REASONS
FOR JUDGMENT
Owen J.
[1]
This is an appeal by George De Gennaro of
the reassessment of his 2008 taxation year by notice dated March 24, 2011 (the
“Reassessment”). By the Reassessment, the
Minister of National Revenue (the “Minister”)
denied a loss of $696,134 (the “Adjustment Loss”)
claimed by Mr. De Gennaro in a T1 Adjustment Request filed by him for his
2008 taxation year (the “2008 Adjustment Request”)
and assessed a penalty under subsection 163(2) of the Income Tax Act
(the “ITA”) in the amount of $100,939.70 (the “penalty”).
[2]
The Appellant was not present at the hearing in
person but was represented by his counsel. The Appellant was not subpoenaed by
the Respondent as a witness, so he was certainly not compelled to attend. The
absence of the Appellant meant that the Respondent could not rely on subsections
146(2) and (3) of the Tax Court of Canada Rules (General Procedure) (the
“Rules”) to call and cross-examine the
Appellant.
[3]
The Respondent’s only witness was Mr. Suleman,
who is the Canada Revenue Agency (“CRA”)
litigation officer assigned to the Appellant’s appeal. Mr. Suleman had no
personal knowledge of the audit or the administrative appeal that followed the
filing of a notice of objection by the Appellant. Mr. Suleman’s testimony
was directed solely at the identification of copies of documents that he had
obtained from the files maintained by the CRA in respect of the Appellant.
[4]
With the consent of counsel for the Appellant,
the documents identified by Mr. Suleman as being part of the Appellant’s CRA
file were marked as exhibits.
[5]
Following the testimony of Mr. Suleman, the
Respondent asked to read in extensive portions of the examination for discovery
of the Appellant under subsection 100(1) of the Rules (collectively, the “Respondent’s Read-Ins”).[1] The examination for discovery of the Appellant was in the form of
written questions and answers under sections 114 and 115 of the Rules. The Court
took a 2½-hour recess for the Appellant’s counsel to review the proposed
read-ins. With the exception of clarifying one answer, the Appellant’s counsel
did not object to the read-ins proposed by the Respondent, and as the evidence
in the read-ins was otherwise admissible I allowed all of the proposed
read-ins.
[6]
The Respondent did not object to the Appellant’s
proposed read-ins to qualify or explain the read-ins of the Respondent
(collectively, the “Appellant’s Read-Ins”),
which I also allowed.
[7]
I note that, generally speaking, the basis on
which evidence given on an examination for discovery may be read in and form
part of the evidentiary record is that the statements are admissions by the
party being discovered.[2] The Respondent is taken to adopt the evidence read in by the
Respondent whether that evidence is favourable or unfavourable to the
Respondent’s case.[3]
[8]
The discovery read-ins by the Respondent and the
Appellant are attached to these reasons as Appendix A.
I have taken the following salient facts from the read-ins.
[9]
The Appellant is a high school graduate with 2½ years
of college.[4] The Appellant was employed full-time by Ontario Hydro from 1978 to
2008. He started as a mechanical maintainer in the nuclear generating division,
progressed to journeyman and was promoted to first line manager after 22 years.[5] During the years relevant to this appeal, his duties involved
supervising Bruce Power’s Outage Maintenance Services Department, which
included “running inspection programs during power
outages, preparing pre-job briefs, preparing work reports, coordinating
surrounding work or supporting tasks, liaising between Bruce Power and other
contractors or work groups, and developing and scheduling the work plan.”[6] In January 2009, the Appellant incorporated a numbered company and
through that company provides “Consultation Services
for First Line Management Supervisory services.”[7]
[10]
The Appellant e-filed his 2008 T1 income tax
return.[8] Michael Bolton of BDO Canada prepared the return on the basis of
the Appellant’s information slips.[9]
[11]
The Appellant first contacted Mr. Tom Thompson
by telephone in March or April 2009.[10] The Appellant told Mr. Thompson that a friend had received a
$50,000 income tax refund after Mr. Thompson prepared his return. The
Appellant asked Mr. Thompson for a meeting so that he could give the
Appellant information on that filing position.[11]
[12]
The Appellant met with Mr. Thompson three
times at the Appellant’s house, but never at Mr. Thompson’s office.[12] The meetings were in or around early April 2009, early June 2009
and mid-June 2009.[13] The Appellant did not ask Mr. Thompson or anyone affiliated
with him for references.[14] The Appellant provided Mr. Thompson with his T4 slips and
other documents for 2008 in or about early June 2009.[15]
[13]
The Appellant took rough notes of his meetings
with Mr. Thompson, which indicate the basic aspects of the proposal that led
to the filing of the 2008 Adjustment Request.[16] Paragraph 14 of the Appellant’s Notice of Appeal states that four
tax lawyers developed the filing position but, when asked about these four
individuals, the Appellant answered that he had not met with them, did not know
their identities and did not know how to contact them.[17]
[14]
The Appellant conceded that the so-called “detax” filing position presented by Mr. Thompson
has no basis in law and is incorrect, although he also states that he did not
understand that at the time he filed the 2008 Adjustment Request.[18] Mr. Thompson’s explanation of the detax filing position is as set
out below.
