REASONS
FOR JUDGMENT
Masse D.J.
Overview
[1]
These two appeals were heard together on common
evidence.
[2]
Florence and Brendan Spurvey are appealing the
penalties for gross negligence that were imposed on them pursuant to subsection
163(2) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the “Act”)
in relation to their 2008 and 2009 taxation years. They were referred by a
friend to unscrupulous tax preparers who led them to believe they would get
huge tax refunds of all the taxes they had paid in the last 10 years. This
was done by claiming very large fictitious business losses. The fact is that
the Appellants never owned or operated any kind of business at all during those
years. The Canada Revenue Agency (the “CRA”) denied the losses and penalized the
Appellants pursuant to subsection 163(2) of the Act. This case pertains only to
the penalties that were imposed.
[3]
The issue is simply whether the Appellants
either knowingly, or in circumstances amounting to gross negligence, made or
acquiesced in the making of false statements in their returns so as to attract
the harsh penalties provided for in subsection 163(2) of the Act.
Factual Context
[4]
Florence and Brendan Spurvey are two senior
citizens who were duped by a friend, Colleen Thompson, and an unknown tax
preparer named Alex, whom the Spurveys never even met. During the years in
question, they earned modest income from employment, pension income, old age
security, Canada pension and employment insurance. Florence is a high school
graduate and is a trained registered practical nurse. She has worked as such
for the past 28 years. She has in the past operated a home craft business
and so she understands concepts like business income and expenses as well as
profit and loss. During 2008 and 2009, Florence was employed at the Runnymede
Health Care Centre. At no time during those years did she own or operate any
kind of a business.
[5]
Brendan Spurvey has a grade 11 high school
education and is a trained and certified tradesman in four different trades:
pipefitter and steamfitter, oil burner mechanic, marine diesel mechanic and electrician.
However, he never worked at any of them. He was employed by Canadian Tire for
about 20 years until 2008 or 2009. He never owned or operated a business. In
the past Florence and Brendan used Softron Tax Preparers to prepare their tax
returns. The fee was in the range of $40 to $120 each for this service.
Florence stated that she never got any refunds in the past that she can
remember. Brendan states that he never got much of a refund in the past;
sometimes he got a bit of money back and other years he had to pay a bit more
taxes.
[6]
Back in 2009, Colleen Thompson, who was a friend
of Florence, told them that they could obtain a refund of all taxes paid dating
back to the past 10 years. All Florence and Brendan had to do was submit
copies of their tax returns dating back to 1999. These were to be passed on to
a third party who would take care of all the paperwork. In return, the third
party was to be paid 45% of any tax refunds that were received. The Spurveys
asked Ms. Thompson how this could be; how could they get a refund of all
taxes paid over the last 10 years? Ms. Thompson told them that years ago,
one of the Prime Ministers of Canada had put a clause into the Constitution
making this tax holiday scheme legal and that they had nothing to worry about.
This information had been on the Internet, but had since been taken down. Ms. Thompson
worked with a group of lawyers so Florence put some faith in what Ms. Thompson
was saying. Brendan testified that he did not know if Ms. Thompson was an
accountant or a lawyer; she could be a janitor for all he knew. She claimed she
worked with some lawyers but Brendan does not know who they are. Brendan
believes that Ms. Thompson was out to recruit people to participate in
this scheme.
[7]
Florence and Brendan got copies of their
returns, gave them to Ms. Thompson and signed papers that were given to
them by Ms. Thompson. Ms. Thompson supposedly gave all of this
paperwork to a person named Muntaz Rasool who would take care of things.
Brendan testified that he never spoke to Mr. Rasool; only Florence did.
Florence only spoke to him over the phone, perhaps two times. Mr. Rasool
assured her that this scheme was all legal. At one point in time, Ms. Thompson
told Florence that Mr. Rasool took too much time to prepare the returns,
so the paperwork was turned over to another person named Alex. The Spurveys do
not know his last name. Florence did ask Ms. Thompson what was Alex’s last
name, but Ms. Thompson never did answer. The Spurveys never did get the
name of the company or outfit that Mr. Rasool and Alex worked for.
Florence did speak to Alex on the phone but Brendan never did. Alex told
Florence that he was a tax arbitrator with the Tax Arbitration Board. Alex also
assured her that this scheme was all legal and it was her right under the Constitution
to receive 10 years of back taxes. She asked Alex to explain this to her,
but Alex gave her a speech using words that were beyond her understanding. She
told him she did not understand and his response was that she did not need to
understand. She was simply told by Ms. Thompson and by Alex to sign her
returns and other documents; everything was perfectly legal and it was in the Constitution.
The Spurveys did not seek any further clarifications from anybody, not from
another tax preparer, not from an accountant, not from a lawyer and not from
the CRA. It is clear that they never checked out and probably never asked for
any references regarding Alex. They simply went on faith and the expectation of
getting back a lot of money.
