REASONS
FOR JUDGMENT
Masse D.J.
[1]
The Appellant is appealing the penalty for gross
negligence imposed on him pursuant to subsection 163(2) of the Income Tax
Act, RSC 1985, c 1 (5th Supp), (the “Act”), in relation to his
2009 taxation year.
Factual Context
[2]
The Appellant is a 59 year old auto worker
employed by General Motors (“GM”). He attended school up until grade 11. He
never did finish high school but his education did not end at grade 11. He went
back to school to upgrade his math and English. He also studied electronics at
George Brown College and he took a certificate course in microcomputer
technology.
[3]
The Appellant has always worked hard starting at
age 16 when he began to work part-time. He has spent his working life as a
factory worker in a chemical factory, in a steel mill and since 1989 as a
full-time auto-worker for GM. He has never owned or operated any kind of
business, although his wife did operate a clothing business from 1993 until
1998 when she had to stop working due to illness.
[4]
The Appellant has never prepared his own tax
returns, relying on friends or professional tax preparers to do so. A colleague
of his referred him to a tax preparer named Chester Lewis. Mr. Lewis began
preparing tax returns for the Appellant and his wife for the 2005 taxation year
and continued to do so up to the 2014 tax year.
[5]
Around 2006, Lewis offered the Appellant and his
wife an opportunity to become involved in a donation programme known as the
Universal Health Trust (“UHT”). Lewis explained that this programme
provided medical supplies to third world countries. The Appellant understood
that by participating in UHT, he would obtain a charitable donation receipt for
tax purposes that would enable him to receive a tax refund larger than he would
were he to make the same donation to some other charity such as his church. The
Appellant stated that he and his wife participated in the UHT donation
programme from 2006 to about 2009. They obtained significant tax refunds as a
result of this donation programme. To say the least, the UHT donation programme
was highly questionable. The CRA reassessed the Appellant and his wife so as to
disallow their charitable donations to UHT and also assessed penalties
amounting to about $20,000. The Appellant passed these matters on to Lewis to
be resolved. Lewis told him that there was someone he was dealing with (who
turned out to be scammers known as Fiscal Arbitrators), who could help to
resolve the matter.
[6]
In April or May of 2010, the Appellant provided
Mr. Lewis with all of his documentation for the preparation of his 2009 tax
return. The Appellant testified that Mr. Lewis accepted the documents and
prepared the tax returns. Mr. Lewis, however, is adamant that he did not
prepare the Appellant’s 2009 tax return, Fiscal Arbitrators did. The Appellant
did not hear from Mr. Lewis and so the Appellant contacted him to find out what
was happening. Mr. Lewis told him that he was having issues regarding the
filing of the return. The Appellant testified that it was around August 2010
that Mr. Lewis contacted him and wanted him to sign some papers. He does not
tell us what these papers are. If these papers were his 2009 return, then the
Appellant is mistaken that he signed his return in August since the weight of
the evidence is that his 2009 return was filed with the CRA in May of 2010.
[7]
A photocopy of the Appellant’s 2009 tax return
appears at Exhibit R-1, Tab 1. This return is undated but I accept that it was
filed in May 2010. He
agrees that it looks like his signature on the last page of the return and he
states that he quite possibly signed this return. The Appellant says that the
first time he saw this tax return was when he recently attended his counsel’s
office in preparation for this hearing. This is simply not true; he clearly saw
it when he signed it in May 2010. The Appellant also signed a Request for Loss
Carryback to the years 2006, 2007 and 2008 (see Exhibit R-1, Tab-4) although he
claims not to remember signing this document which is dated May 12th
2010. He says that he may have signed these documents in the presence of Mr.
Lewis but does not remember. He maintains that he has no knowledge of the
contents of these documents. He did not review these documents before signing
and in fact he probably never even looked at them. He simply signed whatever
document Chester Lewis presented to him. He even goes so far as to say that he
might have signed these documents in blank at the request of Mr. Lewis. Signing
blank documents is something that he has done before.
