Citation: 2013 TCC 143
Date: 20130506
Docket: 2011-3755(IT)G
BETWEEN:
RAJPAL BHATTI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2011-3754(IT)I
BETWEEN:
MANJIT BHATTI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1]
"I got
greedy" – so acknowledged Mr. Bhatti in explaining how he could file a
return claiming a $31,000 refund, an amount promised by a nefarious
organization that prepared returns based on fictitious business losses. How
often this Court suspects what Mr. Bhatti has blurted outright – greed can all
too often be an unfortunate motivator.
[2]
Mr. Bhatti’s General
Procedure case and Ms. Bhatti’s Informal Procedure case were heard
together. In both matters the only issue is the penalties imposed by the
Government. Ms. Bhatti’s penalties were imposed pursuant to subsection 163(2)
of the Income Tax Act (the "Act") (commonly referred to
as gross negligence penalties) based on her failure to report rental income in
2007 and 2008 and her failure to report a capital gain on the disposition of a
rental property in 2007. Mr. Bhatti also faces subsection 163(2) penalties
based on the same issues as Ms. Bhatti, but also based on failure to
report business income in 2008 and also based on reporting $477,716 of
fictitious business losses in 2008.
[3]
Neither Mr. Bhatti nor
Ms. Bhatti gave much testimony in examination‑in‑chief, other than
to suggest that they simply followed professional advice in filing their
returns, and if there is any gross negligence, it lay with their tax return
preparers and not with them personally.
[4]
Unfortunately, Ms.
Bhatti was not at all well: her voice was weak and her recollection dim. What I
could discern, however, was that in 2007 and 2008 part of the home in which she
and Mr. Bhatti resided in Surrey was rented to four tenants in downstairs’
suites. It was primarily Mr. Bhatti who found the tenants and collected the
rent. Ms. Bhatti did take care of the household bills. She worked as a
home-support worker, having obtained a diploma in that regard after a six-month
course.
[5]
Ms. Bhatti had no
involvement in the preparation of her tax returns. It was Mr. Bhatti who would
take all the necessary papers to their accountant, Mr. Sidhu, who would prepare
the returns. Mr. Bhatti would simply bring the returns home for Ms. Bhatti to
sign. She maintained that she would simply sign them without looking at her
returns.
[6]
Mr. Bhatti testified
that with respect to the rental income in 2007 and 2008 ($13,950 and $9,700
respectively) from the suites in their principal residence that he discussed
this with Mr. Sidhu, in whom he had a great deal of confidence, who advised him
that expenses would likely be greater than income, and it was therefore not
necessary to report this income. This story did not accord with both what
Mr. Bhatti said on examinations for discovery, nor what he raised in his
Notice of Appeal. At discovery and in his Notice of Appeal, Mr. Bhatti suggests
that he never actually advised Mr. Sidhu with respect to the rent from the
suites in their home. I consider this discrepancy in light of the fact that Mr.
Sidhu was not called to testify and conclude that Mr. Bhatti’s story at trial
is simply not accurate. He may have believed that his expenses might have
exceeded his rental income, but he did not hear that from Mr. Sidhu.
[7]
In 2007, a rental
property at 6838 135th Street in Surrey (the "Rental Property"),
registered in both Mr. Bhatti’s and Ms. Bhatti’s name, was sold, realizing a
taxable capital gain of approximately $78,800 or $39,000 each. Mr. Bhatti
and Ms. Bhatti had reported rental income from this property in 2004, 2005 and
2006, though Ms. Bhatti claimed to have had no rental income before 2007. In
fact, she disavowed any knowledge of the Rental Property. Neither she nor Mr.
Bhatti reported the taxable capital gain. Ms. Bhatti was confused, vague and
somewhat obtuse in her responses concerning this property. She claimed she
prepared her Notice of Appeal, which clearly refers to the sale of the Rental Property.
She maintained reference to the Rental Property in the Notice of Appeal was
simply a mistake.
[8]
Mr. Bhatti testified
that their new accountant, Mr. Ram, who acted as Ms. Bhatti’s agent at
trial, assisted in the preparation of the Notices of Appeal. Given the
similarity between Mr. Bhatti’s and Ms. Bhatti’s Notices of Appeal, I conclude
that Ms. Bhatti actually had little hand in its preparation. It is not
surprising she was perplexed at the reference to the sale of the Rental Property.
The fact she left the return preparation to her husband and accountant, the
fact she believed she had no rental income prior to 2007, the fact that I do
not believe that she prepared her Notice of Appeal and her utter confusion over
the sale of this property leads me to find that the Rental Property was handled
entirely by Mr. Bhatti. Ms. Bhatti knew nothing of it.
