REASONS
FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1]
These Reasons pertain to an Appeal by Alexander
Rowe against a reassessment (the “Reassessment”) of his 2009 taxation year, as
set out in a Notice of Reassessment dated March 28, 2011. Mr. Rowe’s income tax
return for 2009 was prepared by a representative of an organization known as
Fiscal Arbitrators. That return reported a net business loss large enough to
eliminate (so to speak) Mr. Rowe’s taxable income for 2009, as well as for
the three preceding taxation years. When the Minister of National Revenue (the “Minister”), as represented by the Canada Revenue
Agency (the “CRA”), reassessed Mr. Rowe to deny
the loss, the CRA also imposed a penalty under subsection 163(2) of the Income
Tax Act
(the “ITA”). Mr. Rowe has not
challenged the denial of the loss or the amount of income tax assessed by the
Reassessment, but he has challenged the penalty.
II. ISSUE
[2]
The issue for consideration in this Appeal is
whether Mr. Rowe is liable to a penalty pursuant to subsection 163(2) of the ITA.
More specifically, that requires a determination of whether Mr. Rowe knowingly,
or under circumstances amounting to gross negligence, made or participated in,
assented to or acquiesced in the making of, a false statement in his 2009
income tax return.
III. BACKGROUND
[3]
Mr. Rowe earned a diploma in business from
Sheridan College and obtained a professional designation as a certified general
accountant in 2004.
It should be noted that, although Mr. Rowe is an accountant, he is not a tax
accountant. Mr. Rowe was employed in the accounting department of a meat
trading company from approximately 1993 to 1997; from approximately 1997 to
2000 he was the controller of that company. He was employed as the financial
controller of a printing company from 2000 to 2009. On or about January 31,
2009, the printing company ceased to operate, whereupon Mr. Rowe, having thus
lost his employment, joined members of his family in purchasing and operating a
farm in a country other than Canada.
Mr. Rowe moved to that country in September 2009 to help to establish the farm.
Mr. Rowe’s education and work experience, particularly as an accountant
and controller, have presumably provided him with knowledge and understanding
of business and financial matters.
[4]
In 2004, Chester Lewis, who was a close friend
of Mr. Rowe, a fellow church member and a tax preparer, invited Mr. Rowe to
participate in a charitable donation program. Initially, Mr. Rowe declined to participate
because he knew little about the program. However, he subsequently obtained
more information in respect of the particular charity (the “Charity”) and its donation program, reviewed the CRA’s
website to confirm that the Charity was registered as such, and spoke with a
representative of the CRA, as a result of which he “got
an understanding that this particular group was indeed a reputable charter [sic]
organization.”
Consequently, he made donations to the Charity in 2005, 2006 and 2008. As
events unfolded, the Charity was not as reputable as Mr. Rowe initially
understood and he was reassessed in respect of those three taxation years.
[5]
Facing significant tax liabilities in respect of
2005, 2006 and 2008, by reason of the above reassessments, Mr. Rowe was anxious
to find some way to reduce or eliminate those liabilities. When it was time for
Mr. Rowe to file his 2009 income tax return, Mr. Lewis said that he could
prepare and file the return and that, because of what he knew of Fiscal
Arbitrators, he would be able to “reverse” the
tax liabilities that had arisen by reason of the reassessments that had
disallowed Mr. Rowe’s donations to the Charity. As Mr. Rowe was then spending
a significant amount of time outside Canada, assisting with the farming
venture, he authorized Mr. Lewis to look after the preparation and filing of
the 2009 income tax return.
[6]
As Mr. Rowe had worked for only one month in
2009, his income that year was relatively modest. In particular, his tax return
showed employment income in the amount of $3,273.60, other employment income in
the amount of $3,031.94, employment insurance benefits in the amount of
$14,751.00 and an RRSP withdrawal of $5,000.00. As well, the return showed
gross business income of $30,746.72 and net business income of –$274,576.54. In
other words, a net business loss in the amount of $274,576.54 was reported for
2009, resulting in an overall loss for the year in the amount of $248,520.00.
