Docket: 2011-4093(IT)G
ANSEL HYATALI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent
REASONS FOR JUDGMENT
C. Miller J.
[1]
This is a sad and sorry
tale of taxpayers, Mary Khristine Torres, Eva Torres, Michael McNulty,
Andre Gautier, Carrol Strachan and Ansel Hyatali, who are just
six of many taxpayers who were led down a garden path, with the carrot at the
end of the garden being significant tax refunds. The tax refunds were the
result of claiming fictitious business losses. All the Appellants put their
unwavering faith in representatives of Fiscal Arbitrators to prepare their
returns in a manner that would produce the sought after refunds. The Canada
Revenue Agency ("CRA") denied the losses and penalized the taxpayers
pursuant to subsection 163(2) of the Income Tax Act (the "Act").
These cases pertain only to the penalties.
[2]
The issue is simply
whether the taxpayers either knowingly, or in circumstances that amounted to
gross negligence, made or acquiesced in the making of false statements.
FACTS
Mary Khristine Torres
[3]
Ms. Mary Torres
presented as a forthright, credible witness. She completed three years of a university
degree in the Philippines, and in Canada she completed a Bachelor of Science in
nursing and qualified as a registered practical nurse.
[4]
In 2006, 2007 and 2008,
Ms. Mary Torres worked as a nurse in the long‑term care sector,
specifically completing health assessments. She dutifully reported her
employment income from this work as well as some interest income. She always
had tax preparers do her returns as she indicated she did not understand
accounting, tax returns or even business. For the years 2002 to 2006, she filed
and received refunds of $1,029, $814, $1,061, $1,312 and $29. In 2008,
Ms. Mary Torres filed her 2007 return, again prepared by a tax
preparer, reporting her employment income and investment income of $70,991 and
$267. Shortly thereafter, however, she was introduced to Mr. Larry Watts with
Fiscal Arbitrators. He was a co-worker of Ms. Mary Torres’ mother.
According to Ms. Mary Torres, Mr. Watts had been able to obtain tax
refunds for several of her mother’s friends.
[5]
Ms. Mary Torres had a
couple of meetings with Mr. Watts which led to her filing an adjustment request
on May 26, 2008 for her 2007 tax return. It showed as follows:
Gross Business Income $15,800
Net Business Income ($113,426)
She certified this information as correct. On being
asked whether she reviewed this document before signing, she gave the same
answer she would give to all documents she signed and submitted to the CRA, and
that is, Mr. Watts prepared it, she read it and signed it without asking
anything about it. She trusted him. He was a professional. She claims she
understood so little of the tax return, she did not know what questions to ask.
[6]
It is helpful to review
the documents and correspondence flowing back and forth between the CRA and Ms.
Mary Torres, always bearing in mind that she never drafted the materials
submitted to the CRA, though always read them, claiming not to understand.
[7]
On September 19, 2008,
the CRA responded to Ms. Mary Torres’ adjustment request with a request to
complete and return a business questionnaire, attaching receipts for the
claimed expenses of $129,226. Mr. Watts prepared a letter dated October 14,
2008, for Ms. Mary Torres to send, in response, to the CRA. It forwarded no
information the CRA were seeking.
[8]
On January 21, 2009,
the CRA again wrote Ms. Mary Torres advising they were proposing to deny the
business loss and considering the imposition of penalties.
[9]
Again, Ms. Mary Torres
read the letter, provided it to Mr. Watts, who provided her with a letter
of February 9, 2009, to send back to the CRA again providing no information and
rejecting their proposal.
[10]
On April 29, 2009, the
CRA wrote to Ms. Mary Torres with their final position with respect to the
losses and indicating they were applying gross negligence penalties. Again, Mr.
Watts provided Ms. Mary Torres with a response dated May 2, 2009, to the CRA
rejecting the CRA’s position and seeking compensation from the CRA.
[11]
In going over these
documents, Ms. Mary Torres stated repeatedly that although she read them she
did not understand what they meant, though acknowledging that she knew she was
not engaged in any business activity.
[12]
The communications with
respect to the 2008 taxation year were similar, and it is unnecessary to repeat
a document by document review. I do note, however, that she signed the 2008
return claiming $30,000 in business losses on March 20, 2009, two months after
she had been notified by the CRA they were considering gross negligence
penalties with respect to the 2007 taxation year. She signed her name on her
return after putting in "per". The tax preparer did not complete the
box in the return for professional tax preparers. She held firm in her
testimony that, though she read the correspondences from the CRA, she simply
forwarded everything to Mr. Watts without question, and then followed his
instructions, including, for example, putting a three cent stamp on the bottom
of one of the letters to the CRA, writing her name diagonally across it. She
never contacted the CRA on her own accord or asked her former tax preparer to
review the situation.
[13]
To give a flavour of
the verbiage used by Mr. Watts in the letters he instructed Ms. Mary Torres to
sign, I reproduce part of a letter dated September 8, 2011, from Ms. Mary
Torres, which she wrote with "ens legis" after her name. (translated
as "an artificial being")
Any
and all opinions offered in your letter are expressly rebutted for cause.
Please
provide within 30 days to avoid Full Estoppel of any variance from your stated
duty – the facts, reasons and assumptions and all presumptions upon which you
are relying to make your offer only on a "under your penalty of
perjury" and "under your full commercial and equitable
liability under international law" basis to verify your accountability and
uprightness, as previously agreed, and send all such information to the address
as noted above for verification.
[14]
Ms. Mary Torres,
understandably, could not explain any of what Mr. Watts prepared for her, including
her returns, adjustment requests or correspondences.
[15]
The CRA denied her
business losses for 2007 and 2008 and imposed penalties.
Eva Torres
[16]
Ms. Eva Torres is an
insurance broker with Canada Protection Plan, dealing with health, dental and
travel insurance. She has a Bachelor of Commerce and Economics from the Philippines. Mr. Watts, a representative of Fiscal Arbitrators, was also a broker with the
insurance company. They had worked in the same company for approximately 18
months when Ms. Eva Torres was advised by a colleague that Mr. Watts was
successfully obtaining tax refunds for others. Ms. Eva Torres hired Mr.
