REASONS
FOR JUDGEMENT
Smith J.
[1]
Sylvain Rousseau is appealing under the informal
procedure from an assessment made by the Minister of National Revenue (the “Minister”)
in respect of the 2008 taxation year. In that assessment, the Minister
disallowed business losses in the amount of $208,660.43 and imposed a penalty
for gross negligence in the amount of $20,537 under subsection 163(2) of the Income
Tax Act (the “Act”).
[2]
The Appellant acknowledged that he did not have
a business and that he did not incur business losses in 2008, therefore the
only issue is whether the Minister was justified in imposing said penalty.
Factual context
[3]
In the year in question, the Appellant was an
employee of Bombardier Aerospace, where he had been a site supervisor since
1999. He previously completed a college diploma in mechanical engineering, a
three-year program.
[4]
To provide context, the Appellant explained that
he had always been very active as a volunteer for sports activities, particularly
school soccer teams. He noted a need for a more sustainable and ecological
playing surface and made some efforts in 2007 and 2008. To that end, he
contacted certain people in Boston and prepared a business plan. He then sought
funding and approached several financial institutions, including the National
Bank and the Federal Business Development Bank. He was unsuccessful and
acknowledges that his expertise is mainly technical.
[5]
It was in that context that he met one Martial
Frigon from the Gatineau, Quebec area. The latter claimed that he could find
funding for the project in question and helped him set up the corporation “Eco‑Fields
Inc.”. According to the Appellant, Mr. Frigon is a lawyer or a former member of
the Quebec Bar.
[6]
It was through that individual that he learned
of the group Fiscal Arbitrators (“FA”). He met Carleton Branch and Pierre
Joanisse (in the fall of 2008 or early 2009) and attended a presentation in
Ottawa that was held in English, although some explanations were offered in
French.
[7]
The presenters showed him the tax “bible” and explained
that they had developed an entirely legal technique for recovering income tax
paid in past years. According to the Appellant, copies of tax refund cheques
for $20,000 to $30,000 were circulated among the participants as supporting
proof. There was a presentation on a video projector screen.
[8]
Following the presentation, FA representatives
asked him to fill out a table (Exhibit A‑3) to indicate his income
earned and federal tax paid and a second table for the provincial level for the
1999 to 2007 tax years. Those tables were completed in the form of
spreadsheets. Three columns were left empty with the indication [TRANSLATION] “To
be completed by Fiscal Arbitrators”. The Appellant’s signature appears at the
bottom of both tables.
[9]
The Appellant noted that the tables did not
indicate a business loss, but what he had earned as salary and what he had paid
in taxes. He understood that that information was needed in order to file the
tax refund claim.
[10]
The Appellant added that, after he signed his
income tax return in September 2009, there was a conflict with Mr. Frigon, as
he had taken over the new corporation by appointing himself as the sole
director. There was a confrontation in November 2009 and that is why the
Appellant did not summon him to appear at this hearing.
The 2008 income tax return
[11]
The income tax return for the year in question
was completed and the Appellant met with FA representatives in September 2009.
He noted that his employment income was $38,250.83 and that he had other income
of $13,829.26. He claims that he did not notice the business loss resulting in
a negative total income of $156,580.14 or, if he did notice it when he signed
the return, he did not understand it.
[12]
However, he noticed the “Statement of Agent
Activities” that was not on the standard form, but was prepared using word
processing software. He noticed that there were figures and expressions that he
did not understand.
[13]
In particular, it indicated that he had received
an amount of $59,023.39 “as agent for principal and reported by third parties”.
An amount of $215,545.53 was then deducted and indicated as an “amount to
principal in exchange for labour”, resulting in a total loss of $208,660.43.
[14]
At the bottom of that document, we read the
following phrase: [TRANSLATION] “I certify that I am the agent SYLVAIN ROUSSEAU
and declare that this information is accurate on December 31, 2008”.
[15]
In his testimony, the appellant indicated that
he noticed that his name was written in ink in block letters and that it was
not his signature. He concluded, however, that the document was prepared by FA
representatives from the tables that he himself had prepared previously.
[16]
The past page of the document is signed by the appellant,
although “per” appears before his name. The box for the tax preparer is completed
with the name “FA” and the following address: “FA, 554T, 2C3 AB A1B 2C3” followed
by a telephone number.
[17]
The appellant insisted on the fact that his name
in block letters is not his signature and that he did not understand the
document in question. He nonetheless signed the return, as indicated above, and
mailed it without keeping a copy.
[18]
During cross‑examination, the appellant
acknowledged that, in the past, his income tax returns were prepared by a
technician accountant at a cost of $60 to $80. He nonetheless agreed to pay
fees of $2,108.99 (Exhibit I‑1) made out to Lawrence Watts,
associated with the FA. The appellant is of the view that that amount, although
high compared to what he usually paid, reflected the value of the services
rendered by the FA group.
