REASONS
FOR JUDGMENT
D’Auray J.
[1]
Brian Bolduc (the “appellant”) hired Solutions 21 Financial (“Solutions 21”)
to prepare and file his i tax return for the 2009 taxation year.
[2]
In computing his income for the 2009 taxation year, the appellant
claimed a large business loss, although he was not operating a business during
that year.
[3]
The Minister of National Revenue (the “Minister”) reassessed the appellant
by disallowing the business loss and levied gross negligence penalties pursuant
to subsection 163(2) of the Income Tax Act (the “Act”).
[4]
Subsection 163(2) of the Act imposes a penalty when a taxpayer
knowingly, or under circumstances amounting to gross negligence, makes a false
statement in his income tax return.
[5]
The appellant states that prior to signing his income tax return for the
2009 taxation year, he carefully examined it and asked a representative of
Solutions 21 why a business loss was being deducted. Satisfied with the answers
given, the appellant decided to sign and file his income tax return with the deduction
claimed.
[6]
The appellant states that he did not knowingly make a false statement
nor was he wilfully blind in signing and filing his income tax return for the
2009 taxation year. The appellant further submits that he did not make a false statement
under circumstances amounting to gross negligence.
[7]
The respondent submits that the appellant knew that he was not operating
a business in his 2009 taxation year, but still reported a large business loss.
Therefore, by signing the income tax return, the appellant knowingly made a
false statement.
[8]
The respondent also submits that the appellant was wilfully blind to the
false statement and therefore the assessment by the Minister whereby a penalty
was levied pursuant to subsection 163(2) of the Act should be
maintained.
II.
FACTS
A.
2009 Income Tax Return
[9]
In filing his income tax return for the 2009 taxation year, the appellant
claimed a business loss in the amount of $326,127. The appellant applied
$82,963 of this business loss against his income in the 2009 taxation year and
requested a carry back with respect to the remainder of the loss, which
amounted to $243,164. The remainder of the loss would have been applied to the
2006, 2007, and 2008 taxation years, in the following manner: $78,514 (2006),
$83,860 (2007), and $80,790 (2008).
[10]
On November 12, 2010, the Minister assessed the appellant for the 2009
taxation year and disallowed the business loss of $326,127. In addition, the Minister
levied a penalty of $42,029 pursuant to subsection 163(2) of the Act.
[11]
The appellant appealed this assessment to the Tax Court of Canada on
February 6, 2012.
B. The Appellant
[12]
The appellant was born on October 13, 1977, and graduated from high
school in 1996.
Following high school, the appellant completed an Electrical Engineering
Technician Program at Conestoga College.
[13]
At all relevant times, the appellant was employed at Toyota
Manufacturing as a production team leader. Prior to working at Toyota, the appellant
had worked as a gas station attendant, a heating and cooling system installer
and as an assembler of control panels.
[14]
The appellant began working at Toyota in October 2001.
He started as a mobile equipment operator and was eventually promoted to the
role of production team leader in November 2007. As a team leader, he supervised
six employees.
[15]
The appellant has no training and has minimal knowledge with respect to
tax matters, business law and accounting.
He testified that his knowledge of the Act was little to none.
C.
Prior income tax returns
[16]
The appellant has never prepared his income tax returns. He has been
filing income tax returns since 1993.
[17]
The appellant first used H&R Block for the preparation of his income
tax returns. He stated that he paid H&R Block approximately $100 to $120. To
save on these fees, the appellant asked his mother to prepare his returns.
[18]
With respect to his 2007 taxation year, the appellant participated in
the Home Buyers’ Plan (the “HBP”). Under that Plan, the appellant borrowed an
amount from his registered retirement savings plan (“RRSP”) towards the
purchase of a house.
The appellant stated that in preparing his return for that year, his mother
made a calculation error due to the HBP. Until 2008, when the appellant started
using the services of Solutions 21, the appellant’s income tax returns always
included the same items, employment income, RRSP contributions, and tuition
credits.
D.
Solutions 21
[19]
Beginning in the 2008 taxation year, the appellant hired Solutions 21 to
assist him with tax matters and to prepare his and his spouse’s income tax
returns.
[20]
The appellant was introduced to Solutions 21 through Ms. Linda Lockhart,
his wife’s aunt, and her husband, Mr. Alex Pimentel.
[21]
Ms. Lockhart testified that she thought that it would be a good idea for
the appellant to start using Solutions 21, since he was starting a family and
purchasing a house.
[22]
Ms. Lockhart had known the appellant, who was married to her niece Mandy
Bolduc, for 17 years.
She was very close to Mandy. Ms. Lockhart stated that she saw the appellant and
his spouse several times a month.
[23]
Ms. Lockhart believed that Solutions 21 was a tax planning organization.
Her spouse at the time, Mr. Pimentel, was the one who introduced her to
Solutions 21.
[24]
Mr. Pimentel was first introduced to Solutions 21 through a co-worker at
Denso, Tim Black.
Mr. Pimentel attended a Solutions 21 seminar in 2006. He then started using the
services of Solutions 21 in 2006 and participated in their Stocklogics program.
[25]
Ms. Lockhart attended her first meeting with Solutions 21 in 2007 and
noted that there were between 40 and 50 people in attendance.
At the meeting, people had the opportunity to ask questions while some
attendees shared their personal stories about their successful experience using
Solutions 21.
[26]
Ms. Lockhart and Mr. Pimentel had used Solutions 21 since 2006 for the
following services:
income tax returns preparation for 2006 and 2007,
mortgage consultation and the purchasing of stocks and bonds.