Watts to prepare her 2008 return in March of 2009. She reported approximately
$40,000 of employment income, $13,647 of commission income and a business loss
of $39,523 on gross business income of $71,828. The Statement of Agent Activities,
filed with her return, indicates:
Business
Service: Agent
Gross
receipts:
A.
*Money Collected as Agent for Principal and
reported by third parties and Already Posted on lines
101-130 via T4’s, T5’s, T3’s, other slips, etc. $47,223.55
*T4a’s and other money reported by 3rd
Parties and collected as agent $13,647.83
*TOTAL Money Collected as Agent for Principal and
Reported by third parties: $60,871.38
*Additional
Money Collected as Agent for principal and NOT
Reported
by third parties: $10,956.85
B. Line 162 *Total money collected as Agent for
Principal: $71,838.23
Minus
Sub
contracts and labour
*Amount
to principal in exchange
For
labour $50,456.85
Gross
profit $21,371.38
Subtract:
(from ‘A.’ above)
*Money
Collected as Agent for Principal and
Reported
by third parties and Already Posted
On
lines 101-130 via T4’s, T5’s, T3’s,
Other
slips, etc. $60,871.38
C. Line 135 Net Amount (-
Loss) ($39,500.00)
[17]
Ms. Eva Torres
acknowledged she was not in any agent business. She could not say what any of
the numbers represented. She did not understand how the business losses arose.
[18]
Ms. Eva Torres did read
her return before certifying it correct. She never questioned Mr. Watts about
any of it, as she was confident what he was doing was correct. She, like the
others, followed Fiscal Arbitrators’ instructions to sign her name after
"per" on her return. The box for completion by professional tax
preparers was left blank.
[19]
In a letter of November
2009, the CRA asked Ms. Eva Torres for information supporting the business
losses, including completing a business questionnaire. She simply handed this
on to Fiscal Arbitrators who provided a form of response which she signed and
dated December 4, 2009, providing no further information.
[20]
In June 2009, the CRA proposed
denying the business losses and imposing penalties. Ms. Eva Torres again simply
forwarded this correspondence to Fiscal Arbitrators who again provided a
template response, which Ms. Eva Torres signed and, as requested by Fiscal
Arbitrators, affixed a three cent stamp with her name across it at the bottom
of the letter. She never attempted to contact CRA of her own accord, nor did
she ask Fiscal Arbitrators about the response she was told to sign.
[21]
Ms. Eva Torres, after
receiving the Notice of Assessment dated March 3, 2011, denying losses and
imposing penalties, had Fiscal Arbitrators prepare a Notice of Objection. She
read it and signed it. It still maintained the returns were accurate.
[22]
The CRA wrote to Ms.
Eva Torres in response to the Notice of Objection asking again for support for
the $39,500 business loss claimed. In accordance with her modus operandi
she simply signed what Fiscal Arbitrators told her to. The response letter of
September 8, 2011 read the same as that sent by Ms. Mary Torres on
the same date (see paragraph 13).
[23]
In the five years prior
to 2008, Ms. Eva Torres’ tax returns showed she was entitled to a $310 refund
in 2003 and owed $576, $1,423, $5,168 and $7,822 respectively in the subsequent
years.
[24]
By Notice of
Confirmation dated November 10, 2011, Ms. Eva Torres was assessed penalties of
$4,127 for the 2008 taxation year.
Michael McNulty
[25]
Mr. McNulty has a
Bachelor of Arts in Civil Engineering and a diploma in Civil Technology. For
many years, he acted as a project manager on construction sites for Taggart
Construction. Until filing his 2008 return, he had always prepared and filed
his own returns, obtaining refunds anywhere from $100 to $2,500. In filing such
prior returns, he never reported any business income or loss. As with all the
other Appellants, he claimed to be adverse to risk.
[26]
In October 2008, Mr.
McNulty attended a Fiscal Arbitrators seminar at St. Paul’s University in Ottawa, where he first met Mr. Watts. The meeting was private, and participants were asked
to sign a form of non-disclosure. Mr. McNulty testified that Fiscal
Arbitrators described a new way to file taxes by somehow separating the person
from his social insurance number. The ultimate result would be substantial
refunds. Mr. McNulty was skeptical but went to a second presentation with a
friend. At that meeting, Mr. Watts advised that he was a former CRA officer and
that CRA were aware of this arrangement. Mr. McNulty decided to go ahead
feeling there was no downside, but recognizing it was not the type of thing he
would normally do. He did not tell his wife as, according to Mr. McNulty,
she would have set him straight.
[27]
Mr. McNulty signed his
2008 return, prepared by Fiscal Arbitrators, on May 21, 2009, certifying
it as correct. It, too, did not indicate it was prepared by professional tax
preparers. He testified he browsed the return and, as requested by Fiscal
Arbitrators, put "per" before his signature.
[28]
The return listed
business income as $128,147 with business losses of $392,880. Mr. McNulty said
he knew he did not have a business and could not have spent $392,880. He also
signed as correct a request for loss carrybacks to 2006 and 2007. Mr. McNulty
did not understand his return which referred to business as an agent. He
believed Fiscal Arbitrators, as former CRA officials, were legitimate and knew
what they were doing.
[29]
Mr. McNulty also
submitted to the CRA an adjustment request, seeking adjustments to his 1998 to
2001 taxation years, by claiming losses ranging from $61,000 to $89,000,
resulting in a request for a refund of $104,000 against which Fiscal
Arbitrators charged a fee of $18,000.
[30]
On March 29, 2010, CRA
reassessed the 1998 to 2001 taxation years imposing penalties. Upon receiving
those reassessments, which totalled approximately $110,000 in penalties and
interest, Mr. McNulty said he felt like a dead man. He sought no other advice, but
felt had to rely on Fiscal Arbitrators and respond their way as he
"desperately needed them to get him out of this crap". He felt tied
into them. He felt he had no choice. So, Mr. McNulty signed the letters and
Notice of Objection prepared by Fiscal Arbitrators, followed their instructions
to a tee (including not talking to the CRA), but confessed to being uneasy and
worried.