[8]
Had the Appellant
bothered to look at his return when he signed it, he would have seen some
anomalies and some blatantly false information. The word “per” appears in front of his signature on these documents.
He does not know who wrote “per” in front of his signature and he does
not know what that means. He claims that the word “per” was not there when he signed these
documents. If he contends that he really does not remember reviewing or signing
these documents, it is not plausible that he would remember that the word “per” was not on the signature line. I find
as a fact that the word “per” was on the signature line before he
signed the documents. Box 490, which is reserved for the identification of the professional
tax preparer who completed the return, was left empty. Mr. Lewis states that
had he completed the return, which he did not, he would have completed this box
as he always did in the past. In this return, the Appellant claimed huge net business losses in
the amount of $294,195.29. This is false. He never owned or operated any
business whatsoever during 2009 and could not have had any business losses
whatsoever. The Appellant’s only significant income during the 2009 taxation
year was employment income in the amount of $65,029.73. Just above his
signature, we see the usual certification stating, “I certify that the information given
in this return and in any documents attached is correct, complete, and fully
discloses all my income”. The
truth is that the Appellant made no effort at all to verify the accuracy and
completeness of his return – he never even looked at it. Had he looked at his
return, which he did not, he would surely have seen the ominous warning that
appears just below his signature that “It is a serious offence to make a
false claim”. How
could he not have seen this when he signed the return? By not looking at his
return, he ignored both his duty to verify the completeness and accuracy of his
return and he also ignored the dire warning that it is a serious offence to
make a false claim. He agrees that the claimed refund of about $14,000 was
large compared to what he usually received.
[9]
He claims that he has never had any
communications at all with Fiscal Arbitrators. However, he contradicts himself
in cross-examination when he states that it is possible that he received copies
of his tax returns directly from Fiscal Arbitrators, in an envelope, and he
then brought these documents to Mr. Lewis for him to review and go over.
[10]
The CRA sent a letter to the Appellant dated
September 16, 2009 (Exhibit R-1, Tab 5). This letter clearly indicates in the
fourth line of the body of the letter that the Appellant had claimed business
losses of more than $294,000. The letter asked the Appellant to provide
documentation in support of the claimed business loss. The letter also
requested that the Appellant complete a questionnaire that was included with
the letter. The Appellant agreed that he received this letter. However, the
Appellant equivocates on whether or not he reviewed this document. He indicates
that he may have read the first two paragraphs. If he did, then he clearly
would have become aware that he had claimed large fictitious business losses.
However, he then says that he did not think that he reviewed the letter and it
was quite possible that he sent it to Mr. Lewis without reading it at all.
[11]
The Appellant testified that Mr. Lewis provided
him with a response to the CRA’s letter of inquiry (see letter dated September
29th 2010, Exhibit R-1, Tab-6). The Appellant admits that he wrote
his name and return address on the envelope in which that letter was mailed.
The Appellant claims that Mr. Lewis likely did up this letter, gave it to him
and all the Appellant did was mail it to the CRA. He did not review it before
sending it. He states that had he read it, he still would have sent it on to the
CRA. This letter is confrontational and not at all responsive to the legitimate
inquiries set out in the letter initially sent to him by the CRA. Mr. Lewis is
adamant that he did not draft this letter.
[12]
The CRA sent further letters to the Appellant
seeking information to support the claimed business losses as well as
indicating the possibility that a penalty could be imposed pursuant to s.
163(2) of the Act (see Exhibit R-1, Tab-7, letter dated January 10th
2010; and Tab-8, letter dated April 7th 2010).
[13]
The CRA did not receive any response to these
further letters. Consequently, the Minister of National Revenue disallowed the
claimed business losses, denied the Request for Loss Carryback and imposed a
penalty pursuant to subsection 163(2) of the Act. A Notice of Objection
was filed on behalf of the Appellant but the Minister confirmed the assessment.
Hence the appeal to this Court.
[14]
The Appellant never did get a refund.
