Citation: 2012TCC211
Date: 20120612
Docket: 2011-86(IT)I
BETWEEN:
ALAIN CHÉNARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
When he first filed his
tax returns, the appellant reported employment income only for the 1998, 1999,
2000, 2003 and 2004 taxation years, and employment income and withdrawals from
a registered retirement savings plan (RRSP) for the 2001 and 2002 taxation
years.
[2]
On December 19, 2008,
the appellant filed an adjustment request for the 1998, 1999, 2000, 2001, 2002,
2003 and 2004 taxation years, reporting net business losses of $49,237 for
the 1998 taxation year, $53,776 for the 1999 taxation year, $49,555 for the
2000 taxation year, $48,421 for the 2001 taxation year, $51,222 for
the 2002 taxation year, $62,875 for the 2003 taxation year and $52,321 for
the 2004 taxation year.
[3]
In a notice of
reassessment dated July 27, 2009, the Minister of National Revenue (the
Minister) rejected the adjustment requests of December 19, 2008 and assessed a
penalty for gross negligence in accordance with subsection 163(2) of the Income
Tax Act (the Act) in the amount of $5,339.67 for the 1998 taxation
year, $6,026.85 for the 1999 taxation year, $6,031.14 for the 2000
taxation year, $5,390.51 for the 2001 taxation year, $5,358.61 for the 2002
taxation year, $6,416.83 for the 2003 taxation year and $5,134.48 for the 2004
taxation year.
[4]
The appellant filed an
appeal under the informal procedure solely in respect of the penalties assessed
under subsection 163(2) of the Act in the notices of reassessment dated
July 27, 2009.
[5]
The facts on which the
Minister relied to assess the penalties under subsection 163(2) of the Act
are set out in paragraph 16 of the response to the Notice of Appeal, which
reads as follows:
[translation]
(a)
During the years at issue, the appellant did not
operate any business whatsoever;
(b)
The expenses claimed were all personal expenses
of the appellant;
(c)
The adjustment requests submitted by the
appellant were signed by him;
(d)
The losses claimed by the appellant represent
88% of his total income for the 1998 taxation year, 87% for the 1999 taxation
year, 81% for the 2000 and 2001 taxation years, 88% for the 2002 taxation year
and 87% for the 2003 and 2004 taxation years;
(e)
The losses claimed by the appellant for the
years at issue were part of a scheme devised by the group known as "Fiscal Arbitrators;"
(f)
Given the very nature and scope of the adjustment
requests, the appellant knew or should have known that these applications were
false;
(g)
The appellant never reported business income in
previous years.
[6]
In the case at bar, the
witnesses were as follows: for the respondent, the appellant and Louise Girard
(the appeals officer in the appellants case) and, for the appellant, Yves
Lauzon, a long-standing friend of the appellant.
[7]
The appellants
testimony may be summarized as follows:
(a)
The appellant worked
for Bowater during the years at issue;
(b)
The appellant did not
finish high school and has been working since he was 16 years of age;
(c)
His spouse usually
prepared his tax returns. On several occasions, he engaged the services of a
third party to prepare his tax returns;
(d)
The appellant admitted
never really understanding his tax returns and trusted the individuals who
prepared them. He never reviewed these returns before signing them;
(e)
The appellants spouse
works part time as a clerk in a church;
(f)
The appellants
daughter works as an accounting clerk. She took adult education accounting
courses. She was still studying when the appellant began doing business with
Fiscal Arbitrators (F.A.) in 2008;
(g)
The appellant handled
the household bills: (electricity, heating, etc.);
(h)
He recently sold a home
and bought a new one without using the services of a real estate agent;
(i)
In addition, the
appellant owns two lots he also purchased without the help of a real estate
agent. He also dealt with the bank to remortgage his home;
(j)
The appellant completed
all these transactions on his own, without the help of an agent. When
necessary, he obtained information from the other partys real estate agent;
(k)
During the period at
issue from 1998 to 2004, the appellant did not earn any business income. In
fact, he confirmed never having owned a business;
(l)
Mr. Joannis introduced
the appellant to F.A.;
(m)
It was his
long-standing friend Yves Lauzon who had introduced the appellant to Mr.
