REASONS
FOR JUDGMENT
Masse D.J.
Overview
[1]
The Appellant, Edward Gray, is appealing the
penalty for gross negligence that was imposed on him pursuant to subsection
163(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”)
in relation to his 2008 taxation year and a related request for loss carryback
to the 2005, 2006 and 2007 taxation years. The Appellant’s tax preparer
prepared the Appellant’s tax return in such a way as to claim very large
fictitious business losses. These business losses, if allowed, would result in
the refund to the Appellant of all the taxes paid or deducted at source for the
2005, 2006, 2007 and 2008 taxation years. The fact is that the Appellant never
owned or operated any kind of business at all during the taxation period under
consideration. The Canada Revenue Agency (the “CRA”) disallowed the losses and
penalized the Appellant pursuant to subsection 163(2) of the Act. This case
pertains only to the penalties that were imposed.
Factual Context
[2]
The Appellant is an 85-year-old gentleman. He
went to university from 1949 to 1952 in Montreal. He took one year of commerce
but that was not for him. Therefore, he switched to arts and pre-med but he
left school without obtaining a degree. After leaving school, he went to Europe
for a while. On returning to Canada, he qualified to become a pilot. He found
work with Trans‑Canada Air Lines (now Air Canada). He flew for Air Canada
he says for “35 years, 5 months and 2 days”
(transcript, page 8). I get the impression that he is a man who greatly
enjoyed his professional career. He retired from Air Canada in 1990.
[3]
He has no business or accounting experience and
he has always had someone else prepare his tax returns. At first he had
Guardian Trust prepare his tax returns and for two years he had someone from
TACS, a tax company, do his tax returns for him. However, he found that TACS
was outrageously expensive for what was seemingly a fairly simple tax return.
He believes the fee was about $500.
[4]
Mr. Gray has known Ted Strachan for about
20 years. Their wives are best of friends. Mr. Strachan referred the
Appellant to a person named Carlton Branch, who had done Mr. Strachan’s
tax returns for some time. Mr. Gray retained Mr. Branch to do his tax
returns and Mr. Branch did so for about four or five years without incident.
[5]
Tax time came around in April 2009. Mr. Branch
came to Mr. Gray’s house to obtain his tax information as he usually did.
At that time, there were several people present, the Appellant’s wife, Mr. Strachan
and his wife Carrol Strachan, Norman Galt and his wife Margaret Galt. Mr. Gray
has known the Galts for about 10 years. This meeting was really in the nature
of a sales pitch by Mr. Branch on behalf of Fiscal Arbitrators, a firm of
professional tax preparers of which he and a colleague, Larry Watts, were
members. At this meeting, Mr. Branch told the group that there was a new
method of doing tax returns that resulted in good refunds. According to Mr. Gray,
Mr. Branch did a very smooth job of explaining how the whole thing worked
although Mr. Gray had some difficulty in explaining this method. Mr. Gray
was given to understand that the government simply regarded him as a social insurance
number and that he, as a natural person, was a separate and distinct person for
tax purposes. It was explained to him that he could claim business losses;
these business losses really amount to his personal living expenses, which is
what he says the social insurance number was paid to keep him alive. I have to
confess that this method makes no sense at all to me. Mr. Branch stated
that this method was completely above board and perfectly legal. Mr. Branch
had worked for the CRA in the past and so he had the aura of expertise. Mr. Strachan
stated that his wife Carrol had received a significant refund and she confirmed
at this meeting that she in fact did receive a significant refund using this
method. Consequently, Mr. Gray felt confident that this new way of doing tax
returns was indeed above board. Mr. Branch explained that if they chose to
use this method, then they had to agree that, if there were any communications
with the CRA, they should insist that it all be done in writing and that Mr. Branch
would take care of any responses to the CRA.
[6]
Mr. Galt was at this meeting. He worked as
a banker for 28 years and held a variety of responsible positions. Mr. Galt
provided his recollection of the meeting. He understood that Carlton Branch
and Larry Watts were partners in a company called Fiscal Arbitrators (“FA”).