[31]
In July 2008, the
Minister of National Revenue (the "Minister") issued a Notice of
Confirmation confirming the penalties for 1998 to 2004 of approximately $42,537
as well as a penalty of $56,749 for 2008.
Andre Gautier
[32]
Mr. Gautier is an HVAC
technician having qualified as such at a trade school. He has worked in that
industry for over 30 years, the last few years as a service manager. He is the
sole shareholder of a holding company which has a 10% interest in his
employer’s company. He would always have tax preparers, specifically an
accountant by the name of Mr. Gervais, complete his tax returns for him, which
he said he usually simply signed and sent off. He obtained refunds in the prior
several years of between $500 and $2,500. During 2008, he and his brother owned
a rental property but carried on no other business.
[33]
Mr. Gautier was
introduced to Fiscal Arbitrators through a contact of his brother. He attended
an office where he met Carlton Branch of Fiscal Arbitrators, who explained how
the process worked; in effect, people got refunds due to the individuals’
social insurance number being a business entitled to some expenses such as
clothes, food and other personal expenses. Mr. Gautier never provided Fiscal
Arbitrators with any dollar amount representing such expenses. As Mr. Gautier
stated, he was not exactly sure of all the details, but he was satisfied Fiscal
Arbitrators were professionals and knew what they were doing. He felt no need
to run it by anyone else.
[34]
Fiscal Arbitrators
prepared Mr. Gautier’s 2008 return which Mr. Gautier signed (again, after
"per", as requested), and certified as correct on May 28, 2009. The
return showed his employment income of $81,538, rental income of $9,000 and a
business loss of $301,000. He had no idea what that represented.
[35]
A Statement of Agent
Activities was attached to his return. Mr. Gautier acknowledged he did not
know why it showed an agent business or what subcontractors of labour referred
to. He believed it was all just part of the process, as he called it.
[36]
Mr. Gautier also
claimed loss carrybacks to 2005, 2006 and 2007, of $62,423, $71,942 and $76,953
respectively, which, if allowed would have resulted in a refund of all taxes
for those years.
[37]
On April 9, 2010, the
CRA sent Mr. Gautier a letter requesting information with respect to his
business losses, including a business questionnaire for him to complete. He did
not fill it out but simply had Fiscal Arbitrators prepare responses for him. Fiscal
Arbitrators told him it was all part of the process. He was starting to have
concerns and went to Mr. Gervais, his previous accountant, who could not
explain the numbers to him.
[38]
Several correspondences
went back and forth between the CRA and Mr. Gautier in 2010. All Mr. Gautier’s
responses were crafted by Fiscal Arbitrators. He followed their
instructions, including placing a stamp with his name through it at the bottom
of his response letter, which read in part:
The
terms of the private contract of agency between the free will man commonly
called Andre, of the Gautier family, who is the principal, the contributing
beneficiary and the real party in interest for the fictional
entity/person/trust called ANDRE GAUTIER, which, by necessity, has become the
agent in commerce for the principal; is not subject to the scrutiny of a third
party entity, and therefore; any private dealings between the principal and
agent cannot be released to the Canada Revenue Agency.
Again, he was advised it was all part of the process.
He did not contact the CRA though indicated he and his wife had concerns. He
continued, however, to rely on Fiscal Arbitrators who prepared his Notice of
Objection, again, a template in which the reason for the objection read in part
as follows:
-
This notice is rescinding all signatures and/or
assumed acceptances regarding this reassessment of this taxation year, nunc pro
tunc
-
Proper notice was not received to provide the
opportunity to reject and dispute the terms of the proposal or offer.
-
All information received by CRA was certified as
correct, complete and fully discloses all income.
[39]
Mr. Gautier
acknowledged that it did not make sense at the start and he is embarrassed by
his involvement with Fiscal Arbitrators.
[40]
The CRA issued a
Confirmation July 22, 2011, confirming penalties of $14,117 with respect to the
2008 taxation year.
Carrol Strachan
[41]
Ms. Carrol Strachan is
a long time Air Canada flight attendant who claimed to have a fair to good
understanding of accounting, though did not prepare her own tax returns. She
has never owned or operated her own business that yielded any reportable
income. Before 2007 she never claimed any business loss. She would typically
receive tax refunds of between $1,000 to $2,400. For a number of years, Ms.
Strachan had Carlton Branch prepare her returns without any problem. She
described him as a former CRA official who prepared tax returns and handled
mutual funds. In 2008, she was introduced by Mr. Branch to Mr. Watts at
Fiscal Arbitrators. He came to her home to make a presentation explaining
he used to work for the CRA. He advised her that he could get more back on
taxes and had done so successfully for others. She recalled him explaining
something about principals and agents entitled to deductions, though described
them as "dancing around a lot of stuff". Although they wanted her to "do
more years" she decided to just do the one year, 2007. As she indicated -
"I am cautious".
[42]
Ms. Carrol Strachan had
Fiscal Arbitrators prepare her 2007 return. Mr. Branch advised her to sign
after "per". She reviewed the return, but not in detail. The return
reported her employment income of $76,998 as well as gross business income of
$15,000 and business losses of $62,068. She confessed she does not know what
that means. At the time, Fiscal Arbitrators told her she was entitled to monies
back from the Government, and that they made it sound believable. She felt she
did not need to pay tax as both Mr. Branch and Mr. Watts said she did not have
to. She trusted them but displayed some concern even prior to her return.
[43]
In going over the
Statement of Business Activities filed with her return, it was clear Ms. Carrol
Strachan did not understand the use of agent or monies collected as agent for
principal or other expenses described as paid to principal as agent. This is
not surprising given it is basically nonsense. She maintains that though not
understanding, she felt it was legal. She indicated she filed a
"normal" return for 2008.
[44]
In December 2008, Ms.