[15]
The Appellant testified that he did not know
that his return contained false information and in particular, he did not know
that he had claimed a huge business loss of over a quarter million dollars. He
only realized that there was something really wrong once he got the last letter
from the CRA stating that he owed about $80,000 in penalties and interest. At
no time did he go back and look at his return to see what the problem was. Even
when he received the Notice of Assessment he still did not bother to find out
what the problem was with his 2009 return; he says that he simply assumed that Mr.
Lewis was taking care of things.
[16]
The Appellant
claims that he did not start the present court action and he never instructed
anybody to start any court action – this is a blatant falsehood since he is the
Appellant and he is the one who is seeking to have the penalties and accrued
interest set aside.
[17]
Chester Lewis is a
55 year-old self-employed tax preparer. He has been doing this for a number of
years. He has made it clear that he is neither a tax professional nor an
accountant. Mr. Lewis testified that he first met the Appellant around 2006. He
agrees that he prepared the Appellant’s tax returns as well as those of his wife
starting with the 2005 taxation year. Mr. Lewis prepared all of their returns
for the 2005 through to the 2014 taxation years with the exception of 2009
which is the taxation year here under review. Mr. Lewis was involved in
promoting UHT. As I understand it, UHT would provide charitable donation
receipts to participants in the programme indicating that the amount eligible
to be claimed as a charitable donation far exceeded the actual amount donated
which would result in tax refunds that could exceed the actual amount of the
donation.
[18]
For the 2006 and
2007 taxation years, the Appellant sought to claim deductions for donations to
UHT which donations were disallowed by the CRA. The CRA also assessed penalties
pursuant to subsection 163(2) of the Act. Several of Mr. Lewis’s other
clients were also reassessed in relation to the UHT donation program. Mr. Lewis
indicated that he was really not in a position to help his clients with these
reassessments and he was looking for help in dealing with this problem.
Somehow, a person named Carlton Branch from Fiscal Arbitrators found out about
these difficulties and approached Mr. Lewis indicating that Fiscal Arbitrators
could help his clients to deal with the problems they were having with the UHT
donation program. Mr. Lewis therefore referred his clients, including the Appellant,
to Fiscal Arbitrators.
[19]
The Appellant
provided Mr. Lewis with all of his documentation for the preparation of his
2009 tax return. However, Mr. Lewis testified that the Appellant and his wife
did not mandate him to prepare their 2009 tax returns. Lewis made it clear to
them that they would be referred to Fiscal Arbitrators who would prepare their
returns. According to Mr. Lewis, the Appellant was aware of this before
providing Mr. Lewis with his documents and before his documents were forwarded
to Fiscal Arbitrators. The Appellant disputes this. Mr. Lewis submitted the
Appellant’s documents to Fiscal Arbitrators. After that, according to Mr.
Lewis, Fiscal Arbitrators dealt directly with the Appellant.
[20]
Eventually, Fiscal
Arbitrators sent the Appellant a package containing copies of his completed tax
return. The Appellant brought this package to Mr. Lewis. Initially, Mr. Lewis
indicated that he had no memory of meeting with the Appellant to review the
return but clearly there was such a meeting since Mr. Lewis testified that
he was present and saw the Appellant sign his return as well as a Request for Loss
Carryback. Mr. Lewis testified that he remembered the Appellant had a package
that had already been opened, containing the return. Mr. Lewis has no idea
who wrote “per” in front of the Appellant’s signature
on the return. The word “per”
was already there when the Appellant signed his documents. The Tax Completion
Checklist (Exhibit A-8), that came with the package from Fiscal Arbitrators,
indicated that “per” should appear in front of all
signatures. The Appellant had possession of his return for quite some time and
he had ample opportunity to review his return in its entirety if he chose to do
so. The Appellant could have asked Mr. Lewis any questions that he wanted about
his return but did not do so.
[21]
Mr. Lewis testified that he did not review the
tax return with the Appellant since he did not prepare it. He simply advised him
to make sure that the information contained in the return was correct before
signing. He also told him to make sure all required documentation was submitted
with the return. He did not give the Appellant any advice other than to follow
the instructions provided by Fiscal Arbitrators since they had prepared the
return.