They had extensive experience with the CRA. Mr. Galt understood that FA
had developed a new methodology of filing tax returns. Over a thousand people
across Canada had signed on to this new method. Ms. Strachan confirmed
that she herself had received a refund using this method. Mr. Galt stated
that the methodology was extremely confusing and convoluted. He stated that the
taxpayer filed as if he was outside of the normal method. According to this
method, individuals had the right to deduct individual expenses and they were
not beholden to report anything to the government. Mr. Galt realized that
this was a big conundrum. This method had not been tried by anybody else other
than FA. Mr. Galt did not know if the CRA would allow or disallow it. He
was cautious about doing it. He questioned Mr. Branch extensively about it
and he decided to file his 2008 tax return the normal way. However, FA did file
a claim for prior years on his behalf but it was disallowed by the CRA.
[7]
FA did prepare the 2008 tax return for Mr. Gray
and Mr. Gray did file it. A copy of the return can be found at Exhibit R-1, Tab
1. Although not admitting that he signed this return, the Appellant states that
the signature on the last page of the return looks like his. I find as a fact
on the balance of probabilities that it is his signature. Just above the
Appellant’s signature on the last page, there appears the usual certification
that the taxpayer certifies that the information contained in the return and
attached documents is complete and accurate and fully discloses all his income.
He says that he did not see this. Just below his signature, there appears the
warning that it is a serious offence to make a false return. He says that he
may not have seen this but he is aware that you do not lie on your tax return.
Just in front of his signature appears the word “per”.
He does not know who wrote this but he does not think that he did. He was
simply told to sign “per” because that was the
way it is done. He did not notice that box 490, reserved for the identification
of the professional tax preparer that prepared the return, was left blank.
[8]
The Appellant’s return contains some blatantly
false information. In his return, the Appellant claimed that he suffered net
business losses for the year amounting to $458,476.10. This is completely and
utterly false. The Appellant’s only significant income during the 2008 taxation
year was primarily pension income, Canada Pension Plan benefits, Old Age
Security pension and income from a Registered Retirement Income Fund — he had
no business income. The Appellant never owned or operated any business
whatsoever during 2008 and he never incurred the business expenses that were
claimed. He simply does not know how any of the figures in his return were
calculated. He certainly never provided FA with any information that would
permit the calculation of those numbers.
[9]
The Appellant states that he did not notice that
he was to get a refund of some $40,800 for 2008. However, the refund is
conspicuously shown just to the right of his signature on the last page of his
return. It would be very difficult not to notice it. In addition, it is only
human nature for a taxpayer to want to know the amount of his tax return. In
past years, the Appellant usually ended up owing some additional tax rather
than getting a refund.
[10]
The Appellant also signed a request for loss carryback
on May 10, 2009 (Exhibit R-1, Tab 1, pages 14 and 15), but he claims that
he did not know that he did so. It is clearly his signature and therefore I
find that he did sign this document. The Appellant claimed a portion of these
business losses against his 2008 income and he requested that the balance be
carried back and applied to his 2005, 2006 and 2007 taxation years. If these
business losses were allowed, this would result in the Appellant having all the
taxes that he had paid or were deducted at source refunded to him for 2005
through to 2008. He would have gotten a tax holiday for those four years. He
states that he never authorized claiming a loss carryback and he states that he
did not realize that he would not have had to pay taxes.
[11]
The Appellant admits that he did look at his
return, but it did not mean much to him because when it comes to numbers his
brain turns to mush. He stated that the numbers he saw on the return seemed
very large. He states that he may have seen that he was claiming business
losses of more than $458,000. He queried this and he was informed that this is
the way it is done. He was told “don’t worry, that is —
those things are the expenses for keeping you alive” (transcript, page 14).
Mr. Gray admits that he did not provide any information to his tax
preparer that would permit the calculation of that number. He does not know how
this number was determined. He took no steps at all to verify the accuracy of
the information that was contained therein. He says that he asked a lot of
questions, but the answers that he was given eluded him.
[12]
The Appellant received a letter from FA, a copy
of which can be found at Exhibit A-1, Tab 2. He claims that he does not recall
receiving it but he frankly admits that he is sure that he did. This letter
purports to be a schedule to an agreement that he had with FA dated July 15,
2008. This agreement provided for an initial fee of $500 and 10% of any refund
(less the initial fee). The Appellant says that, at some point, this became 20%
of any refund; he cannot explain how this happened. The total refund was
estimated to be $130,114.29 for the four years spanning from 2004 to 2007. He
does not remember paying the $500. He was only told that they would do his 2008
tax return and later on in the game he learned that they had thrown in a few
other years.
