REASONS
FOR JUDGMENT
Masse D.J.
Overview
[1]
The Appellant’s tax return for 2009 was prepared
by unscrupulous tax preparers. In preparing the tax return, the tax preparer
created fictitious business losses that were claimed in the return and in a related
request for loss carryback to the 2006, 2007 and 2008 taxation years. Had these
fictitious business losses been accepted by the Canada Revenue Agency (the
“CRA”), this would have resulted in significant tax refunds such that the
Appellant would not have paid any taxes at all for those years. The fact is
that the Appellant never owned or operated any kind of business at all during
those years and therefore did not incur any business losses at all. The CRA
denied the claimed business losses and penalized the Appellant pursuant to subsection
163(2) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the
“Act”). This case pertains only to the penalty.
[2]
The issue is whether the Appellant either
knowingly, or in circumstances amounting to gross negligence, made or
acquiesced in the making of false statements in his return so as to attract the
harsh penalties provided for in subsection 163(2) of the Act.
Factual Context
[3]
The Appellant, Rainford Taylor, is a Jamaican
born man who came to Canada in September 1990. He attended university from 1981
to 1985 and obtained a bachelor of science degree in mathematics and geology
from the University of the West Indies. Before coming to Canada, he worked in
Jamaica with the Bank of Nova Scotia. Taxes were deducted at source but he was
not required to file any tax returns with the government of Jamaica. When he
came to Canada, he was unemployed for a few months but then he was employed by
the Bank of Nova Scotia in Canada as a data clerk beginning in 1991, he
believes. He married his wife, who is also from Jamaica, in 1991. He stated
that since coming to Canada, he prepared his own tax returns and those of his
wife up until 2009. In 2009, he was being paid by IBM to do technical support
work at a call centre rendering assistance to Bank of Nova Scotia employees.
[4]
In 2006, the Appellant became involved with a
financial advisory group called DSC Lifestyles (“DSC”). He attended weekly
meetings with DSC. He says that his involvement with DSC was educational, more
than anything else. It was also a place for him to make some connections and
socialize. DSC also offered investment and business opportunities. In the past
the Appellant acted upon advice provided by DSC and made donations to the
Global Learning Gifting Initiative (“GLGI”) in the amount of $24,506 for the
2006 taxation year. This donation has since been disallowed by the CRA and,
according to Lorraine DuPont, senior office auditor for the CRA, the
reassessment disallowing this donation was in July 2009, prior to the Appellant
filing his 2009 tax return, so he knew prior to May 2010 when he filed his 2009
return that the CRA was questioning some of his prior deductions.
[5]
The Appellant testified that DSC came up with a
proposal that would maximize his tax refunds. No one explained to him how the
tax savings scheme worked. He provided all the information that DSC requested
of him to allow them to prepare his return. He did not find out until after the
fact that an organization known as Fiscal Arbitrators, not DSC, had prepared
his 2009 tax return and a request for loss carryback to the 2006, 2007 and 2008
taxation years.
[6]
In May 2010, Mr. Taylor got a call from
Janet Perry, a DSC associate, who told him that his tax return for 2009 was
ready to be picked up. He met with Ms. Perry in order to sign his return. Mr. Taylor
signed his 2009 tax return (Exhibit R‑1, Tab 3) together with a request
for loss carryback to the years 2006, 2007 and 2008 (Exhibit R-1, Tab 2). He
signed these documents in front of Ms. Perry and there was no discussion
about the tax return or the request for loss carryback. He did not review these
documents before signing since he claims that he had a relationship with DSC
for the past four years and he had no reason at all not to trust them. He then
filed his return. At the time he picked up his return, he was presented with an
invoice which indicated total fees of $10,302.98 in relation to the total tax
refunds of $38,639.88 for the 2006, 2007, 2008 and 2009 taxation years (Exhibit
A-1, Tab 21, page 51). This invoice mentions Trem-Dy Group Inc. and Fiscal
Arbitrators, but nowhere mentions DSC. This certainly should have alerted the
Appellant that DSC was not the tax preparer. The Appellant testified that he
was expecting $18,000 as a refund for 2009 but in the past he got sometimes
$13,000 or $14,000 so he was not surprised at the amount since it was in the
range that he received in previous years. However, knowing that he was
expecting refunds totalling more than $38,000 and that he would have to pay
fees of more than $10,000, and not knowing any of the details of the tax return
or how it was that he should expect such a significant refund, he signed the
return and sent it in anyways.