[27]
Ms. Lockhart told the appellant that the advisers at Solutions 21 were
experts who were very helpful and reliable. She described the organization’s
two principal individuals, Ms. Janet Perry and Mr. Alrich Parkins, as being highly
educated, experienced and trustworthy advisers.
[28]
Ms. Lockhart’s impression was that Ms. Perry and Mr. Parkins were very
professional, and knowledgeable about finances, income tax return preparation,
RRSPs and debt consolidation.
She stated that they promoted themselves as being registered financial
advisors.
[29]
Further, Ms. Lockhart advised the appellant that Solutions 21 had
connected her with Mr. Armavidis who was a mortgage broker at TD Canada Trust.
[30]
Ms. Lockhart testified that she conducted the following research on
Solutions 21 and relayed this information to the appellant:
-
Checked if there were any complaints against Solutions 21 with
the Better Business Bureau. After finding
Solutions 21 on the Better Business Bureau she found no bad reviews or alerts
about them.
-
Conducted Google searches on Solutions 21, Ms. Perry, Mr. Parkins
and Mr. Armavidis, and did not find anything negative or concerning with
respect to these individuals. She believed that if there was something
illegitimate about Solutions 21 it would be apparent from Google searches.
-
Watched a YouTube video of a CityTV interview of Mr. Parkins
discussing Solutions 21.
[31]
Prior to attending his first meeting with Solutions 21 in November 2008,
the appellant asked Ms. Lockhart questions about the organization. He also
asked about the roles of Ms. Perry and Mr. Parkins and what services they
had provided to Ms. Lockhart.
E.
Appellant’s first meeting with Solutions 21
[32]
The appellant met with Solutions 21 for the first time in November 2008
at the residence of Ms. Lockhart and Mr. Pimentel. It was Ms. Perry and Mr. Parkins
who led the Solutions 21 seminar. Eight or nine people attended the seminar
including the appellant, his spouse, Ms. Bolduc, Ms. Lockhart, Mr. Pimentel
and family and friends of Mr. Pimentel.
[33]
The appellant stated that he was impressed with Ms. Perry and Mr. Parkins,
he believed that they were highly educated and were registered financial
advisors. He found them to be very professional, well‑dressed and well‑spoken.
In addition, the appellant stated that he was told by Ms. Perry that Solutions
21 was affiliated with TD Bank with respect to providing mortgage services.
[34]
During the meeting, Solutions 21 representatives presented a slideshow
that provided background on them personally and on Solutions 21. They promoted
Solutions 21 as an innovative company made up of experienced financial advisors
offering different services such as RRSPs, Tax Free Savings Accounts (TFSA),
and life insurance. They also promoted their affiliation with TD Bank for
mortgage services.
As well, they distributed written materials explaining their various programs.
[35]
One of the products Solutions 21 promoted at the meeting was a
charitable donation program. They provided a list of charities that had been
researched and approved by Solutions 21. Further, they provided the appellant
and the other attendees at the seminar with a link to review the charities on
CRA’s website. The link had three charities that they could choose from.
[36]
Immediately after the meeting, the appellant with Ms. Lockhart and
Mr. Pimentel, conducted research on Solutions 21. Together they looked at
Solutions 21’s website, and Ms. Perry and Mr. Parkin’s profiles. They found
that everything on the website matched the information provided at the
presentation.
[37]
In addition, they watched a CityTV video on Solutions 21 and saw information
on Solutions 21’s website about their affiliation with TD Bank.
[38]
As a group, they discussed the charitable donation program presented by
Solutions 21 and reviewed the CRA’s website to look at the list of charities.
They looked on the CRA’s website to make sure the charities were legitimate.
[39]
Everyone in the group chose the same charity namely, Furry World Rescue
Mission. They found Furry World Rescue Mission on the CRA’s website.
The appellant chose this charity because it was located near his community in
Cambridge, Ontario.
[40]
Overall, the appellant testified that he thought Solutions 21 was a
financial and savings institution. He believed it to be an all-star team made
up of former CRA agents, high-end lawyers and experienced tax preparers.
F.
Charitable donation program
[41]
After the meeting in November 2008, the appellant decided to participate
in the charitable donation program and donated $2,000 to Furry World Rescue
Mission.
[42]
The appellant believed that Solutions 21 would be making a group donation,
that would act similarly to a stock purchase, whereby depending on your
donation amount, stocks would be disbursed throughout the group.
The appellant did not understand the details of the program but believed that
Solutions 21 would be purchasing stock, while the money would be going to
the charities.
[43]
After making the donation, Solutions 21 provided a donation receipt to
the appellant. The receipt listed a donation amount of $12,000. The appellant
understood this amount to be the eligible amount of the donation or stock that
was purchased on his behalf as a group donation.
The donation receipt specified the property received by the charity as common
shares of RCT Global Networks Inc. appraised by the Frankfurt Stock
Exchange.
The appellant did ask questions about these details when he received the
receipt.
G.
Additional meetings in 2008
[44]
The appellant next attended a meeting at Solutions 21’s office in
December 2008, where there was a presentation for another product based on
a Whitby land development plan.
The appellant stated that approximately 30 to 40 persons attended the meeting.
The appellant also picked up his receipts from the charitable donation program.
[45]
The appellant described Solutions 21’s office as a two to three storey
glass building, with a reception area and boardrooms.
The appellant met with Solutions 21 at this office location on four different
occasions.
Ms. Lockhart described the building as “gorgeous, beautiful, tall building.
Kind of like downtown Toronto. Very well furnished.”
H.
The appellant’s income tax return for his 2008 taxation year
[46]
The appellant hired Solutions 21 to prepare his and his spouse’s income
tax returns for the 2008 taxation year. He paid them approximately $150 for
this service, which he found reasonable since it was similar to what he had
previously paid to H&R Block.