[22]
In the fall of 2010, the CRA began questioning
the information contained in the returns of some of Mr. Lewis’ clients who had
been referred to Fiscal Arbitrators. These clients contacted Mr. Lewis and it
became obvious that something was just not right; Fiscal Arbitrators had done
something terribly wrong. Lewis stated that he advised his clients not to have
anything further to do with Fiscal Arbitrators and not to let Fiscal
Arbitrators do anything else for them. Mr. Lewis wanted to assist his clients
and he wanted to refile on behalf of several of his clients, including the
Appellant, in order to undo what Fiscal Arbitrators had done. Mr. Lewis
contacted the CRA requesting information on how to refile. He was told that
because the returns were already in the system, he had to wait until the
clients received an assessment before he could refile.
[23]
The Appellant’s Notice of Assessment was issued
in May 2011 (Exhibit R‑1, Tab-9). Mr. Lewis then started to reach out to
other professionals for help and that is when one Mr. Rudolfo Terracina,
supposedly a chartered accountant, became involved. Mr. Lewis paid a deposit
for Mr. Terracina’s services out of his own pocket. Mr. Terracina told Mr. Lewis
that the donation programs were a scam and that Fiscal Arbitrators was running
an even bigger scam. Mr. Terracina prepared and served a Notice of
Objection dated July 11, 2011 on behalf of the Appellant (Exhibit R-1, Tab-10).
This was unbeknownst to the Appellant, or so the Appellant claims. Even though Mr.
Terracina was of the view that Fiscal Arbitrators was running a scam, a reading
of the Notice of Objection appears to buy into and perpetuate the Fiscal
Arbitrators scam.
[24]
When the Appellant started to receive letters
from the CRA Mr. Lewis did not give him any advice on how to respond, because
the only people who could respond were Fiscal Arbitrators since they were the
ones who completed the Appellant’s tax return. The most Mr. Lewis would have
told any of his clients, including the Appellant, was not to let Fiscal
Arbitrators do anything further on their behalf. Mr. Lewis did not understand
what Fiscal Arbitrators had done and he did not trust Fiscal Arbitrators. He
states that he never told his clients that he would look after the problem but
yet he appears to have expended some considerable effort and expense in trying
to rectify the problem.
Position of the parties
[25]
The Appellant concedes that he likely signed his
2009 tax return that was filed, even though he states that he does not have a
specific recollection of the circumstances surrounding the signing. The
Appellant further concedes that it is open to this Court to find that he was
negligent in signing a document that neither he nor Mr. Lewis understood. It is
argued however, that such action does not amount to gross negligence and ought
not to attract the penalties provided for in subsection 163(2) of the Act.
In addition, it is argued that the Appellant ought not to be liable for gross
negligence penalties because he relied upon the information, advice and
assistance of Chester Lewis, an experienced tax preparer, whom he trusted since
2005 when Lewis first began to prepare tax returns for the Appellant and his
wife. It is submitted that the Appellant was completely unaware that his 2009
return contained any false information and it is suggested that Mr. Lewis
intentionally kept him in the dark concerning the true state of his income tax
situation. The Appellant claims to be an innocent victim. Chester Lewis
and Fiscal Arbitrators, who were engaged by Chester Lewis, are the culprits
here and it is unjust to punish the Appellant for their wrongdoings. The
Appellant therefore prays that his appeal be allowed and that this Court waive
the penalties and interest that are the subject of the present appeal.
[26]
The Respondent submits that the Appellant never
owned or operated any kind of a business during the 2009 taxation year and so
his claimed business losses as reported in his tax return are obviously false.
These false statements are of such a magnitude that if allowed, would result in
the refund of all taxes withheld or paid from 2006 through to 2009 – a
significant amount. The Respondent submits that the Appellant was wilfully
blind or otherwise grossly negligent regarding the falseness of the statements
contained in his return. The penalties for gross negligence imposed pursuant to
subsection 163(2) of the Act are therefore justified. The Respondent
urges this Court to dismiss the appeal with costs.