[7]
As already indicated, Mr. Taylor did not
review his return before signing and filing. Had he done so, he would have
discovered some glaringly false information. In his return, Mr. Taylor
claimed that he earned business income in the amount of $87,643.91. The
business activity was that of “agent”. He also
claimed business expenses described as “amt to
principal fr agent” in the amount of $332,324.41. He reported net
business losses amounting to $244,680.50. These are significant business losses
compared to his reported employment income of about $74,000. All these figures
are set out in the statement of business or professional activities (Exhibit
R-1, Tab 1) and in the 2009 tax return. All this information is patently false.
The Appellant acknowledges that at no time during the period under
consideration did he own or operate a business of any kind. He acknowledges that
he had no idea what it meant to be in business as an “agent”
nor did he understand what “receipts as agent” meant
or what the business expenses reported as “amt to
principal fr agent” meant.
[8]
In his return, Mr. Taylor requested to use
$73,774.50 of the 2009 business losses against his income in the 2009 taxation
year and requested that the unused balance of $170,906 be carried back to his
2006, 2007 and 2008 taxation years. These deductions, if they were to be
allowed, would have resulted in the refund of all taxes deducted at source for
the years 2006 through to 2009. He would have paid no taxes at all for four
years.
[9]
Mr. Taylor is not a stranger to tax returns
since he had prepared his own returns and those of his wife in prior years. He
admits that by signing his return he certified that the information on his
return and in any documents attached is correct and complete. Just below the
signature line appears a warning that “it is a serious
offence to make a false return”. Still, Mr. Taylor never did check to
see if the information was complete and accurate before he signed the return
and filed it with the CRA.
[10]
Mr. Taylor acknowledges that the portion of
the return reserved for the identification of the tax preparer (line 490) was
left blank and was not completed by DSC, by Fiscal Arbitrators or by any other
tax preparer. The word “per” appears just before
his signature on the signature line of his return and on his request for loss carryback.
He does not know why “per” was written just
before the signature line. He did not ask Ms. Perry or anybody else for
any explanation as to why he had to sign his name after the word “per”.
[11]
On October 25, 2010, the CRA sent a letter
(Exhibit R-1, Tab 4) to the Appellant seeking further information from him in
relation to his claimed business losses for 2009. The CRA was requiring proof
that the Appellant was in business and proof by way of source documents that
would establish the claimed business income and business expenses. The CRA also
asked the Appellant to complete and return a business questionnaire and also
provide the identity of his tax preparer. This is the first time Mr. Taylor
became aware that he had claimed huge business losses for 2009. He testified
that this alarmed him and in fact made him quite peeved or angry. He was quite
taken aback by this since he was certainly aware that he had not owned or
operated any business during 2009. He tried to contact DSC but was
unsuccessful. He eventually tracked down Ms. Perry but she had no
explanation for the claimed business losses. In spite of being upset by the
letter that the CRA sent to him, he did not respond directly to the CRA in
order to address the obvious problem. The letter was given to DSC, presumably Ms. Perry,
who handed it off to Fiscal Arbitrators whom, we now know, were the tax
preparers. Fiscal Arbitrators drafted a reply to this letter for the signature
of the Appellant (Exhibit R-1, Tab 6). This letter was not in any way
responsive to the concerns raised by the CRA and in no way provided any explanation
to Mr. Taylor of how it came to be that he had claimed enormous business
losses. In addition, this response is complete and utter nonsense. This
response ends as follows:
Sincerely,
For: RAINFORD A. TAYLOR
Per: [signature],
authorized representative
Mr. Taylor does not know why the letter
was drafted this way and, in spite of the fact that this letter makes no sense
at all and is not in any way responsive to the concerns raised by the CRA or
even to his concerns, he still signed it and sent it in.
[12]
The CRA never did receive the information
requested. The Appellant simply did not and, indeed, could not provide any
details related to his business income and losses since they did not exist. The
CRA sent a follow-up letter dated March 8, 2011 to the Appellant advising of
its intent to disallow the net business losses claimed for 2009 and also
advising of its intent to impose penalties pursuant to subsection 163(2) of the
Act (Exhibit R-1, Tab 7). Again, rather than responding to the CRA, the
Appellant provided this letter to Fiscal Arbitrators who prepared a short covering
letter attaching a T4A summary that provided no information other than “Other Income — $332,324.41” (Exhibit R-1, Tab 8).