[15]
Specifically, Tom Thompson stated that the
agency-principal distinction allows the Government of Canada to use an
individual's personal registration number or birth certificate number as a bond
account, against which the Government borrows funds from foreign sources to
allow it to get good rates, make money on citizens, and “bolster” government coffers. Tom Thompson also
stated that a person’s social insurance number functions like a company,
separate from the person him- or herself, and that the CRA has to refund taxes
to the individual but not to the social insurance number.[19]
[16]
The Appellant attempted to improve his
understanding of the plan, and did in fact improve his understanding of it, by
asking Mr. Thompson questions.[20] The Appellant says that he was not cautioned against the plan by
his accountant or his financial planner and that he was persuaded that the plan
relied on a little-known legal loophole and was legitimate by the fact that
others had received refunds.[21] The Appellant did not have any notes or documents when he discussed
the plan with his accountant.[22]
[17]
Mr. Thompson prepared and delivered the
completed 2008 Adjustment Request to the Appellant in or about mid-June 2009.[23] The Appellant reviewed the completed 2008 Adjustment Request, the Request
for Loss Carryback and the Statement of Agent Activities before he signed these
documents.[24]
[18]
The Appellant signed and then mailed the 2008
Adjustment Request.[25] He filed the Statement of Agent Activities with the 2008 Adjustment
Request.[26] This statement identified the following three material amounts
included in the computation of the amount of $696,134 identified on the 2008
Adjustment Request as a negative adjustment to Line 135[27] of the Appellant’s 2008 T1 income tax return (the Appellant
believed he was the principal and his social insurance number was his agent):[28]
B. Line 162 *Total money collected as Agent for Principal: $190,589.66
Minus:
. . .
*Amount to
principal in exchange for labour $703,287.78
. . .
[Minus]
*Money Collected as Agent for Principal and reported by third
parties and Already Posted on lines 101-130 via T4’s, T5’s, T3’s, Other
slips, etc.
$183,435.67
[19]
The Appellant has never conducted a business
personally and understands now that he did not have a business loss in 2008.[29]
The Appellant was aware at the time that he signed the 2008 Adjustment Request
that he was reporting a business loss of $696,134.[30] The Appellant
reported this business loss because Tom Thompson had advised him that this
was the “technical method
required to file in accordance with the legal loophole.”[31]
The Appellant now agrees that the loss stated on the 2008 Adjustment Request
was a false business loss.[32]
[20]
The Appellant believed that he would receive a
full or partial refund of the income tax withheld at source for 2008.[33] The largest refund received by the Appellant prior to 2008 was
$15,000 received after he had made a $34,000 RRSP contribution in or about the
1998 taxation year.[34]
[21]
The Appellant reviewed a Request for Loss
Carryback prepared by Mr. Thompson and was aware that he was claiming
refunds for the 2005, 2006 and 2007 taxation years.[35] The Appellant signed the request on or around June 15, 2009
and filed it by mail.[36] After Mr. Thompson delivered the request to the Appellant, the
Appellant did not communicate with anyone affiliated with Mr. Thompson to
discuss the request prior to mailing it.[37]
I.
Position of the Appellant
[22]
Counsel for the Appellant submits that the
Appellant should not be liable for the penalty assessed by the Minister under
subsection 163(2) of the ITA. The burden of establishing the facts justifying
the assessment of the penalty falls on the Minister and the Minister has not
satisfied that burden. In particular, counsel submits that there is no evidence
to support the conclusion that the Appellant failed to consult a third party
advisor regarding the plan prior to filing the 2008 Adjustment Request. In
fact, counsel submits, the Appellant stated in answer to questions 33 and 35 of
the Appellant’s Read-Ins that he did discuss the plan with his accountant and
financial advisor and that neither cautioned him against it.
[23]
The Appellant submits that, as the Respondent’s
Read-Ins are the only evidence on this point, the Respondent has failed to
establish the third requirement for a finding of wilful blindness identified in
Torres v. The Queen, 2013 TCC 380[38] at paragraph 65(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.
II.
Position of the Respondent
[24]
The Respondent acknowledges that subsections
163(2) and (3) of the ITA place the onus on the Minister to establish that the
Appellant has made a false statement in a return, form, certificate, statement
or answer and that the false statement was made by the Appellant knowingly or
under circumstances amounting to gross negligence.
[25]
The Respondent submits on the basis of the
factors identified in Torres that the Appellant, either knowingly or
under circumstances amounting to gross negligence, made a false statement in
the 2008 Adjustment Request. In making this submission, counsel for the
Respondent acknowledges that the evidence available to the Court in this case
in support of the assessment of a penalty against the Appellant under
subsection 163(2) of the ITA is confined to the four corners of the discovery
read-ins and the documents in evidence that are identified by the Appellant in
the read-ins.