Credibility and findings of fact
[27]
I have a great deal of difficulty with the
credibility of both Chester Lewis and the Appellant. Chester Lewis is not a
disinterested party. He is being targeted by the Appellant as being the author
of all of the Appellant’s problems and indeed, in a sense, he is since he is
the one who referred his clients to Fiscal Arbitrators. He assumes no
responsibility whatsoever for the difficulties suffered by his clients. He
stated that he did not review the Appellant’s 2009 tax return with the
Appellant since he did not prepare it. It is clear that the Appellant came to
Mr. Lewis to review the return and it seems to me that Mr. Lewis should have taken
a look at it to see if everything was in order; after all, he was the
Appellant’s trusted tax preparer. Had he done so, Mr. Lewis would have seen the
claimed business losses and hopefully would have told the Appellant not to sign
and not to file the return. I view his evidence with a great deal of suspicion.
[28]
The Appellant’s credibility and reliability are
even more suspect. His evidence is vague, uncertain, inconsistent and
contradictory. He is incapable of accurately relating time frames, events or
circumstances. He is very equivocal in his evidence as to whether or not he
reviewed any of the documents that are central to this appeal. If he reviewed
them, then he merely glimpsed at them. It is highly likely, and I find as a
fact, that he did not even look at his documents at all before signing. He goes
so far as to suggest that he may even have signed his returns, including his
2009 return, in blank at the urging of Mr. Lewis. Throughout his testimony, he
was unable to state with any certainty as to when he first became aware that he
had claimed huge business losses on his return. He simply does not really know.
He states that the first time he ever saw his return was in his counsel’s
office a short time before and in preparation for this hearing. That is simply
not believable. He states that he did not start these court proceedings and he
did not instruct anybody to institute these proceedings on his behalf; yet he
is the named Appellant and he clearly wants this Court to set aside the
penalties and the accrued interest that were assessed against him. This
assertion is also patently false. In summary, I find the Appellant’s evidence
to be unreliable.
[29]
On weighing the entirety of the evidence, I am
able to glean the following facts. I find as a fact that Fiscal Arbitrators
prepared the Appellant’s 2009 tax return, not Chester Lewis. However, this was
done on the recommendation of Chester Lewis who referred the Appellant to
Fiscal Arbitrators. I find that the Appellant signed his 2009 tax return and
the Request for Loss Carryback without even looking at these very important
documents. The return contained patently false information. He did not ask any
questions at all about the information contained in his returns. He made no
efforts at all to verify the completeness and accuracy of the information
contained in his return. The Appellant was already under scrutiny by the CRA
since he had been assessed penalties regarding his participation in the UHT
donation programme, which programme had been recommended to him by Chester
Lewis. In spite of this, he was still willing to sign any documents presented
to him by Chester Lewis without looking at them and he was even willing to sign
these documents in blank. I find that had the Appellant bothered to take a look
at his return, he would have immediately known that his return contained some
blatantly false and fraudulent information. This information was obvious on the
face of these documents. Even an unsophisticated person would have immediately
seen the false information and would have known that the information was false
and did not reflect the reality of the Appellant’s fiscal situation.
Legislative dispositions
[30]
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 …
[31]
According to subsection 163(3), the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
Analysis
[32]
In the case at hand, I will apply the same
analysis that I did in many prior cases involving s. 163(2) of the Act.
In fact, most of this analysis is a direct repetition of what I have previously
stated in those past cases.
[33]
It is trite law that our system of taxation is
both self-reporting and self-assessing. It is based on the “honour system” and relies on the honesty and integrity
of the individual taxpayer. The taxpayer has a positive 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. Justice Martineau stated
succinctly in Northview Apartments Ltd. v. Canada (A.G.), 2009 FC 74
(CanLII), 2009 D.T.C. 5051, “[i]t is
the essence of our tax collection system that taxpayers are sole responsible
for self-assessment and self-reporting to the CRA” (para. 11).