Joannis;
(n)
Mr. Lauzon had
recruited the appellant to encourage him to invest in one of Mr. Joannis
projects involving home buying kits. The appellant had invested about $2,000 in
the doomed adventure. He lost all the money that he invested;
(o)
On the advice of Mr.
Joannis, the appellant then invested about $12,000 in ICF, a company that
invested in gold products;
(p)
The appellant and Mr.
Lauzon developed a friendship with Mr. Joannis. They went fishing and
hunting together;
(q)
Mr. Joannis then offered
to introduce the appellant to F.A. representatives. Mr. Joannis had used the
services of the F.A. tax experts for some of his business projects. He offered
the appellant the opportunity to meet with them with a view to saving taxes;
(r)
Mr. Joannis intimated
that because the appellant was a special client who had invested in his
companies, he was giving him the opportunity to meet with the tax experts at
F.A.;
(s)
The appellant therefore
attended a meeting with the F.A. tax experts. The meeting had been called for
the appellant, Mr. Lauzon and a few other people. The appellants spouse also
attended the meeting;
(t)
The meeting was held in
English. Since the appellant is not fluent in English, he relied on his friends
Messrs. Lauzon and Joannis to tell him about what was discussed at the meeting;
(u)
It was during this
meeting that the F.A. representatives presented a plan that would allow the
appellant to obtain tax refunds by claiming business losses. The refunds would
allow the appellant to recoup all the income taxes he had paid during the seven
years at issue;
(v)
The appellant thought
he was part of a corporation. He thought that it was through this
corporation that he had invested in the projects of Mr. Joannis, Fine Add and
ICF;
(w)
In his mind, this
status as a corporation legitimized the claimed business losses.
(x)
However, the appellant
confirmed that he never understood the plan used by F.A. to claim expenses. He
did not try to obtain information from others to gain a better understanding of
the plan proposed by F.A.;
(y)
One of the F.A.
representatives said he had worked for the CRA for many years;
(z)
The F.A.
representatives stated their plan was legal. Mr. Lauzon also showed the
appellant the Fine Add Web site, which stated that their company was "CRA approved;"
(aa)
The appellant therefore
trusted the F.A. representatives because they were tax experts;
(bb)
The appellant consulted
his spouse, who ultimately left the decision to participate in the project up
to him. He did not consult his daughter;
(cc)
F.A. charged a base fee
of $500 as well as 10% of the tax refunds obtained;
(dd)
The appellant was
required to sign an agreement in which he undertook to stop communicating with
the CRA. All correspondence with the CRA would be in English and sent to F.A.;
(ee)
The appellant therefore
signed all the adjustment requests prepared by F.A.;
(ff)
The appellant never
received any refunds;
(gg)
A CRA agent contacted
the appellant to discuss his file. Whenever he received a call, the appellant
requested that all correspondence be sent to him in writing, in English. He
then forwarded the correspondence to F.A.
[8]
During his testimony,
Mr. Lauzon essentially corroborated the appellants testimony in respect of the
elements mentioned in paragraphs 6(l), 6(m), 6(n), 6(o), 6(p), 6(s), 6(t),
6(u), 6(y) and 6(z). Mr. Lauzon added that:
(i)
like the appellant, he had invested in Fine Add
and ICF;
(ii)
his investments in Fine Add and ICF proved to be
failures;
(iii)
like the appellant, he had claimed business
losses and had believed that the plan proposed by F.A. was "CRA approved;"
(iv)
he only recently discovered that he had been
cheated by Joannis and the F.A. representatives. Mr. Lauzon explained that Mr.
Joannis and the F.A. representatives had taken advantage of his good faith, naïveté
and lack of business experience. In other words, Mr. Lauzon was a victim in
this carefully crafted scam of the F.A. representatives.
The issue
[9]
The only issue is to
determine whether the penalty assessed under subsection 163(2) of the Act
for the 1998 to 2004 taxation years was justified.