[47]
The appellant did not have any reasons not to trust the representatives
from Solutions 21. They had assisted Ms. Lockhart and her husband with respect
to a mortgage, in addition to preparing successfully their income tax returns.
The representatives at Solutions 21 were also able to solve the appellant’s tax
issue with respect to the calculation error made by his mother in his 2007
income tax return.
[48]
In April 2009, the appellant went to the business premises of Solutions
21 with Ms. Lockhart, Mr. Pimentel and Mr. Pimentel’s brother and father (the
“Group”). The purpose of the visit was to review their income tax returns for
the 2008 taxation year.The
Group met together with Ms. Perry, and reviewed their respective income tax
returns page by page, asking questions throughout.
[49]
Everyone in the Group participated in the charitable donation program
and was satisfied with Ms. Perry’s answers to their questions.
As far as the appellant knew, everyone in the donation program was getting a
tax receipt that was not for the exact amount that they donated.
[50]
The appellant preferred the Group atmosphere, as it gave everyone the
opportunity to ask questions together, which was beneficial in case there was something
he or someone else missed.
[51]
Solutions 21 had claimed on behalf of the appellant a charitable
donation in the amount of $12,000 for his 2008 taxation year.
[52]
Following the filing of his income tax return, an assessment was issued
by the Minister and the appellant received a $7,000 refund.
[53]
The appellant thought the amount refunded by CRA was too high. He
contacted Ms. Perry at Solutions 21 who confirmed that the amount of the refund
was correct. Ms. Perry told the appellant that the refund was large due to the
following reasons:
(1)
He was the sole income earner in his family;
(2)
It was the first year he had claimed child tax credits; and
(3)
He had made the charitable donation.
[54]
Ms. Perry advised the appellant that without the charitable donation he
would have received a refund of around $2,500 and that the donation brought it
up to $7,000.
[55]
After speaking with Ms. Perry, the appellant believed that the refund
was legitimate and that he was entitled to a refund of $7,000.
[56]
In the summer of 2009, the Minister reassessed the appellant for his
2008 taxation year. The reassessment reduced the appellant’s refund by $400.
[57]
Apart from this $400 adjustment, the appellant was under the impression
that his income tax return had been accepted as is, by the CRA.
[58]
The appellant only found out that there was an issue with the charitable
donation that he had claimed in his 2008 income tax return when the CRA
contacted him in 2011.
By this time, he had already filed his 2009 income tax return, which he signed
on April 14, 2010.
At the time his 2009 income tax return was filed, the appellant had no reason
to believe that there was any issue with the donation he had claimed in 2008.
I. Tiger Concierge program
[59]
The appellant attended a seminar in November 2009, where he was
introduced by the representatives of Solutions 21 to the Tiger Concierge
program.
The seminar was held at Solutions 21’s business premises. There were 30 to 40
people attending the seminar.
[60]
The appellant understood that the Tiger Concierge program would give him
access and advice to invest in RRSPs, TFSAs, and a loss carryback program.
[61]
The loss carryback program was promoted by Solutions 21 as a plan that
had similarities with the HBP. The appellant stated that Solutions 21 advised
him that you had to apply with the CRA and it was the CRA that decided if a
taxpayer qualified for the loss carryback program. Solutions 21 told the appellant
that he was a good candidate for the program because his spouse did not work;
he just had a child and had recently purchased a house.
[62]
The appellant believed that the loss carryback program was put in place
in order to provide interest-free loans to assist taxpayers that qualified for
the program. In the presentation on the loss carryback program, the
representatives of Solutions 21 suggested that the program had worked in the
past for other taxpayers.
[63]
The appellant and other attendees asked at the meeting why more people
were not filing their income tax returns in this manner. The representatives of
Solutions 21 explained at the meeting that this program was a special
initiative that Solutions 21 had organized with the CRA and that this program
was not available to the public at large.
[64]
The appellant discussed the program with the Group prior to joining.
[65]
The appellant believed that by joining the program he would gain access
to the expertise of accountants and lawyers at Solutions 21. He paid $1,000 to
join the program.
J.
The appellant’s 2009 income tax return
[66]
On April 14, 2010, the Group met with Ms. Perry and Mr. Parkins at
Solutions 21’s business premises to review and sign their respective 2009
income tax returns.
The appellant stated that he reviewed his income tax return, page by page, in
the group setting.
[67]
Prior to signing his 2009 income tax return, the appellant and other members
of the Group asked many questions about the information in their income tax
return. The Group asked about the business loss claimed in the income tax
returns and confirmed with Solutions 21 that none of them had a business.
[68]
Solutions 21 advised the appellant that the business loss of
($326,127.38) was not actually a business loss but was made up of his total
income for the previous four years.
Ms. Perry explained that this was the manner in which they had to organize the
return in order to explain to the CRA the loss carryback program request.
The appellant had a similar understanding of the meaning of the gross business
income that was titled Receipts as Agent.
He believed that the amount listed as gross business income was the equivalent
of the income tax deducted for the last four years.
[69]
The appellant understood that as result of the loss carryback program he
did not owe any tax. The appellant testified that he noticed that the Tiger
Concierge program was not mentioned on his income tax return. That said, after
asking questions about the business loss, the appellant and the rest of the
Group were comfortable with the explanations provided and all signed their
respective income tax returns.
[70]
The appellant also noticed that on the last page of the income tax
return, the word “Per” appeared beside the signature area.
The representatives of Solutions 21 explained to the appellant that since they
were doing the request for the loss carryback program that they had to put the
word “Per” beside the signature area.