III.
Analysis
A. The
Standard of Proof and the Burden of Proof under Subsections 163(2) and 163(3)
of the ITA
[26]
The issue in this appeal is whether the
Appellant is subject to the penalty assessed by the Minister under subsection
163(2) of the ITA. In Guindon v. Canada, 2015 SCC 41, [2015] 3 S.C.R. 3,
the Supreme Court of Canada confirmed that the penalty provisions found in Part
I, Division I of the ITA impose civil penalties and not criminal penalties. Subsection
163(2) is found in Part I, Division I of the ITA. Accordingly, the standard of
proof that must be met in order for the Court to uphold a penalty assessed
under subsection 163(2) of the ITA is proof on a balance of probabilities.
[27]
The Supreme Court explained this standard in
civil cases in F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41 at
paragraphs 45 to 49:
[45] To suggest
that depending upon the seriousness, the evidence in the civil case must be
scrutinized with greater care implies that in less serious cases the evidence
need not be scrutinized with such care. I think it is inappropriate to say that
there are legally recognized different levels of scrutiny of the evidence
depending upon the seriousness of the case. There is only one legal rule and that
is that in all cases, evidence must be scrutinized with care by the trial judge.
[46] Similarly,
evidence must always be sufficiently clear, convincing and cogent to satisfy
the balance of probabilities test. But again, there is no objective standard to
measure sufficiency. In serious cases, like the present, judges may be faced
with evidence of events that are alleged to have occurred many years before,
where there is little other evidence than that of the plaintiff and defendant. As
difficult as the task may be, the judge must make a decision. If a responsible
judge finds for the plaintiff, it must be accepted that the evidence was
sufficiently clear, convincing and cogent to that judge that the plaintiff
satisfied the balance of probabilities test.
[47] Finally
there may be cases in which there is an inherent improbability that an event
occurred. Inherent improbability will always depend upon the circumstances. As
Baroness Hale stated in In re B, at para. 72:
Consider the famous example of the
animal seen in Regent’s Park. If it is seen outside the zoo on a stretch of
greensward regularly used for walking dogs, then of course it is more likely to
be a dog than a lion. If it is seen in the zoo next to the lions’ enclosure
when the door is open, then it may well be more likely to be a lion than a dog.
[48] Some alleged
events may be highly improbable. Others less so. There can be no rule as to
when and to what extent inherent improbability must be taken into account by a
trial judge. As Lord Hoffmann observed at para. 15 of In re B:
Common sense, not law, requires that
in deciding this question, regard should be had, to whatever extent
appropriate, to inherent probabilities.
It will be for
the trial judge to decide to what extent, if any, the circumstances suggest
that an allegation is inherently improbable and where appropriate, that may be
taken into account in the assessment of whether the evidence establishes that
it is more likely than not that the event occurred. However, there can be no
rule of law imposing such a formula.
(5) Conclusion on Standard of Proof
[49] In the
result, I would reaffirm that in civil cases there is only one standard of
proof and that is proof on a balance of probabilities. In all civil cases, the
trial judge must scrutinize the relevant evidence with care to determine
whether it is more likely than not that an alleged event occurred.[39]
[28]
The introductory words of subsection 163(2) of
the ITA state:
Every person who,
knowingly, or under circumstances amounting to gross negligence, has made or
has participated in, assented to or acquiesced in the making of, a false
statement or omission in a return, form, certificate, statement or answer (in
this section referred to as a “return”) filed or made in respect of a taxation
year for the purposes of this Act, is liable to a penalty of the greater of
$100 and 50% of the total of . . .
[29]
The introductory words identify two conditions
that must be satisfied if the assessment by the Minister of a penalty under
subsection 163(2) of the ITA is to be maintained.
[30]
First, the Appellant must have made,
participated in, assented to or acquiesced in the making of a false statement
or omission in a return, form, certificate, statement or answer, referred to collectively
as a “return”.
[31]
The terms “false statement”
and “omission” do not identify the mental
requirement for the penalty, which is instead identified in the second
requirement.[40] Accordingly, for the purposes of subsection 163(2) of the ITA, a “false statement” is simply a statement that is untrue and
an “omission” is simply something that is left
out.
[32]
Second, the false statement or omission must
have been made by the Appellant knowingly or under circumstances amounting to
gross negligence, or the Appellant must have participated in, assented to or
acquiesced in the making of the false statement or omission knowingly or under
circumstances amounting to gross negligence.
