REASONS
FOR JUDGMENT
Masse D.J.
Overview
[1]
André Mallette is appealing the penalty for
gross negligence that was imposed on him pursuant to subsection 163(2) of the Income
Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the “Act”) in relation to his
2008 taxation year and a related request for loss carryback to the 2005, 2006
and 2007 taxation years. Tax preparers known as Fiscal Arbitrators (“FA”)
prepared his tax return in such a way as to claim very large fictitious
business losses amounting to more than $520,000. These business losses, if
allowed, would result in the refund to the Appellant of all or practically all
the taxes paid by him or deducted at source for the 2005, 2006, 2007 and 2008
taxation years. The fact is that these claimed business losses never existed.
The Canada Revenue Agency (the “CRA”) disallowed the losses and penalized the
Appellant pursuant to subsection 163(2) of the Act. This case pertains only to
the penalties that were imposed.
Factual Context
[2]
André Mallette resides in Gatineau, Quebec. He
attended the CEGEP program in Quebec and then attended the University of
Toronto obtaining a bachelor of science degree in forestry in 1980. This is
ordinarily a four‑year program, but he obtained credits for his CEGEP
studies thus permitting him to complete his university degree in three years.
After graduation, he began working in the pulp, paper and forestry industry. He
was known to be a self‑starter and could work independently. He held
several important positions starting as a logging foreman, progressing through
to procurement of fibre materials and project manager in charge of wood scaling
operations for five different mills. This was a middle management position that
involved working with budgets, resource allocation and cost follow-up. He was
responsible for many employees, perhaps as many as 95 at a time. He was
resilient enough to survive several corporate reorganizations while others
around him fell by the wayside. He continued working in this industry for 28 years
up until the end of May 2008 when he was terminated by his then employer,
AbitibiBowater, as a result of restructuring. He was 51 years old at the
time. Before he was terminated, he was resourceful enough to establish himself
in a forestry consulting business and he incorporated himself under the name of
Casoma Forest Management Inc. This enterprise continued on after his
termination. The Appellant testified that he has taken no courses in taxation
or accounting, but he has taken courses in economics. He is no stranger to tax
return preparation since he was the one who completed and filed his own tax
returns between 1980 and 2006.
[3]
The Appellant testified that he was introduced
to Philippe Joanisse some time in 2007 through his personal trainer. Mr. Joanisse
is the national sales director for an organization called Frieslander
Financials (“FF”). FF are purportedly experts at financial opportunities and
tax deferrals. Mr. Joanisse was doing a lot of multi-marketing
opportunities at that time as a sideline. The Appellant became friends with Mr. Joanisse
and they socialized on frequent occasions.
[4]
Mr. Joanisse convinced the Appellant to
invest in certain opportunities. Some of these opportunities involved
investments in gold and oil which could produce a return on investments of up
to 30%. These investment opportunities were somehow linked up with using the
services of FA, who were described as tax specialists from Toronto who used to
work for the CRA. In order to take advantage of these investment opportunities
promoted by Mr. Joanisse, the Appellant had to use the services of FA. The
money to be saved through using the services of FA would be used to finance the
investments promoted by Mr. Joanisse.
[5]
The Appellant attended presentations given by Mr. Joanisse
regarding FA. These presentations were meant to explain a tax savings scheme
that would result in maximized refunds. The Appellant understood that he could
claim all his personal expenses so as to offset revenues based on some theory
of principal and agent. He understood that an individual could be split into
two entities for tax purposes — André Mallette, the natural person who is the agent,
and André Mallette, a fictional entity created by his social insurance number
who is the principal. The agent generates revenues for the principal and the agent
can deduct the expenses that were used to generate these revenues. Apparently,
these expenses are all in the nature of the Appellant’s personal expenses that
are spent to allow André Mallette, the principal, to earn revenues. The
Appellant agrees that he was both the principal and the agent. The Appellant
agrees that this was not any kind of a business relationship. FA charged an
initial fee of $500 and the Appellant was also to pay to FA 20% (less the
initial $500) of any tax refunds received by him. The Appellant recognized that
FA were proposing a scheme that would result in not paying any income taxes
over four years and there was even a possibility of being able to extend this
tax holiday for 10 years back. He stated that at the time it all made
sense to him to claim a large business loss on his tax return that he never
even incurred. Describing this deduction as a business loss was the only way
the CRA would accept it since the tax return forms did not permit of any other
kind of description. The Appellant did not know who FA were and he had never
heard of them before. He did some Internet searches on both FA and FF and he
did not find anything negative so he assumed that they were on the level.