[13]
The CRA sent a letter to the Appellant on
November 13, 2009 (Exhibit R‑1, Tab 3) questioning his business
losses and seeking documentary proof of the claimed business losses. When the
Appellant saw this letter he was upset. He had no idea how he should respond to
it so he tried to get a hold of Mr. Branch. He was not successful. He
ended up talking to Mr. Watts who told him to send him the letter and he
would respond to it. The response that Mr. Watts provided to the Appellant
did not make any sense to him. More letters came from the CRA and the Appellant
again gave them to Mr. Watts who looked after drafting a response. All the
responses were nonsensical. Still, the Appellant did exactly as he was
instructed to do by FA. One response in particular, which is shown at Exhibit
A-1, Tab 24, is absolutely ridiculous. The Appellant was instructed to put a 3 cent
or 5 cent stamp at the bottom right hand of the letter of response
and to write his signature across the stamp at a 45 degree angle from the
bottom left corner of the stamp to the top right corner of the stamp. He found
that confusing but he never got an explanation as to why he should do this. Any
explanations provided by Mr. Watts were always evasive and did not really
make much sense. Mr. Watts would simply say most of the time that he would
take care of it. The Appellant never did communicate with the CRA directly and
never provided the information that the CRA requested. He continued to deal
with FA since he did not know who else to turn to. He never sought any advice
from any other person.
[14]
Ultimately, the Minister of National Revenue
(the “Minister”) disallowed the claimed business losses, denied the request for
loss carryback and applied a penalty pursuant to subsection 163(2) of the Act.
The Appellant objected to this assessment but the Minister confirmed the
assessment, hence the appeal to this Court.
[15]
It is argued that Mr. Gray ought not to be held
liable for gross negligence penalties because he had no knowledge of the false
statements contained in his 2008 tax return nor was he wilfully blind or
otherwise grossly negligent. It is argued that it is not wilful blindness or
gross negligence to rely on the advice of a trusted tax preparer. Such reliance
negates any finding of intentional conduct required for the assessment of gross
negligence penalties. It is argued that Mr. Gray honestly believed that he
was entitled to a tax refund based on the advice of Mr. Branch and also
based on the fact that Ms. Strachan had received a refund. He believed
that this was completely above board. It is unjust to punish the Appellant for
the wrongdoing of FA since he is an innocent victim of FA’s fraudulent conduct.
The Appellant therefore prays that his appeal be allowed with costs and that
this Court waive the penalties and interest that are the subject of the present
appeal.
[16]
The Respondent is of the view that the Appellant
never owned or operated any kind of business during 2008 and that his claimed
business losses 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 over the last four years. The Respondent submits that the Appellant
knowingly made these false statements. In the alternative, the Appellant made,
participated in, assented to or acquiesced in the making of, these false
statements in circumstances amounting to gross negligence. At the very least,
the Appellant was wilfully blind regarding the falseness of the statements
contained in his tax return. The Respondent urges this Court to dismiss the
appeal with costs.
Legislative Dispositions
[17]
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 . . .
[18]
According to subsection 163(3), the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
Analysis
[19]
Counsel for the Appellant has done a great deal
of research and has supplied a book of authorities for my guidance. These
authorities are: R. v. Hinchey, [1996] 3 S.C.R. 1128; Udell v. M.N.R.,
[1969] C.T.C. 704 (Ex. Ct.); Venne v. Canada, [1984] F.C.J. No. 314
(QL); Dunleavy v. The Queen, [1993] 1 C.T.C. 2648 (TCC); Farm
Business Consultants Inc. v. Canada, [1994] T.C.J. No. 760 (QL), affirmed
by the Federal Court of Appeal, [1996] F.C.J. No. 82 (QL); R. v.
Jorgensen, [1995] 4 S.C.R. 55; Carlson v. The Queen, [1998] 2 C.T.C.