[33]
Under subsection 163(3) of the ITA, the Minister
has the burden of establishing the facts that justify the assessment of a
penalty under subsection 163(2) of the ITA.[41] This burden is described by the Federal Court of Appeal in Lacroix
v. The Queen, 2008 FCA 241 at paragraph 26, as follows:
Although the
Minister has the benefit of the assumptions of fact underlying the
reassessment, he does not enjoy any similar advantage with regard to proving
the facts justifying a reassessment beyond the statutory period, or those facts
justifying the assessment of a penalty for the taxpayer’s misconduct in filing
his tax return. The Minister is undeniably required to adduce facts justifying
these exceptional measures.
[34]
The manner in which this burden may be satisfied
is described by the Court at paragraph 32:
What, then, of
the burden of proof on the Minister? How does he discharge this burden? There
may be circumstances where the Minister would be able to show direct evidence
of the taxpayer’s state of mind at the time the tax return was filed. However,
in the vast majority of cases, the Minister will be limited to undermining the
taxpayer’s credibility by either adducing evidence or cross-examining the
taxpayer. Insofar as the Tax Court of Canada is satisfied that the taxpayer
earned unreported income and did not provide a credible explanation for the
discrepancy between his or her reported income and his or her net worth, the
Minister has discharged the burden of proof on him within the meaning of
subparagraph 152(4)(a)(i) and subsection 162(3) [sic].
[35]
The result of the combination of the civil
standard of proof and the burden of proof applicable under subsection 163(2) of
the ITA is that the Respondent has the burden of establishing on a balance of
probabilities facts that lead to the legal conclusion that the Appellant knowingly
or in circumstances amounting to gross negligence made a false statement in a
return. The role of the trial judge is to carefully scrutinize all of the
evidence (including any admissible evidence of the Respondent obtained by the
Respondent through the discovery or cross-examination of the Appellant and any
admissible evidence presented by the Appellant to rebut or qualify the evidence
of the Respondent) to determine if the burden of proof imposed on the Minister
has been met to the civil standard of proof. [42]
[36]
In Farm Business Consultants Inc. v. The
Queen, 95 DTC 200 (TCC) (affirmed by the FCA at 96 DTC 6085), Judge Bowman
(as he then was) stated at pages 205-206:
A court must be
extremely cautious in sanctioning the imposition of penalties under subsection
163(2). Conduct that warrants reopening a statute-barred year does not
automatically justify a penalty and the routine imposition of penalties by the
Minister is to be discouraged. . . . Moreover, where a penalty is imposed
under subsection 163(2) although a civil standard of proof is required, if a
taxpayer’s conduct is consistent with two viable and reasonable hypotheses, one
justifying the penalty and one not, the benefit of the doubt must be given to
the taxpayer and the penalty must be deleted. . . .
[37]
Judge Bowman highlights two points. First,
subparagraph 152(4)(a)(i) of the ITA imposes different standards[43]
with respect to opening up an otherwise statute-barred year than does subsection
163(2) of the ITA for the assessment of a penalty. Consequently, the fact that
one of the standards in subparagraph 152(4)(a)(i) of the ITA is met is
not, in and of itself, a basis for imposing a penalty under subsection 163(2)
of the ITA. Second, where the facts suggest two equally possible results, the
benefit of the doubt goes to the taxpayer. Another way of stating this is to
say that in such a case the Minister has not met the requirement under
subsection 163(3) of the ITA of establishing on a balance of probabilities facts
that justify the assessment of the penalty.
B. False
Statement or Omission
[38]
The Respondent submits that the Appellant made a
false statement in a return[44]
when he signed the 2008 Adjustment Request in order to claim a business loss of
$696,134 for 2008.
[39]
In the answers to questions 13, 16 to 19, and 65
to 68 of the Respondent’s Read-Ins, the Appellant states that Mr. Thompson
prepared the 2008 Adjustment Request but that he (the Appellant) signed the
form and mailed it to the CRA. The Appellant also states that he subsequently
came to understand that he was not carrying on a business in 2008 and that he
did not have a business loss in 2008. In light of these admissions by the
Appellant, the $696,134 figure identified as a business loss on the 2008
Adjustment Request is a false statement made by the Appellant in a return.
C. Knowingly,
or Under Circumstances Amounting to Gross Negligence
[40]
The remaining question is whether the false
statement in the 2008 Adjustment Request was made by the Appellant knowingly or
under circumstances amounting to gross negligence. The false statement was made
at the time the Appellant signed the 2008 Adjustment Request. Accordingly, this
determination must be made as at the time the Appellant signed the 2008
Adjustment Request.
(1)
Knowingly
[41]
A textual reading of the term “knowingly”
requires that the Appellant subjectively knew that the impugned statement was
false when it was made. The context of the word “knowingly”,
which is in contrast to “circumstances
amounting to gross negligence”, supports this
meaning.
[42]
Some of the cases addressing subsection 163(2)
of the ITA might be read as suggesting that knowledge can be imputed through a
finding of wilful blindness.[45]
However, I do not believe that these cases are suggesting that wilful blindness
is a substitute for the subjective knowledge required by the word “knowingly”.