Carrol Strachan received a request from the CRA for information with respect to
the business losses. She called Mr. Branch and Mr. Watts who indicated
they would take care of it. She asked them what did you get me into. However,
she signed the responses to CRA they prepared for her.
[45]
What followed was the
correspondences back and forth between the CRA and Ms. Carrol Strachan, each
time Ms. Strachan relying on the template provided by Fiscal Arbitrators. She
kept being advised they would take care of it, and that she remained entitled
to the monies. This continued right up to Fiscal Arbitrators drafting her
appeal after the Notice of Confirmation. Even in an Answer to the Reply she is
still being referred to as a fictional entity.
[46]
Ms. Carrol Strachan did
get a refund though kept it in the bank as she was not comfortable spending it.
[47]
Ms. Carrol Strachan
never called the CRA to inquire of the correctness of the arrangement. She
never saw or heard of any warning from the Government about this, but neither
did she search for anything on their website.
[48]
The Minister issued a
Notice of Confirmation June 25, 2010, denying the losses and applying penalties
against her 2007 taxation year.
Ansel Hyatali
[49]
Mr. Ansel Hyatali has
worked as a lead hand at a paint distribution centre for 25 years. He has a
Grade 12 education and a welding certificate. He has never owned or operated a
business and consequently never, until the years in issue, reported business
losses, just employment income. He normally got a $2,000 to $4,000 refund on
his returns. Prior to 2007, he used the firm of Steve Tax Services to prepare
his returns.
[50]
Mr. Ansel Hyatali had
been put in touch with Mr. Carlton Lewis in 2007 by a workmate who advised Mr.
Hyatali that Mr. Lewis attended church. There is some confusion from Mr.
Hyatali’s testimony as to who prepared what returns, though it seems Mr. Lewis
prepared Mr. Hyatali’s 2007 return, someone else prepared his 2008 return and a
Mr. Frikki prepared the 2009 return, the return in question. Mr. Hyatali
testified, however, that it was Mr. Lewis who told him to simply sign the 2009
return. Mr. Hyatali gave no evidence of Mr. Frikki’s background.
[51]
In the 2007 and 2008
returns, Mr. Ansel Hyatali claims some significant charitable donations, which
were questioned by the CRA. Mr. Hyatali asked Mr. Lewis to assist him with
that issue. Mr. Hyatali claims to have never had any contact with Fiscal
Arbitrators, though was advised by Mr. Lewis that correspondence from the CRA
to Mr. Hyatali would be passed on to Fiscal Arbitrators.
[52]
Mr. Ansel Hyatali did
not prepare his 2009 return though he did sign it and certify it. It did not
show that it was prepared by a professional tax preparer. The 2009 return
indicated Mr. Hyatali’s employment income was $64,881 and that he also had
business income of $76,910 and a business loss of $232,159. Mr. Hyatali
has no idea where that came from. He had no business. He did not ask anyone
about the numbers. Similarly, he had no idea what the numbers on the Statement
of Business Activities meant. He just signed where told, without reviewing the
documents. He knew he did not have a business when he signed. Likewise, in
claiming loss carrybacks of $57,402, $60,021 and $52,152 he had no idea what it
meant.
[53]
In October 2010, Mr.
Ansel Hyatali received a request for more information from the CRA regarding
the business losses. He simply handed this over to Mr. Lewis, who said he
would take care of it. He was given a letter to sign in response to the CRA on
October 14, 2010, which read in part:
These
proposals are conditionally accepted upon receipt of truthful answers to each
of the questions below by close of business, thirty (30) days from the date of
this letter; absent the answer to any one of the questions, acknowledges your
office’s agreement to compensate the animator pursuant to the animator’s fee
schedule for responding to any review or audit.
Mr. Ansel Hyatali had no idea who the animator was,
referred to in the letter. He never spoke to the CRA directly. The usual back
and forth correspondences followed between the CRA and Mr. Hyatali, who relied
totally on answers provided by Mr. Lewis. Mr. Hyatali never questioned why he
owed money. He never sought additional help. He simply let Mr. Lewis deal with
it. In the Notice of Objection of April 28, 2011, which Mr. Lewis had Mr. Hyatali
sign, there is reference to establishing a home business. Mr. Hyatali
acknowledged he had no idea why that was put in.
[54]
Mr. Ansel Hyatali never
went to the CRA website or contacted the CRA directly. He agreed that he
blindly followed Mr. Lewis’ advice.
[55]
By Notice of
Confirmation November 1, 2011, the Minister denied the business loss of
$232,159 and levied penalties of $28,111.
CRA Publications
[56]
The CRA introduced into
evidence several excerpts from their website. Many indicated they were modified
in 2011 or 2012 so it cannot be determined if they were on the site in 2007,
2008 or 2009. There are a handful, however, that appear to have been on the
website during the relevant period. I will reproduce some excerpts from the CRA
website:
a) Tax Alert: Aggressive Tax
Planning (2005-11-10)
If it sounds too good to be true, or
whenever you are dealing with a situation that is out of the ordinary for you,
you might want to consult with a trusted and knowledgeable tax advisor who will
explain to you the risks and consequences of various tax planning arrangements.
b) Tax Alert: Warning:
Schemes that promote big tax losses or deductions are not worth the risk.
If it sounds too
good to be true, it probably is. Unregistered tax shelters can take many forms,
but they typically involve buying a tax loss that is well in excess of the cash
investment. ...
However, don’t be
fooled; simply buying a tax loss does not mean it is deductible. …
Get professional,
independent advice…
Come to us before we
come to you.
c) News Release: The
CRA takes action to enforce tax laws – April 3, 2009
Some Canadians are
finding out the hard way that they cannot avoid paying their share of taxes. …
The CRA is reminding
all taxpayers when they file their 2008 return to be sure to report their
income, deductions and credits accurately.
d) Tax Alert: Don’t get
involved in illegal tax filing.
If you hear about a
tax preparer offering larger refunds than other preparers, don’t be fooled!