The return was accompanied by a Request for Loss Carryback (Form T1A), which
showed a carryback amount of $249,820.00,
which was carried back to the three preceding taxation years and applied as
follows:
|
2006
|
$86,132.00
|
|
2007
|
88,329.00
|
|
2008
|
75,359.00
|
|
|
$249,820.00
|
IV.
ANALYSIS
A. Statutory Provisions
[7]
There is no dispute as to the amount of the
penalty. Therefore, for the purposes of this Appeal, the relevant portion of
subsection 163(2) of the ITA is the following:
(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 …. in a return … filed or made
in respect of a taxation year for the purposes of this Act, is liable to a penalty….
[8]
Although in many situations a taxpayer has the
burden of proving that a challenged assessment is not valid or binding, subsection 163(3) of the ITA
places the burden of proof on the Minister in the case of this penalty:
(3) Where, in an appeal under this Act, a penalty assessed by
the Minister under this section … is in issue, the burden of establishing the
facts justifying the assessment of the penalty is on the Minister.
[9]
This is a burden that is to be taken seriously
and that is not lightly discharged, as explained by Bowman ACJ (as he then was)
in Farm Business Consultants:
A court must be
extremely cautious in sanctioning the imposition of penalties under subsection
163(2)…. [T]he routine imposition of penalties by the Minister is to be discouraged….
[S]ubsection 163(2) … involves the penalizing of conduct that requires a higher
degree of reprehensibility. In such a case a court must, even in applying a civil
standard of proof, scrutinize the evidence with great care and look for a
higher degree of probability than would be expected where allegations of a less
serious nature are sought to be established. Moreover, where a penalty is
imposed under subsection 163(2) although a civil standard of proof is required,
if a taxpayer’s conduct is consistent with two viable and reasonable
hypotheses, one justifying the penalty and one not, the benefit of the doubt
must be given to the taxpayer and the penalty must be deleted. I think that in
this case the required degree of probability has been established by the
respondent, and that no hypothesis that is inconsistent with that advanced by
the respondent is sustainable on the basis of the evidence adduced.
B. False Statements
[10]
Mr. Rowe’s 2009 income tax return contained a
Statement of Business or Professional Activities (Form T2125), which
described his gross business income as “RECEIPTS AS
AGENT” in the amount of $30,746.72. That Statement showed no other
business revenue or business expenses other than an expense described in the “other expenses” category as “AMT
TO PRINCIPAL FR AGENT,” which presumably meant “amount
to principal from agent,” in the amount of $305,323.26. The result was a
reported loss from the business in the amount of $274,576.54 (i.e., $30,746.72 – $305,323.26). As indicated above, the gross business
income and the net business loss were reported on Mr. Rowe’s 2009 income tax
return.
[11]
During cross-examination, Mr. Rowe acknowledged
that he did not operate a business in 2009.
Thus, the statements in Mr. Rowe’s 2009 income tax return, including the
Statement of Business or Professional Activities, to the effect that he had
business receipts as agent in the amount of $30,746.72 and expenses described,
in essence, as an amount to principal from agent in the amount of $305,323.26,
resulting in a net business loss of $274,576.54, were false statements.
C. “Knowingly” Criterion
[12]
During his testimony, Mr. Rowe did not say that,
when he signed his 2009 income tax return or arranged for it to be sent to the
CRA, he knew that he was making false statements in that return. Rather, during
his cross-examination, Mr. Rowe stated that:
a)
when he signed his 2009 income tax return, he
did not see that line 162 on page 2 of that return reported gross business
income in the amount of $30,746.72;
b) when he filed his tax return, he was not aware that he was claiming
a loss of approximately $248,000;
and
c)
he did not know that Mr. Lewis had prepared a
request for a loss carryback.
[13]
In some circumstances, knowledge may be imputed
to a taxpayer, or a taxpayer may be deemed to have knowledge. The Crown has not persuaded
me that those circumstances existed in this Appeal.
D. “Gross
Negligence” Criterion
[14]
Subsection 163(2) of the ITA may apply
where a taxpayer makes a false statement under circumstances amounting to gross
negligence. The Federal Court of Appeal recently confirmed that the correct
legal test for establishing gross negligence is to determine whether there was
neglect beyond a failure to use reasonable care.