[9]
Mr. Bhatti, however,
was very much aware of the proceeds arising from the sale of the Rental Property.
He did not advise Mr. Sidhu of the disposition, on a mistaken belief he was not
aware such proceeds should be reported. This is not Mr. Bhatti’s first
capital gain. Neither was it his only real property sale. Mr. Bhatti had not
only built the home he and his wife lived in in 2004, but in 2006 he started a
construction business, under the name Jivu Construction, with a partner,
Mr. Gandhi. In 2007, the partnership constructed and sold a duplex in Surrey. In 2008, Mr. Bhatti, with Mr. Gandhi and a third partner, Mr. Gill, built and sold
another home in Surrey. Mr. Bhatti earned a profit of approximately $23,160 on
this sale, which he failed to report.
[10]
Before reviewing Mr.
Bhatti’s testimony with respect to the fictitious $477,000 loss claim in 2008,
it should be noted that until 2008 he had relied on Mr. Sidhu to prepare his
returns. His income consisted primarily of employment income as a longshoreman,
with some smaller investment income and rental income. Mr. Sidhu would prepare
returns based on what Mr. Bhatti provided to him. Mr. Bhatti indicated that he
would average tax refunds of $3,000 o $4,000 a year.
[11]
I turn now to Mr.
Bhatti’s testimony regarding the fictitious business losses claimed by him,
that resulted in a $31,000 refund for his 2008 taxation year. Mr. Bhatti
and his co-workers were drawn to a poster by an organization known as Fiscal
Arbitrators, a poster that had been displayed at their workplace. One of
Mr. Bhatti’s co-workers, Mr. Bal, confirmed the poster and its appeal to
their co‑workers, which led to several of them meeting with Fiscal
Arbitrators. This meeting was with Mr. John Gillespie who was later joined by
Mr. Larry Watts, who explained that expenses could be claimed to obtain
significant tax refunds. Mr. Gillespie and Mr. Watts appeared professional
to Mr. Bal and Mr. Bhatti as well as being knowledgeable, one of them even
claiming to have worked for some period of time for the Canada Revenue Agency
("CRA"). Mr. Bhatti and his co‑workers were advised by Fiscal
Arbitrators to obtain assessments going back 10 years from the CRA. Mr.
Bhatti proceeded to do this and took that information to Mr. John Gillespie
with Fiscal Arbitrators. Mr. Bhatti was advised that he would get a refund of
all of his 2008 taxes that had been remitted through his employment (some
$31,000). At some later point, Fiscal Arbitrators provided Mr. Bhatti with
a schedule indicating that losses could be used to offset prior years’ taxes to
the tune of approximately $103,000. Mr. Bhatti was also advised that he would
have to pay $500 for the initial preparation of his return if he wanted to
proceed, and ultimately he would have to pay 20% of any refund he received from
the CRA to Fiscal Arbitrators, but that the $500 would be taken off that 20%
amount. Mr. Bhatti did in fact pay 20% of his $31,000 refund to Fiscal
Arbitrators less the $500.
[12]
Mr. Bhatti did not sign
up right away with Fiscal Arbitrators, but received calls from Mr. John Gillespie
pressuring him to do so. He discussed this with both his wife and his accountant,
Mr. Sidhu, who both advised against it. At his examination for discovery, Mr.
Bhatti acknowledged that both his wife and accountant suggested he would be
engaging in fraud: Mr. Bhatti did not have such a clear memory of that at
trial.
[13]
Mr. Bhatti ignored his
wife and accountant and advised Mr. Sidhu not to prepare his 2008 return, and
instead he proceeded to have the return prepared by Fiscal Arbitrators. He was
sent his tax return by Fiscal Arbitrators, which had yellow stickers where he
was supposed to sign. The package included instructions that he was to write
"per" before his signature. The return included a "statement of
agent activity" showing money "collected as agent for principals"
of approximately $1,000,000 with costs of goods sold and expenses of Jivu
Construction of $744,000 plus $612,000 for "amount to principal in
exchange for labour", leaving a loss of some $477,000. This was sheer
nonsense.
[14]
Mr. Bhatti forthrightly
acknowledged these were all simply made up numbers. He had no idea what they
meant and he certainly knew they did not pertain to any of his business or
employment income: in fact, he had no idea what it meant other than it would
result in a significant return. As he said, "all I was happy about was
getting my money". At the time, he paid little attention to the numbers.
[15]
Mr. Bhatti signed the
return. He never called CRA, a tax lawyer or any other accountant. He maintains
he was brainwashed by Fiscal Arbitrators.