However, he never did seek the advice of a tax accountant, a tax lawyer or the
CRA regarding the legitimacy of this tax savings scheme.
[6]
His 2008 tax return was prepared by FA and sent
to Mr. Joanisse at FF to be presented and reviewed with the Appellant.
Exhibit R-1, Tab 2, is the Appellant’s 2008 tax return dated May 27, 2009.
The Appellant agrees that when he got the completed tax return, he was supposed
to look at it and he did look at it. Therefore, I find that he has knowledge of
its contents. In this return, he reported employment income of $109,120.02,
other income of $62,483.75 (which he describes as severance pay), additional
money collected as “agent for principal not reported by third parties” in the
amount of $30,865.75. The Appellant admits that this was money that he never
even earned and never received. This resulted in business income described as “total
money collected as agent for principal” in the amount of $202,342.13 (statement
of agent activities, Exhibit R-1, Tab 1). He claimed business expenses
amounting to $551,729.13 described as “amount to principal in exchange for
labour”. This resulted in net business losses in the amount of $520,863.38
reported at line 135 of his return. The Appellant stated that this was the
amount that FA told him he could claim back as expenses. He does not explain nor
does he even know how this amount was calculated. He never provided FA with any
kind of an itemized list of expenses so it is incomprehensible to me how FA
could have come up with expenses of more than half a million dollars. The
Appellant used $163,325.38 of these business losses against his 2008 tax return.
He also signed a request for loss carryback (Exhibit R-1, Tab 3) wherein he
requested that the unused balance of these business losses be carried back to
2005, 2006 and 2007 as non‑capital losses and be applied against his
income of those years. It is clear to me that this fiscal “sleight of hand”
would result in the Appellant having to pay no taxes from 2005 through to 2008 —
a most astounding result.
[7]
It is obvious that this tax return contains some
blatantly false information. The Appellant never earned income of $30,865.75 as
“agent for principal”, yet he reported this as earned income. The Appellant
never incurred expenses, described as “amount to principal in exchange for
labour”, or any expenses of any nature at all during that year amounting to
more than half a million dollars. This is a huge falsehood. There was no
business enterprise at all between the agent and the principal. There was no
exchange of money at all between the agent and the principal, nor could there
be since the agent and the principal were one and the same person. On the first
page of the return, the Appellant is described as single; in fact he was
married. All the foregoing information is patently false, yet the Appellant admits
that he signed the return on the last page thus certifying that the information
contained in the return was correct, complete and fully disclosed all his
income.
[8]
FA made some unusual requests of the Appellant
in relation to his tax return. The word “per” had
to appear before the Appellant’s signature anywhere he signed. The Appellant
knows that this means he was not signing on his own behalf but on behalf of
someone else — yet this was his own personal tax return, not anyone else’s. He
did not receive any explanation as to why he had to do this. He had to write
his name in block letters on the statement of agent activities and it had to be
in blue ink. He did not receive any explanation as to why he had to do this.
The Appellant was simply told that FA had prepared the return that way and that
is the way it had to be in order for the tax savings scheme to work. In
addition, FA suggested that the Appellant not provide the CRA with his phone
number, that he not speak directly with the CRA, that he refer all
correspondence received from the CRA to FA, that he not file electronically and
that he not take advantage of direct deposit of refunds. One has to wonder why?
[9]
The Appellant knew that he was going to get a
refund of about $21,400 for 2008, and that he could expect a total refund of
$178,235.26 over the four years from 2005 through to 2008 (Exhibit A-1, Tab 67)
— a considerable sum of money. He actually did receive a refund cheque for 2008
in the amount of about $25,500. The Appellant wrote a cheque to FA for 20% of
this refund (less $500) and he gave FF the remainder to be invested. These
investments were not fruitful. FF has since gone out of business and the
Appellant has since lost everything.