While most preparers provide excellent service to tax filers, a few
unscrupulous return preparers file false and fraudulent tax returns and
ultimately defraud their clients. Remember that even if someone else prepares
your tax return, you are the one responsible for all the information on the
return. …
Failure to follow
tax laws will result in consequences. In addition to fines imposed by the
courts, which can represent up to 200% of the taxes evaded, and in jail time,
you still have to pay the taxes owed and all other civil penalties and interest
imposed the CRA.
Issue
Are the Appellants subject to penalties pursuant to
subsection 163(2) of the Act?
Analysis
[57]
Subsection 163(2) of
the Act reads in part as follows:
Every person who, knowingly, or under
circumstances amounting to gross negligence, has made or has participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return, form, certificate, statement or answer (in this section referred to as
a “return”) filed or made in respect of a taxation year for the purposes of
this Act, is liable to a penalty of the greater of $100 and 50% of the total of
[58]
There are two elements
necessary to find liability for penalties in the cases before me:
a) a false statement;
b) knowledge or gross
negligence of making, assenting to or acquiescing in the making of a false
statement in a return.
[59]
The Appellants’ counsel
also raised the defence that, as the CRA did not warn taxpayers of the Fiscal
Arbitrators’ scam, as required to do under the provisions of the taxpayers Bill
of Rights, the taxpayers had no reason to question the convincing presentations
of Fiscal Arbitrators and cannot therefore be found to be grossly negligent,
and should therefore be absolved of any liability.
[60]
In all cases there is
no question there is a false statement. None of the Appellants had losses
arising from a business.
[61]
Turning then to the
issue of whether the Appellants knew or acted in a grossly negligent manner, I
will review some case law with respect to gross negligence penalties generally
and then refer to the few Fiscal Arbitrator cases that our Court has already
heard.
[62]
Justice Bédard in the
case of Laplante v Canada
provides a good summary of the general principles regarding gross negligence:
11. The concept of "gross
negligence" accepted in the case law is that defined by Mr. Justice
Strayer in Venne v. Canada (Minister of National Revenue -
M.N.R.)(F.C.T.D.), [1984] F.C.J. 314:
..."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....
12. In Da Costa v. Canada , [2005] T.C.J. No. 396 (TCC informal
procedure), the Honourable Chief Justice Bowman referred to the decision in Undell v. M.N.R. , [1969] C.T.C. 704, 70 DTC 6019 (Ex.
Ct.), and two other decisions by Mr. Justice Ripp (as he then was) and made the
following remarks:
…
11. In drawing
the line between "ordinary" negligence or neglect and "gross"
negligence a number of factors have to be considered. One of course is the
magnitude of the omission in relation to the income declared. Another is the
opportunity the taxpayer had to detect the error. Another is the taxpayer's
education and apparent intelligence. No single factor predominates. Each must
be assigned its proper weight in the context of the overall picture that
emerges from the evidence.
…
13. Further, in Villeneuve v. Canada , 2004 DTC 6077, the Federal Court of
Appeal made it clear that "gross negligence" could include wilful
blindness in addition to an intentional act and wrongful intent. In that
decision, Mr. Justice Létourneau said the following in this regard, at
paragraph 6:
With respect, I think the
judge failed to consider the concept of gross negligence that may result from
the wrongdoer's wilful blindness. Even a wrongful intent, which often takes the
form of knowledge of one or more of the ingredients of the alleged act, may be
established through proof of wilful blindness. In such cases the wrongdoer,
while he may not have actual knowledge of the alleged ingredient, will be
deemed to have that knowledge.
[63]
The Federal Court of
Appeal addressed the concept of wilful blindness in more detail in the case of Panini
v Canada,
also citing Justice Létourneau in the Villeneuve v Canada case,
but going on to draw on the criminal case of R. v Hinchey:
42 In R. v. Hinchey, [1996] 3 S.C.R. 1128, Cory J.
discussed the concept of "wilful blindness" in the context of
criminal law. At paragraphs 112 to 115 of that decision, he wrote the
following:
…
In other words, there is a
suspicion which the defendant deliberately omits to turn into certain
knowledge. This is frequently expressed by saying that he "shut his
eyes" to the fact, or that he was "wilfully blind."
…
114. In Sansregret,
supra, this Court held that the circumstances were
not restricted to those immediately surrounding a particular offence but could
be more broadly defined to include past events. McIntyre J. distinguished wilful
blindness from recklessness and quoted with approval a passage from Glanville
Williams with regard to its application (at pp. 584 and 586):
Wilful
blindness is distinct from recklessness because, while recklessness involves
knowledge of a danger or risk and persistence in a course of conduct which
creates a risk that the prohibited result will occur, wilful blindness arises
where a person who has become aware of the need for some inquiry declines to
make the inquiry because he does not wish to know the truth. He would prefer to
remain ignorant.
…
43. Although Cory J.'s comments were made in the context of a
criminal law case, they are nonetheless, in my view, entirely apposite to the
facts of the present case. Consequently, the law will impute knowledge to a
taxpayer who, in circumstances that dictate or strongly suggest that an inquiry
should be made with respect to his or her tax situation, refuses or fails to
commence such an inquiry without proper justification.
[64]
The Tax Court of Canada
has had several occasions to apply the concept of wilful blindness to Fiscal
Arbitrator type cases, and there has developed a similarity of approach and
result.
Bhatti v Canada
22. … Mr. Bhatti
saw and signed his return. I believe he saw the $1,000,000 income and $477,000
loss. He knew they were simply not true. He knowingly made a false statement in
this regard.
23. Even if I
accept his explanation that he did not review the return in such detail as to
have known the refund was drawn from made up numbers, then his conduct was so
wilfully blind, not caring whether or not he complied with the law, that it
constituted gross negligence.
24. The reason I reach this conclusion is
because:
a) The magnitude
of the claim was huge compared to his overall income.
b) He had many
opportunities to detect the false assertion:
i) just the
size of the refund alone should have raised suspicions.
ii) both his
wife and his accountant told him it smacked of fraud.
iii) a cursory
review of the return itself would reveal the completely unaccountable $500,000
loss.
iv) the request
to sign the return with the insertion of "per".