[34]
In R. v. Jarvis, [2002] 3 S.C.R. 757,
2002 SCC 73, the Supreme Court of Canada explained the responsibilities and
duties of taxpayers as well as some of the measures contained in the Act
that are 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 … 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)). …
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” …
[35]
The penalties provided for in section 163 of the
Act have as their purpose 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.
[36]
I have often stated that I am of the view that
the decision whether or not a taxpayer should be subjected to the penalties
under subsection 163(2) of the Act should be determined in light of the
positive responsibilities and duties of the taxpayer to accurately and
completely report his income in a self-reporting and self-assessing system.
[37]
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 of, or gross negligence in the making of,
participating in, assenting to or acquiescing in the making of that false
statement.
[38]
There can be no question that the Appellant’s
2009 tax return contained false statements. The Appellant never owned or
operated any kind of a business during that year and therefore could not have
had any net business losses amounting to more than $294,000. His claim for
business losses has no foundation in fact and is patently false.
[39]
If the Appellant is to be believed, then it is
evident that he had no knowledge that his return contained any false
information since he simply never bothered to look at his return before signing
it; indeed, he goes so far as to suggest that he may have signed his return in
blank.
[40]
I come to the conclusion that the Crown has clearly
established on the balance of probabilities that the Appellant made, assented
to, participated in or acquiesced in the making of the false statements in his 2009
return in circumstances amounting to gross negligence. I come to this conclusion
for the reasons that follow.
[41]
There is a difference between ordinary negligence
and gross negligence. Negligence is the failure to use such care as a
reasonably prudent and careful person would use under similar circumstances.
Gross negligence involves greater neglect than simply a failure to use
reasonable care. It involves 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), at paragraph 37.
[42]
It is also well settled law that gross
negligence can include “wilful blindness”. The concept of “wilful blindness”, well known to the criminal law, was
explained by Mr. justice Cory of the Supreme Court of Canada 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.
[43]
It has been long recognized that the concept of “wilful blindness” is applicable to tax cases and is
included in the term “gross
negligence” as that term is used in
subsection 163(2) of the Act: Villeneuve v. Canada , 2004 FCA
20); Panini v The Queen, 2006 FCA 224 at paragraph 43.
[44]
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, and
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. HMQ, 2013 TCC 228, at paragraph 14).
[45]
Justice Campbell Miller in the matter of Torres
et al. v. Canada, 2013 TCC 380, affd 2015 FCA 60, conducted a thorough
review of the jurisprudence regarding gross negligence penalties under
subsection 163(2) of the Act. He summarized the governing principles to
be applied at paragraph 65 of his decision, and I paraphrase:
a. Knowledge of a false statement can be imputed by wilful
blindness.
b. 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.
Circumstances that indicate a need for an inquiry prior to filing,
include:
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.
This is certainly
not an exhaustive list.
[46]
An application of the Torres factors
leads inescapably to the conclusion that the Appellant was wilfully blind when
he signed his return and therefore he exercised gross negligence. The Torres
analysis yields the following:
The Appellant is a man of average intelligence who chose not to
complete his secondary education but preferred to enter the work force when he
was in grade 11. However, he has taken courses at George Brown to upgrade his
education and also to acquire knowledge in electronics and microcomputer
technology. He understands financial transactions having negotiated mortgages
for his homes and motor vehicle leases. He was able to take the steps necessary
to obtain the Disability Tax Credit for his wife when she became ill. He has a
rudimentary knowledge of business matters since his wife had her own clothing
business for a while. The Appellant has sufficient intelligence, education and
life experience to be able to ensure that his tax returns are accurate and
complete and it is clear that he would have been able to recognize that a false
business loss had been claimed in his 2009 tax return had he simply looked at
his return.
The business loss claimed is huge compared to the Appellant’s actual
income. The refund claimed is also very large. He would have known this had he
looked at his return.