2476 (TCC); 897366 Ontario Ltd. v. Canada, [2000] T.C.J. No. 117
(QL); Findlay v. Canada, [2000] F.C.J. No. 731 (QL); Turcotte v. The
Queen, [2002] 2 C.T.C. 2806 (TCC); Isaza v. The Queen, [2002] 3
C.T.C. 2107 (TCC); Therrien v. The Queen, [2002] 3 C.T.C. 2141 (TCC); 410812
Ontario Ltd. v. Canada, [2002] T.C.J. No. 176 (QL); McGhee v. The Queen,
2003 TCC 265; Bernick v. The Queen, 2003 TCC 433, affirmed by the
Federal Court of Appeal, 2004 FCA 191; Klotz v. The Queen, 2004 TCC 147;
St‑Pierre v. Canada, [2002] T.C.J. No. 613 (QL); Julian v. The
Queen, 2004 TCC 330; Caron v. Canada, [2002] T.C.J. No. 696 (QL); Larouche
v. The Queen, 2004 TCC 629; Mark v. The Queen, 2006 TCC 35; Hine
v. The Queen, 2012 TCC 295; and Murugesu v. The Queen, 2013 TCC 21.
[20]
Counsel for the Respondent has also provided a
book of authorities. These authorities are: Venne v. Canada, [1984]
F.C.J. No. 314 (QL); Canada v. Villeneuve, 2004 FCA 20; DeCosta v.
The Queen, 2005 TCC 545; Panini v. Canada, 2006 FCA 224; Laplante
v. The Queen, 2008 TCC 335; Gélinas v. The Queen, 2009 TCC 136; Chénard
v. The Queen, 2012 TCC 211; Bhatti v. The Queen, 2013 TCC 143; Mullen
v. Canada, 2013 FCA 101; Janovsky v. The Queen, 2013 TCC 140; McLeod
v. The Queen, 2013 TCC 228; Brisson v. The Queen, 2013 TCC 235; Torres
v. The Queen, 2013 TCC 380, affirmed by the Federal Court of Appeal, 2015
FCA 60; Allison v. The Queen (February 4, 2014), TCC, 2013-2144(IT)I; Guindon
v. Canada, 2015 SCC 41; Lavoie c. La Reine, 2015 CCI 228; and Atutornu
v. The Queen, 2014 TCC 174.
[21]
I am thankful to counsel for this helpful review
of the authorities.
[22]
It is axiomatic that our system of taxation is
both self-reporting and self‑assessing. It relies on the honesty and
integrity of the individual taxpayer. It is based on the “honour system”. The
taxpayer has a 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.”
[23]
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.]
[24]
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. . . .
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.
[25]
Therefore, I am of the view that the decision of
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.
[26]
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, participating in, assenting to or
acquiescing in the making of, that false statement.
[27]
It cannot be disputed that Mr. Gray’s 2008
tax return contained false statements. He never owned or operated any kind of
business during that year. His claim for business losses is patently false.
[28]
Under cross-examination, Mr. Gray admits
that he did take a look at his return before filing it although he claims that
he really did not understand it. He also stated that he did see some numbers on
the return and they seemed very large. He states that he may have seen that he
was claiming business losses of more than $458,000. Mr. Gray does not know
how this number was calculated and he admits that he did not provide any
information to FA that would permit the calculation of that number. Therefore,
he must have known that these numbers had no foundation in fact. I come to the
conclusion on the balance of probabilities that the Appellant had knowledge
that his tax return contained false information and that he came to this
realization when he saw the unusually large numbers in his return that are
patently obvious and that are described on the return as business losses. This
finding is sufficient in and of itself to justify the imposition of penalties
pursuant to subsection 163(2) of the Act.
[29]
If I am mistaken in concluding that the
Appellant had knowledge of the false information, then I must go on and
consider whether or not he made, participated in, assented to or acquiesced in
the making of, the false statement that was in his return in circumstances
amounting to gross negligence.
[30]
There is a difference between ordinary
negligence and gross negligence. Several of my colleagues and myself have
canvassed the law in this area on many occasions in recent decisions.
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, above. In Venne,
Justice Strayer of the Federal Court (Trial Division) stated that subsection
163(2) is a penal provision and must be construed strictly. These penalties
ought to be imposed only where there is a high degree of blameworthiness
involving knowing or reckless misconduct.
