REASONS
FOR JUDGMENT
D'Arcy J.
[1]
The three appeals before the Court are in
respect of the Appellant’s 2008, 2009, 2010 and 2011 taxation years. The Court
heard the appeals together on common evidence.
[2]
The Appellant reported a loss from a business on
his income tax return for each of the relevant years, as follows:
-
2008 taxation year: loss of $946,479
-
2009 taxation year: loss of $16,537
-
2010 taxation year: loss of $222,198
-
2011 taxation year: loss of $268,916
[3]
For the 2008 taxation year, the purported
business loss is shown on a form included as part of the Appellant’s 2008 tax
return that is titled Statement of Agent Activities (the “Statement of Agent Activities”).
The Appellant included with his income tax returns for the 2009, 2010 and 2011
taxation years the CRA form T2125 titled Statement of Business or Professional Activities
(for 2009 and 2010) and Statement of Business Activities (for 2011). For each
year, the filed form states that the main product or service of the Appellant’s
purported business was “agent”.
[4]
The Appellant claimed the business losses after
attending a seminar and receiving advice from a Mr. Larry Watts. The Appellant
referred to Mr. Watts as being with an entity known as the Fiscal Arbitrators.
[5]
The Appellant filed with his 2008 income tax
return a signed request for loss carry-back. Specifically, it was requested
that $922,600 of the business loss reported on his 2008 income tax return be carried
back and applied against his 2005, 2006 and 2007 taxation years.
[6]
Through a number of assessments and
reassessments, the Minister denied all of the business losses claimed by the
Appellant. She did not process the $922,600 loss carry-back request. The
Minister also assessed gross negligence penalties.
[7]
In his notice of appeal for each of the taxation
years at issue, the Appellant is challenging the imposition of the gross
negligence penalty.
[8]
In his notices of appeal for the 2009, 2010 and
2011 taxation years, the Appellant also appears to be challenging the denial of
the business losses. On cross-examination, he stated that he still maintains
that he had a business loss for each of the relevant years.
[9]
The Minister also denied certain rental losses
claimed by the Appellant in his tax returns filed for the 2009 and 2011
taxation years.
[10]
The Appellant did not provide any evidence in
chief.
[11]
The Respondent called two witnesses: Ms. Kim
Robinson (a CRA appeals officer) and the Appellant.
[12]
I found Ms. Robinson to be a credible witness. I
did not find the Appellant to be a credible witness. In most instances, he
either did not answer the question put to him by counsel for the Respondent or
he provided a vague answer. On numerous occasions his answer to counsel’s question
was “I don’t recall without reviewing it” or words to like effect.
[13]
For example, during her examination of the
Appellant, counsel for the Respondent took the Appellant to the Statement of
Agent Activities that he had included with his 2008 income tax return. The
statement shows revenue of $31,519.77 (including one item for $21,364.67) and
two expense items: an expense of $954,119.77 identified as “Amount to principal in
exchange for labour” and an expense of
$23,878.61 identified as “Money Collected as
Agent for Principal and reported by third parties”.
[14]
The following exchange occurred between counsel
and the Appellant with respect to the Statement of Agent Activities:
Q. Do you
know where these numbers come from, the $21,364, et cetera?
A. I don't
recall without reviewing it.
Q. Okay. I
am just going to ask you about the large amount here. There is an amount for
$954,119.77. It says "Amount to principal in exchange for labour". Do
you understand what that means?
A. I don't
recall without reviewing it.
Q. Okay.
What this particular statement suggests is that there is a net loss of $949,000
and change. Did you lose $946,000 in 2008?
A. I don't
recall that without reviewing it.
Q. It
seems to be the kind of thing that one would recall if you lost almost a million
dollars, wouldn't it?
A. Well,
for some people, yes. But I don't-- well, I can't recall it without reviewing
it. Eight years ago.
[15]
This is one example of the numerous instances
where the Appellant either did not answer counsel’s question with respect to
his income tax filings or provided a vague answer. I do not accept that an
intelligent person such as the Appellant could not remember the reason why he
claimed an expense of approximately $954,000 in his tax returns. His conduct
while being examined by counsel for the Respondent destroyed his credibility.
I. Deductibility
of Business Losses
[16]
I will first deal with the deductibility of the
claimed business losses.
[17]
The Reply for each of the relevant years except
2008 states that, when assessing the Appellant, the Minister assumed the
following with respect to the business losses claimed by the Appellant:
-
The Appellant was not engaged in any business,
including in a business as an agent.
-
The Appellant’s alleged business was not a
source of income.
-
The Appellant did not have any expenses in
respect to his alleged business.
[18]
As I noted previously, the Appellant declined to
provide any evidence in chief.
[19]
In other words, he did not provide any evidence
to rebut the Minister’s assumptions. He did attempt to file an affidavit. I did
not allow the Appellant to file the affidavit since he was present at the
hearing. It is well established that parties should provide their evidence by
oral testimony. This allows the opposing party to cross-examine the witness and
the judge to assess the credibility of the witness. This is certainly the case
when, as in the current appeal, the Appellant’s credibility is at issue and the
evidence is contentious.