[16]
Mr. Bhatti obtained his
$31,000 refund. The CRA then reassessed and disallowed Mr. Bhatti the
fictitious business losses of $477,716, assessed additional income in both Mr.
Bhatti’s and Ms. Bhatti’s 2007 and 2008 returns to include the net rental
income of $4,471 and $2,943 each respectively, assessed a taxable capital gain
of $39,418 arising on the sale of the rental property against each of Mr. and
Mrs. Bhatti and added $23,116 in 2008 to Mr. Bhatti’s income from
business, from the sale of the Surrey home he and his partners had constructed.
The CRA also assessed penalties pursuant to subsection 163(2) of the Act
based on these amounts. It is the penalties that are at issue before me.
Analysis
[17]
Subsection 163(2) of
the Act reads in part as follows:
Every person who, knowingly, or under
circumstances amounting to gross negligence, has made or has participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return, form, certificate, statement or answer (in this section referred to as
a “return”) filed or made in respect of a taxation year for the purposes of
this Act, is liable to a penalty of the greater of $100 and 50% of the total of
…
[18]
Pursuant to subsection 163(3)
of the Act, the onus is on the Crown to prove subsection 163(2) of the Act
applies. The Crown must therefore prove:
a) a false statement or omission;
b) such statement or omission was
either made:
i) knowingly, or
ii) under circumstances amounting to gross
negligence.
There is considerable jurisprudence as to what is
intended by gross negligence. The classic statement of the term is found in the
Federal Court of Appeal decision in Venne v. Canada:
With
respect to the possibility of gross negligence, I have with some difficulty
come to the conclusion that this has not been established either. "Gross
negligence" must be taken to involve greater neglect than simply a failure
to use reasonable care. It must involve a high degree of negligence tantamount
to intentional acting, and indifference as to whether the law is complied with
or not. I do not find that high degree of negligence in connection with his misstatements
of business income. To be sure the Plaintiff did not exercise the care of a reasonable
man, and as I have noted earlier should have at least reviewed his tax returns
before signing them. A reasonable man in doing so, having regard to other
information available to him, would have been led to believe that something was
amiss and would have pursued the matter further with his bookkeeper.
[19]
Indeed, in a recent
2012 case, Chénard v. The Queen
which dealt with the same nefarious organization, Fiscal Arbitrators, Justice
Bédard relied on former Chief Justice Bowman’s explanation of the difference
between ordinary and gross negligence in DaCosta v. The Queen:
11. In drawing the line between "ordinary"
negligence or neglect and "gross" negligence a number of factors have
to be considered. One of course is the magnitude of the omission in relation to
the income declared. Another is the opportunity the taxpayer had to detect the
error. Another is the taxpayer’s education and apparent intelligence. No single
factor predominates. Each must be assigned its proper weight in the context of
the overall picture that emerges from the evidence.
12. What do we have here? A highly intelligent man who
declares $30,000 in employment income and fails to declare gross sales of about
$134,000 and net profits of $54,000. While of course his accountant must bear some
responsibility, I do not think it could 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.
[20]
The Federal Court of
Appeal has adopted the term "willful blindness" as a description of
what can constitute gross negligence (see for example Villeneuve v. Canada,
2004 FCA 20). Justice Favreau relied on this concept in the case of Brochu
v. Canada
in concluding penalties were applicable:
Since
Villeneuve, the issue is no longer confined to determining whether a
taxpayer was aware of the specialist’s negligence and whether he or she was
indifferent, but also includes cases where the taxpayer blindly trusts the
person preparing the return. In this case, even though the Appellant had no
intentional and deliberate knowledge of Ms. Tremblay’s errors, she was still
wilfully blind.
[21]
Given this state of the
law, have Mr. Bhatti and Ms. Bhatti properly been assessed penalties pursuant
to subsection 163(2) of the Act?
[22]
I will first address
the penalties in connection with the $477,000 fictitious business losses
claimed by Mr. Bhatti. First, is this claim a false statement? Yes, Mr. Bhatti
admitted this. Second, did he make it knowingly or under circumstances
amounting to gross negligence? Mr. Bhatti saw and signed his return. I believe
he saw the $1,000,000 income and $477,000 loss. He knew they were simply not
true. He knowingly made a false statement in this regard.
[23]
Even if I accept his
explanation that he did not review the return in such detail as to have known
the refund was drawn from made up numbers, then his conduct was so wilfully
blind, not caring whether or not he complied with the law, that it constituted
gross negligence.