The false statement was blatant and was easily detectable. He
ignored this by not even looking at the return.
The tax preparer, Fiscal Arbitrator, did not acknowledge having
prepared the return.
The Tax Completion Checklist instructed the Appellant to write “per” next to his signature and the Appellant was instructed not to
respond directly to the CRA if contacted. These are unusual requests.
Fiscal Arbitrators was previously unknown to the Appellant and he
never did have any personal contact with any representative of Fiscal
Arbitrators.
The Appellant never sought nor was he provided with any explanations
at all about how his tax return was completed or about the information
contained therein.
The Appellant’s previous returns were being scrutinized by the CRA
as a result of the UHT donation programme. This should have alerted the
Appellant to exercise greater caution in the preparation of his 2009 tax
return.
Chester Lewis told the Appellant that he did not understand what
Fiscal Arbitrator was doing. This should have been a warning to the Appellant
to exercise caution and to inform himself about what was going on. He did not
seek input from anyone else.
The Appellant made no efforts whatsoever to comply with the law. His
subsequent behaviour and lack of cooperation when the CRA was simply seeking
clarification about his claimed business losses is indicative of the complete
absence of due diligence throughout.
[47]
On considering all of the foregoing, I come to
the conclusion that the Appellant was wilfully blind as to the falsity of the
contents of his 2009 tax return. By not even looking at his return, he chose to
ignore what should have been obvious red flags.
[48]
However, quite apart from wilful blindness, I
find that the Appellant was otherwise grossly negligent in the preparation and
filing of his tax return. The Appellant certified by his signature that the
information contained in his return was complete and accurate. Yet he made no
effort at all to verify the accuracy of the contents of his tax return, as it
was his duty to do. All he did was sign his return without even looking at it.
Had the Appellant bothered to take even a cursory look at his return, he would
have immediately discovered the blatantly false information contained therein.
He did not care what was contained in his return and he was content to let Mr.
Lewis or whomever prepare his return. He was even willing to sign his return in
blank thus showing a highly cavalier attitude in regards to the accuracy and
completeness of his returns. Such conduct in refusing to inform himself, even
in general terms of what was contained in his return, is not only evidence of
wilful blindness but is also conduct otherwise amounting to gross negligence in
my opinion. He showed wanton and reckless disregard as to whether or not his
return was completed in compliance with the law.
[49]
The Appellant takes the position that he placed
his complete trust and confidence in Chester Lewis. He argues that he is an
innocent victim who was somehow betrayed by Lewis and Fiscal Arbitrators. 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: Jean-Yves Coté et Lise Lavoie c. Sa
Majesté La Reine, 2015 CCI 228, a case where the taxpayers relied on their
lawyer whom they had known and
trusted for more than 30 years and who was a friend.
[50]
However, there is a
significant body of jurisprudence to the effect that taxpayers cannot 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 return. Quite apart from wilful blindness,
taxpayers who take no steps whatsoever to verify the completeness and accuracy
of the information contained in their return may thereby face penalties for
gross negligence.
[51]
In Gingras v. The Queen, [2000] T.C.J. No. 541 (QL), the
appellants contended that they had always acted in good
faith and that they believed that their tax preparer was conducting a
responsible and reliable business, adding that they had little or no knowledge
of tax matters. Justice Tardiff 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.
[20] The appellants signed returns of income containing false and
untruthful information and
cannot claim that this was done without their knowledge. They had an obligation
to ensure that all the information contained in their returns was truthful. …
[52]
Further, at paragraph 30 and 31, Justice Tardiff
continues:
[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.
[31] With
respect to penalties, the burden of proof is on the respondent. It was clearly
shown on a preponderance of the evidence adduced that the appellants submitted
in their respective returns major false statements which had significant impact
on their tax burden. They could not have been unaware that these statements
were false. The Court can understand that the taxpayers might have been
incapable, inexperienced and incompetent when it came to preparing their income
tax returns. However, 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.