[15]
A number of cases have held that wilful
blindness may support a finding of gross negligence. For instance, the Federal
Court of Appeal stated the following in Strachan:
Gross negligence may be established where a taxpayer is willfully
blind to the relevant facts in circumstances where the taxpayer becomes aware
of the need for some inquiry but declines to make the inquiry because the
taxpayer does not want to know the truth….
In other words, for the purposes of the legal test confirmed in Melman,
wilful blindness of the type described in Strachan constitutes neglect
beyond a failure to use reasonable care.
[16]
Some cases have held that an indifference
concerning compliance with the law may constitute gross negligence. In Venne,
Strayer J stated:
“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, an indifference as to whether the law is
complied with or not.
[17]
I will first consider whether Mr. Rowe was
wilfully blind in signing and filing his 2009 income tax return, which reported
a net business loss in the amount of $274,576.54. I will then determine whether
Mr. Rowe demonstrated an indifference as to whether the ITA was complied
with or not.
E. Wilful Blindness
[18]
In Torres, C. Miller J identified various
principles to be applied in determining whether a taxpayer was wilfully blind:
(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 [ITA]….
(c) In determining wilful blindness, consideration must be
given to the education and experience of the taxpayer.
(d) To find wilful blindness there must be a need or a
suspicion for an inquiry.
(e) Circumstances that would indicate a need for an inquiry
prior to filing, or flashing red lights …, include the following:
(i) the magnitude of the advantage or omission;
(ii) the blatantness of the false statement and how readily
detectable it is;
(iii) the lack of acknowledgement 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.
I will now, in
the context of this Appeal, turn to a consideration of the principles
enunciated in Torres.
(1) Education
and Experience
[19]
As noted above, Mr. Rowe earned a college
diploma in business and obtained a CGA (now CPA) professional designation. He
worked as an accountant and later as a controller. Thus, Mr. Rowe cannot claim
that a lack of education or experience contributed to his making of the false
statements in his 2009 income tax return.
(2) Suspicion
or Need for an Inquiry
[20]
When Mr. Lewis asked Mr. Rowe to participate in
the charitable donation program in 2004, Mr. Rowe declined to do so until he had
first investigated the program and made inquiries about the Charity. A year
later he determined (perhaps incorrectly)
that the Charity was legitimate and that it would be appropriate for him to
contribute. When Mr. Lewis approached Mr. Rowe about the Fiscal Arbitrators
program in 2009 or early 2010, Mr. Rowe chose not to make the same level of
inquiry, primarily because he was not then in Canada and because of the trust that
he had placed in Mr. Lewis.
Mr. Rowe acknowledged that his trust in Mr. Lewis may have been misplaced:
… I have to say
that I probably had – well not probably, it is clear that I did not – I trusted
this individual [Mr. Lewis] more that I should have … I did not do the work as
I should have on my own.
Ultimately, Mr.
Rowe realized that, although he had trusted Mr. Lewis “with all [his] heart,” he had been “misled.”[24] During his oral testimony, Mr. Rowe did not give any indication of
his having harbored doubts or suspicions about the preparation and filing of
his 2009 income tax return. However, a need for an inquiry can be inferred if
there are warning signs or “flashing
red lights.” I will now consider whether there
were any such warning signs.
(3) Warning
Signs
(a) Magnitude of the Advantage
[21]
The amount of the net business loss claimed by
Mr. Rowe in his 2009 income tax return was $274,576.54, large enough to result
in a refund of all tax withheld at source for 2009 and to create potential
refunds of all tax paid by Mr. Rowe in 2006, 2007 and 2008.
[22]
In Chénard, Bédard J considered an appeal
by a taxpayer who engaged Fiscal Arbitrators to file adjustment requests for
eight previous taxation years, so as to report net business losses in amounts
sufficient to give rise to tax refunds for each of those years. Bédard J made
the following comment about the magnitude of the claimed losses:
These losses
would have allowed the appellant to receive a full refund of all the income
taxes paid over the course of the years in question…. In this case, the
magnitude of the reported business losses is an overwhelming factor because,
even with little formal education and even without understanding our tax
system, a reasonable person could have easily questioned the legitimacy of
these losses.