[10]
The CRA sent a letter dated April 7, 2010
(Exhibit R-1, Tab 4) to the Appellant seeking further information from him in
relation to his claimed business losses of $520,863.38 for 2008. The CRA
required the completion of a business questionnaire and also the production of
source documents that would establish the claimed business expenses. On
September 8, 2010, the CRA sent another letter (Exhibit R-1, Tab 5) to the
Appellant advising of its intention to disallow the claimed business losses and
also advising of the likely imposition of penalties pursuant to subsection
163(2) of the Act. This letter was forwarded to Mr. Joanisse. Either Mr. Joanisse
or FA drafted a response for him. This response (Exhibit R-1, Tab 6, and
Exhibit A-1, Tab 19) made no sense at all, not even to the Appellant. He
testified that he read it over three times when he got it and he still does not
know what it meant, yet, it was sent in to the CRA unsigned. It was completely
non-responsive to the concerns raised by the CRA.
[11]
The CRA never did receive the information
requested. The CRA subsequently disallowed the business losses and assessed the
Appellant accordingly. The CRA also assessed penalties under subsection 163(2)
of the Act. The Appellant objected to this assessment, but the assessment was
confirmed, hence the appeal to this Court.
[12]
The Appellant takes the position that he is the
innocent victim of a fraudulent tax scheme concocted by Mr. Joanisse and
FA that has cost him dearly. He, at all times, put his trust and confidence in Mr. Joanisse
whom he had known and trusted for 18 months. He did not knowingly, or in
circumstances amounting to gross negligence, sign a tax return that was
incorrect or contained false information. The Appellant therefore prays that
the appeal be allowed and that the matter be referred back to the Minister of
National Revenue (the “Minister”) for reassessment on the basis that the
penalties imposed pursuant to subsection 163(2) are not appropriate in the
circumstances.
[13]
The Respondent submits that the Appellant’s 2008
tax return contained false information of such a magnitude that, if allowed,
would result in the refund of all taxes withheld or paid from 2005 through to
2008. The Respondent submits that the Appellant knew these statements to be
false. In the alternative, the Appellant made, assented to or acquiesced in the
making of, these false statements in circumstances amounting to gross
negligence. At the very least, the Appellant was wilfully blind regarding the
falseness of the statements contained in his tax return and related request for
loss carryback. The Respondent urges this Court to dismiss the appeal with
costs.
Legislative Dispositions
[14]
Subsection 163(2) of the Act reads in part as
follows:
163(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 . . .
[15]
According to subsection 163(3), the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
Analysis
[16]
Our system of taxation is both self-reporting
and self-assessing. It relies on the honesty and integrity of the individual
taxpayer. It is the taxpayer’s duty to report his taxable income completely,
correctly and accurately no matter who prepares the return. Therefore, the
taxpayer must be vigilant in ensuring the completeness and accuracy of the
information contained in his return. Justice Martineau stated in Northview
Apartments Ltd. v. Canada (Attorney General), 2009 FC 74, at paragraph 11: “It is the essence of our tax collection system that
taxpayers are sole responsible for self‑assessment and self‑reporting
to the CRA.”
[17]
In the matter of R. v. Jarvis, 2002 SCC
73, Justices Iacobucci and Major of the Supreme Court of Canada explained the
responsibilities and duties of taxpayers as well as some of the measures in the
Act designed to encourage compliance:
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 . . .). 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), and to disclose this
estimate to the CCRA in the income return that they are required to file
(s. 150(1)). . . . Upon receipt of a taxpayer’s return, the
Minister is directed, “with all due dispatch”, to conduct an examination and
original assessment of the amount of tax to be paid or refunded, and to remit a
notice of assessment to this effect (ss. 152(1) and 152(2)). Subject to certain
time limitations, the Minister may subsequently reassess or make an additional
assessment of a taxpayer’s yearly tax liability (s. 152(4)).
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” . . . . 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.
51 It follows from the tax scheme’s basic self‑assessment and
self‑reporting characteristics that the success of its administration
depends primarily upon taxpayer forthrightness. As Cory J. stated in Knox
Contracting, supra, at p. 350: “The entire system of levying
and collecting income tax is dependent upon the integrity of the taxpayer in
reporting and assessing income. If the system is to work, the returns must be
honestly completed.” It is therefore not surprising that the Act exhibits a
concern to limit the possibility that a taxpayer may attempt “to take advantage
of the self-reporting system in order to avoid paying his or her full share of
the tax burden by violating the rules set forth in the Act” . . . .
[Emphasis added. Citations omitted.]