[71]
The appellant testified that he believed that the way this program
worked was that he would receive a refund of approximately $21,000, which he
could invest, but would need to reimburse that amount to the CRA after four
years. He believed that the refund was essentially an interest-free loan, and
he planned to invest the money in a TFSA or RRSP through Solutions 21.
[72]
The appellant believed that he would only receive this refund if he were
to qualify for the loss carryback program. If he did not qualify, he would not
receive the refund. However, if CRA granted his request, the appellant had to
pay 20% of the loss carryback amount to Solutions 21.
[73]
The appellant signed his 2009 income tax return. He testified that he
believed the explanations given by the people at Solutions 21 because he
trusted them. He had established a relationship with Solutions 21. In addition,
at the time of signing his income tax return, the appellant had not been
reassessed with respect to the charitable donation. He was under the
impression that everything was in order.
[74]
Solutions 21 then filed the appellant’s 2009 tax return with the CRA. In
initially assessing the appellant, the Minister’s denied the appellant’s claim for
a business loss, therefore the appellant never received a refund from the CRA.
[75]
Overall, the appellant testified that he met with Solutions 21 around eight
to ten times, between 2008 and 2010.
These meetings included seminars, meet and greets, and the signing of tax
returns.
K.
Communication with the CRA
[76]
The CRA contacted the appellant in July 2010 and asked him to complete a
business questionnaire in respect of his 2009 tax return.
The appellant was forewarned by Solutions 21 that because he was requesting a
loss carryback related to a business loss, the CRA would first send this
questionnaire prior to granting the loss carryback. Solutions 21 advised the appellant
to forward the questionnaire to them so that they could properly respond.
[77]
The appellant contacted Solutions 21 when he received the questionnaire
from the CRA, which was dated July 15, 2010.
Solutions 21 then provided him with a letter to send back to the CRA.
[78]
The letter used obscure wording such as “free will man”.
When the appellant read the letter, it did not make sense to him. He didn’t
feel right sending it to the CRA so he contacted Ms. Perry.
[79]
The appellant asked why it was worded in that way. Ms. Perry assured him
that this was how the program worked. She asked him if they had ever steered
him wrong before, and said that he was dealing with an experienced team “that
knows what they can do”.
The appellant then sent the letter to the CRA.
[80]
In August 2010, after reading the letter provided by Solutions 21, members
of the Group decided to consult an accountant. The Group, including the
appellant, met with Mr. Atcheson. The latter advised the appellant (and the
other members of the Group) that his 2009 income tax return prepared by
Solutions 21 was not legitimate. A T1 adjustment was prepared by Mr. Atcheson
for the appellant’s 2009 taxation year.
[81]
After meeting with Mr. Atcheson, the appellant discontinued all
communication with Solutions 21.
III. ISSUES
[82]
The only issue in this appeal is whether the appellant is liable for
penalties in the 2009 taxation year pursuant to subsection 163(2) of the Act.
IV.
POSITION OF THE PARTIES
[83]
Before stating the position of the parties, the Minister’s assessment
will be confirmed if pursuant to subsection 163(2) of the Act, the
respondent establishes on a balance of probabilities, that:
1. the
appellant knowingly made a false statement, or (referred herein
as the first path of subsection 163(2) of the Act.)
2. the
appellant made a false statement under circumstances amounting to gross
negligence (referred herein as the second path of subsection 163(2) of the Act.)
A. Appellant’s position
[84]
The appellant argues that he did not know that there was a false
statement in his income tax return at the time of filing his income tax return.
He also argued that he was not wilfully blind.
[85]
The appellant submits that this Court’s decision in Torres,
which was upheld by the Federal Court of Appeal in Strachan, applied the
wrong test to determine whether a taxpayer was wilfully blind, under the first
path of subsection 163(2) of the Act. The appellant’s position is that
the correct test for wilful blindness was articulated by the Supreme Court of
Canada in the criminal context in Sansregret
and Hinchey.
[86]
Relying on the Supreme Court of Canada decisions, the appellant argues
that for a Court to find that a taxpayer is wilfully blind, the respondent
needs to establish that the taxpayer was deliberately ignorant of the need to
make inquiry or he or she intended to cheat in filing his or her income tax
return.
[87]
The appellant argues that the test applied in Torres
to determine if a taxpayer was wilfully blind, under the first path of
subsection 163(2) of the Act, had the effect of diluting the concept of
wilful blindness as formulated by the Supreme Court of Canada in Sanregret
and Hinchey.
[88]
Therefore, the appellant submits that the respondent did not establish
that the appellant was wilfully blind to the false statement in his 2009 income
tax return, namely the claim of a business loss. The appellant argues that he
inquired as to why a business loss was claimed and he never had an intention to
cheat.
[89]
The appellant further submits that he did not make a false statement in
his income tax return under circumstances amounting to gross negligence
pursuant to second path of subsection 163(2) of the Act.
B. Respondent’s position
[90]
The respondent argues that the appellant understood the meaning of
business income and loss. He signed his income tax return, knowing that he was
claiming a large business loss, although he was not operating a business. He
knowingly made a false statement when filing his income return for the 2009
taxation year.
[91]
Relying on the decision in Torres,
the respondent also argued that the appellant was wilfully blind at the
time of filing his income tax return. She argued that the appellant knew that
he was not carrying on a business. After noticing that a large business loss
was claimed in his 2009 income tax return, the appellant chose not to inquire
about the business loss claimed to avoid finding the truth.
[92]
The respondent also argued that the appellant by not asking anyone else
than the representatives of Solutions 21 about the business loss, was wilfully
blind and grossly negligent.
[93]
The respondent submits that the factors outlined in Torres
have been confirmed by the Federal Court of Appeal and are the relevant factors
to apply in this appeal as to whether the appellant was wilfully blind under
subsection 163(2) of the Act.