[20]
After the Respondent finished her examination of
the Appellant, I allowed the Appellant to provide oral testimony by reading in
his affidavit. I then provided counsel for the Respondent the opportunity to
cross-examine on the Appellant’s oral testimony. I appreciate that it is
unusual to allow the Appellant to provide oral evidence for the first time
after the Respondent has presented her witnesses. However, I wanted to provide
the Appellant with every opportunity to present his evidence, and there was no
prejudice to the Respondent since I provided her the opportunity to
cross-examine on the testimony.
[21]
The Appellant’s oral testimony was in the nature
of argument. He stated that he believes he is allowed to arrange his affairs so
as to pay less tax and asserted his right to operate a business and only be
taxed on the net profit from such business.
[22]
I agree with his comments. However, this is not
the issue before the Court. The issue before the Court in respect of the 2009,
2010 and 2011 taxations years is whether, as a question of fact, the Appellant
carried on a business. When assessing the Appellant, the Minister assumed that
the Appellant did not carry on a business. The Appellant did not present the
Court with any evidence to rebut this assumption.
[23]
Through her examination of Ms. Robinson and the
Appellant, the Respondent provided evidence to support the Minister’s
assumptions.
[24]
For example, Exhibit R-1 is the Appellant’s 2008
tax return. As discussed previously, he included with the return a Statement of
Agent Activities, which shows a loss of $946,479. This loss was claimed on the
2008 tax return.
[25]
During his examination by counsel for the
Respondent, the Appellant stated that he prepared the Statement of Agent
Activities with the help of a Mr. Watts. He then noted the following with
respect to the nature of the purported agency business:
Q. . . . Did you review-- so you say
you prepared this statement of agent activities with Mr. Watts. Do you
understand what this means? Like, if we look at that statement of agent
activity, there is "business service agent". Do you know what that
means?
A. The business service agent is me.
Q. You're an agent?
A. Yes.
Q. An agent for what?
A. A business. I am a business.
Q. You are a business? What do you
do?
A. I am an agent. The Ontario
government has given me permission to be one.
Q. How so?
A. Could I provide you with a
document?
Q. No, just your explanation. What
do you understand or how can you explain that?
A. For me, it is just to operate my
affairs.
Q. Your personal affairs?
A. My personal affairs or business
affairs.
[26]
The Appellant provided the following explanation
of this so-called agency in a letter to the Canada Revenue Agency dated May 31,
2010:
The terms of the
private contract of agency between the free will man commonly called Warren, of
the Bradshaw family, who is the principal, the contributing beneficiary and the
true party in interest for the fictional entity/person/trust called WARREN
BRADSHAW, which, by necessity, is the agent in commerce for the principal; is
not subject to the scrutiny of a third party entity, and therefore; any private
dealings between the principal and agent cannot be released to the Canada
Revenue Agency (“CRA”) and or you Debbie Thorne (“DT”) and any and all agents
of the CRA.
[27]
The Appellant’s position is that, from 2008 to
2011 he carried on a business of acting as agent for himself and that, over the
four years, he incurred losses of almost $1.5 million. The losses appear to be
based on amounts he paid to himself. For example, included with the Appellant’s
2010 income tax return is a T5 summary issued by the Appellant, which purports
to show that he paid $222,198.79 of interest to himself. This so-called
interest is then deducted on his income tax return as a business loss.
[28]
The Appellant’s argument that he carried on a
business of providing agency services to himself is nonsense; no business
existed. His claiming of almost $1.5 million of business losses in respect of a
fictitious business was a rather weak attempt to avoid the payment of taxes.
II. Gross
Negligence Penalties
[29]
The introductory words of subsection 163(2) of
the Income Tax Act state:
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 . . .
[30]
The introductory words identify two conditions
that must be satisfied if the assessment by the Minister of a penalty under
subsection 163(2) of the Income Tax Act is to be maintained.
[31]
First, the Appellant must have made,
participated in, assented to, or acquiesced in the making of a false statement
or omission in a return, form, certificate, statement or answer.
[32]
Second, the false statement or omission must
have been made by the Appellant knowingly or under circumstances amounting to
gross negligence, or the Appellant must have participated in, assented to or
acquiesced in the making of the false statement or omission knowingly or under
circumstances amounting to gross negligence.
[33]
Under subsection 163(3) of the Income Tax Act,
the Minister has the burden of establishing the facts that justify the assessment
of a penalty under subsection 163(2).
[34]
The Appellant reviewed and signed each of the
tax returns for the relevant years. Each return claimed a loss from a business
of acting as agent. As a question of fact, such a business did not exist. The
Appellant’s previously discussed explanation of the purported agency business
is absurd.
[35]
Further, the Appellant knows what constitutes a
business. He has been involved in the family business for a significant period.