There was also no business number reported on this T4A summary. This was signed
“By: [signature], Authorized Rep”. Again, this
provided no information to the CRA that would support the Appellant’s claim of
business losses.
[13]
Consequently, the CRA denied the Appellant’s
business losses for 2009 as well as the loss carryback to the 2006, 2007 and
2008 taxation years. The CRA also imposed a federal gross negligence penalty
pursuant to subsection 163(2) of the Act in the amount of $29,925.19 and a
provincial penalty plus interest. The Appellant was assessed accordingly by way
of notice of assessment. The Appellant objected to the assessment by notice of objection,
but the Minister of National Revenue (the “Minister”) confirmed the assessment,
hence the appeal to this Court.
[14]
The Appellant says that he did not review his
2009 return and attached documents before signing and filing. He states that he
signed in good faith because he had no reason not to trust DSC given that he
had a relationship with DSC that lasted four years. He believed that they were
the experts and they knew what they were doing. He agrees that he was naive and
that, if he had had any inkling that what was being done was fishy, he would
never have participated. He stated in evidence: “[Y]ou
may accuse me of being silly or reckless, but I didn’t pay attention to these
lines at all. So at the time, I wasn’t aware that I was claiming a business
loss”. The Appellant takes the position that he may have been negligent
but his conduct was not so careless as to amount to gross negligence or that
high degree of negligence that would justify the imposition of the harsh
penalties provided for in subsection 163(2) of the Act.
Legislative Dispositions
[15]
Subsection 163(2) of the Act reads in part as
follows:
163(2) 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 . . .
[16]
According to subsection 163(3), the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
Analysis
[17]
Our system of taxation is both self-reporting
and self-assessing. It relies on the honesty and integrity of the individual
taxpayer. It is the taxpayer’s duty to report his taxable income completely,
correctly and accurately no matter who prepares the return. Therefore, the
taxpayer must be vigilant in ensuring the completeness and accuracy of the
information contained in his return. As noted by Justice Martineau in Northview
Apartments Ltd. v. Canada (Attorney General), 2009 FC 74, at paragraph 11: “It is the essence of our tax collection system that taxpayers
are sole responsible for self-assessment and self-reporting to the CRA.”
[18]
In the matter of R. v. Jarvis, 2002 SCC
73, Justices Iacobucci and Major of the Supreme Court of Canada explained the
responsibilities and duties of taxpayers as well as some of the measures in the
Act designed to encourage compliance:
49 Every person resident in Canada during a
given taxation year is obligated to pay tax on his or her taxable income, as
computed under rules prescribed by the Act (ITA, s. 2 . . .).
The process of tax collection relies primarily upon taxpayer self‑assessment
and self-reporting: taxpayers are obliged to estimate their annual income tax
payable (s. 151), and to disclose this estimate to the CCRA in the income
return that they are required to file (s. 150(1)). . . . Upon
receipt of a taxpayer’s return, the Minister is directed, “with all due
dispatch”, to conduct an examination and original assessment of the amount of
tax to be paid or refunded, and to remit a notice of assessment to this effect
(ss. 152(1) and 152(2)). Subject to certain time limitations, the Minister may
subsequently reassess or make an additional assessment of a taxpayer’s yearly
tax liability (s. 152(4)).
50 While voluntary compliance and
self-assessment comprise the essence of the ITA’s regulatory structure, the tax
system is equipped with “persuasive inducements to encourage taxpayers to
disclose their income” . . . . For example, in promotion of the
scheme’s self-reporting aspect, s. 162 of the ITA creates monetary penalties
for persons who fail to file their income returns. Likewise, to encourage
care and accuracy in the self-assessment task, s. 163 of the Act sets up
penalties of the same sort for persons who repeatedly fail to report
required amounts, or who are complicit or grossly negligent in the making of
false statements or omissions.
51 It follows from the tax scheme’s basic self-assessment and
self-reporting characteristics that the success of its administration depends
primarily upon taxpayer forthrightness. As Cory J. stated in Knox
Contracting, supra, at p. 350: “The entire system of levying and
collecting income tax is dependent upon the integrity of the taxpayer in
reporting and assessing income. If the system is to work, the returns must be
honestly completed.” It is therefore not surprising that the Act exhibits a
concern to limit the possibility that a taxpayer may attempt “to take advantage
of the self-reporting system in order to avoid paying his or her full share of
the tax burden by violating the rules set forth in the Act” . . . .