[18]
The penalties provided for in section 163 of the
Act have been conceived in order to ensure the integrity of our self‑assessing
and self‑reporting system and to encourage a taxpayer to exercise care
and accuracy in the preparation of his return, no matter who prepares the
return. In Sbrollini v. The Queen, 2015 TCC 178, Justice Boyle of this
Court was of the view that the penalty provisions set out in subsection 163(2)
of the Act reflect:
15 . . . the significance and
importance of the requirements of honesty and accuracy in the Canadian
self-reporting income tax system. . . .
16 Such
penalties are properly payable . . . if [a taxpayer] knowingly, or
under circumstances amounting to gross negligence, made or participated in,
assented to or acquiesced in, the making of false statements or omissions in
his returns.
[19]
Therefore, the decision of whether or not a
taxpayer should be subjected to the penalties under subsection 163(2) of the
Act should be considered in light of the responsibilities and duties of the
taxpayer to accurately and completely report his income in a self-reporting and
self-assessing system.
[20]
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.
[21]
There can be no question that the Appellant’s
2008 tax return and his request for loss carryback contained false statements —
he did not have business expenditures exceeding half a million dollars! This is
the most blatant of the falsehoods contained in his return. His claim for
business losses has no foundation in fact and is patently false.
[22]
It is clear from the evidence that the Appellant
did review his return and therefore he is aware of its contents. He knew that
he did not have any business expenditures of such a huge magnitude and he knew
that this information was simply not true. This in and of itself justifies the
imposition of penalties pursuant to subsection 163(2) of the Act for knowingly
making, participating in, assenting to or acquiescing in the making of, a false
statement. Even if he honestly believed that the tax savings scheme conceived
by FA was legitimate, which obviously it is not, then he still knew that he did
not incur anywhere near half a million dollars in any kind of expenses that
year. He never supplied FA with any information that would allow the
calculation of such an amount of expenditures. He knew therefore that this was
just a made up number. This appeal must be dismissed on this basis alone.
[23]
However, if I am wrong in my conclusion that he
knowingly made, participated in, assented to or acquiesced in the making of,
such a false statement, I would have to go on to consider whether he made,
participated in, assented to or acquiesced in the making of, that false
statement in circumstances amounting to gross negligence. As already indicated,
the burden of proving gross negligence lies on the Crown. It is not sufficient
for the Crown to prove mere negligence; it must go beyond simple negligence and
prove that the Appellant was grossly negligent.
[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 FCA 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).
[28]
In Torres v. The Queen, 2013 TCC 380,
Justice C. Miller conducted a very thorough review of the jurisprudence
regarding gross negligence penalties under subsection 163(2) of the Act. He
summarized the governing principles to be applied at paragraph 65:
a) Knowledge of a
false statement can be imputed by wilful blindness.
b) The concept of
wilful blindness can be applied to gross negligence penalties pursuant to
subsection 163(2) of the Act . . . .
c) In determining
wilful blindness, consideration must be given to the education and experience
of the taxpayer.
d) To find wilful
blindness there must be a need or a suspicion for an inquiry.
e) Circumstances
that would indicate a need for an inquiry prior to filing . . . include
the following:
i) the
magnitude of the advantage or omission;
ii) the
blatantness of the false statement and how readily detectable it is;
iii) the
lack of acknowledgment 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.
[29]
This is certainly not an exhaustive list and
there may be other factors that may need to be considered depending on the
circumstances of any particular case.
[30]
The Appellant is university educated, fluently
bilingual and has enjoyed success in industry having ascended to an important
middle management position before his position became redundant. He presented
as an intelligent, charming, articulate and sophisticated individual. He is a
go‑getter and a self‑starter who is clearly very self‑motivated.
He is familiar with the preparation of tax returns since he had prepared his
own returns from 1980 through to and including 2006. He is a savvy businessman
and so he understands basic business concepts such as profit and loss. The
Appellant is not so lacking in education or basic understanding of concepts
such as business or taxes as to claim ignorance. Education, experience and
intelligence are not factors that could relieve the Appellant of a finding that
he made false statements under circumstances amounting to gross negligence. In
fact, given his education, intelligence and life experience, it is simply
astounding to me that he would fall for such a transparently fraudulent tax
savings scheme.
[31]
There were ample warning signs or “red flags”
that should have aroused the Appellant’s suspicions and awakened in him the
need to make further inquiries.