V.
LEGAL ANALYSIS
A.
Penalties under subsection 163(2) of the Act
[94]
The relevant part of subsection 163(2) states:
False
statements or omissions
(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 of the
greater of $100 and 50% of the total of
…
[95]
The burden of proof for justifying the imposition of gross negligence
penalties is on the respondent. Subsection 163(3) of the Act states:
(3) Where, in an appeal under this Act,
a penalty assessed by the Minister under this section or section 163.2 is in
issue, the burden of establishing the facts justifying the assessment of the
penalty is on the Minister.
[96]
After meeting with the accountant, Mr. Atcheson, the appellant became
aware that he was dealing with scammers and that the program promoted by
Solutions 21 did not exist. He therefore understood that he was not entitled to
claim business losses, since he was not carrying on a business. Therefore,
there is no doubt that there was a false statement in the appellant’s income
tax return for the 2009 taxation year.
[97]
Accordingly, I will need to determine if the appellant knowingly made a
false statement or if the appellant made a false statement under circumstances
amounting to gross negligence.
B.
Knowingly and wilful blindness
[98]
In my view, the first argument of the respondent must fall. The evidence
did not establish that the appellant knew that he made a false statement in his
2009 income tax return. At the time of signing his income tax return, the
appellant believed that the loss claimed on his behalf by Solutions 21 was the
mechanism to qualify for the program whereby the losses claimed could be
reimbursed to the CRA similarly to HBP program after four years. I do not have
any reason to doubt the testimony of the appellant. He was a candid and sincere
witness.
[99]
That said, the Courts have stated that knowledge of one or more
ingredients of the alleged act, may be established through the proof of wilful
blindness. In Torres,
Justice Miller of this Court refers to the decisions of Hinchey
and Sansregret.
At paragraph 63 of his decision, Justice Miller stated as follows:
[42] In R.
v. Hinchey, [1996] 3 S.C.R. 1128, Cory J. discussed the concept of
"wilful blindness" in the context of criminal law. At paragraphs 112
to 115 of that decision, he wrote the following:
. . .
In other words, there is a suspicion
which the defendant deliberately omits to turn into certain knowledge. This is
frequently expressed by saying that he “shut his eyes” to the fact or that he
was “wilfully blind”.
. . .
114. In Sansregret,
supra, this Court held that the circumstances were not restricted to those
immediately surrounding a particular offence but could be more broadly defined
to include past events. McIntyre J. distinguished wilful blindness from
recklessness and quoted with approval a passage from Glanville Williams with
regard to its application (at pp. 584 and 586):
Wilful
blindness is distinct from recklessness because, while recklessness involves
knowledge of a danger or risk and persistence in a course of conduct which
creates a risk that the prohibited result will occur, wilful blindness
arises where a person who has become aware of the need for some inquiry
declines to make the inquiry because he does not wish to know the truth. He
would prefer to remain ignorant.
. . .
[43] Although
Cory J.'s comments were made in the context of a criminal law case, they are
nonetheless, in my view, entirely apposite to the facts of the present case.
Consequently, 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.
[100] In Wynter,
which is a decision recently rendered by the Federal Court of Appeal, Justice
Rennie rejected the argument of the appellant, that this Court in Torres
and the Federal Court of Appeal in Strachan failed to adopt the
restrictive test for wilful blindness as formulated the Supreme Court of Canada
in Sansregret and Hinchey and therefore, diluted the concept of
wilful blindness.
[101] Justice
Rennie stated as follows with respect to the concept of wilful blindness and in
what circumstances it should be applied:
[14] I turn to the
appellant’s main argument. The appellant contends that wilful blindness
requires evidence sufficient to demonstrate that the taxpayer actually knew the
return was false and that the taxpayer “intended to cheat the administration of
justice”.
[15] The jurisprudence does
not support the conclusion that an intention to cheat is a prerequisite for a
finding of knowledge, and in particular, of wilful blindness. The decision of
the Supreme Court of Canada in Guindon v. Canada, 2015 SCC 41, [2015] 3
S.C.R. 3 (Guindon), removes any doubt. The Supreme Court agreed with the
decision of this Court, cited as Canada v. Guindon, 2013 FCA 153 at
para. 37, [2014] 4 F.C.R. 786, which stated that “the assessment of a penalty
under section 163.2 [dealing with tax preparers] is not the equivalent of being
‘charged with a [criminal] offence.’” While there is still a mental element
present in subsection 163(2), I also note the Supreme Court’s endorsement in Guindon
at paragraphs 60-62 of the reasons of Justice Strayer in Venne v. The Queen
(1984), 84 D.T.C. 6247, [1984] C.T.C. 223 (Venne), and those of the Tax
Court in Sidhu v. The Queen, 2004 TCC 174 at para. 23, 2004 D.T.C. 2540
that “[t]he burden here is not to prove, beyond a reasonable doubt, mens rea
to evade taxes.”
[16] In sum, the law will
impute knowledge to a taxpayer who, in circumstances that suggest inquiry
should be made, chooses not to do so. The knowledge requirement is satisfied
through the choice of the taxpayer not to inquire, not through a positive
finding of an intention to cheat.
[17] While evidence, for
example, of an actual intent to make a false statement would suffice to meet
the “knowingly” requirement of subsection 163(2), requiring an intention to
cheat to establish wilful blindness is inconsistent with the well-established
jurisprudence that wilful blindness pivots on a finding that the taxpayer
deliberately chose not to make inquiries in order to avoid verifying that which
might be such an inconvenient truth. The essential factual element is a finding
of deliberate ignorance, as it “connotes ‘an actual process of suppressing a
suspicion’”: Briscoe at para. 24. I would add that, in the context of
subsection 163(2), references to “an intention to cheat” are a distraction. The
gravamen of the offence under subsection 163(2) is making of a false statement,
knowing (actually or constructively, i.e., through wilful blindness) that it is
false.