Rather, they simply confirm that wilful blindness is sufficient to establish “circumstances amounting to gross negligence”. This is made clear in the reasons of the Federal Court of Appeal
in Attorney General of Canada v. Villeneuve, 2004 FCA 20 at paragraph 6,
Panini v. The Queen, 2006 FCA 224 at paragraphs 41 to 43 and Strachan
v. The Queen, 2015 FCA 60 at paragraph 4.
[43]
I note that this interpretation is also
consistent with the fact that in criminal matters wilful blindness can
substitute for actual knowledge whenever knowledge is a component of mens
rea, but cannot be used to impute subjective knowledge where such knowledge
is a statutory requirement for the criminal offence.[46]
[44]
Turning to the evidence presented by the
Respondent in the form of the Respondent’s Read-Ins, it is clear from the
Appellant’s answers to questions 65 and 68 of the Respondent’s Read-Ins that
the Appellant did not conduct any business in 2008 and as a consequence could
not have made any outlay or incurred any expense that would qualify as a
deductible business expense. In my view, even a rudimentary understanding of
Canada’s income tax system is sufficient for an average individual to be aware
that deductible business losses do not simply appear out of thin air. However,
the only evidence I have on the Appellant’s subjective knowledge is the
evidence from the Respondent’s Read-Ins. In his answer to question 68, the
Appellant states that “at the time I signed the T1
Adjustment, I did not believe it [the loss of $696,134] was a false business
loss. I believed I was filing in accordance with the law.” The Appellant
elaborates on his understanding of the loss in his answers to questions 20, 29
and 31 of the Respondent’s Read-Ins.
[45]
In light of the Appellant’s uncontradicted
evidence regarding his subjective understanding of the basis for the claimed
business loss at the time he signed the 2008 Adjustment Request, I have no
choice but to accept that the false statement in the 2008 Adjustment Request
was not made by the Appellant knowingly. This leaves only the question of
whether the false statement was made by the Appellant under circumstances
amounting to gross negligence.
(2)
Under Circumstances Amounting to Gross Negligence
(a) General
Comments on Negligence
[46]
The concept of negligence is well understood in
tort law; however, the concept of “gross negligence” is not a staple
concept in that area of the law. Philip H. Osborne states in The Law of
Torts (5th ed.):
. . . Negligence
is conduct that gives rise to a foreseeable and substantial risk of its
consequences. As the likelihood of the consequences increases, the conduct of
the defendant may be described first as grossly negligent and then as reckless.[47]
[47]
The author then adds the following footnote:
These concepts [i.e.,
gross negligence and recklessness] play no significant role in tort law. At
common law they are drawn within the umbrella concept of negligence. There are,
however, some legislative provisions that require the proof of gross negligence
or recklessness in order to establish statutory causes of action.[48]
[48]
In a glossary of terms, the author defines “gross negligence” as “[c]onduct that
carries a high degree of risk.”[49] Negligence is
defined as a “tort based on
careless conduct or conduct that creates a reasonably foreseeable risk of harm.”[50]
[49]
The standard against which conduct is assessed
is that of a reasonable person, which is an objective standard. Osborne
explains:
. . . The common
law has, however, typically resorted to the reasonable person when it is
in need of a normative standard of conduct, and negligence law is no exception.
The standard of care that must be met in the tort of negligence is that of the
reasonably careful person in the circumstances of the defendant.[51]
[50]
In the area of criminal law, the Supreme Court
of Canada has consistently held that in offences that involve a determination
of negligence, the minimum standard that must be applied is that of a marked
departure from the conduct of a reasonable person in the same circumstances.[52]
The Court explains the basis for the higher standard (when compared to the
civil standard for negligence) as follows:
In a civil
setting, it does not matter how far the driver fell short of the standard of
reasonable care required by law. The extent of the driver’s liability depends
not on the degree of negligence, but on the amount of damage done. Also, the
mental state (or lack thereof) of the tortfeasor is immaterial, except in
respect of punitive damages. In a criminal setting, the driver’s mental state
does matter because the punishment of an innocent person is contrary to
fundamental principles of criminal justice. The degree of negligence is the
determinative question because criminal fault must be based on conduct that
merits punishment.
For that reason,
the objective test, as modified to suit the criminal setting, requires proof of
a marked departure from the standard of care that a reasonable person
would observe in all the circumstances. As stated earlier, it is only when
there is a marked departure from the norm that objectively dangerous conduct
demonstrates sufficient blameworthiness to support a finding of penal liability.
With the marked departure, the act of dangerous driving is accompanied with the
presence of sufficient mens rea and the offence is made out.[53]
[Emphasis added.]