(a) The Fee
Structure — FA were seeking a fee of 20% of the refunds. Had the scheme
succeeded, this would have amounted to a fee of $35,647.05 based on total
expected refunds of $178,235.26. This was an exorbitant fee for simply filling
out a few forms. This should have led the Appellant to question the legitimacy
of this tax savings scheme.
(b) Tax Preparer
Previously Unknown to Taxpayer — The Appellant did not know who FA were. FA
were not a mainstream tax accounting professional firm and yet came up with
this amazing tax savings scheme. Remarkably, the Appellant could not deal with
FA directly but had to go through Mr. Joanisse. One has to ask why?
Although the Appellant did perform an Internet search regarding both FF and FA,
the fact that he did not get any negative information did not lend any
legitimacy to FA’s tax savings scheme. This is perhaps a small factor, but when
taken together with all the other factors, it should have alerted the Appellant
to exercise more care.
(c) Linking of FF
Investments with FA Services — As I understood the evidence of the
Appellant, he could only participate in FF’s investment opportunities if he
used the services of FA. It was the savings that he would realize through FA
that would finance the investments. This is certainly a strange symbiotic
relationship that should have alerted the Appellant to question the entire tax savings‑investment
scheme.
(d) Speciousness
of the Tax Savings Scheme — The scheme proposed by FA was utterly
preposterous and this should have been immediately obvious to the Appellant.
The theory that there was a way that an individual could be separated from his social
insurance number and thus create two separate entities for tax purposes is
ludicrous. No one, except the most unsophisticated, ignorant, naive and
gullible individual, could reasonably believe that he could charge personal
expenses amounting to more than half a million dollars against his personal
income. The Appellant is not such a naive man. As I have already indicated,
even if he believed this scheme to be legitimate, he should have asked himself
how FA came up with the numbers that they did. The business income, business
expenses and business losses reported in the Appellant’s 2008 tax return made
no sense at all and the Appellant knew this. This is a factor that strongly
suggests gross negligence through wilful blindness.
(e) Magnitude of the
Advantage — The Appellant stood to have all of his taxes paid over the last
four years returned to him. This amounted to over $178,000. He indicated that
he was told that perhaps he could get all taxes back that he had paid over the
last nine or 10 years. This was not tax deferral but was tax avoidance at the
very least. The magnitude of the advantage that the Appellant was to receive as
a result of the false information contained in his return was a bright red flag
that must have aroused his suspicions and should have induced him to critically
question what FA were doing. This is another strong factor pointing to gross
negligence through wilful blindness.
(f) Blatantly and
Readily Detectable False Statements — the “money collected as agent for principal
not reported by third parties” amounting to $30,865.75, the “amount to
principal in exchange for labour” amounting to $551,729.13, the business losses
amounting to $520,863.38 and the marital status of the Appellant are blatantly
false statements. They are readily and easily detectable and were in fact
detected by the Appellant. If he in fact did not detect these blatantly false
statements, then he should have. This is another glaring factor that points
towards gross negligence through wilful blindness.
(g) Tax Preparer
Makes Unusual Requests — FA made some unusual requests of the Appellant in
relation to his tax return. The word “per” had
to appear before the Appellant’s signature anywhere he signed. The Appellant
knows that this means he was not signing on his own behalf but on behalf of
someone else — yet this was his tax return, not anyone else’s. Why would FA
want him to do that? He did not receive any explanation as to why he had to do
this. He had to write his name in block letters on the statement of agent activities
and it had to be in blue ink. He did not receive any explanation as to why he
had to do this. FA suggested that the Appellant not provide the CRA with his
phone number, that he not speak directly with the CRA, that he refer all
correspondence received from the CRA to FA, that he not file electronically and
that he not take advantage of the direct deposit of refunds. One has to wonder
why? All these unusual requests should have alerted the Appellant to be wary of
what FA were doing.
(h) Tax Preparer
does not Acknowledge Preparing Return — Box 490 of the return is reserved
for the identification of the professional tax preparer who prepared the
return. Fiscal Arbitrators described themselves simply as FA in box 490. It
gave as an address FA, 555 YT, 2C3 AB A1B 2C3, and then gave a phone number.
This address format appears to be bizarre and frankly I have no idea where this
is. This should give reason to question why FA would use such a strange address
format.