[Emphasis added. Citations omitted.]
[19]
The penalties provided for in section 163 of the
Act have been conceived in order to ensure the integrity of our self-assessing
and self-reporting system and to encourage a taxpayer to exercise care and
accuracy in the preparation of his return, no matter who prepares the return.
In Sbrollini v. The Queen, 2015 TCC 178, Justice Boyle of this Court
opined that the penalty provisions set out in subsection 163(2) of the Act
reflect:
15 . . . the significance and
importance of the requirements of honesty and accuracy in the Canadian
self-reporting income tax system. Fairness to all taxpayers requires that such
penalties be payable by those . . . Canadians who would seek to take
advantage of our self-reporting system . . . .
16 Such penalties are properly payable
. . . if [a taxpayer] knowingly, or under circumstances amounting to
gross negligence, made or participated in, assented to or acquiesced in, the
making of false statements or omissions in his returns.
[20]
Therefore, the determination of whether or not a
taxpayer should be subjected to the penalties under subsection 163(2) of the
Act should be viewed through the lens of the responsibilities and duties of the
taxpayer to accurately and completely report his income in a self-reporting and
self-assessing system.
[21]
There are two necessary elements that must be
established in order to find liability for subsection 163(2) penalties:
(a) a false statement in a return, and
(b) knowledge or
gross negligence in the making of, assenting to or acquiescing in the making of
that false statement.
[22]
There can be no question that the Appellant’s
2009 tax return and his request for loss carryback contained false statements.
The Appellant never owned or operated any kind of a business during that year
and therefore could not have had any business income or business expenses. His
claim for business losses has no foundation in fact and is patently false.
[23]
I am satisfied, however, that the Appellant did
not knowingly make a false statement since he really was not aware of what was
contained in his return. It was his evidence that he did not review his tax
return and request for loss carryback before he signed these documents.
Therefore, the issue becomes: Did he make a false statement in circumstances
amounting to gross negligence? As already indicated, the burden of proving
gross negligence lies on the Crown. It is not sufficient for the Crown to prove
mere negligence; it must go beyond simple negligence and prove that the Appellant
was grossly negligent.
[24]
Negligence is defined as the failure to use such
care as a reasonably prudent and careful person would use under similar
circumstances. The concept of negligence is so well known in Anglo-Canadian
jurisprudence that no authority need be cited for this definition. However,
gross negligence requires something more than mere negligence. 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 or indifference as to whether the law is complied with or
not; see Venne v. Canada, [1984] F.C.J. No. 314 (QL). In Venne,
Justice Strayer of the Federal Court (Trial Division) cautions that subsection
163(2) of the Act “is a penal provision and it must be
interpreted restrictively so that if there is a reasonable interpretation which
will avoid the penalty in a particular case that construction should be
adopted” and the taxpayer should be given the benefit of the doubt. In Farm
Business Consultants Inc. v. Canada, [1994] T.C.J. No. 760 (QL), Justice
Bowman (as he then was) of the Tax Court of Canada stated at paragraph 23 that
the words “gross negligence” in subsection
163(2) imply conduct characterized by so high a degree of negligence that it
borders on recklessness. In such a case a court must, even in applying a civil
standard of proof, scrutinize the evidence with great care and look for a
higher degree of probability than would be expected where allegations of a less
serious nature are sought to be established (paragraph 28).
[25]
It is also well‑settled law that gross
negligence can include “wilful blindness”, a concept
well known to the criminal law. The concept of “wilful
blindness” in the context of the criminal law was fully explained by
Justice Cory of the Supreme Court of Canada in the decision in R. v. Hinchey,
[1996] 3 S.C.R. 1128. The rule is that if a party has his suspicion aroused but
then deliberately omits to make further inquiries, because he wishes to remain
in ignorance, he is deemed to have knowledge. Stated otherwise, “wilful blindness” occurs 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, preferring instead to remain ignorant.
There is a suspicion which the defendant deliberately omits to turn into
certain knowledge. The defendant “shut his eyes”
or was “wilfully blind”.