[36]
As a question of fact, the first condition of
subsection 163(2) is satisfied.
[37]
By signing and filing his 2008, 2009, 2010 and
2011 income tax returns and the request for loss carry-back, the Appellant made
or participated in, assented to or acquiesced in the making of a false
statement in his return and on a form.
[38]
I must now determine if the Appellant made the
false statements knowingly or under circumstances amounting to gross negligence.
That determination must be made as at the time at which the Appellant signed
his income tax returns and the request for the carry-back of the losses from
the purported agency business.
[39]
I will first consider whether the Appellant made
the false statements under circumstances amounting to gross negligence.
[40]
The phrase “gross
negligence” as used in subsection 163(2) was
considered in the widely adopted decision of Venne v. The Queen, 84 DTC
6247 (FCTD). At page 6256 of that decision, 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. . . .
[41]
As stated in Venne, a finding of “gross negligence”
requires a high degree of negligence. The existence (or non-existence) of a
high degree of negligence is determined by reference to the objective standard
of a reasonable person in the same circumstances as the person against whom the
penalty is assessed and not by reference to the subjective beliefs or
characteristics of this person.
[42]
The objective standard is only relaxed if it is
established that the person is incapable of understanding the duty not to make
a false statement or an omission in a return.
[43]
It is clear from the evidence before me that the
Appellant is capable of understanding his duty not to make a false statement or
an omission in a return. He is an intelligent person, and clearly knows his
duty to file his tax returns and report his actual income.
[44]
As a result, the Respondent must establish on a
balance of probabilities facts that lead to the conclusion that the making by
the Appellant of the false statements in his 2008, 2009, 2010 and 2011 income
tax returns was such a marked and substantial departure from the conduct of a
reasonable person in the same circumstances that it constituted gross
negligence.
[45]
The Respondent has established such facts.
[46]
In my view, a reasonable person presented with a
plan such as the one presented to the Appellant by the Fiscal Arbitrators would
immediately realize that there was something seriously wrong with the plan. A
reasonable person would realize that business losses do not materialize out of
thin air and that he is not a “fictional
entity/person/trust”.
[47]
The description of the tax plan provided by Mr.
Watts on behalf of the Fiscal Arbitrators prior to the Appellant filing his tax
returns was patently absurd, and no reasonable person would accept such an
explanation or file a return based on such an absurd explanation.
[48]
This alone is sufficient for a finding of conduct
that is such a marked and substantial departure from the conduct of a
reasonable person that it constituted gross negligence.
[49]
There are other factors that support such a
conclusion.
[50]
A reasonable person faced with such a scheme
would have sought advice from a professional accountant or lawyer, especially
when the amounts at issue were almost $1.5 million. The Appellant testified
that he did not seek advice from his previous accountant or any other
professional.
[51]
The magnitude of the losses claimed by the
Appellant compared to the Appellant’s historic income would raise significant suspicion
in a reasonable person. Exhibit R-19 shows that the loss claimed by the
Appellant on his 2008 income tax return would have eliminated the tax he would
otherwise have paid for 2008 and all or most of the tax he had paid in 2005,
2006 and 2007.
[52]
In my view, on the evidence before me, the
Appellant’s signing and filing of his 2008, 2009, 2010 and 2011 income tax
returns and the request for loss carry-back represents such a marked and
substantial departure from the conduct of a reasonable person in the same
circumstances that it constitutes gross negligence as described in Venne.
[53]
As a result, the false statements made by the
Appellant in his 2008, 2009, 2010 and 2011 income tax returns in respect of
fictitious business losses and in the request for loss carry-back were made in
circumstances amounting to gross negligence.
III. Other
Issues
[54]
It is not clear to me whether the Appellant is
challenging the Minister’s denial of rental losses claimed in the Appellant’s
2009 and 2011 income tax returns. However, the Appellant presented no evidence
with respect to the denied rental losses.
[55]
During his testimony, the Appellant stated the
following:
The affiant
believes that his rights under sections 6(2)(b) and [15(1)] of the Charter of
Rights and Freedoms have been abridged, as the administration of the Income Tax
Act by the Minister did not account for the appellant's right to pursue the
gaining of a livelihood and to equal benefits under the law.
[56]
He provided no further argument or evidence with
respect to his allegation.
[57]
Paragraph 6(2)(b) of the Canadian Charter of
Rights and Freedoms sets out the right of Canadians to pursue the gaining
of a livelihood in any province. Subsection 15(1) guarantees Canadians equality
before and under the law and equal protection and benefit of the law without
discrimination.
[58]
The Appellant’s rights under paragraph 6(2)(b)
and subsection 15(1) are not violated when the Minister carries out her
statutory duty to assess the Appellant for his failure to pay taxes as a result
of the claiming of losses from a fictitious business.
[59]
For the foregoing reasons, the appeals are
dismissed with costs to the Respondent.
Signed
at Antigonish, Nova Scotia, this 27th day of June 2017.
“S. D’Arcy”
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