[53]
In DeCosta v. The Queen, 2005 DTC 1436, Bowman C.J. stated at para. 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.
[54]
In Ghislain Laplante v. The Queen, 2008
TCC 335, the Appellant, just as in the case at bar, did not look at his tax
return at all before signing. This was held to be gross negligence. Justice Bédard of this Court wrote as follows:
[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? 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. 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 added]
[55]
Justice Bowie of this Court stated in Brown v. The Queen, 2009 TCC 28 (CanLII);
[2009] 4 CTC 2162:
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]
[56]
Of particular relevance is the decision of
Justice Bédard of this Court in Gélinas v. Canada, 2009 TCC 136, where he stated:
[11] In my opinion, the Appellant also committed gross negligence
in 2004. I am of the opinion that the Appellant’s negligence (based
on the fact that he did not check his entire return before his accountant sent
it to the Canada Customs and Revenue Agency) was serious enough to justify
using the somewhat pejorative epithet “gross”. The Appellant’s attitude
was so cavalier that it translates to a complete indifference in terms of
respecting the Act. If the Appellant had examined his income tax return
for the 2004 taxation year, he would likely have discovered the false statement
contained within (a statement which apparently was made by his accountant) in
terms of the size of the amounts of unreported income and other factors
analyzed above. The Appellant cannot absolve himself of his
responsibility by pointing the finger at his accountant. By
attempting to absolve himself of all responsibility with respect to his income
tax returns, the Appellant is being negligent by ignoring the responsibilities,
duties and obligations imposed by the Act. Also, the Act imposes a
minimum obligation to the Appellant to check his income tax return for the 2004
taxation year before his accountant sends it in; in addition, a more than
cursory glance would have permitted him, in my opinion to find the false
statement that his accountant had made.
[Emphasis added]
[57]
In Brochu v. HMQ, 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 or
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 inform herself was
carelessness amounting to gross negligence.
[58]
In Bhatti v. R., 2013 TCC 143, Mr. Justice Campbell Miller pointed out at
paragraph 30:
[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. …
This dicta of
Justice Miller is most apt to the case at bar.
[59]
Another recent example can be found in the matter of Atutornu v. H.M.Q.,
2014 TCC 174, where the taxpayers simply signed their returns where they were told to sign and 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. Justice Jorré of this Court held that the complete failure of
the taxpayers to ask any questions or review their returns, when only a little
effort would have raised red flags, clearly showed wilful blindness which
justified the imposition of subsection 163(2) gross negligence penalties.
Conclusion
[60]
It cannot be disputed that the Appellant’s 2009
tax return contained false statements – the Appellant did not carry on a
business and he did not incur any business losses whatsoever, let alone losses
amounting to more than $294,000. On considering the entirety of the evidence
and recent jurisprudence, I come to the conclusion that the Appellant made,
participated in, assented to or acquiesced in the making of false statements in
his return in circumstances amounting to gross negligence. If he is to be
believed, then regardless of who prepared his return, whether it be Chester
Lewis or Fiscal Arbitrators, he did nothing to verify the accuracy of the
information contained in his tax return. He simply signed his return without
reviewing it or without even looking at it. In so doing, he certified that the
return was complete and accurate – it was not and in fact it was patently
false. He had a duty to exercise care and accuracy in the completion of his
return and he failed miserably in this duty, making no effort at all to verify
the accuracy and completeness of his return. Had he made even the most minimal
effort, he would have quickly and easily discovered the blatantly false
information contained in the return. His actions in signing his return without
even looking at it are not only negligent but are grossly negligent. In
addition, if he signed his return in blank, as he suggests he may have done,
then this is even greater recklessness that would also attract the
characterisation of “gross negligence”. As such, the Appellant is properly
subject to the penalties imposed on him pursuant to subsection 163(2) of the Act.
[61]
For all of the foregoing reasons, this appeal is
dismissed. The Respondent is entitled to her costs if she wants them.
Signed at Kingston, Ontario, this 6th day of October
2016.
“R.G. Masse”
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