[26]
It has been held that the concept of “wilful blindness” is applicable to tax cases; see Canada
v. Villeneuve, 2004 FCA 20, and Panini v. Canada, 2006 FCA 224. In Panini,
Justice Nadon made it clear that the concept of “wilful
blindness” is included in “gross negligence” as
that term is used in subsection 163(2) of the Act. He stated:
43 . . .
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.
[27]
It has been held that in drawing the line
between “ordinary” negligence or neglect and “gross” negligence, a number of
factors have to be considered:
(a) the magnitude of the omission in relation to the income
declared,
(b) the opportunity the taxpayer had to detect the error,
(c) the taxpayer’s education and apparent intelligence,
(d) genuine effort to
comply.
No single factor predominates. Each must be
assigned its proper weight in the context of the overall picture that emerges
from the evidence (see DeCosta v. The Queen, 2005 TCC 545, at paragraph
11; Bhatti v. The Queen, 2013 TCC 143, at paragraph 24; and McLeod v.
The Queen, 2013 TCC 228, at paragraph 14).
[28]
In Torres v. The Queen, 2013 TCC 380,
Justice C. Miller conducted a very thorough review of the jurisprudence regarding
gross negligence penalties under subsection 163(2) of the Act and, in so doing,
he was able to distill the governing principles to be applied. I paraphrase his
dicta found at paragraph 65:
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 . . . .
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 . . ., 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.
[29]
This is certainly not an exhaustive list and
there may be other factors that may need to be considered depending on the
circumstances of any particular case. I am of the view that Justice C. Miller
provides an excellent template that can be used in analyzing cases such as the
one here under consideration. I will proceed to apply the factors enumerated by
Justice C. Miller to the case at hand. It will be somewhat obvious that some of
these factors overlap and are interrelated.
Education and Experience of the Taxpayer
[30]
The Appellant is university educated and has a
bachelor’s degree in mathematics and geology. He presented as an intelligent,
charming and articulate individual. He is familiar with the preparation of tax
returns here in Canada since he had prepared his returns and his wife’s returns
for several years since coming to Canada. He has work experience in the banking
system and with IBM. He understands basic business concepts such as profit and
loss. He is interested in business and investment opportunities and, to that
end, he has become involved with DSC. He has in the past taken advantage of tax
savings schemes proposed by DSC such as the GLGI gifting program. The Appellant
is not so lacking in education or basic understanding of concepts such as
business, or taxes, as to claim ignorance. Education, experience and
intelligence are not factors that could relieve the Appellant of a finding he
made false statements under circumstances amounting to gross negligence.
Suspicion or Need to Make an Inquiry
[31]
There were ample warning signs or “red flags”
that should have aroused the Appellant’s suspicions and awakened in him the
need to make further inquiries.
Warning Signs
Magnitude of the Advantage
[32]
When the Appellant picked up his return and
signed all the documents, he also received the invoice from Trem-Dy Group and
Fiscal Arbitrators. He saw that this invoice indicated a very high fee in
excess of $10,000 and that he could expect to obtain total refunds exceeding
$38,000 for 2006 through to 2009. He states that the fact that he was expecting
a refund of about $18,000 did not surprise him since he ordinarily got refunds
in the range of $13,000 to $14,000. That may be true but the total refunds
exceeding $38,000 for the years 2006 through to 2009 was in addition to the
refunds already received for those years. The magnitude of the refunds is such
that he would not have paid any taxes at all for all those years. The magnitude
of the advantage that the Appellant was to receive as a result of the false
information contained in his return was a bright red flag that must have
aroused his suspicions and induced him into making further inquiries. This
factor points towards a finding of wilful blindness.
Blatantly False Statement — Readily Detectable
[33]
The Appellant claimed business income of about
$87,650 and huge business expenses exceeding $320,000 resulting in net business
losses of about $244,680 — when he was not actually engaged in business. This
information is blatantly false. In addition, had the Appellant simply taken a
look at his return, instead of simply signing it, he would have easily and
readily detected the false information. This is another glaring factor that
points towards gross negligence.