[51]
The Court elaborates on the standard of care
that a reasonable person would observe in all the circumstances:
. . . Short of
incapacity to appreciate the risk or incapacity to avoid creating it, personal
attributes such as age, experience and education are not relevant. The standard
against which the conduct must be measured is always the same - it is the
conduct expected of the reasonably prudent person in the circumstances. The
reasonable person, however, must be put in the circumstances the accused found
himself in when the events occurred in order to assess the reasonableness of
the conduct.[54]
[52]
In the case of criminal negligence such as
criminal negligence causing death, the standard adopted by the Supreme Court is
that of a marked and substantial departure from reasonable conduct.[55]
Professor Roach observes:
The decision in J.F.
recognizes subtle and fine distinctions in the degree of objective fault
between the general rule of proof of a marked departure from reasonable
conduct, and the higher standard of marked and substantial departure from
reasonable conduct that is required for criminal negligence.[56]
[53]
In either case, the conduct is measured against
the standard of care that a reasonable person would observe in all the
circumstances, without regard to the personal attributes of the offender,
unless it is established that the individual cannot reasonably be held
responsible for satisfying that standard. Professor Roach describes the
exception to the reasonable person standard as follows:
In short, the
reasonable person will not be invested with the personal characteristics of the
accused unless the characteristics are so extreme as to create an incapacity to
appreciate the prohibited risk or the quality of the prohibited conduct.[57]
[54]
To summarize, in criminal law (as in tort law)
the standard against which the marked departure and marked and substantial
departure requirements are applied is an objective one except that the
reasonable person is placed in the circumstances of the offender to determine
the conduct expected of a reasonable person in those circumstances.
[55]
In my view, these principles are instructive in
applying the gross negligence standard in subsection 163(2) of the ITA.
(b) Gross
Negligence under Subsection 163(2) of the ITA
[56]
The phrase “gross negligence” as used in
subsection 163(2) of the ITA was considered in the widely adopted decision of Venne
v. The Queen, 84 DTC 6247 (FCTD). At page 6256 of that decision, Strayer J.
stated:
. . . “Gross
negligence” must be taken to involve greater neglect than simply a failure to
use reasonable care. It must involve a high degree of negligence tantamount to
intentional acting, an indifference as to whether the law is complied with or
not. . . .
[57]
Clearly, there is a parallel between this
description of gross negligence and the standard for a finding of negligence
under the criminal law. Both require at least a marked departure from the
conduct of a reasonable person in the circumstances. In fact, the description
in Venne may best be equated with the “marked and substantial departure”
standard required for a finding of criminal negligence.
[58]
Gross negligence for the purposes of subsection
163(2) of the ITA has been found to exist in circumstances involving wilful
blindness. In Villeneuve, supra, the Federal Court of Appeal stated at
paragraph 6:
With respect, I
think the judge failed to consider the concept of gross negligence that may
result from the wrongdoer’s willful blindness.
[59]
In Strachan, supra, the Federal
Court of Appeal agreed with the trial judge’s finding of wilful blindness in a
case involving a similar detaxing scheme to the one in issue here. It is
instructive to repeat the reasons of the Court in their entirety:
[1] Subsection 163(2) of the Income Tax Act,
R.S.C., 1985, c. 1 (5th Supp.) renders a taxpayer liable to payment of a
penalty when the taxpayer knowingly, or under circumstances amounting to gross
negligence, makes a false statement in a return.
[2] For reasons cited as 2013 TCC 380, a judge of
the Tax Court of Canada dismissed an appeal brought by the appellant from the
assessment of a gross negligence penalty in respect of the 2007 taxation year.
The facts giving rise to the imposition of the penalty were that 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.
[3] While counsel for the appellant asserts various
errors on the part of the Judge, the appellant has failed to establish any
basis for interfering with the judgment of the Tax Court. We reach this
conclusion on the following basis.
[4] First, as conceded in oral argument by counsel
for the appellant, the Judge made no error in articulating the applicable legal
test. Gross negligence may be established where a taxpayer is willfully
blind to the relevant facts in circumstances where the taxpayer becomes aware
of the need for some inquiry but declines to make the inquiry because the
taxpayer does not want to know the truth (Canada (Attorney General) v.
Villeneuve, 2004 FCA 20, 327 N.R. 186, at paragraph 6; Panini v. Canada,
2006 FCA 224, [2006] F.C.J. No. 955, at paragraphs 41-43).
[5] Contrary to counsel for the appellant’s
submissions, the Judge’s reasons demonstrate that he properly considered the
appellant's background and circumstances.
[6] Second, the appellant has failed to establish
that the Judge misapplied the correct legal test. No palpable and overriding
error has been shown in the Judge's finding of mixed fact and law that given
the numerous “warning” signs, the appellant was required to make further
inquiries of her tax preparer, an independent advisor or the Canada Revenue
Agency itself before signing her tax return. 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.]
[60]
The Court makes several important points. First,
it confirms that gross negligence may be proven by establishing wilful
blindness on the part of the taxpayer. Second, the Court confirms that an
aspect of a finding of wilful blindness is a failure by a taxpayer to seek out
advice when faced with clear warning signs indicating that something is amiss. Finally,
the Court confirms that, in the face of clear warning signs, a taxpayer cannot
hide behind the wrongful representations of his or her tax preparer.