A similar comment
could be made about Mr. Rowe and the magnitude of the losses claimed by him.
(b) Blatantness and
Detectability of False Statement
[23]
Page 2 of Mr. Rowe’s 2009 income tax return
contained seven entries; the rest of the lines were left blank. Those entries,
with the applicable line numbers, are as follows:
|
Line
|
Description
|
Amount ($)
|
|
101
|
Employment income
|
3,273.60
|
|
104
|
Other employment income
|
3,031.94
|
|
119
|
Employment insurance benefits
|
14,751.00
|
|
129
|
RRSP income
|
5,000.00
|
|
162
|
Gross business income
|
30,746.72
|
|
135
|
Net business income
|
–274,576.54
|
|
150
|
Total income
|
–248,520.00
|
The above seven entries are spread out on page 2 of the return, such
that each amount is readily visible and discernable. Mr. Rowe knew that he did not
carry on a business in 2009,
so the entries on page 2 of the return showing gross business income and a net
business loss would have been glaring and patently obvious. Similarly, the two-page
Statement of Business or Professional Activities (containing the entries “RECEIPTS AS AGENT” and “AMT
TO PRINCIPAL FR AGENT”), which was filed with the return, would have
been conspicuous and readily noticeable. Accordingly, the false statements in
Mr. Rowe’s 2009 income tax return were blatant and readily detectable.
(c) Tax Preparer Acknowledgment
[24]
Box 490 on the signature page of Mr. Rowe’s 2009
income tax return contains spaces for the name, address and telephone number of
the professional tax preparer who prepared the return. That information was not
provided by Mr. Lewis or by Fiscal Arbitrators. Box 490 appears immediately
to the right of the line where Mr. Rowe signed the return. As indicated by Miller
J in Torres, “It is difficult not to see it [Box
490]”.
Thus, Mr. Rowe would likely have noticed that the tax preparer’s name and
contact information were not provided. Although this may have been a minor
point, combined with the other warning signs, it should have raised suspicion.
(d) Unusual Requests by Tax
Preparer
[25]
Before Mr. Rowe was given his 2009 income tax
return to sign, someone had written the word “Per”
on the signature line immediately to the left of the space where Mr. Rowe was
to sign.
This practice was described by Miller J as an “odd
request.” Mr. Rowe explained, during his cross-examination,
that he understood that the word “Per” indicated the place where he was
to sign.
Thus, the use of the word “Per” did not seem to
raise any questions or suspicion on the part of Mr. Rowe, or, from his
perspective, create a need for an inquiry.
(e) Previously Unknown Tax
Preparer
[26]
Mr. Rowe engaged Mr. Lewis, a long-time and
trusted friend, a “church brother” and a tax
preparer, to prepare his 2009 income tax return. However, notwithstanding that
Mr. Lewis was well known to Mr. Rowe, 2009 was the first taxation year for
which Mr. Lewis was engaged to prepare the return (as Mr. Rowe had
previously prepared his own returns).
Furthermore, as it turned out (and at the time unbeknown to Mr. Rowe), the
return was actually prepared by a representative of Fiscal Arbitrators and not
by Mr. Lewis.
Before Mr. Lewis spoke to Mr. Rowe about Fiscal Arbitrators, Mr. Rowe was not
aware of the organization, nor had he attended any of its meetings or met any
of its representatives.
Given that Mr. Rowe had no knowledge of, and no prior involvement with,
Fiscal Arbitrators, further investigation was warranted, as he has
acknowledged.