[102] Therefore,
a taxpayer will be deemed to have knowledge of a false statement and will be
held responsible for the penalties under the first path of subsection 163(2) of
the Act, if the respondent established that the taxpayer was willfully
blind, namely in circumstances that suggest that an inquiry should be made but
the taxpayer decides not to inquire because he knows that the answer may not
serve his purposes. Contrary to the appellant’s position, the respondent does
not have to establish that the intention of the taxpayer was to cheat.
[103] Accordingly,
I will apply the factors formulated in Torres
to the facts of this appeal to determine if the appellant was wilfully blind to
the false statement.
a) Education and experience
[104] The
appellant graduated from high school and completed a two-year Electrical
Engineering Technician Program at Conestoga College.
[105] During the
relevant years, the appellant worked at Toyota as a production team leader. His
position involved supervising a team of six employees, performing quality
checks and helping out with repairs.
[106] The
appellant has no training in business, accounting or tax law. He has never
prepared his own tax returns, but has been filing since 1993. Although he has
never prepared his own returns, he did have a basic knowledge and understanding
of RRSPs, the HBP and child tax credits.
[107] Overall,
the appellant’s education and experience is sufficient for him to have been
suspicious of the methods used by Solutions 21. As a result, this factor will
not limit the appellant’s liability in this case.
b) Circumstances indicating a need for an inquiry
[108] Justice
Campbell Miller in Bhatti
used the term “flashing red lights” to describe circumstances that would
indicate a need for inquiry. Examining the following factors will demonstrate
whether there were “flashing red lights” that should have aroused the suspicion
of the appellant.
(i) Magnitude of the advantage
[109] In prior
tax years, the appellant received refunds of a few hundred dollars. In 2008,
when the appellant used Solutions 21, he received a $7,000 tax refund. This was
a significant advantage; however, the appellant did not specifically hire
Solutions 21 anticipating this type of advantage.
[110] Further,
when the appellant received this refund, he immediately contacted Ms. Perry to confirm
that the amount was correct. The appellant did not blindly just accept this
amount; he asked questions to ensure that everything was filed correctly and
that he was entitled to the refund.
[111] In 2009,
the appellant was claiming a refund of approximately $21,000. Even if the
appellant did not receive the refund, it represented a significant benefit for
the appellant, at the time of filing his income tax return. However, the
appellant believed that he was requesting, under the program promoted by Solutions
21, a loan from the CRA of the last four years of income tax paid. He testified
that he understood this amount to be an interest-free loan that would have to
be repaid after four years and was part of a program put in place to assist
couples with young families.
[112] I found
the appellant to be credible and honest and accept his testimony that he
believed that the program promoted by Solutions 21 existed and that the amount
of the loan had to be reimbursed after four years.
[113] An
interest free loan of $21,000 is still a significant advantage for the
appellant. However, once again, the appellant did inquire as to how he was
entitled to this amount and asked questions on several occasions about how the
loss carryback program worked.
[114] The
appellant asked the tax preparer Solutions 21, questions to try to understand
his entitlement to the refund. The tax preparer satisfactorily answered all his
questions, leading him to genuinely believe he was entitled to these amounts.
(ii) Blatantness of the false statement
[115] The false
statement was blatant on his 2009 tax return. The appellant testified that he
did see the large business loss claimed by Solutions 21.
[116] This is
not a case where the taxpayer did not look at his return or did not notice the
false statement. In this appeal, the appellant did see the false business loss
and knew that he did not have a business.
[117] However,
the appellant questioned the tax preparer on why they claimed a large business
loss. The appellant did not ignore the fact that a large business loss was
claimed but asked questions and tried to understand why his return was
organized in this manner.
[118] The
appellant believed the explanations provided by Solutions 21, and he did not
appreciate the presence of the false statements.
(iii) Lack of acknowledgement
by the tax preparer
[119] Solutions
21 did not complete the box in the tax return reserved for tax professionals.
The appellant did not understand the significance of the tax preparer filling
out this box and could not remember if he had seen it filled out in the past.
[120] In this
appeal, I do not think much weight should be given to this factor. This factor
is especially relevant when it appears that the tax preparer does not want to
acknowledge the services it performed. Although Solutions 21 did not fill out this
box, this would not trigger suspicion in the mind of the appellant because
Solutions 21 was visible publically.
[121] The
appellant testified that Solutions 21 had professional offices, a website and
hosted large seminars (30 to 50 people). This is not a case where the tax
preparer kept a low profile and not filling out the tax preparers’ box would be
significant.
[122] Solutions
21 operated in the public sphere and even if the appellant noticed that it did
not fill out this box, it would not create much suspicion. In addition, the
Group had been using Solutions 21 for different financial services, including,
mortgages, RRSP and buying shares, since 2006. A trust relationship existed
between Solutions 21 and the appellant.
(iv) Unusual requests made by
the tax preparer
[123] The
appellant did not write the word “Per” beside his signature but did notice that
it was written on his tax return. He asked Solutions 21 about this and was
satisfied with their answer.
[124] This
factor does not appear overly significant in this case.
(v) Tax
preparer previously unknown to the taxpayer
[125] The tax
preparer was known by the appellant. Mrs. Bolduc’s aunt and her husband had
used Solutions 21 since 2006. Ms. Lockhart told the appellant about Solutions
21 and invited him to attend a meeting.
[126] The
appellant was not approached out of the blue by a supposed tax preparer. The
tax preparer was recommended to him by close family members and he went on his
own accord to learn more about their services.