[61]
It is important to recognize, however, that a
finding of wilful blindness is but one basis on which to conclude that a false
statement in a return was made under circumstances amounting to gross
negligence. One must not lose sight of the basic question of whether the false
statement or omission was made in circumstances amounting to gross negligence. A
finding of wilful blindness is simply a finding that, in a particular set of
circumstances, the actions of the taxpayer support a finding of gross
negligence. The concept of wilful blindness is not intended to limit the circumstances
in which a finding of gross negligence may be made.
[62]
As stated in Venne, a finding of “gross negligence” requires a high degree of negligence.
The existence (or non-existence) of a high degree of negligence is determined
by reference to the objective standard of a reasonable person in the same
circumstances as the person against whom the penalty is assessed and not by
reference to the subjective beliefs or characteristics of this person.[58] The objective standard is only relaxed if it is established that
the person is incapable of understanding the duty not to make a false statement
or an omission in a return.
[63]
In summary, for the purposes of this case,
absent evidence that the Appellant was incapable of understanding his duty not
to make a false statement or an omission in a return,[59] to establish circumstances amounting to gross negligence, the
Respondent must establish on a balance of probabilities facts that lead to the
conclusion that the making of the false statement in the 2008 Adjustment
Request by the Appellant was a marked and substantial departure from the
conduct of a reasonable person in the same circumstances. It is through this
prism that I will review the evidence presented by the Respondent in the form
of the Respondent’s Read-Ins.
(c) Application
of the Law to the Facts
[64]
The Appellant graduated from high school and has
2½ years of college. He was employed by Ontario Hydro from 1978 to 2008, first
as a mechanical maintainer in the nuclear generating division, then as a
journeyman and finally, after 22 years, as a first line manager, which is a
supervisory position. The Appellant performed substantial duties in the course
of his employment, including the supervision of others. In 2009, the Appellant
incorporated a corporation and provided first line management services to Bruce
Power through that corporation.
[65]
The education and employment duties and
experience of the Appellant strongly suggest that he was capable of
understanding his duty not to make a false statement or omission in a return.
The Appellant had a reasonable level of education and his employment required
him to carry out reasonably complex duties, including the supervision of
others.[60]
To the extent that the facts suggest that the Appellant may have been gullible,
that is a personal trait that is not material to the determination of gross
negligence.
[66]
The Appellant knew when he signed the 2008
Adjustment Request that he was claiming a business loss of $696,134. He also
anticipated a refund. I have no doubt that a reasonable person presented with
the plan advocated by Mr. Thompson would immediately recognize that there
was something seriously wrong with the plan and that it is not possible to
materialize a $696,134 business loss out of thin air, regardless of the nature
of the purported loophole. Nevertheless, notwithstanding his education and
employment experience, the Appellant claimed a $696,134 business loss in the
absence of an actual business and actual business expenses. In my view, these
facts alone suggest conduct that is a marked and substantial departure from
that of a reasonable person in the same circumstances.
[67]
There are other facts that support this
conclusion. The business loss claimed by the Appellant was almost four times
the Appellant’s employment income for his 2008 taxation year. The claim for the
loss not only eliminated his income for 2008 but created a non-capital loss of
$522,826 that the Appellant attempted to carryback to his 2005, 2006 and 2007
taxation years. If allowed, the business loss claimed by the Appellant would
have eliminated all income tax otherwise payable for 2008. It also appears very
likely that the loss would have eliminated all or a significant portion of the
tax paid by the Appellant in 2005, 2006 and 2007.[61] In my view, a
reasonable person would view such a remarkable result with great suspicion and
would not pursue such a course of action without confirmation from an
independent advisor or the CRA that the position taken in the T1 Adjustment Request
had merit.[62]
The failure of an advisor, who may or may not have been aware of the details of
the plan, to caution the Appellant against the plan is not confirmation of the
merit of the plan.
[68]
Prior to 2008, the only significant refund
received by the Appellant was $15,000 and resulted from a $34,000 RRSP
contribution. The refund promised by the plan was at least four times larger
for 2008 alone and did not require any actual outlay or expenditure by the
Appellant. Again, a reasonable person would view such a remarkable result with
great suspicion.
[69]
Mr. Thompson’s name does not appear
anywhere on the 2008 Adjustment Request even though he prepared the request for
the Appellant. A reasonable person would question why Mr. Thompson’s name
is missing from the form.
[70]
The Appellant communicated with Mr. Thompson
primarily by telephone and e-mail. The Appellant met with Mr. Thompson in
his (the Appellant’s) home and did not attend Mr. Thompson’s office in
Kincardine. A reasonable person would want to visit the office of an individual
advocating a tax plan that produces such a remarkable result if for no other
reason than to confirm that the individual actually had an office.