(f) Incomprehensible
Explanation by Tax Preparer
[27]
In certain other cases decided by this Court, some
taxpayers whose income tax returns were prepared by Fiscal Arbitrators were
provided with incomprehensible explanations for the large tax refunds that they
claimed. For instance, some were told that their social insurance number was a
separate entity that could somehow incur expenses that would be deductible by
them (as fictional entities),
while others were told that they were the principal of their own agency and
that they were engaged in the business of “agency.” It appears that Mr. Lewis
explained Mr. Rowe’s anticipated refunds in different terms, as seen from the
following excerpt from Mr. Rowe’s cross-examination:
Q. So is your understanding that you would clear your past
tax debt with only the 2009 tax filing?
A. It’s not just that. I understand also that there’s a
little bit of – there are – this is how it was placed to me that, you know,
there are tax laws that the normal citizen is just not aware of. At certain –
at certain income levels it is beneficial to you while it might not be beneficial
to someone else.
So Mr. Lewis mentioned to me that because of the taxes
that I have paid in previous years, I will be able to refile my taxes. I should
be able to see some refund, but yes, it will indeed clear the previous
reassessments that are done on those donation programs.
Q. And
again, he didn’t tell you the mechanism or the statute − ?
A. No. I was not aware of how – what process would be used,
how it will be done….
Q. Did you ask Mr. Lewis for an explanation?
A. Of?
Q. Of how you would be entitled to these monies?
A. I mentioned to you that when Mr. Lewis spoke to me, he
mentioned that I – because of the previous tax returns, the previous income tax
level that I paid, they can go and refile for – for those – portions of those
taxes that I paid for previous years.
While the
explanation provided by Mr. Lewis did not contain the same “nonsense [and] gobbledygook” that is sometimes seen in
other Fiscal Arbitrators cases, it nevertheless did not clearly explain how a
taxpayer, merely because of having earned income and having paid taxes at
particular levels in previous years, could be entitled to a refund of those
taxes.
(g) Conduct of Others, Warnings
or Concerns
[28]
There was no evidence to suggest that Mr. Rowe
was aware of anyone who declined to engage Fiscal Arbitrators, that he was
warned against doing so himself, or that he was fearful of telling others about
Fiscal Arbitrators. During his oral submissions, counsel for the Crown
acknowledged that this particular warning sign is not applicable in this
Appeal.
(h) Previous Experience with
Tax Adviser
[29]
It was Mr. Lewis who suggested to Mr. Rowe in
2004 that the latter contribute to the Charity. Mr. Rowe waited a year, while
he investigated the Charity, and then contributed to it in 2005, 2006 and 2008.
Subsequently, the CRA reassessed Mr. Rowe and disallowed the tax credit that he
had claimed in respect of those donations. As it was Mr. Lewis who suggested both
the questionable donation program and the Fiscal Arbitrators program to Mr.
Rowe, one would have expected Mr. Rowe to wonder whether the Fiscal
Arbitrators program was similarly suspect. It appears that Mr. Rowe failed
to see this warning sign, as he trusted Mr. Lewis to involve him in another
program, even though it had been Mr. Lewis who had introduced to him to the
donation program that was ultimately challenged by the CRA.
[30]
While this was not one of the warning signs
identified by Miller J in Torres, it is, in the circumstances of this
case, a relevant warning sign.
(4) Inquiry
to Understand Tax Return
[31]
During his cross-examination, Mr. Rowe
acknowledged that he did not ask Mr. Lewis to explain any of the amounts set
out on page 2 of the 2009 income tax return, nor did Mr. Rowe ask anyone else
any questions in order to obtain a better understanding of that which he was
claiming in the tax return.
[32]
It is my impression that in 2009 and early 2010
(when the 2009 income tax return was prepared), Mr. Rowe was particularly
concerned about the reassessments that had been issued to him in respect of the
donations that he had made to the Charity in 2005, 2006 and 2008. His
recollection is that the aggregate amount of tax owed by him due to the
disallowed donations was in the range of $40,000 to $50,000. When Mr. Lewis
suggested that, if the Fiscal Arbitrators program were to be used for 2009, the
liability from the reassessments for the previous years would be cleared, Mr.
Rowe readily agreed to let Mr. Lewis proceed as proposed, without insisting on
a full explanation of the contents of his 2009 income tax return.