Tax Preparer does not Acknowledge Preparing Return
[34]
The Appellant believed that DSC prepared his tax
return. He had trust in DSC as a result of his four-year relationship with
them. Yet when he got the invoice advising that fees of more than $10,000 were
to be paid to Trem-Dy Group and Fiscal Arbitrators, he became aware that DSC
was not the tax preparer. This should have caused him to make inquiries as to
who was actually the tax preparer. In addition, whoever prepared the tax return
did not complete the box for tax professionals. This box, on the last page of
the return, is at line 490 of the return and is right beside the line to be
signed by the Appellant certifying the information is correct and complete. The
box labelled “For professional tax preparers only”
is obvious to the taxpayer who signs the return. It is to be noted that the
Appellant is familiar with tax returns since he prepared them in prior years for
himself and his wife. The fact that line 490 was left blank should have alerted
the Appellant to the fact that the tax preparer may have wished to remain
anonymous to the CRA. This may not be a major point, but when considered
cumulatively with all the other red flags, it should have aroused suspicion in
his mind.
Tax Preparer Makes Unusual Requests
[35]
The word “per” was
handwritten on the signature line just in front of the place where the
Appellant was to sign. He was never told why “per”
was on the signature line, nor did he ever question this odd request. This
strange request, although not a strong factor, should have aroused the
Appellant’s suspicions when considered together with all the other factors.
Tax Preparer Previously Unknown to Taxpayer
[36]
The Appellant believed that DSC prepared his
return but it is clear that they did not. It is likely that Fiscal Arbitrators
prepared the return since the $10,000 fee was payable to them. The Appellant
must have realized this when he received the invoice at the time he signed the
documents and filed the return. Fiscal Arbitrators were previously unknown to
the Appellant. This is perhaps a small factor, but when taken together with all
of the other factors, it should have alerted the Appellant to undertake a bit
more due diligence with regard to the legitimacy of Fiscal Arbitrators. The
Appellant should have asked Ms. Perry from DSC who Fiscal Arbitrators were
and what their relationship with DSC was. The Appellant should have also
questioned why he was never introduced to any representative from Fiscal
Arbitrators. He should have asked for and checked out references. The Appellant
did not do so.
Lack of Explanation by Tax Preparer
[37]
The Appellant testified that DSC came up with a
proposal that would maximize his tax refunds. We now know that this was going
to be done through the instrumentality of falsified business losses. No one
explained to the Appellant how his tax refunds would be maximized and he did
not ask anyone at all how this would be done. It seems to me that a person who
has experience preparing his own tax returns would be curious to know what it
was that he had supposedly missed in the preparation of his returns in years
gone by. Yet, he did not bother to inform himself at all about the proposed tax
savings scheme. There are simply no explanations either asked for or given. He
simply relied on the blind trust he reposed in DSC. He chose to remain
blissfully ignorant of what was going on. Such conduct in refusing to inform
himself about this tax savings scheme is evidence of gross negligence in my
opinion.
Others do not do it or the Taxpayer is Warned Against it
or the Taxpayer is Fearful of Telling Others
[38]
This is not a factor in the circumstances of
this particular case.
Lack of Inquiries of Other Professionals or of the CRA
[39]
Not only did the Appellant not make any
inquiries or seek any explanations from his tax preparer, he did not seek any
explanations from any other tax preparer, accountant, tax lawyer or from the
CRA. Again, he chose to remain blissfully ignorant, blindly trusting DSC and
not bothering to inform himself regarding the legitimacy of what was being
done. This is indicative of gross negligence.
The Fee Structure
[40]
The tax preparer was seeking a fee of more than
$10,000 on a contingency basis. This was an exorbitant fee for simply filling
out a few forms. This should have led the Appellant to question the legitimacy
of his tax preparer.
Appellant’s Trust in his Tax Preparer
[41]
This factor is interdependent with the fact that
the Appellant did not review his tax return. The Appellant’s entire argument
hinges on the fact that he placed his trust in DSC with whom he had a
relationship of four years and that he had no reason not to trust them. That is
why he did not review his tax return.
[42]
However, in the past, the Appellant did act upon
advice provided by DSC and made contributions to the GLGI in the amount of
$24,506 for the 2006 taxation year. This contribution has since been disallowed
by the CRA and the Appellant was advised of this in May 2010 prior to filing
his 2009 return. I do not know if this is still being disputed or is being
litigated. Suffice it to say that, in view of the fact that the CRA was
questioning the legitimacy of the financial opportunities provided by DSC to
the Appellant, this should have given him reason to exercise a bit more due
diligence before accepting without question what was being proposed to him by
DSC. Therefore, the Appellant knew, at the time he signed his 2009 return, that
the tax advice provided by DSC might be questionable. However, this is a minor
point and is not crucial to the decision I have to make.