[127] The
appellant asked Ms. Lockhart about Solutions 21 prior to attending his first
meeting. Further, the appellant learned more about Solutions 21, Ms. Perry and
Mr. Parkins at the meeting, and believed that the two individuals were
registered financial advisors.
[128] He relied
on his own research and research conducted by Ms. Lockhart prior to getting
involved with Solutions 21. He also relied on the fact that Ms. Lockhart
had used Solutions 21 for two years for different financial services and had
not experienced any problems with their services; in fact they had assisted Ms.
Lockhart in her debt consolidation and with her mortgage. Solutions 21
also took care on behalf of the appellant of the error made by his mother, in
his income tax return with respect to his HBP.
[129] After
using Solutions 21 in 2008, the appellant received a refund that was assessed
and reassessed, leaving him with no knowledge of any improper conduct prior to
signing his 2009 tax return.
[130] By the
time he signed his 2009 tax return he had built up a level of trust with the
tax preparer that he had met with eight to ten times, and that his close family
members had used since 2006.
(vi) Incomprehensible
explanations given by the tax preparer
[131] The
explanations given by the tax preparer made sense, at the time, to the
appellant. Solutions 21 promoted the loss carryback program as being similar to
the HBP program that the appellant was familiar with.
[132] The tax
preparer explained to him that the business loss listed was equal to his income
from the last four years, and that the refund he received was equal to the tax
he paid over that period. They told the appellant that this was the way they
had to break it down for the CRA to understand that he was making the loss
carryback request. The appellant trusted the representatives of Solutions 21;
he did not have any reasons to not believe the explanations given by Solutions
21 as to why business losses were claimed.
[133] Solutions
21 promoted the program as an initiative to assist young families in a similar
way to the HBP program. This made sense to the appellant. The idea that the CRA
could offer a program that allows taxpayers to borrow income tax previously
paid to stimulate investment is not completely unreasonable. The appellant did
go through his income tax return page by page with Solutions 21 and asked
questions about the claimed amounts. The appellant made an effort to understand
how the loss carryback program worked and believed that it was a legitimate
program organized by the tax experts at Solutions 21.
[134] The fact
that the appellant asked questions and tried to understand the tax return is
relevant in establishing his liability. He was under the impression that the
program was designed to assist young families and that the amounts received
would be repaid to the federal government after four years.
[135] This Court
in Brochu, noted that a taxpayer should try to understand their tax
return to make sure it is filled out properly. The Court stated:
The appellant testified that she had quickly
leafed through the return but that she did not understand the words “business
income” and “credit”. Considering her education level and the fact that she had
prepared her original return for the 2001 taxation year herself, it is
difficult to believe that the appellant did not understand those words. If
it is true that she did not understand them, she cannot use that as an excuse
to avoid her liability. She should have tried to understand by asking Ms.
Tremblay questions or by getting information from others in order to ensure
that her income and expenses were properly accounted. For some reason, she did
not think it necessary to get informed, and it is that carelessness which
constitutes gross negligence, in my opinion. The penalty is thus justified
under the circumstances.
[Emphasis
added.]
[136] The
program itself is not incomprehensible, and does not resemble tax plans that
involve a separate identity for an individual and their social insurance
number.
[137] The
appellant did not view any of the explanations as incomprehensible until he saw
the letter that Solutions 21 provided him to send in to the CRA. This is the
first time that the appellant saw explanations that made no sense to him, and
shortly after he received this letter, he sought advice from an accountant.
(vii) Whether
others engaged the tax preparer or warned against using the tax preparer
[138] No one
warned the appellant about using the services of Solutions 21. The opposite was
true in this appeal, as the appellant’s close family members encouraged him to
use Solutions 21 for tax preparation.
[139] His family
had not experienced any problems with Solutions 21 since using their services
and had not found anything negative on the company or on Ms. Janet Perry
and Mr. Alrich Parkins when researching on the Internet. There was nothing
negative found on Solutions 21 after researching them on the Internet and
checking with the Better Business Bureau.
(viii) Whether the taxpayer
made an inquiry of the tax preparer to understand the return
[140] The
appellant asked questions of the tax preparer and tried to understand his
income tax return.
[141] This was
not a case where the taxpayer did not look through their return, or blindly
accepted the explanations of the tax preparer.
[142] The
appellant sat down with the tax preparer and went through his tax return page
by page, asking questions throughout. He tried to understand all of the numbers
claimed on the return and asked questions specifically about the business loss.
Solutions 21 provided answers to all of his questions and unfortunately the
appellant believed the explanations given.
[143] The
respondent argued that appellant should have inquired outside of Solutions 21.
However, in the mind of the appellant there was no need to do so. He believed
Solutions 21 was made up of experienced tax experts, who knew what they were
doing.
[144] The
appellant’s close family members had used Solutions 21 since 2006 and had never
had any problems with them. The appellant’s 2008 tax return was assessed and
reassessed, and after these assessments the appellant believed that Solutions
21 properly filed his 2008 tax return.
[145] The
appellant asked questions of Solutions 21 when he went through his income tax
return. He was satisfied with the answers and did not believe that any further
inquiries were necessary.
(ix) Fee
structure
[146] In 2009,
the appellant paid $1,000 to join the Tiger Concierge program. Although this
fee is high, the appellant believed that by joining it he would get access to
products designed by experienced accountants and lawyers at Solutions 21.
In this light, the fee did not seem unreasonably high to the appellant.
[147] Further,
if the appellant received a refund, he would need to pay a percentage of it to
Solutions 21.
[148] Overall,
the appellant believed he was getting access to an all-star team of tax
professionals and did not view the fee structure suspiciously.