(5) Summary
[33]
The application of the Torres principles
to the circumstances of Mr. Rowe’s Appeal may be summarized as follows:
a) Education and Experience: There was
no lack of education, professional training or work experience that contributed
to the making of the false statements by Mr. Rowe in his 2009 income tax
return.
b) Suspicion or Need for an Inquiry: Mr.
Rowe trusted Mr. Lewis and appeared to accept without question the latter’s
suggestion that the Fiscal Arbitrators program be used to prepare Mr. Rowe’s
2009 income tax return. Mr. Rowe did not acknowledge having any specific
suspicion, but he did concede that he should have investigated Mr. Lewis’
proposal.
c) Warning Signs: Some of the warning
signs identified in the jurisprudence were not present or applicable in this
Appeal. In particular:
i.
the insertion of the word “Per” on the signature line of Mr. Rowe’s 2009 income
tax return appears to have been innocuous in this situation; and
ii.
there was nothing in the conduct of, nor were
there warnings from, Mr. Rowe’s associates to put him on his guard, and he
expressed no concern about Fiscal Arbitrators to any of his associates.
However,
several warnings signs were present:
i.
Magnitude of the Advantage: The amount of the net business loss claimed by Mr. Rowe was approximately
nine times greater than the amount of the gross business income reported
(incorrectly) by him and approximately ten times greater than the aggregate of
the actual income (employment, EI benefits and RRSP income) reported by him in
his 2009 income tax return. If the net business loss had been allowed, it would
have eliminated any tax liability for 2009 and resulted in refunds of all of
the tax paid by Mr. Rowe in 2006, 2007 and 2008.
ii.
Blatantness and Detectability of False Statement: Page 2 of Mr. Rowe’s 2009 income tax return contained only
seven entries, such that even a cursory glance at that page would have
disclosed the gross business income and net business loss that were falsely
reported thereon. Merely by leafing through his return, Mr. Rowe would
have seen the two-page Statement of Business or Professional Activities, which would
have struck him as odd, given that he did not carry on a business in 2009.
iii.
Tax Preparer Acknowledgement: The empty box for the name, address and telephone number of the
person who prepared Mr. Rowe’s 2009 income tax return would have been
readily visible when Mr. Rowe signed the return immediately to the left of that
box.
iv.
Previously Unknown Tax Preparer: Mr. Rowe understood that Mr. Lewis, a long-time and trusted
friend, would prepare the 2009 income tax return. However, Mr. Lewis advised
Mr. Rowe that he would be filing the return in accordance with the “Fiscal Arbitration program” (as Mr. Rowe called it). As this was a new program,
with which Mr. Rowe was not familiar, an inquiry was warranted, as Mr. Rowe
acknowledged but did not do.
v.
Incomprehensible Explanation by Tax Preparer: While the explanation provided by Mr. Lewis to Mr. Rowe of the
basis for the anticipated tax refunds was not as incomprehensible as some
explanations that have been given in other cases, it still made little, if any,
sense. In essence, Mr. Lewis suggested that, for no other reason than Mr.
Rowe’s income level and tax level, he owed no tax for the current year and was
entitled to a refund of all the taxes paid in the previous three years.
vi.
Previous Experience with Tax Adviser: Mr. Lewis was the tax adviser who introduced Mr. Rowe to the charitable
donation program to which the latter contributed in 2005, 2006 and 2008. Those
donations had been disallowed by the CRA before Mr. Lewis spoke to Mr. Rowe
about Fiscal Arbitrators. The fact that it was Mr. Lewis who introduced
Mr. Rowe to the questionable donation program should have suggested that
perhaps the Fiscal Arbitrators program was also questionable.
By reason of the above
factors, there were enough warning signs that an inquiry by Mr. Rowe was
warranted.
d) Inquiry to Understand Tax Return:
As Mr. Rowe was outside Canada when his 2009 income
tax return was prepared, and perhaps because he was overly anxious to obtain
tax refunds for previous years to offset the disallowed charitable donations,
he did not inquire about the entries in his 2009 income tax return and he made
no inquiries about Fiscal Arbitrators.