[43]
As already indicated, the Appellant takes the
position that he had no reason not to trust DSC. In some cases, a taxpayer can
shed blame by pointing to negligent or dishonest professionals in whom the
taxpayer reposed his trust and confidence; for example, see Lavoie c. La
Reine, 2015 CCI 228, a case where the taxpayers relied on a lawyer whom
they had known and trusted for more than 30 years and who was a trusted
friend. However, cases abound where the taxpayers could not avoid penalties for
gross negligence by placing blind faith and trust in their tax preparers
without at least taking some steps to verify the correctness of the information
supplied in their tax returns.
[44]
In Gingras v. Canada, [2000] T.C.J. No.
541 (QL), Justice Tardif wrote:
19 Relying on an
expert or on someone who presents himself as such in no way absolves from
responsibility those who certify by their signature that their returns are
truthful.
. . .
30 It is the person signing a return of
income who is accountable for false information provided in that return, not
the agent who completed it, regardless of the agent’s skills or qualifications.
[45]
In DeCosta, above, Chief Justice Bowman
stated:
12 . . . While of course his
accountant must bear some responsibility I do not think it can be said that the
appellant can nonchalantly sign his return and turn a blind eye to the omission
of an amount that is almost twice as much as that which he declared. So
cavalier an attitude goes beyond simple carelessness.
[46]
In Laplante v. The Queen, 2008 TCC 335,
Justice Bédard wrote:
15 . . . The Appellant cannot
avoid liability in this case by pointing the finger at his accountant. By
attempting to shield himself in this way from any liability for his income tax
returns, the Appellant is recklessly abandoning his responsibilities, duties
and obligations under the Act. . . .
[47]
In Brochu v. The Queen, 2011 TCC 75,
gross negligence penalties were upheld in a case where the taxpayer simply
trusted her accountant’s statements that everything was fine. She had quickly
leafed through the return and claimed that she did not understand the words “business income” and “credit”,
but yet had not asked her accountant nor anyone else any questions in order to
ensure that her income and expenses were properly accounted for. Justice
Favreau of this Court was of the view that the fact that the taxpayer did not
think it necessary to get informed amounted to carelessness, which constituted
gross negligence.
[48]
In Janovsky v. The Queen, 2013 TCC 140, Justice
V.A. Miller stated:
22 The Appellant said he reviewed his return
before he signed it and he did not ask any questions. He stated that he placed
his trust in FA as they were tax experts. I find this statement to be
implausible. He attended one meeting with the FA in 2009. He had never heard of
them before and yet between his meeting with them and his filing his return in
June 2010, he made no enquiries about the FA. He did not question their credentials
or their claims. In his desire to receive a large refund, the Appellant did not
try to educate himself about the FA.
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.
[49]
Another recent example can be found in the
matter of Atutornu v. The Queen, 2014 TCC 174, where the taxpayers
simply blindly relied on the advice of their tax preparer without reading or
reviewing their returns and without making any effort whatsoever to verify the
accuracy of their returns.
Signing the Return Without Reviewing it
[50]
This factor is intertwined with the issue of
“trusting the professional tax preparer” discussed above. It is clear that the
Appellant simply did not review his return before signing it. It has been held
that this in and of itself may be sufficient to amount to gross negligence.
[51]
As has often been stated by our courts, our tax
system is one of self‑assessment and each individual taxpayer has the
obligation to ensure that all the information contained in his return is
truthful. The Appellant made no effort to verify the accuracy and completeness
of his return. Had he made even the most minimal of effort, he would have
discovered the numerous red flags that were patently obvious on even the most
cursory review of his return. As stated by Justice Tardif in Gingras,
above:
31
. . . it is utterly reprehensible to certify by one’s signature that
the information provided is correct when one knows or ought to know that it
contains false statements. Such conduct is a sufficient basis for a finding of
gross negligence justifying the assessment of the applicable penalties.
[52]
In Laplante, above, Justice Bédard wrote:
15 In any event, the Court finds that the Appellant’s negligence (in
not looking at his income tax returns at all prior to signing them) was
serious enough to justify the use of the somewhat pejorative epithet “gross”.