[24]
The reason I reach this
conclusion is because:
a) The magnitude of the claim was
huge compared to his overall income.
b) He had many opportunities to detect
the false assertion:
i) just the size of the
refund alone should have raised suspicions.
ii) both his wife and his
accountant told him it smacked of fraud.
iii) a cursory review of
the return itself would reveal the completely unaccountable $500,000 loss.
iv) the request to sign
the return with the insertion of "per".
These are not subtle signs of a possible problem, but
glaring flashing red lights. Mr. Bhatti did nothing.
c)
Mr. Bhatti was not
inexperienced when it came to knowing what business income and losses were. He
not only had employment income, but also business income from his construction
business. As well, he had some investment income and rental income. He was not
inexperienced commercially.
He had the opportunity, the experience and the
knowledge to appreciate this $31,000 could only be triggered by false
assertions. This is a classic case of wilfull blindness to which penalties
should apply.
[25]
I understand there have
been a handful of Fiscal Arbitrators related penalty appeals, all of which have
been dismissed, though this is the first such case heard under the General
Procedure. No doubt others who have let greed get the better of them share
Mr. Bhatti’s concern that the Fiscal Arbitrators principals are truly the ones
to blame. Sadly, they were the ones that led the horses to water, that
Mr. Bhatti was all too keen to drink.
[26]
I turn next to the
failure of Mr. Bhatti to report the $23,160 business income from the sale of
the Surrey house with his two partners in 2008. Again, I find Mr. Bhatti
knew he had this income and therefore he knowingly made this false omission.
His own partnership financial statements indicated as much.
[27]
Next, with respect to
the rental income from the suites in their principal residence, I do not accept
Mr. Bhatti’s assertion that because the rent was derived from his principal residence,
he was not aware he had to report it. He had other rental income: he knew what rent
was. He collected the rent himself from his tenants. He knowingly made this
false omission.
[28]
Finally, with respect
to the failure to report the capital gain on the disposition of the Rental Property,
Mr. Bhatti was no stranger to capital gains nor to proceeds from the
disposition of real property. He was in the house construction business and
knew the proceeds from such sales were business income. He would have known an
$80,000 gain on the sale of a rental property would attract some tax
consequences. Even if he was not sure, to assume there were no tax
ramifications goes beyond simple carelessness. It is the very sort of cavalier
attitude or nonchalance as to whether or not to comply with the law that
jurisprudence suggests is gross negligence that attracts the subsection 163(2)
of the Act penalties.
[29]
While I have no doubt
the result of these penalties imposes a severe financial burden on Mr. Bhatti,
one he claims he may never be able to satisfy, that is no reason to not impose
a penalty that is clearly justified. It is a harsh result and a painful lesson
to Mr. Bhatti. One can only hope that this will be a lesson for others
attracted by a tax deal that seems too good to be true. It inevitably will be
just that.
[30]
I turn now to Ms.
Bhatti’s penalties. While she is not as intimately involved with the rental
arrangement at home, she knew very well they were receiving rent from their
tenants. She knowingly did not report it. 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. She handled the family’s household bills, she had received training in
her chosen career; she was an intelligent woman. Signing a return is just the
opportunity to ensure its correctness. While the rental amounts ($4,471 and
$2,943) may not have been significant in Mr. Bhatti’s returns, Ms.
Bhatti’s income was substantially less and these amounts would not be
insignificant.
[31]
Finally, with respect
to the capital gains on the sale of the Rental Property, I find the Respondent
has not proven on balance that Ms. Bhatti knew or should have known she had
either knowingly or in circumstances amounting to gross negligence made a false
omission. I interpret Ms. Bhatti’s evidence to favour, on balance, a finding
that she simply knew nothing of the Rental Property. She did not believe she
had rental income from such a property and, indeed, did not appear to know what
property she was being questioned about. I conclude that while the property may
have been held jointly, she knew nothing of it. I cannot on that basis find
that she acted either knowingly or with gross negligence in failing to report a
gain.
[32]
In conclusion, I
dismiss Mr. Bhatti’s Appeals for both years and Ms. Bhatti’s Appeal for 2008. I
allow Ms. Bhatti’s Appeal with respect to her 2007 taxation year, and refer the
matter back to the Minister of National Revenue for reconsideration and
reassessment on the basis no penalties pursuant to subsection 163(2) of
the Act are exigible in connection with the purported taxable capital
gain of $39,418 on the Rental Property.
[33]
I do not intend to pour
salt into an open wound by ordering any costs.
Signed at Vancouver, British Columbia, this 6th day of
May 2013.
"Campbell J. Miller"
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