Accordingly, after
having considered the factors set out above, I am of the view that Mr. Rowe was
wilfully blind when he signed his 2009 income tax return, in which he reported gross
business income in the amount of $30,746.72 and a net business loss in the
amount of $274,576.54.
[34]
Three of the Torres factors discussed
above (i.e., education/experience, magnitude and detectability) are also,
according to DeCosta, factors to be considered in drawing the line
between ordinary negligence and gross negligence. Accordingly, in the context
of this Appeal, those factors provide additional support for a finding of gross
negligence.
F. Indifference Concerning
Compliance
[35]
As noted above, Venne indicated that
gross negligence may arise where there is an indifference as to whether the law
is complied with or not.
The interrelated concepts of gross negligence and indifference concerning
compliance with the law were discussed by Hershfield J in Sidhu, a
case dealing with the capital gains deduction, in which he made the following
comments in the context of paragraph 110.6(6)(a) of the ITA,
which precludes such a deduction where an individual “knowingly
or under circumstances amounting to gross negligence” fails to file a
tax return or fails to report a capital gain:
The Appellant
relies on the decision in Venne … and argues that the bar for finding
gross negligence has been raised to require a finding of a high degree of
negligence tantamount to intentional acting. While some support may be found to
argue otherwise, the decision in Venne does not raise the bar to require
the Minister to establish actual intent to deceive or willful misconduct. If
that were the test, the subject provision of the [ITA] need only have
referred to “knowingly” failing to report a
gain. Actions “tantamount” to intentional actions are
actions from which an imputed intention can be found such as actions
demonstrating “an indifference as to whether the law is complied with or not”….
The burden here is not to prove, beyond a reasonable doubt, mens rea to
evade taxes. The burden is to prove on a balance of probability such an
indifference to appropriate and reasonable diligence in a self-assessing system
as belies or offends common sense.
(1) Illustration
of Indifference
[36]
On March 17, 2012, Mr. Rowe sent a letter to the
Appeals Division of the CRA, in which he provided certain background
information and made various submissions.
After summarizing the donations that he had made to the Charity in 2005, 2006
and 2008, Mr. Rowe stated the following:
As you may be
aware, CRA reassessed all these tax shelter programs and as a result I was
suddenly liable for large sums to Revenue Canada. In the midst of this, I lost
my job in January 2009 and as a result I tried to find gainful employment and
became unsuccessful for over a year as I was unable to find a permanent
position. I then proceeded to ask a tax preparer to see how they could help
with these three years of tax shelter program liabilities. I was then
introduced to what is called “Fiscal Arbitrattion”. It
was explained to me quite genuinely that I am able to re-file my prior tax
returns (up to eight years) and legally request most, if not all the income
taxes that was paid in those years. Quite frankly, I did not investigate this
as much as I did the tax shelter program because the individual who introduced
me to Fiscal Arbitration is someone I trusted immensely. He is also quite
an experienced tax preparer and is not known to me as individuals who would get
involved in any questionable activities. Needless, to say I participated based
on the advised. I felt also that I had nothing to lose since this was not
an illegal activity (this was what I thought at the time).
During Mr. Rowe’s
testimony, he indicated that it was Mr. Lewis who approached him about Fiscal
Arbitrators. The above excerpt from Mr. Rowe’s letter to the CRA indicates
that, before Mr. Lewis said anything about Fiscal Arbitrators, Mr. Rowe
approached Mr. Lewis to see if there was some way of dealing with the tax
liabilities that had arisen by reason of the disallowed charitable donations.
[37]
Mr. Rowe’s statement in the above letter, to the
effect that he had nothing to lose by participating in the Fiscal Arbitrators
program, may suggest a nonchalant or cavalier attitude toward compliance with
the ITA,
or at least a less-than-cautious regard as to whether the ITA was
complied with or not.
[38]
Mr. Rowe was asked, during his cross-examination,
about his understanding of the gross business income in the amount of $30,746
that he had reported on line 162 of his 2009 income tax return. Mr. Rowe
indicated that he had no understanding of that item, as he did not see it at
the time of signing the return.
Mr. Rowe also acknowledged that he did not review the first page of the
two-page Request for Loss Carryback before signing at the bottom of the second
page.