[31]
However, in Guindon, above, the Supreme
Court of Canada held that section 163.2 of the Act, which provides for the
imposition of gross negligence penalties against third party tax preparers, is
not a penal provision. The section provides for an administrative penalty that
is primarily intended to maintain compliance or to regulate conduct within a
limited sphere of activity — the purpose being to promote honesty and deter
gross negligence, qualities that are essential to the self-reporting system of
income tax assessment. I am of the view that the same can be said of the
penalties provided for in subsection 163(2) with which we are dealing. One
should therefore not look for proof approaching the standard of beyond a
reasonable doubt before concluding that the imposition of penalties as provided
by subsection 163(2) is justified. Nonetheless, the penalties are meant to
capture serious conduct, not ordinary negligence or simple mistakes made by a
taxpayer.
[32]
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 Justice Cory of the Supreme Court of Canada in Hinchey,
above. 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.
[33]
It has been held that the concept of “wilful blindness” is applicable to tax cases; see Villeneuve,
above, and Panini, above. 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.
[34]
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.
Obviously, 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, above, at paragraph 11; Bhatti,
above, at paragraph 24; and McLeod, above, at paragraph 14).
[35]
In Torres, above, Justice C. Miller of
this Court conducted a very 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:
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 . . . 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.
[36]
This is certainly not an exhaustive list.
[37]
The Appellant is an intelligent, sophisticated
and articulate person who has engaged in post‑secondary studies in
commerce and pre‑med. He is intelligent enough to have qualified to be an
airline pilot — quite an accomplishment in my view. Although he professes to
not have much of an understanding of tax returns, he knows the difference
between business income and employment income. He knows the difference between
profit and loss. Education, experience and intelligence are not factors that
could relieve the Appellant of a finding that he made false statements under
circumstances amounting to gross negligence.
[38]
There were ample warning signs that should have
aroused the Appellant’s suspicions and motivated in him the need to make
further inquiries:
(a) Speciousness
of the Tax Savings Scheme — Mr. Branch had prepared the Appellant’s
tax returns for a few years in the past without incident, then for 2008,
Mr. Branch suggests a totally different and new method of tax preparation.
This should arouse some curiosity and certainly some questions about what was
amiss with the way Mr. Branch had prepared his returns in the past. The
scheme proposed by Mr. Branch and FA was on its face ridiculous and this
should have been immediately obvious to the Appellant. The theory that there
was a way that an individual could be separated from his social insurance
number and thus create two separate entities for tax purposes is ludicrous. No
one can honestly believe that personal expenses could be charged against
personal income in the guise of business expenses. Even if the Appellant
believed this scheme to be legitimate, he should have asked himself how Mr. Branch
and FA came up with the numbers that they did. The business losses reported in
the Appellant’s 2008 tax return make no sense at all and the Appellant knew
this. This is a factor that strongly suggests gross negligence through wilful
blindness.
(b) The
Fee Structure — The Appellant testified that his prior tax preparer, TACS,
charged him outrageous fees just for completing a seemingly simple tax return.
Yet, FA charged him the exact same fee of $500 plus 10% of any refund (less the
initial fee). This later turned out to be 20%. It is clear that the Appellant
was expecting a significant return compared to other years and therefore the
fee that he would have had to pay would have been very large, amounting to
several thousands of dollars. The tax return prepared by FA was not all that
complicated so as to justify such an exorbitant fee considering that FA only
filled out some forms based on the limited information that the Appellant would
have supplied to FA. This should have been a bright red flag for the Appellant.
(c) Lack
of Explanations by Tax Preparer — It is clear that the Appellant did not
have much understanding of the new methodology being proposed by Mr. Branch
and FA. Such a situation would require some explanations on the part of the
tax preparer. Any explanations provided were woefully inadequate and basically
consisted of “don’t worry”. A true professional would want to make sure that
his clients understood the scope of what was being done and why, especially
when there is a radical departure from an established methodology. The lack of
full and adequate explanations in these circumstances and the elusive answers
provided by the tax preparer should have alerted the Appellant to the fact that
there was something at play that was simply not correct.