(i) Lack of
Inquiries of Other Professionals or of the CRA — The Appellant did not seek
any advice about FA’s tax savings scheme from a recognized tax preparer, tax
accountant, tax lawyer or from the CRA itself. He was concerned enough about FA
to make inquiries on the Internet about FA, but not enough to run the proposed
scheme by the CRA to get an opinion if it was legal.
All the foregoing factors are indicators
that the Appellant was wilfully blind and that he ignored some very obvious
warning signs that should have led him not only to question what FA were doing,
but should have convinced him to walk away from FA’s questionable scheme. I
conclude that the Appellant was grossly negligent through wilful blindness.
[32]
The Appellant submits that he is the innocent
victim of people whom he trusted. He had known Mr. Joanisse for 18 months
and was friends with him. He trusted Mr. Joanisse, who introduced him to
FA, and he had no reason not to trust FA. In some cases, a taxpayer can shed
blame by pointing to negligent or dishonest professionals in whom the taxpayer
reposed his trust and confidence; for example, see Lavoie c. La Reine,
2015 CCI 228, a case where the taxpayers relied on a lawyer whom they had known
and trusted for more than 30 years and who was a trusted friend. Counsel
for the Appellant has also brought to my attention the case of Hine v. The
Queen, 2012 TCC 295. In Hine, the taxpayer’s wife prepared his
return. He was in the business of “flipping properties”. Unfortunately, his
wife had failed to report significant income as a result of double counting
mortgage deductions resulting from late receipt of their lawyer’s trust account
statement. The CRA disallowed the deduction and assessed gross negligence
penalties pursuant to subsection 163(2) of the Act. Justice Hershfield of
this Court held that in the peculiar circumstances of the case, the taxpayer
was not grossly negligent or wilfully blind in relying on his wife to prepare
his return. The mistake in underreporting the income was the result of honest
confusion on the part of the wife.
[33]
However, cases abound where taxpayers could not
avoid penalties for gross negligence by placing blind faith and trust in their
tax preparers without at least taking some steps to verify the correctness of
the information supplied in their tax returns.
[34]
In Gingras v. Canada, [2000] T.C.J. No.
541 (QL), Justice Tardif wrote:
19 Relying on an
expert or on someone who presents himself as such in no way absolves from
responsibility those who certify by their signature that their returns are
truthful.
. . .
30 It is the
person signing a return of income who is accountable for false information
provided in that return, not the agent who completed it, regardless of the
agent’s skills or qualifications.
[35]
In DeCosta, above, Chief Justice Bowman
stated:
12 . . . 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.
[36]
In Laplante v. The Queen, 2008 TCC 335,
Justice Bédard wrote:
15 . . . The Appellant cannot
avoid liability in this case by pointing the finger at his accountant. By
attempting to shield himself in this way from any liability for his income tax
returns, the Appellant is recklessly abandoning his responsibilities, duties
and obligations under the Act. . . .
[37]
As stated by Justice Tardif in Gingras,
above:
31
. . . it is utterly reprehensible to certify by one’s signature that
the information provided is correct when one knows or ought to know that it
contains false statements. Such conduct is a sufficient basis for a finding of
gross negligence justifying the assessment of the applicable penalties.
[38]
I am of the view that the Appellant made no
effort to comply with the law. This is certainly borne out by his after‑the‑fact
conduct. When he got a letter from the CRA questioning his business losses,
rather than respond directly to the CRA and take his tax preparer to task, he
gave the CRA letter to Mr. Joanisse who gave it to FA. FA drafted a
response that made no sense to the Appellant or to anyone else. Even realizing
that the response was complete and utter nonsense, he still sent it on to the
CRA. This gives a clear indication as to his mindset throughout.
Conclusion
[39]
There is no doubt that the Appellant’s 2008 tax
return and his request for loss carryback contained false statements — the
Appellant did not incur any business losses exceeding $520,000. This was a made
up number. The Appellant is a sophisticated, intelligent and well-educated man
who is quite savvy in business matters. I can come to no other conclusion than
that the Appellant acted either knowingly or with wilful blindness in signing a
return with made up numbers. The magnitude of his claim was huge and should
have raised significant suspicions and concerns. As such, he is properly
subject to the penalties imposed on him pursuant to subsection 163(2) of the
Act.
[40]
For all the foregoing reasons, this appeal is
dismissed. The Respondent is entitled to her costs if she wants them.
Signed at Kingston, Ontario, this 27th day of January 2016.
“Rommel G. Masse”
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