[19]
The appellant added that he not completely
understand everything because the income tax return was prepared in English. In
September 2011, he sent an email to FA asking that they provide a French
translation. They replied that that service was not available.
The law
[20]
The penalty for gross negligence is set out in
subsection 163(2) of the Act, but under subsection 163(3), the burden is on the
Minister to establish the facts on which the assessment of the penalty is
based. Those provisions read as follows:
Every person who, knowingly, or under
circumstances amounting to gross negligence, has made or has participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return, form, certificate, statement or answer (in this section referred to as
a “return”) filed or made in respect of a taxation year for the purposes of
this Act, is liable to a penalty of the greater of $100 and 50% of the total of
[…]
163(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.
[21]
It is agreed that the penalty is onerous, but
there is a reason for it, as the obligation to report income is one of the
cornerstones of the Canadian tax system. As explained by the Supreme Court of
Canada in R. v. Jarvis, 2002 SCC 73, [2002] 3 S.C.R. 757:
[49] Every person resident in Canada
during a given taxation year is obligated to pay tax on his or her taxable
income, as computed under rules prescribed by the Act (ITA, s. 2; Smerchanski
v. M.R.N., [1977] 2 S.C.R. 23, at p. 32, per Laskin C.J.). The process
of tax collection relies primarily upon taxpayer self-assessment and
self-reporting: taxpayers are obliged to estimate their annual income tax
payable (s. 151) [...]
[50] While voluntary compliance and
self-assessment comprise the essence of the ITA’s regulatory structure, the tax
system is equipped with “persuasive inducements to encourage taxpayers to
disclose their income”: Krishna, supra, at p. 767. In this connection,
Krishna writes at p. 772, the “system is ‘voluntary’ only in the sense that a
taxpayer must file income tax returns without being called upon to do so by the
Minister”. For example, in promotion of the scheme’s self‑reporting
aspect, s. 162 of the ITA creates monetary penalties for persons who fail to
file their income returns. Likewise, to encourage care and accuracy in the
self-assessment task, s. 163 of the Act sets up penalties of the same sort for
persons who repeatedly fail to report required amounts, or who are complicit or
grossly negligent in the making of false statements or omissions.
[Emphasis added.]
[22]
It is therefore in that legal context that the
facts on which the Minister based the assessment of the penalty must be
analyzed. As indicated in Lauzon v. The Queen, 2016 TCC 171:
[21] There are two necessary elements
that must be established in order to find liability for subsection 163(2)
penalties:
a) a false
statement in a return; and
b) knowledge
or gross negligence in the making of, participating in, assenting to or
acquiescing in the making of, that false statement.
[23]
The appellant acknowledges that there was a
false statement in his return, but because the Minister is not alleging that
the appellant “knowingly” made it, the main issue that the court must examine
is therefore whether there was “gross negligence” on the appellant’s part in
making a false statement.
[24]
In Malette v. The Queen, 2016 TCC 27, the
Court examined the characteristics of gross negligence:
[24] Negligence is defined as 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; see Venne v. Canada, [1984] F.C.J. No. 314
(QL). In Farm Business Consultants Inc. v. Canada, [1994] T.C.J. No 760
(QL), Justice Bowman (as he then was) of the Tax Court of Canada stated at
paragraph 23 that the words “gross negligence” in subsection 163(2) imply
conduct characterized by so high a degree of negligence that it borders on
recklessness. 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 (paragraph 28).
[25] It is also well-settled law
that gross negligence can include “wilful blindness”. The concept of “wilful
blindness”, well known to the criminal law, was explained by Justice Cory of
the Supreme Court of Canada in the decision in R. v. Hinchey, [1996] 3
S.C.R. 1128. The rule is that if a party has his suspicion aroused but then
deliberately omits to make further inquiries, because he wishes to remain in
ignorance, he is deemed to have knowledge. “Wilful blindness” occurs 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, preferring instead to
remain ignorant. There is a suspicion which the defendant deliberately omits to
turn into certain knowledge. The defendant “shut his eyes” or was “wilfully
blind”.
[26] The concept of “wilful
blindness” is applicable to tax cases; see Canada v. Villeneuve,
2004 FCA 20, and Panini v. Canada, 2006 CAF 224. In Panini,
Justice Nadon made it clear that the concept of “wilful” blindness” is
included in “gross negligence” as that term is used in subsection 163(2) of
the Act. He stated:
43 . . . 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.
[27] It has been held that in drawing
the line between “ordinary” negligence or neglect and “gross” negligence, a
number of factors have to be considered:
(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,
(d) genuine
effort to comply.
No single factor predominates. Each must be
assigned its proper weight in the context of the overall picture that emerges
from the evidence (see DeCosta v. The Queen, 2005 TCC 545, at paragraph
11; Bhatti v. The Queen, 2013 TCC 143, at paragraph 24; and McLeod v.