(d) Magnitude
of the Advantage — The Appellant states that he did not notice that he was
to get a refund of some $40,800 for 2008. However, the refund is conspicuously
shown just to the right of his signature on the last page of his return. It
would be very difficult not to notice it. I cannot accept his assertion that he
did not notice this; it would have been obvious to anyone who even glanced at
the signature page. In addition, it is only human nature for a taxpayer to want
to know the amount of his tax refund. The letter shown at Exhibit A-1, Tab 2,
which the Appellant admits he in all likelihood received, indicates that he
could expect to receive a total refund of about $130,000 for the years 2004 to
2007. This was highly questionable since nothing had changed in his fiscal
situation and in the past the Appellant usually had to pay some additional
taxes rather than obtain a refund. Mr. Branch had prepared his returns for
the last few years and, all of a sudden, it is discovered that the Appellant
should have gotten huge refunds during those years? Mr. Branch was
supposed to have been a former employee of the CRA. If what was being proposed
was legitimate, why was it that Mr. Branch had not suggested it right from
the beginning? This should have led the Appellant to question the scheme that Mr. Branch
was proposing. What was it that Mr. Branch, a supposedly professional
taxman, had missed in the past that would now result in a tax advantage of some
$130,000? The magnitude of this advantage was a glaringly bright red flag that
should have motivated the Appellant to question what it was that his tax
preparer was doing.
(e) Blatantly
and Readily Detectable False Statements — The business losses indicated in
the 2008 tax return were huge, amounting to about $458,500. This was blatantly
false information. The Appellant saw this very large number. Even if he did not
see it or did not notice it, then he certainly should have — it was readily and
easily detectable. This is another glaring factor that points towards gross
negligence through wilful blindness.
(f) Tax
Preparer does not Acknowledge Preparing Return — Box 490 of the return is
reserved for the identification of the professional tax preparer that prepared
the return. It is empty. The Appellant’s assertion that he did not notice box
490 is difficult to accept since this box appears right beside his signature on
the last page of the return. He must have seen it and he should have asked
himself why it was that Mr. Branch, Mr. Watts or FA did not want to
identify themselves to the CRA. If the Appellant indeed did not see this box,
then this demonstrated carelessness on his part in that he could not be
bothered to take a look at his return.
(g) Lack
of Inquiries of Other Professionals or the CRA — When the Appellant did not
receive any adequate explanations from his tax preparer, he did not seek any
advice from a tax accountant, a tax lawyer, his past tax preparers or any other
known tax preparer or even the CRA. He simply chose not to inform himself. He
should have and his failure to do so shows that he chose to remain in
ignorance. This is indicative of wilful blindness.
(h) Genuine
Effort to Comply with the Law — 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,
rather than respond directly to the CRA and take his tax preparer to task, he
gave the CRA letter to Mr. Watts. The response that was prepared for the
Appellant made no sense at all and was not in any way responsive to the valid
concerns raised by the CRA. Yet, he still sent it on to the CRA. He must have
known when he got the first letter from the CRA that Mr. Branch or FA had
done something dreadfully wrong and he no longer had any reason to trust them.
Still, he continued with the obstructionist conduct advocated by Mr. Watts.
The response shown at Exhibit A-1, Tab 24, together with Mr. Watts’ instructions
to the Appellant to write his signature from the bottom left corner to the
upper right corner at a 45 degree angle across a 3 cent or 5 cent
stamp, is ridiculous and the Appellant could not honestly believe that this
letter was a bona fide response to the concerns raised by the CRA. This
after‑the‑fact conduct gives an indication as to his mindset
throughout; see Mullen, above, at paragraph 7 regarding after‑the‑fact
conduct.
All the foregoing factors should have
aroused the Appellant’s suspicions concerning FA and should have incited the
Appellant to question what was going on. However, he did not. In fact, he did
nothing. He chose to remain ignorant, preferring instead to place his complete
and unquestioning trust and confidence in Mr. Branch, Mr. Watts and
FA. 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
conduct otherwise amounting to gross negligence in my opinion.