These are not subtle signs of a possible
problem, but glaring flashing red lights. Mr. Bhatti did nothing.
c) Mr. Bhatti
was not inexperienced when it came to knowing what business income and losses
were. He not only had employment income, but also business income from his
construction business. As well, he had some investment income and rental
income. He was not inexperienced commercially.
He had the opportunity, the experience and the
knowledge to appreciate this $31,000 could only be triggered by false
assertions. This is a classic case of wilfull blindness to which penalties
should apply.
Brochu v HMQ
20. Since Villeneuve,
the issue is no longer confined to determining whether a taxpayer was aware of
the specialist's negligence and whether he or she was indifferent, but also
includes cases where the taxpayer blindly trusts the person preparing the
return. In this case, even though the appellant had no intentional and
deliberate knowledge of Ms. Tremblay's errors, she was still wilfully
blind.
…
22. The appellant
testified that she had quickly leafed through the return but that she did not
understand the words "business income" and "credit". Considering
her education level and the fact that she had prepared her original return for
the 2001 taxation year herself, it is difficult to believe that the
appellant did not understand those words. If it is true that she did not
understand them, she cannot use that as an excuse to avoid her liability. She
should have tried to understand by asking Ms. Tremblay questions or by
getting information from others in order to ensure that her income and expenses
were properly accounted. For some reason, she did not think it necessary to get
informed, and it is that carelessness which constitutes gross negligence, in my
opinion. The penalty is thus justified under the circumstances.
Brisson v
Canada
30. Mr. Brisson stated that he did not make an
omission or a false statement in his 2008 income tax return. The evidence
contradicted his testimony. It showed that he claimed a business loss of
$876,260.10 in his return and yet in cross-examination he admitted that he did
not have a business and the business loss he claimed did not occur. This is
exactly the type of false statement that subsection 163(2) is intended to
penalize and deter.
…
35. Considering Mr. Brisson’s business
experience, that he had prepared his own income tax returns for 35 years and
the magnitude of the false statement he reported in his 2008 income tax return,
I have concluded that Mr. Brisson knew that the amounts he reported in his
return were false and I have concluded that the gross negligence penalties were
properly imposed.
36. …
If Mr. Brisson truly did not know
that he was participating in a scam on the tax system, then he was wilfully
blind. He was willing to sign his income tax return and join in the deception
in exchange for a refund of all the taxes he had paid in 2005, 2006, 2007 and 2008.
Chénard v
Canada
21. … In this
case, the magnitude of the reported business losses is an overwhelming factor
because, even with little formal education and even without understanding our
tax system, a reasonable person could have easily questioned the legitimacy of
these losses.
22. The appellant
also admitted never having run a business. However, even if he thought he was
part of a “corporation” through
which he had invested in Mr. Joannis’ business projects, the amounts of
the reported losses were not at all
consistent with reality. The concepts of business and loss are not so obscure
that a reasonable person could think it was legal to report unrealistic
business losses.
…
27. The evidence
presented by the respondent shows that the appellant had been careless and even
indifferent and that his behaviour was tantamount to gross negligence. The
appellant had never run a business and while he thought he was part of a
company, he had never sustained substantial losses. He could not speak English,
the language in which this proposal was offered. He did not understand how he
could be entitled to such tax refunds, but chose to believe the people making
the proposal because they were experts.
28. The appellant
should have made an effort to consult other people besides those proposing the
plan. …
Janovsky v
Canada
18. I agree with counsel that gross negligence
includes the concept of wilful blindness. However, it is my view that the
evidence in this appeal demonstrates that the Appellant knowingly made the
false statement.
…
23. Considering
the Appellant’s education and the magnitude of the false statement he reported
in his 2009 return, it is my view that the Appellant knew that the amounts
reported in his return were fake.
24. If I am
incorrect and the Appellant did not knowingly make the false statement, then I
find that he was wilfully blind. If he indeed did not understand the
terminology used by FA in his return and if he did not understand how FA
calculated his expenses, then he had a duty to ask others aside from FA. In a
self-assessing system such as ours, the Appellant had a duty to ensure that his
income and expenses were correctly reported. Our system of taxation is both
self-reporting and self-assessing and it depends on the honesty and integrity
of the taxpayers for its success: R v McKinlay Transport Ltd.,
[1990] 1 S.C.R. 627. The Appellant’s cavalier attitude demonstrated such a high
degree of negligence of wilful blindness that it qualified as gross
negligence: Chénard v The Queen, 2012 TCC 211.
[65]
Based on this
jurisprudence and the evidence that I have heard in the six Appeals before me,
I draw the following principles:
a) Knowledge of a false
statement can be imputed by wilful blindness.
b) The concept of wilful
blindness can be applied to gross negligence penalties pursuant to subsection
163(2) of the Act and it is appropriate to do so in the cases before me.
c) In determining wilful
blindness, consideration must be given to the education and experience of the
taxpayer.
d) To find wilful
blindness there must be a need or a suspicion for an inquiry.
e) Circumstances that
would indicate a need for an inquiry prior to filing, or flashing red lights as
I called it in the Bhatti decision, include the following:
i)
the magnitude of the
advantage or omission;
ii)
the blatantness of the
false statement and how readily detectable it is;
iii)
the lack of
acknowledgment by the tax preparer who prepared the return in the return
itself;
iv)
unusual requests made
by the tax preparer;
v)
the tax preparer being
previously unknown to the taxpayer;
vi)
incomprehensible
explanations by the tax preparer;
vii)
whether others engaged
the tax preparer or warned against doing so, or the taxpayer himself or herself
expresses concern about telling others.
f) The final requirement
for wilful blindness is that the taxpayer makes no inquiry of the tax preparer
to understand the return, nor makes any inquiry of a third party, nor the CRA
itself.
[66]
Did the Appellants act
with wilful blindness?
Education and experience
[67]
All the Appellants
presented as intelligent individuals, who understood what a business was,
though professed to not understanding accounting principles (although Ms.
