Citation: 2013TCC140
Date: 20130502
Docket: 2012-4340(IT)I
BETWEEN:
JAN JANOVSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on April 24, 2013, in Edmonton, Alberta.)
V.A. Miller J.
[1]
This appeal relates to
Jan Janovsky’s 2009 taxation year. The only issue raised by the Appellant was
whether he was liable for gross negligence penalties under subsection 163(2) of
the Income Tax Act (the “Act”).
[2]
When he filed his
income tax return for 2009, the Appellant reported gross business income of
$21,583.30; he claimed losses of $29,157 for an “agent activities” business;
and he requested that $29,157 be carried back to his 2006 and 2007 taxation
years. In reassessing the Appellant, the Minister made various adjustments but
the major adjustment was that he disallowed the “agent activities” business
loss and he assessed a penalty pursuant to subsection 163(2). In determining
the Appellant’s tax liability, the Minster made various assumptions which were not
disputed by the Appellant. Those assumptions are:
a)
in 2009, the Appellant
was a court-reporting student finishing his studies at the Northern Alberta
Institute of Technology;
b)
in 2009, the Appellant
received a student loan of $2,030;
c)
the Appellant did not
pay any source deductions in 2009;
d)
in 2009, the Appellant
was also a self-employed musician, performing shows called “Janovsky” on cruise
ships (the previously defined Musician Business);
e)
the Appellant earned
gross business income of $18,290.93 from his Musician Business;
f)
the Appellant incurred
business expenses for the Musician Business of no more that $9,452.40 for the
2009 taxation year as detailed in the attached schedule;
g)
the Appellant earned
net business income from the Musician Business of $8,838.53;
h)
the Appellant paid
interest of $850 on his student loan;
i)
the Appellant incurred
medical expenses of $922;
j)
the Appellant paid
tuition fees of $1,977;
k)
the Appellant was
entitled to the education and textbook amount of $2,325;
l)
the Appellant reported
gross business income of $21,583.30 for 2009;
m)
the Appellant reported
business expenses of $50,740.30 for 2009;
n)
the Appellant claimed
business losses of $29,157.00 (the previously defined Claimed Agent Losses);
o)
the Appellant claimed in
his income tax return for the 2009 taxation year that the business was as an
“Agent”;
p)
the Appellant did not
operate a business in the 2009 taxation year as an “Agent”;
q)
the Appellant claimed
that his income of $21,583.30 from this business was “Receipts as Agent”;
r)
the Appellant did not
receive any income as agent;
s)
the Appellant claimed
that expenses of $50,740.30 from his business were “amt to principal fr agent”;
t)
the Appellant did not
pay any amount to “principal fr agent”;
u)
the Appellant did not
incur any business expenses relating to “amt to principal fr agent” in 2009;
v)
the Appellant did not incur
a business loss in 2009;
w)
the Appellant did not
collect his income as agent for a principal;
x)
the Appellant signed
his income tax return for the 2009 taxation year “per” himself;
y)
the Appellant’s
position is based on a script;
z)
the Appellant knowingly
participated in a type of detax scheme in order to avoid paying tax; and
aa)the Appellant was not involved in any agent activities
or business.
[3]
The Respondent had the
onus to establish the facts which justified the assessment of the gross
negligence penalties. In support of its position the Respondent relied on the
affidavit of Connie Yeung, a Litigation Officer with the Vancouver Tax Services
Office and the evidence of the Appellant.
[4]
The Appellant is 33
years old. He is a self-employed musician and a teacher of music at Sherwood
Park School of Music in Alberta. He has two degrees in music – one as an artist
jazz performer and another as a classical pianist.
[5]
At some point in time,
he was in the military and was trained as a linesman. He has been enrolled in a
court reporter program at the Northern Alberta Institute of Technology since
September 2009 where he has completed all of the academic courses and is now
attempting to attain the desired speed which is required to receive his
certificate as a court reporter.
[6]
In 2009, he learned
about an organization called the Fiscal Arbitrators (“FA”) from his
girlfriend’s father, Martin Whitaker. He and Mr. Whitaker attended a meeting in
Edmonton sponsored by the FA where he was told that the FA would get him the
highest refund possible. There he learned that a natural person did not have to
pay taxes and that the fictional person could claim expenses on behalf of the
natural person. The “agent” is the natural and the fictional person. According
to the Appellant, he was told by a Mr. Larry Watts that what the FA did was
legal and was based on their understanding and interpretation of the law.