[39]
The Appellant argues that he is the innocent
victim of people whom he trusted. He takes the position that he honestly
believed that what Mr. Branch was proposing was perfectly legal. 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, above, 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. Counsel for the Appellant has also provided other examples of
cases where it has been held that a taxpayer ought not to be responsible for
gross negligence penalties where the taxpayer honestly relies on a trusted
financial advisor, tax preparer, friend or family member (see Mark,
above, at paragraphs 18 and 19; Findlay, above, at paragraph 27; Hine,
above, at paragraphs 9, 35, 42 and 51 — reliance on spouse; Udell,
above, at paragraph 44 — reliance on accountant; Murugesu, above, at
paragraphs 54 and 55 — recent immigrant chose an accountant recommended by
members of his community; and Klotz, above, at paragraphs 70 and 72 — reliance
on financial advisor). It is also argued that when a taxpayer honestly but
wrongly believes that what the tax preparer has done is right, he cannot be
liable for gross negligence penalties. Reliance on a trusted advisor will
negate a finding of wilful blindness because a person does not question
something that he believes and would not bother to verify something about which
he has no doubt (see Larouche, above, at paragraphs 25 and 26; McGhee,
above, at paragraph 27; Dunleavy, above, at paragraph 50; and Carlson,
above, at paragraphs 33 and 36).
[40]
However, many examples can be cited of
situations 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. Quite apart from wilful blindness, taxpayers who take no steps
whatsoever to verify the completeness and accuracy of the information contained
in their returns may thereby face penalties for gross negligence.
[41]
In Gingras v. Canada, [2000] T.C.J. No.
541 (QL), just as in the case at bar, 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 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.
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. If,
as the theory put forward by Ratelle [the tax preparer] goes, every taxpayer is
entitled to a total exemption from tax once in his life, which is not the case,
this did not allow the appellants to submit false statements in order to
exercise the alleged privilege, or justify them in so doing.
[42]
Justice Tardif further wrote:
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.
[Emphasis added.]
[43]
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.
[44]
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? 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.]
[45]
In Brown v. The Queen, 2009 TCC 28,
Justice Bowie stated:
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.]
[46]
In Gélinas, above, Justice Bédard stated:
11 . . . 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.]
[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 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 get informed amounted to
carelessness amounting to gross negligence. This is not much different from the
case at hand.
[48]
In Janovsky, above, 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.
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.
[Emphasis added.]
[49]
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. . . .
[50]
Another recent example can be found in the
matter of Atutornu, above, 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 held
that gross negligence penalties pursuant to subsection 163(2) were appropriate
in the circumstances.
[51]
In the leading case of Torres, above,
Justice C. Miller heard the appeals of six taxpayers who were satisfied that FA
were professional people, former CRA officials who knew what they were doing.
The taxpayers believed FA to be legitimate and they all trusted FA to properly
prepare their tax returns. FA convinced the taxpayers to become involved in a
scam identical to the one here under consideration. All the taxpayers were
confident that they were entitled to the refunds they were claiming. They had
been completely and utterly convinced so by superb conmen. The CRA disallowed
the claimed business losses and imposed gross negligence penalties. Justice C. Miller
dismissed their appeals even though the taxpayers put “unwavering
faith in representatives of Fiscal Arbitrators to prepare their returns in a
manner that would produce the sought after refunds”. Even though the
taxpayers were credible and believed that what FA had done was legitimate, and
even though they all trusted FA, Justice C. Miller found that they were all
wilfully blind and dismissed their appeals against the assessment of penalties
for gross negligence. A further appeal to the Federal Court of Appeal was
dismissed.
[52]
It is difficult for me to see how the case of
the Appellant can be distinguished from that of any of the taxpayers in Torres.
Conclusion
[53]
There is no doubt that the Appellant’s 2008 tax
return contained false statements — the Appellant did not carry on a business
and he did not incur any business losses whatsoever. I am of the view that, in
the circumstances of the present case, the Appellant had knowledge of the false
statements or at the very least he was wilfully blind or otherwise grossly
negligent in the making of, participating in, assenting to or acquiescing in
the making of, a false statement in his return. He signed his return and thus
certified that the return was complete and accurate — it was not. He had a duty
to exercise care and accuracy in the completion of his return and he failed in
this duty, making no effort at all to verify the accuracy and completeness of
his return. His actions are not only negligent, but are grossly negligent. As
such, he is properly subject to the penalties imposed on him pursuant to
subsection 163(2) of the Act.
[54]
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 8th day of March 2016.
“Rommel G. Masse”
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