and the taxpayer. Consequently, no intention to deceive was attributed to the taxpayer, despite SARS submitting the taxpayer should be penalised for his agent's deceit. In the end, the AD left the question open whether an accountant's intent could be attributed to his client. At the time local commentators opined that "... the taxpayer cannot vicariously (by delegation) be held to have had the intent to evade tax simply because his agent had that intent". This differs from the position in England.Pleasants v Atkinson 1988 STC 847held that, where an architect had appointed accountants who included private expenditure in the accounts as deductible expenses, it was proper to infer wilful intent (on the part of the architect) from the conduct of the accountants.
Fast-forward to a recent Canadian case where the issue was to what extent a taxpayer could rely on the work of his tax preparer?
InHine v. The Queen (2012) TCC 295the taxpayer was a general contractor who sold renovated homes at handy profits. He was into 'flipping houses'. His accountant (in this case his wife who had a background in financial accounting) prepared his tax returns. Because of the under-declaration of income of some $157 000 during the 2006 tax year, the Canadian Revenue Authority (CRA) imposed a 'gross negligence' penalty – since there had been a false statement or omission in the contractor's tax return.
Evidence before Court was that the contractor's wife was "organized, meticulous and diligent" and that there were "no reservations about her skill set in accounting and financial management and her honesty and integrity". Once her husband started 'flipping houses' she had called the CRA multiple times to ask how to report said income. She testified that the under-declaration of the 2006 income was 'an innocent mistake'. It was for the Court to decide whether the gross negligence penalty was justified?
The CRA referred to numerous cases putting the onus to accurately report income on the taxpayer, especially because Canada had a self-assess system. The CRA alleged that Mr Hine was privy to his wife's gross negligence alternatively there was 'wilful blindness' on his part. In contrast, Mr Hine and his wife argued that 'flipping houses' was a new venture and that they had researched how the income should be reported. They even later cooperated fully with the CRA auditor. It was argued on behalf of Mr Hine (with reference to Canadian precedent) that "... for the gross negligence penalty to apply, there must be greater neglect than simply the failure to use reasonable care. And a reasonable man not noticing a mistake does not make for gross negligence".
The Court allowed Mr Hine's appeal against the gross negligence penalty. It accepted that "... an honest confusion existed in this case and that a mistake was made in that confusion".
The Court also evaluated Mr Hine's complete reliance on his wife to keep proper records and to accurately report his income. Reference was made to case law where taxpayers relied on agents to prepare their tax filings. The Court mentioned the following principles:
- Each case will be fact-specific;
- It is critical to determine whether the taxpayer had knowledge of the negligence of his tax preparer or whether it was reasonable to find that the taxpayer should have made further inquiries;
- The fact that Mr Hine's spouse acted as his tax preparer should be ignored in considering the 'attribution' question – the normal approach should apply.
The Court found that Mr Hine's not questioning the return prepared by his wife did not constitute gross negligence. His belief that she reported the relevant income properly was not unreasonable. There had been no 'wilful blindness'. The Court accepted "this was a simple mistake".
All revenue authorities seem to view taxpayers' blaming of their accountants with a huge pinch of salt.
Hine's outcome favouring the taxpayer is therefore refreshing: the Court clinically evaluated all relevant facts and did not allow the spousal connection to cloud the issue.