[10]
Subsection 163(2) of
the Act reads as follows:
False
statements or omissions 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:
[11]
This provision can only
apply if it can be shown that the taxpayer "knowingly or under circumstances
amounting to gross negligence" made a "false statement" in a
return or participated in this statement. Under subsection 163(3) of the
Act, "the burden of establishing the facts justifying the assessment of
the penalty is on the Minister ".
The appellants arguments
[12]
The appellants
arguments may be summarized as follows:
(i)
The respondent has not
met its burden of proof;
(ii)
The appellant did not
knowingly or under circumstances amounting to gross negligence make a false
statement as required by subsection 163(2) of the Act;
(iii)
The appellant alleges
he was a victim of a well orchestrated scam of the F.A. representatives who
took advantage of his good faith, naiveté, lack of business experience, lack of
formal education and lastly, his ignorance in the area of taxation;
(iv)
The appellant did not
derive any tax advantages from the adjustment requests prepared by F.A.
[13]
In light of the
evidence submitted by the parties, it is clear that the appellant was guilty of
negligence in signing a tax return that contained false statements. As such,
our analysis should instead focus on the following question: Was the negligence
exhibited by the appellant so great as to merit the epithet "gross?"
The concept of gross negligence
[14]
In Venne v. The
Queen, [1984] C.T.C. 223, 84 DTC 6247 (FCTD), Strayer J. made the
following comment concerning the meaning of the term "gross negligence"
for the purpose of assessing penalties under 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.
[15]
In DeCosta v. The
Queen, 2005 DTC 1436 (T.C.C., informal procedure), Bowman C.J. referred to
the decision in Udell v. M.N.R., [1969] C.T.C. 704, 70 DTC 6019 (Ex.
Ct.), and two decisions by Rip J. (now chief justice) and made the following
comments:
[9] I have no difficulty in
reconciling the decision of Cattanach, J. with those of Rip, J. They each
depend on a finding of fact by the court with respect to the degree of
involvement of the taxpayers. The question in every case is, leaving aside the
question of wilfulness, which is not suggested here:
(a) "Was the taxpayer negligent in making a misstatement or omission in
the return?"
(b) "Was the negligence so great as to justify
the use of the somewhat pejorative epithet 'gross'?"
This is, I believe, consistent with the
principle enunciated by Strayer, J. in Venne v. The Queen , 84 DTC 6247.
...
[11] In drawing the line between
"ordinary" negligence or neglect and "gross" negligence, a
number of factors have to be considered. One of course is the magnitude of the
omission in relation to the income declared. Another is the opportunity the
taxpayer had to detect the error. Another is the taxpayer's education and
apparent intelligence. No single factor predominates. Each must be assigned its
proper weight in the context of the overall picture that emerges from the
evidence.
[12] What do we have here? A highly
intelligent man who declares $30,000 in employment income and fails to declare
gross sales of about $134,000 and net profits of $54,000. While of course his accountant must bear
some responsibility I do not think it can be said that the appellant can
nonchalantly sign his return and turn a blind eye to the omission of an amount
that is almost twice as much as that which he declared. So cavalier an attitude
goes beyond simple carelessness.
[Emphasis added.]
Analysis and conclusion
[16]
The appellant testified
that he had little formal education and never really understood the content of his
tax returns. This is why he always asked his spouse or a third party to prepare
his returns. The appellant trusted the people who prepared his returns and he
always signed them without reviewing their contents.
[17]
In addition, the
appellant was not fluent in English. Still, the meeting organized by "Fiscal
Arbitrators" which the appellant attended took place in English only. It
was during this meeting that "Fiscal Arbitrators" proposed the scheme
that would allow the participants to realize substantial tax savings.
[18]
The appellant chose to
trust the representatives of "Fiscal Arbitrators" because they had
been referred to him by his friends, Messrs. Lauzon and Joannis, because these
representatives said they were experts in their field and lastly, because this
strategy had been proposed as being legally compliant with tax laws. The
appellant alleges that he was a victim of a scam and that for all these reasons,
he should not be charged with gross negligence.