The Appellant’s attitude was cavalier enough in this case to be tantamount to
total indifference as to whether the law was complied with or not. Did the
Appellant not admit that, had he looked at his income tax returns prior to
signing them, he would have been bound to notice the many false statements they
contained, statements allegedly made by Mr. Cloutier? . . . In this
case, the Appellant had an obligation under the Act to at least quickly look at
his income tax returns before signing them, especially since he himself
admitted that, had he done so, he would have seen the false statements made by
his accountant.
[Emphasis in original.]
[53]
Even more recently, Justice Bowie stated in Brown
v. The Queen, 2009 TCC 28:
20 Quite apart from all of that, in respect
of the gross negligence penalties under the Income Tax Act, the
Appellant in his own evidence early on made it clear that he signed his returns
for each of the four years under appeal without having paid the least attention
to what income was included in them and what expenses were claimed in them. He
said that he kept the records that he kept, prepared spreadsheets from them and
gave them to a tax preparer who, in each year, prepared the returns for him
based on the material that he gave her. We did not hear from her on that, but
taking that statement at its face value, it still leaves the Appellant with
an onus to look at the completed return before signing it and filing it with
the Minister. The declaration that the taxpayer makes when he signs that form
is,
I certify that the information
given on this return and in any documents attached is correct, complete and
fully discloses all my income.
To sign an income tax return and make that
certification without having even glanced at the contents of the return,
because that is what I understood his evidence to be is of itself, in my view,
gross negligence that justifies the penalties.
[Emphasis added.]
[54]
In Bhatti, above, Justice C. Miller
pointed out:
30 . . . It is simply insufficient
to say I did not review my returns. Blindly entrusting your affairs to another
without even a minimal amount of verifying the correctness of the return goes
beyond carelessness. So, even if she did not knowingly make a false omission,
she certainly displayed the cavalier attitude of not caring one way or the
other . . . .
[55]
This is a very important factor that points
towards gross negligence.
Genuine Effort to Comply
[56]
I am of the view that the Appellant made no
effort to comply with the law. This is certainly borne out by his after‑the‑fact
conduct. When he got a letter from the CRA questioning his business losses, he
stated that this was the first time he was made aware of the fact that he was
indeed claiming huge business losses. The letter from the CRA most certainly
alerted him to the fact that there was something dreadfully wrong with his tax
return and that the tax preparer had obviously included some fictitious
information about business losses in his return. He says this made him angry
and he wanted his tax preparer to fix the problem. However, rather than
respond directly to the CRA and take his tax preparer to task, he gave the CRA
letter to Ms. Perry who supposedly gave it to the tax preparer. He never
did respond to the concerns raised by the CRA. The tax preparer drafted
nonsensical responses to any correspondence received from the CRA. Even
realizing that these responses were complete and utter nonsense, he still sent
them on to the CRA. This gives a clear indication as to his mindset throughout.
Conclusion
[57]
There is no doubt that the Appellant’s 2009 tax
return and his request for loss carryback contained false statements — the
Appellant did not carry on a business and he did not incur any business losses
whatsoever, let alone business losses exceeding $244,000. I can come to no
other conclusion than that the Appellant was wilfully blind and grossly
negligent as to the falsity of these statements. This is especially so since he
signed his return and thus certified the accuracy of the information contained
therein without bothering to make any efforts to verify the return’s accuracy.
As such, he is properly subject to the penalties imposed on him pursuant to
subsection 163(2) of the Act.
[58]
I have much sympathy for the Appellant. He and
his wife are good people of modest means who were taken in by unscrupulous
people. However, he should have known better, given all of the circumstances,
and all of this could have been avoided had Mr. Taylor simply taken a look
at the information contained in his return. These penalties are very harsh and
will undoubtedly cause much hardship to this family. I wish I had the authority
to alleviate the harshness of these penalties, but unfortunately I do not. The
only question I can decide is whether the penalties are well founded or not.
[59]
The Court draws to the Appellant’s attention the
fact that a waiver of the penalty and interest may be sought from the CRA
pursuant to the taxpayer relief provisions in subsection 220(3.1) of the Act.
This Court has no role to play in relation to such applications and it should
be made clear that a waiver of penalty and interest lies entirely in the
discretion of the Minister. Such an application is made to the CRA; the CRA
publishes an information circular (IC07-1) as well as a form (RC4288) for
making taxpayer relief applications.
[60]
For all the foregoing reasons, this appeal is
dismissed. The Respondent is entitled to her costs if she wants them.
Signed at Kingston, Ontario, this 18th day
of December 2015.
“Rommel G. Masse”
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