The Queen, 2013 TCC 228, at paragraph 14).
[Emphasis added.]
[25]
The respondent also referred the Court to Torres
v. the Queen, 2013 TCC 380, in which several taxpayers had
reported fictitious business losses following presentations by the FA group.
Miller J reviewed the issue of “wilful blindness”, indicating:
[65] […]
e) Circumstances
that would indicate a need for an inquiry prior to filing, or flashing red
lights as I called it in the Bhatti decision, include the following:
i) the
magnitude of the advantage or omission;
ii) the
blantantness 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.
[26]
In this case, the appellant claims that he first
relied on Mr. Frigon in the context of seeking funding for his business plan,
which he assigned to the alleged experts in the FA group.
[27]
That issue was examined in Lavoie v. The
Queen, 2015 TCC 228, in which the Court allowed the appeal from the penalty
for gross negligence in circumstances in which the taxpayer relied on his
lawyer, who he had known for 30 years. Thus, in very exceptional circumstances,
a taxpayer who has relied on negligent or dishonest professionals can be
exonerated from the penalty.
[28]
In Strachan v. The Queen, 2015 FCA 60,
the Federal Court of Appeal had to decide an appeal in which “the appellant, at
the behest of an unscrupulous tax preparer, claimed a fictitious business loss
in an amount sufficient to generate a complete refund of all taxes paid by the
appellant in respect of her employment income” (at para 2). Dawson J.
concluded:
[6] […] Nor has any palpable and
overriding error been shown in the Judge’s conclusion that the circumstances
precluded a defence that, based upon the wrongful representations of her
tax preparer, the appellant believed that what she was doing was permissible.
[Emphasis added.]
[29]
Thus, except in very exceptional circumstances,
such as a long-standing professional relationship, a taxpayer cannot claim that
he relied on third parties (even if they present themselves as tax specialists)
and that he thought what he “was doing was permissible”: Strachan,
above, at para 6.
Analysis
[30]
First, the Court must analyze the issue of the
appellant’s credibility and determine whether his testimony was candid and
honest. In particular, the Court must be satisfied that his presentation of the
facts was realistic, plausible and probable.
[31]
Considering the appellant’s testimony as a
whole, I conclude that he did not testify frankly regarding the circumstances
surrounding his meeting with Mr. Frigon and the search for funding. Without
more details and, particularly, without any documents, such as a business card,
a business plan or a credit application, to corroborate the project, the idea
that he was seeking funding, in the view of the Court, remains incomplete, and
even farfetched. The only likely conclusion, and the one relevant to this case,
is that the appellant met a certain Mr. Frigon, who introduced him to the FA
group.
[32]
In the end, there was no link between seeking
funding and the tax refund in question. The appellant also admitted that he
realized that the amount recovered likely could not be used to fund his
business project.
[33]
As for the representatives of the FA group, it
is clear to the Court that they are scrupulous crooks and fraudsters. Moreover,
Lawrence Watts was found guilty of fraud, as reported in: The Queen v. Watts,
2016 ONSC 4843. However, the appellant was also a victim of his own greed. He
let himself be caught up by the idea of a scheme for recovering taxes. The
income tax return was signed quickly and he did not feel the need to keep a copy
of it for his own records.
[34]
Were there alarm signals? The appellant
acknowledged that he saw the document with his name in block letters and that
it was not his signature. There were figures and expressions that he did not
understand. He acknowledged that he had doubts and suspicions. As well, the
document was in English and his understanding was limited. It was not until
September 2011, after receiving the notice of assessment, that he asked the FA
group to provide him with a translation. However, it was too late, because the
return had been signed and mailed in September 2009.
[35]
Moreover, while the appellant completed his
income tax returns for previous years through a technician accountant for a
modest sum, he agreed to pay fees of $2,108.99 to the FA group, representing
almost half of the anticipated refund. He must have realized that something was
not right when he was charged such a high amount.
[36]
I would add that the Court is not insensitive to
the Appellant’s personal circumstances, particularly his divorce at the time
and his health problems, as confirmed by his osteopath (Exhibit A‑8).
However, those circumstances do not explain, and particularly do not excuse,
signing an income tax return when it is clear that he should have sought advice
from a third party, from an accountant or from a CRA representative. The
appellant chose to close his eyes and take a risk in the hopes of obtaining a
tax refund.
[37]
For these reasons, I conclude that the Minister
has discharged his burden, allowing the Court to conclude that the appellant
made a false statement on his income tax return for the tax year in question,
in circumstances amounting to gross negligence. It therefore follows that the
appellant is subject to the penalty assessed under subsection 163(2) of the
Act.
[38]
The appeal is dismissed, without costs.
Signed at Ottawa, Canada, this 10th day of January 2018.
“Guy Smith”
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