Strachan indicated a limited to fair understanding) or the complexities of tax
returns. Apart from Mr. Hyatali, all had some post-high school education,
university or trade school. All appeared to have had steady employment. Apart
from Mr. McNulty, all had had tax preparers file previous returns up to the
years in question, though Ms. Strachan had Mr. Branch (later associated with
Fiscal Arbitrators) prepare hers. I consider none of the Appellants so lacking
in education or basic understanding of concepts such as business, or tax as to
claim ignorance. The worst that can be said is that they shared an unfortunate
level of gullibility, and I can only conclude that was fed upon by Fiscal
Arbitrators, appreciating no doubt the motivating strength of substantial
refunds. Education, experience and intelligence are not factors that could
relieve these Appellants of a finding they knowingly or under circumstances
amounting to gross negligence made false statements.
Suspicion or need to make an inquiry
[68]
It is in this respect
that Mr. Barrett argues the Appellants are not wrongdoers upon whom such harsh
penalties should be levied. They were confident they were entitled to the
refunds: they had been completely and utterly convinced so by superb conmen.
According to Mr. Barrett, the Appellants are blameless: they neither knew nor
suspected there was anything untoward about how these former CRA officials were
preparing their returns. They were satisfied CRA were aware of the process and
that others had successfully obtained refunds. There were no warning signs Mr.
Barrett stresses that would have caused the Appellants to feel any need to make
an inquiry. I disagree.
Warning signs
[69]
Addressing the factors
I identified above that suggest a need for inquiry:
a) Magnitude of the advantage.
In all cases the Appellants were seeking a
complete refund. In all cases this was significantly different from prior
years’ filings. In all cases the amount of the loss claimed was significant in
relation to the other income, in some cases (Hyatali, Gautier, McNulty)
substantially so.
b) Blatantness of false statement –
readily detectable.
In all cases the nature of the falsehood,
large business losses when none of the Appellants were actually engaged in
business, is so blatantly untrue that no matter how firmly the Appellants
believed that, pursuant to some process, they were entitled to refunds of all
their taxes, they could not have believed they incurred large business losses.
Being convinced of the refund does not automatically imply they believed they
had business losses. They simply did not address their minds to it. Mr. Barrett
suggested that tax experts could read the return and understand that reporting
such business losses made no sense, but these people were not experts. I do
not accept that argument. These are all intelligent people with good jobs with
a given tax return filing history. None of their returns were elaborate with
multiple sources of income. They (with the exception of Mr. Hyatali) all saw
the major source of income showed up as an employment income on page 2 of their
return. There were not many other numbers on page 2 of their returns and the
negative number beside business income does not require a tax expert to
comprehend. It is not that complicated. It is easily detectable. In and of
itself this is sufficient to cause a suspicion, demanding an inquiry.
But in and of itself, is this sufficient to
find actual knowledge of the false statement? If a taxpayer reads a line on a
return that indicates clearly a loss from a business, with the knowledge the
taxpayer had no business, how can it be said the taxpayer did not know that was
false? In the context of the con job done on these Appellants, I can accept
they may not have appreciated the significance of the outright lie, and I am
therefore pursuing the wilful blindness analysis. So, to be clear, I am looking
on the blatantness of the false statement as a warning sign invoking the
concept of wilful blindness and imputed knowledge, rather than finding actual
knowledge.
c) Tax preparer does not acknowledge
preparing return.
Although this may seem a minor point,
combined with the many other factors, it should have raised a suspicion. In
none of the returns did the tax preparer complete the box for tax
professionals. This box, on the last page of the return, is right beside the
box signed and dated by each Appellant certifying the information is correct.
It is difficult not to see it. It was left empty.
d) Tax preparer makes unusual requests.
The Appellants were asked to sign their
returns after the word "per". None of the Appellants suggested they
had ever done so before. They were simply following instructions. None of them
questioned this odd request.
e) Tax preparer previously unknown to
taxpayer.
In most of the cases, Fiscal Arbitrators
were unknown to the Appellants. Ms. Eva Torres’ and Mr. Watts’ time
working at Canada Protection Plan overlapped for about 18 months. Ms. Strachan
had Mr. Branch do her returns for a few years, though not until the year in
question, did he do so in conjunction with Fiscal Arbitrators. Again, this is
one of those factors that by itself does not raise strong alarms, but when
taken in conjunction with all the other factors, the alarm bell is deafening.
f) Explanation by tax preparer
regarding false statement is incomprehensible.
None of the Appellants could explain how
the process worked. While they all professed to have the utmost confidence in
their tax preparers, they clearly did not understand what they had confidence
in, other than an entitlement to large refunds. Some tried to explain that they
were led to believe their social insurance number was a separate entity and
could somehow incur expenses deductible to them as individuals, or in
Fiscal Arbitrator terms, as fictional entities. The language is absurd,
the concept is absurd. I can only conclude that the desire for money back outweighed
the need to understand.
Mr. Barrett argues that the lack of
understanding goes to the complexity of the tax system, and whereas he and I
might appreciate the tomfoolery of it all, in the complex world of tax filings,
otherwise intelligent people may actually believe they and their social
insurance number are separate entities, that they are fiction, that they can
legitimately claim business losses without a business and that they can receive
full refunds that they had never ever received before. Mr. Gautier believed it
had something to do with claiming household expenses yet never submitted any
expense numbers to Fiscal Arbitrators. No, I simply do not buy it.
Something as completely inexplicable as the Fiscal Arbitrators’ scam can only
be accepted holus‑bolus by an indifference to the comprehension of it. As
long as the refund is forthcoming there is no need to understand the detail
appears to be the approach, no need to understand the Statement of Business
Activities or Agent Activities, for example, which the Appellants certified as
correct. This is simply not good enough.
g) Others do not do it or the
taxpayer is warned against it or the taxpayer is fearful of telling others.
Ms. Strachan only bit for one year;
something was cautioning her against doing more. Mr. McNulty was skeptical
after the first meeting with Fiscal Arbitrators; he did not tell his wife
as she "would have set him straight". This is an acknowledgment of
having seen the signs and yet still made no further investigation. Mr. McNulty
perhaps best explained this by saying he believed there was simply no downside.