(x) Appearance
of the tax preparer
[149] In this
appeal, the appearance of legitimacy is an important aspect to consider. In
prior cases involving similar tax plans, often the tax preparer would never
bring the taxpayer to their office but rather would go to the taxpayer’s home
or meet in a coffee shop to sign the tax return.
[150] In
contrast, Solutions 21 had a professional office, a reception area and
boardrooms. The representatives were well dressed and hosted seminars that
attracted 40 to 50 guests. They had a comprehensive website and discussed their
business on CityTV. Further, they advertised an affiliation with TD Bank.
[151] This
factor on its own does not free the appellant from liability. However, it does
make it more reasonable for a person to trust Solutions 21 and to believe that
it was a legitimate financial savings institution.
[152] In light
of my analysis of all the facts in this appeal and the analysis of the factors enumerated
in Torres,
I am of the opinion that the respondent has not established that the appellant
was willfully blind. The first path of subsection 163(2) of the Act is based
on a subjective analysis. I believe the appellant when he stated that he
trusted the representatives of Solutions 21 and believed in the existence of
the program created by the government to assist families. Therefore, the
appellant should not be imposed a penalty under the first path of subsection
163(2).
[153] I will now
analyze if the appellant made a false statement under circumstances amounting
to gross negligence.
C. False statement under
circumstances amounting to gross negligence
[154] The
concept of gross negligence in subsection 163(2) of the Act is the
subject of a wide body of jurisprudence.
[155] The seminal
decision on the meaning of gross negligence in the tax context is the Federal
Court’s decision in Venne. Justice Strayer stated as follows on the
meaning of gross negligence in subsection 163(2) of the Act:
“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.
[156] In Lauzon,
this Court distinguished gross negligence from ordinary negligence. Gross
negligence was described as a marked and substantial departure from the conduct
of a reasonable person in similar circumstances. In the words of Deputy Judge
Masse:
There is a difference between ordinary
negligence and gross negligence. 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
[157] As was
stated by Justice Bowman in DeCosta,
in order to determine if the penalties under subsection 163(2) of the Act
applies, the Court needs to consider a number of factors in order to draw the
line between “ordinary” negligence and “gross” negligence, namely:
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, and
d. genuine effort to comply.
[158] No single
factor predominates. Each must be assigned its proper weight in the context of
the overall picture that emerges from the evidence.
[159] Justice
Bowman also stated in Farm Business Consultants,
that generally courts should be cautious when upholding the imposition of gross
negligence penalties, and the benefit of the doubt should be in favour of the
taxpayer.
[160] It has
been long recognized that the concept of “wilful blindness” is applicable to
tax cases and is a circumstance, among others, amounting to “gross negligence” as
that term is used in subsection 163(2) of the Act.
[161] The
Federal Court of Appeal in Wynter
confirmed this approach. Justice Rennie for the Court of Appeal stated as
follows at paragraph 20 of his reasons:
[20] There is no question that, while
conceptually different, gross negligence and wilful blindness may merge to some
extent in their application. A taxpayer who turns a blind eye to the truth and
accuracy of statements made in their income tax return is wilfully blind and also
grossly negligent. . . .
[162] The
respondent argues that the penalties should be maintained, since she has
established that the appellant was grossly negligent, by being wilfully blind
to the false statement.
[163] The Federal
Court of Appeal in Villeneuve, Panini and Strachan
explained in what circumstances a taxpayer may be found to be willfully blind.
If he or she becomes aware of the need for inquiry but declines to make such
inquiry because the taxpayer does not want to know the truth.
[164] The appellant
was deceived by organized and sophisticated tax schemers. Solutions 21 had
professional offices, a website, advertised an affiliation with TD Bank and ran
seminars explaining their products.
[165] Solutions
21 did not approach the appellant, but rather they were recommended to him by
trusted family members. These family members had successfully used Solutions 21
for two years prior to the appellant getting involved.
[166] Solutions
21’s programs offered tax advantages, but in this case the appellant did not
blindly accept these advantages. The appellant asked questions and sought to
understand the programs he was participating in.
[167] It cannot
be said that the appellant turned a blind eye to the amounts claimed in his tax
return. The appellant went over his return with Solutions 21 page by page and
specifically asked questions about the business loss claimed. Solutions 21 answered
all the questions asked by the appellant.
[168] The appellant
believed their explanations and signed his tax return. Solutions 21 promoted a
program that was allegedly offered by the government of Canada and the CRA,
whereby young families could apply and if they qualified could benefit from a
tax break for a four-year period. Further, under this program the benefit was a
loan and would need to be repaid after four years. The program offered and the
explanations provided by Solutions 21 were not incomprehensible. Solutions
21 did not promote an obscure scheme that involved a separate existence for an
individual and their social insurance number.
[169] The appellant’s
behavior in this case does not meet the standard of wilful blindness and does
not otherwise fall under conduct that occurred in circumstances that amount to
gross negligence. The appellant’s conduct does not involve a degree of
negligence tantamount to intentional acting or indifference as to whether the
law is complied with or not. The appellant made a mistake by believing
Solutions 21’s explanations but was not turning a blind eye in suspicious
circumstances. It may be said that the appellant was naive, but in my view, his
conduct, in light of what Solutions 21 told him, was not so reprehensible or
unreasonable to be considered grossly negligent.
[170] Overall,
the appellant may have been naive by participating in the programs offered by
Solutions 21. However, his conduct does not meet the higher standard of gross
negligence and therefore does not warrant the imposition of subsection 163(2)
penalties.
VI.
Disposition
[171] The appeal
is allowed with costs.
Signed at
Ottawa, Canada, this 10th day of October 2017.
“Johanne D’Auray”
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