[7]
The Appellant
understood that Mr. Watts is an accountant and had worked for the Canada
revenue Agency (“CRA”). He described Mr. Watts as a legal expert.
[8]
The Appellant paid FA
$500 to prepare his 2009 income tax return and promised them 20% of any amount
he received from CRA. The FA prepared the Appellant’s return and gave it to him
to review, sign and file with the CRA.
[9]
The Appellant testified
that he didn’t understand that he had claimed a loss of $29,157 or that he had
applied for a loss carryback to the 2006 and 2007 taxation years.
[10]
He stated that after he
was reassessed he tried to contact Mr. Watts but he did not respond. Instead,
Alexander Di Mauro, who I gather is also associated with the FA, agreed to help
the Appellant with this appeal for a fee of $1,000. Because he did not pay the
fee, no help was forthcoming.
[11]
In response to a
question from me concerning the calculation of expenses which he claimed in his
income tax return, the Appellant stated that he did not know how the expenses
were calculated and he didn’t ask. He also did not understand what the notation
“amt to principal fr agent” meant. He later testified that the amount of
expenses consisted of all amounts he had spent for his music business and all
of the expenses which he incurred as a student. He did not submit any documents
to support his evidence.
[12]
It was the Appellant’s
position that he trusted the FA and they owed him a duty of care. He has always
paid his taxes and he gave the FA all of his documents as he did with H &
R Block in prior years. He believed that the representatives of FA were legal
tax experts. He was referred to the FA by his girlfriend’s father who is both
wealthy and knowledgeable.
[13]
It is my view that the
Respondent has established that the Minister was entitled to assess gross
negligence penalties.
[14]
Subsection 163(2) of
the Act reads:
163(2)
False statements or omissions – Every person who, knowingly, or under
circumstances amounting to gross negligence, has made or has participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return, form, certificate, statement or answer (in this section referred to as
a “return”) filed or made in respect of a taxation year for the purposes of
this Act, is liable to a penalty of the greater of $100 and 50% of the total of
…
[15]
There are two elements
contained in subsection 163(2). In the circumstances of this appeal, the
Respondent had to show that the Appellant made a false statement in his 2009
income tax return and that the false statement was made knowingly or under
circumstances amounting to gross negligence.
[16]
In his 2009 return, the
Appellant claimed that he, as agent, paid an expense of $50,740.30 to himself
as principal. He may not have understood what this meant but he knew that he
had not incurred an expense of $50,740.30 in 2009. I concluded that the
Appellant did make a false statement in his return. In fact, he admitted the
making of the false statement. He accepted that the Minister’s reassessment was
correct except for the imposition of gross negligence penalties. In doing so,
the Appellant also accepted the assumptions made by the Minister in assessing
his tax liability.
[17]
Counsel for the
Respondent stated that she did not think that the Appellant knowingly made a
false statement in his tax return but that he was wilfully blind. It was the
Respondent’s position that gross negligence includes the concept of wilful
blindness: Villeneuve v Canada, 2004 FCA 20 at paragraph 6.
[18]
I agree with counsel
that gross negligence includes the concept of wilful blindness. However, it is
my view that the evidence in this appeal demonstrates that the Appellant
knowingly made the false statement.
[19]
The Appellant is well
educated. He has two university degrees and is now in school studying to become
a court reporter.
[20]
The magnitude of his
false statement was huge. In 2009, the Appellant only earned income from his
business as a musician. His gross income was $18,290.93 and his expenses were
$9,452.40. When he considered these expenses and those which he incurred from
being a student, he ought to have known that the business expense of $50,740.30
which he reported on his income tax return was incorrect. His actual net income
was $10,868 and yet he reported a business loss of $29,157. This is a false
statement of $40,025.
[21]
In his 2009 return, the
Appellant also claimed a loss carryback for 2006 and 2007 in the amount of
$8,787 and $20,370 respectively. If those losses had been allowed, the
Appellant would have received a refund of all the income taxes he paid in those
years. In 2006 and 2007, the total taxes payable by the Appellant were
$1,021.10 and $4,379.90.
[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 expnses, 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: Chenard v The Queen,
2012 TCC 211.
[25]
The Appellant relied on
the fact that FA had a duty of care to him. I explained to him that this court
does not have jurisdiction with respect to this issue.
[26]
In conclusion, the appeal
is dismissed.
Signed at Ottawa, Canada, this 2nd day of
May 2013.
“V.A. Miller”
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