While this is an understandable response, it does not serve to relieve him of a
finding of wilful blindness.
[70]
I readily conclude
there were sufficient warning signs to cause the Appellants to make further
inquiries of the tax preparers themselves, independent advisers or even the
CRA, prior to signing their returns. None of the Appellants made such inquiries
before making the false statements. Mr. Barrett argues there were no warnings
justifying an inquiry. As I have made clear, the evidence does not support
that argument. He then seems to suggest the warnings were not so evident or
strong as to demand an inquiry. Again, I have found otherwise - the evidence
simply does not support that position. Then he suggests that even if there were
warnings, the Appellants were so conned by Fiscal Arbitrators they may have
been blind to those warnings, but they were not wilfully blind. There was no
wilful or intentional wrongdoing punishable by such harsh penalties. Negligence
perhaps, Mr. Barrett would argue, but not such cavalier disregard for the law
as to attract gross negligence. They were simply duped.
[71]
The Appellants argument
in this regard would be more persuasive where the circumstances do not suggest
so strongly the need to inquire. It is difficult to counter wilful blindness
with a defence of no wrongful intention when the concept of wilful blindness
imputes knowledge regardless of intention (see Panini). Perhaps it might
be better stated that such strong circumstances as I find exist here, that scream
for an inquiry, impute the wilful element of wilful blindness. Blindness is
evident. The strong circumstances effectively preclude a defence that "I
believed what I was doing was okay", even where that belief arises from
being duped by others.
[72]
As is clear from a
review of the evidence, as well as a review of the factors that indicate an
inquiry was warranted, there are significant similarities amongst the six
Appeals. The circumstances surrounding the preparation, review, signing and
filing of the returns are not so dissimilar to reach any different results. The
difference in circumstances are minor. I will identify a few.
Mr. Hyatali may not have read the return to see the
glaring large business loss staring him in the face. That was negligent:
combined with the other warning signs, all ignored by Mr. Hyatali, there is
more than enough to conclude he too was wilfully blind.
Ms. Mary Torres not only should have suspected
something amiss when filing her 2007 return, she clearly knew something was
wrong when she filed her 2008 return, given the CRA had been in touch with
her regarding her 2007 return.
While Ms. Eva Torres indicated Mr. Watts worked at the
same organization for 18 months, she did not suggest there was any close
working relationship that might have alleviated any suspicion.
CRA warnings
[73]
I turn now to the
Appellants’ argument that based on the taxpayers’ Bill of Rights, the
Government had a duty to warn taxpayers and it failed to do so. Its failure
therefore precludes it from now seeking penalties from the Appellants. An
intriguing argument but it too must fail.
[74]
First, if the
taxpayers’ Bill of Rights imposes a duty on the Government, a failure to meet
that duty might be cause of action against the Government, but it does not go
to the correctness of the penalty assessment. At most, it can be considered in
the context of whether or not there were any warning signs that would demand an
inquiry by the Appellants. A failure of the Government to provide warnings
suggests there were not sufficiently strong circumstances to find wilful
blindness. I have, however, concluded that even without any warning from the
CRA, the circumstances of the Fiscal Arbitrators prepared returns strongly
justified further inquiry.
[75]
Yet, I would go
further. Had any of the Appellants done some minimal snooping on the CRA’s
website to their Tax Alert section, they would have readily found the types of
warnings set out earlier in these Reasons. If something is too good to be true,
guess what? Mr. Barrett argues the warnings were not explicit enough, not
publicized enough. He suggested a full page ad in the Globe and Mail
specifically referring to Fiscal Arbitrators may be considered sufficient
warning. In this modern age of electronic communication and websites for pretty
much everything, it is not unreasonable to expect the CRA would have a website
and warnings, if any, would be posted on that website.
[76]
I reject Mr. Barrett’s
argument that the CRA failed to warn. I further reject the notion that if they
did fail to warn, penalties cannot be assessed. They can be assessed.
Conclusion
[77]
It is difficult to feel
a great deal of sympathy for the Appellants notwithstanding some presented as
most sympathetic characters, simply duped by the bad guys. Yet, underlying this
purported duping is a motivation attributable to all of them to not have to pay
taxes. Fiscal Arbitrators was not hired just to prepare their returns – it was
hired to prepare their returns in such a way as to produce a significant
refund; in fact, a refund that would result in no tax in the year in question,
and with respect to some, prior years as well. I question how an individual,
regardless of the level of education, who has worked in Canada, paid taxes and
benefited from all the country has to offer, can without question enter
an arrangement where he or she claims fictitious business losses and therefore
simply does not have to pay his or her fair share, indeed, does not have to pay
any share of what it takes to make the country function. I am not unsympathetic
to spouses and family who may suffer from the significant negative financial
consequences these penalties will heap upon them by the actions of the
Appellants: the Appellants’ penalties are indeed harsh. I however cannot
pretend the specific 50% penalty called for by subsection 163(2) of the Act
can be something less. That is only something the Government can consider.
[78]
It was clear to me
these Appellants have paid a huge price, not just economically, as a result of
Fiscal Arbitrators’ deceitful ways. I have concluded, however, that penalties
are clearly justified, though I am concerned about the devastating effect the
magnitude of the penalties will have on the Appellants. I recognize this
consideration is not a factor cited in Rule 147 of Tax Court of Canada Rules
(General Procedure), but I do not view the list of factors as exhaustive. Add
to this the fact that few General Procedure cases have been heard regarding
Fiscal Arbitrators, that I view these matters akin to test cases, though
acknowledging the Parties did not present them as such, and that a novel
argument was presented by the Appellants’ counsel, I exercise my discretion to
not award costs. Having said that, I make no representation that not awarding
costs is something I would consider in future Fiscal Arbitrators’ cases.
[79]
The Appeals are
dismissed.
Signed at Toronto, Ontario, this 2nd day of December 2013.
"Campbell J. Miller"
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