[71]
The Appellant could not identify, and did not
meet with, any of the four tax lawyers credited with having conceived the plan.
A reasonable person would have insisted on discussing a tax plan that generates
such a remarkable result with at least one of the four tax lawyers who
purportedly came up with the plan.
[72]
The Appellant was given the 2008 Adjustment
Request with the word “per” before the place
where he was to sign the form. A reasonable person would have questioned why
the word “per” was being used on a form that had
to be signed by that person.
[73]
Mr. Thompson was not known to the Appellant
prior to his retaining him to prepare the 2008 Adjustment Request. A reasonable
person would be very wary of tax advice from a stranger that produces such a
remarkable result, and would seek reliable confirmation that the advice is
correct.
[74]
The Appellant initiated contact with Mr. Thompson
on the recommendation of a friend who had received an inordinately large tax
refund. A reasonable person would be suspicious of a recommendation based on a
filing position that generates an inordinately large tax refund. As well, the
fact that a refund was given is not proof of a valid tax plan.
[75]
The Appellant did not ask for or receive
references from Mr. Thompson. A reasonable person would want to ensure
that the individual advocating a tax plan that produces such a remarkable
result had legitimate references.
[76]
The Appellant states in his discovery evidence
that he relied on Mr. Thompson’s explanation of the plan and that he
believed he was relying on a legal loophole to create the business loss.[63] The Appellant explained his understanding of the plan in his
answers to questions 20 and 29 of the Respondent’s Read-Ins:
. . . the
agency-principal distinction allows the Government of Canada to use an
individual’s personal registration number or Birth Certificate number as a bond
account, against which the Government borrows funds from foreign sources, to
allow the Government [to] get good rates, make money on citizens, and bolster
the coffers. Tom Thompson also stated that a person’s social insurance
number functions like a company, separate from the person him- or herself, and
that CRA has to refund taxes to the individual but not to the SIN.
[77]
The Appellant explains his understanding of the
Statement of Agent Activities filed with the 2008 Adjustment Request in his
answer to question 71:
My understanding
of the Statement of Agent Activities is set out in my response to question 29.
I believe that I was the principal and my social insurance number was my agent.
[78]
The explanation provided by Mr. Thompson is
on its face patently absurd and no reasonable person would accept that explanation
in support of a $696,134 business loss that has no other justification
whatsoever. The idea that a social insurance number functions like a company or
that a social insurance number can be an agent of the person holding that
number is ridiculous. The idea that a loss of $696,134 can, in effect, be
plucked out of thin air is also ridiculous.
[79]
The explanation in the answers to questions 20,
29 and 71 of the Respondent’s Read-Ins is not the description of a tax plan or
of a legal loophole. Rather, it is pure nonsense and gobbledegook. In my view,
no reasonable person would accept Mr. Thompson’s explanation in support of
a tax plan that produces a $696,134 business loss purportedly on the basis of a
legal loophole. Accordingly, the fact that the representations of Mr. Thompson
are part of the circumstances in which the reasonable person is placed is of no
assistance to the Appellant.
[80]
The Appellant indicates in his discovery
evidence that he discussed the plan with his accountant and with his financial
advisor and that they did not caution him against the plan. I have already
noted that a failure to caution against the plan is not the same as
confirmation that the plan has merit, which a reasonable person would seek in
the circumstances. In any event, the Appellant also states that he did not have
any notes or documents when he discussed the plan with his accountant, Again,
those are not the actions of a reasonable person in the circumstances.
[81]
The Appellant’s counsel submits that the
Respondent has failed to produce evidence that the Appellant did not seek the
advice of a third party and therefore has not met the burden established by
subsection 163(3) of the ITA. In my view, the absence of such evidence is not
fatal to the position of the Respondent because it is the totality of the
evidence that must be considered in determining whether the Respondent has met
the burden established by that subsection. After careful consideration of all
of the Respondent’s evidence regarding the circumstances of the false statement
made by the Appellant in the 2008 Adjustment Request, I am of the view that the
burden on the Respondent established by subsection 163(3) of the ITA has been
satisfied.
[82]
In particular, the Appellant’s signing and
filing of the 2008 Adjustment Request in the circumstances disclosed by the
evidence tendered by the Respondent represents a marked and substantial
departure from the conduct of a reasonable person in the same circumstances and
constitutes gross negligence as described in Venne. Accordingly, the
false statement made by the Appellant in the 2008 Adjustment Request was made
in circumstances amounting to gross negligence.
[83]
If the Appellant wished to explain why the facts
disclosed by the evidence of the Respondent do not properly reflect the facts
that should be considered by this Court, it was incumbent on him to testify,
which he chose not to do.
[84]
For the foregoing reasons, the appeal of the
Appellant is dismissed with costs to the Respondent.
Signed
at Ottawa, Canada, this 2nd day of May 2016.
“J.R. Owen”
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