In my view, placing undue trust in a tax preparer or tax adviser, to the extent
of signing a tax return or a tax form without reviewing it and being aware of
its contents, demonstrates an indifference as to whether the ITA is
complied with or not.
(2) Acknowledgments
by Mr. Rowe
[39]
At the hearing Mr. Rowe was contrite, forthright
and well aware that he should have conducted some due diligence in respect of
Fiscal Arbitrators before authorizing Mr. Lewis to use the Fiscal Arbitrators
program in preparing the 2009 income tax return. On several occasions during
the hearing, Mr. Rowe acknowledged that he did not do all that he should have done
in order to verify the contents of his 2009 income tax return. During his
direct examination, he stated:
… I did not do
in-depth research of the text, of the procedure he [i.e., Mr. Lewis] had used
for this, for the filing of my 2009 tax return. I trusted him and I felt that
he had done the research necessary….
… I felt that I
could trust him to go ahead and do what needed to be done because I was not at
the time here in Canada or able to do the research that I would have
normally done on a tax program like – not a tax program, but on the Fiscal
Arbitration program….
… I have to say
that I probably had – well not probably, it is clear that I did not – I trusted
this individual more than I should have, and I’ve allowed him to take care of a
lot of my – the tax issues that related to these two issues, and I did not
do the work as I should have on my own.
During Mr. Rowe’s
cross-examination, the following exchanges occurred:
Q. … what was the mechanism for you to get a portion of your
taxes back each year?
A. Because there is an Income Tax Act law that allows that,
that’s what – that’s what I was told. And I’m going to be frank with you. I
probably should have checked to ensure, but I did not. I believed Mr. Lewis….
Q. Did you
ask Mr. Lewis for an explanation?...
A. … I probably should have gone into more detail [about my
2009 income tax return], but at the time I guess I did not. I trusted Mr. Lewis
and I went with his suggestion. You could call me a fool for that (inaudible),
but maybe I should have asked more questions.
I’m just – I’m just telling you the truth. I did not. I did not get
into the details as I should have; and at this point I regret I didn’t question
it….
Q. Is it your position that you took reasonable steps to
ensure that your income taxes payable were accurately reported in your 2009
return?
A. I don’t think I did it. Now I don’t think I did.
During his oral
argument, Mr. Rowe stated the following:
… as an
individual, I believe that I may have made some error by not doing a thorough
assessment as I should have. I honestly did not understand the process to be
what it has turned out to be. I do not believe the penalty that was levied for
myself really is a true amount to – to place guilt on me, so to speak.
I believe this is far beyond what it should be in my case.
I don’t want to
sit here and don’t take any responsibility. I may be an unusual witness or an
unusual appellant in this case, but I’m just – I’m a fair and honest
individual. I've always been all my life, and now that I look back, I should
have, I really should have done more to make sure that I am – that my tax return
has been done according to the law….
I wish I had done
what I was supposed to have done.
By indicating
that he “really should have done more to make sure”
that his tax return was “done according to the law,”
Mr. Rowe was, in a sense, acknowledging that, when he signed and filed his 2009
income tax return, he was indifferent as to whether the law (i.e., the ITA)
was complied with or not.
V. CONCLUSION
[40]
While I accept that Mr. Rowe did not knowingly
make false statements in his 2009 income tax return, I find that, in addition
to turning a blind eye to the warning signs that were there to be seen, he was
indifferent as to whether the ITA was complied with or not. Accordingly,
I have concluded that Mr. Rowe, under circumstances amounting to gross
negligence, made false statements in his 2009 income tax return. Therefore, this
Appeal is dismissed.
[41]
I anticipate that the penalty that is the
subject of this Appeal will likely have a devastating effect on Mr. Rowe. For that reason, as well as
others (including Mr. Rowe’s forthrightness, contrition, acceptance of
responsibility and demeanor on the witness stand and in his oral submissions), I am not awarding costs
against him.
Signed at Ottawa, Canada,
this 23rd day of June, 2017.
“Don R. Sommerfeldt”
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