[19]
When a taxpayer places
his trust in a third party and when the latter makes a false statement or
omission on the taxpayers tax return, it must be determined whether the false
statement or omission can be attributed to the taxpayer. As in the case at bar,
it must be determined whether, under the circumstances, the appellant demonstrated
a high degree of negligence or wilful blindness tantamount to gross negligence
in choosing to trust the representatives of "Fiscal Arbitrators."
[20]
I submit that the
facts show that the appellant should have been more prudent and that his
behaviour demonstrates such a high degree of negligence or wilful blindness
that it can be qualified as gross negligence.
[21]
First, the business
losses retroactively reported by the appellant are among the predominant
factors in this case. As the respondent submitted, these amounts represent more
than 80% of the appellants total income for each of the seven years in
question. 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
(testimony of Ms. Girard, appeals officer at the Canada Revenue Agency).
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.
[22]
The appellant also
admitted never having run a business. However, even if he thought he was part
of a corporation through which he had invested in Mr. Joannis business
projects, the amounts of the reported losses were not at all consistent with
reality. The concepts of business and loss are not so obscure that a reasonable
person could think it was legal to report unrealistic business losses.
[23]
Lastly, the appellant
is relying on the decision of Tardif J. of the Tax Court of Canada Therrien v.
R. (2002 CarswellNat 87, [2002] 3 C.T.C. 2141 (T.C.C. [informal procedure]).
In this case, the taxpayer had become embroiled in a scheme orchestrated by a
company called Highway. The Court had ruled in favour of the appellant by
refusing to apply the penalty.
[24]
According to Tardif J.,
while the taxpayer had been negligent, imprudent and even somewhat naïve, the
evidence did not show any recklessness, carelessness, indifference or lack of
concern tantamount to gross negligence. The Court had even found that the
opposite was true. It was shown on a balance of probabilities that the
appellant had been cautious and had had a concern for the honesty of the
procedure. In this case, the evidence submitted by the respondent shows that
the appellant had little concern for the honesty of the procedure.
[25]
The respondent showed
that, despite his lack of formal education, the appellant was responsible for
paying the household bills. He had sold his home and purchased a new one as
well as land, all without the help of a real estate agent. The appellant had
remortgaged his home with the bank and had invested close to $20,000 in Mr. Joannis
business projects, albeit at a loss. The appellant was therefore able to
understand the concepts of profit and loss. He was comfortable enough with
numbers to take on these transactions.
[26]
The appellant could not
speak English, yet the meeting organized by "Fiscal Arbitrators" took
place in English only. Since he had trouble understanding the information that
had been relayed during the meeting, the appellant relied on his friends
Messrs. Lauzon and Joannis, who reassured him that the plan was legally
compliant with tax laws. Beyond this assurance, the appellant did not
understand the proposed plan, but this did not prevent him from participating.
[27]
The evidence presented
by the respondent shows that the appellant had been careless and even
indifferent and that his behaviour was tantamount to gross negligence. The
appellant had never run a business and while he thought he was part of a
company, he had never sustained substantial losses. He could not speak English,
the language in which this proposal was offered. He did not understand how he
could be entitled to such tax refunds, but chose to believe the people making
the proposal because they were experts.
[28]
The appellant should
have made an effort to consult other people besides those proposing the plan.
In Therrien, supra, some of the participants in the plan proposed by
Highway had contacted Revenue Canada, Revenu Québec and the consumer protection
office to check whether the plan was legal, whether it was a concept that was
under investigation or whether it was known as likely to cause problems. All
the steps initiated revealed no irregularities that put the plans legitimacy
into question. This is not the case here. The appellant did not take any similar
steps to verify the legitimacy of the process.
[29]
The appellants
behaviour demonstrated such indifference and carelessness that his negligence
must be qualified as gross. For this reason, the appeal must be dismissed.
Signed at Ottawa, Canada, this 12th day of June 2012.
"Paul Bédard"
Translation certified true
on this 26th day of July 2012
Monica F.
Chamberlain, Reviser
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