[8]
Florence admits having signed a T1 adjustment request
for 2008 on September 16, 2009 (Exhibit R-1, Tab 5) and a related request
for loss carryback to the years 2005, 2006 and 2007 on September 18, 2009
(Exhibit R-1, Tab 6). In this T1 adjustment request, she claimed business
losses in the amount of $180,559. The so-called business was that of an “agent” and the losses
are detailed in the statement of agent activities (Exhibit R-1, Tab 3). She requested
to use $51,457 of this business loss against her income in the 2008 taxation
year and requested that the unused balance be carried back and applied to her
2005, 2006 and 2007 taxation years (Exhibit R-1, Tab 6).
[9]
On April 1, 2010, Florence signed her 2009
tax return (Exhibit R‑1, Tab 2) and a related request for loss carryback
(Exhibit R-1, Tab 8). In her 2009 tax return, Florence claimed business losses
in the amount of $196,613.39. Again, the business was that of an “agent” and
the losses are detailed in the statement of agent activities (Exhibit R-1, Tab
4). Florence requested to use $61,639.39 of the 2009 business losses against
her income in the 2009 taxation year and requested that the unused balance of
$134,974 be carried back to her 2006, 2007 and 2008 taxation years (Exhibit
R-1, Tab 8).
[10]
Florence did not understand any of these
documents or what they contained, but she signed them anyway. She did not seek
the advice of an accountant, a lawyer, the CRA or any other person who could
explain them to her. She admits that she was expecting to get a refund of
$9,571. That refund is much bigger than she had ever gotten in the past and, in
fact, she had never gotten a refund in the past. She did question Alex about
the size of this refund, but she did not understand his response. In spite of
that, she still did not seek advice from anyone else.
[11]
Brendan reviewed and signed all documents that
were presented to him by Ms. Thompson. On September 16, 2009 he
signed a T1 adjustment request for 2008 (Exhibit R-2, Tab 4) and a related request
for loss carryback to the years 2005, 2006 and 2007 dated September 18,
2009 (Exhibit R-2, Tab 5). In this T1 adjustment request, Brendan claimed
business losses in the amount of $302,592. The business was that of an “agent”
and the losses are detailed in the statement of agent activities for 2008
(Exhibit R-2, Tab 2). Brendan requested to use $52,823 of this business loss
against his income in the 2008 taxation year and requested that the unused
balance be carried back and applied to his 2005, 2006, and 2007 taxation years
(Exhibit R-2, Tab 5).
[12]
On April 1, 2010, Brendan signed his 2009
tax return (Exhibit R‑2, Tab 7) together with a request for loss carryback
to the years 2006, 2007 and 2008 (Exhibit R-2, Tab 8). Brendan claimed business
losses in the amount of $288,354.11. Again, the business was that of an “agent”
and the losses are detailed in the statement of agent activities (Exhibit R-2,
Tab 3). Brendan requested to use $45,203.11 of the 2009 business losses against
his income in the 2009 taxation year and requested that the unused balance of
$243,151 be carried back to his 2006, 2007 and 2008 taxation years (Exhibit
R-2, Tab 8).
[13]
Brendan admits to looking these documents over,
reading them and signing them. Florence thinks she may have looked at the
documents when she signed them. By signing their returns and the requests for loss
carryback, both Florence and Brendan certified that the information contained
therein was correct and complete. All the documents are signed “per Florence Spurvey” or “per
Brendan Spurvey” as the case may be. It is also clear that the tax preparer
did not indicate on the signature page of the return who had prepared the
return (Exhibit R-1, Tab 2, page 33; Exhibit R-2, Tab 7, page 39). Brendan saw
the large numbers described as business losses. He testified that he knew the
numbers did not look right at the time. He and Florence went along with
whatever Ms. Thompson and Alex said because they were expecting a big
amount. I find that Brendan’s suspicions were definitely aroused and he admits
that this entire scheme, as it was explained to him, rang a bell for him.
[14]
On December 4, 2009, the CRA sent letters
to both Florence and Brendan questioning their T1 adjustment requests for the
2008 taxation year. These letters asked them to complete a business
questionnaire, provide the identity of their tax preparer, provide all source
documents supporting their claimed business expenses, as well as all
information in support of their claim that they were operating a business. This
demand letter most certainly raised some red flags concerning the propriety of
what they had done for 2008. However, they did not respond to this letter but
instead sent it to Alex who prepared a response (Exhibit R-1, Tab 1; Exhibit
R-2, Tab 1). These responses are identical in wording. They make no sense at
all and are completely non-responsive to the concerns raised by the CRA. What
is revealing, however, is that the letters sent by CRA to Florence and Brendan,
which clearly raise some obvious concerns, were sent to them before they
submitted their 2009 tax returns. Yet, in spite of these obvious red flags,
Florence and Brendan still allowed Alex to prepare and file their 2009 tax
returns in April 2010 when they knew that the CRA was questioning their
business expenses for 2008.
[15]
The CRA sent another demand letter to Florence
and Brendan on June 18, 2010 (Exhibit R-1, Tab 9; Exhibit R-2, Tab 9)
advising them that the CRA was proposing to disallow their claimed business
losses for 2008 as well as their request for loss carryback. These letters also
required them to provide proof of their business expenses for 2009 — which did
not exist. Again, they did not respond to these letters from the CRA and
instead provided them to Alex who prepared a reply (Exhibit R-1, Tab 10;
Exhibit R-2, Tab 10). These replies are again identical in wording to each
other and again are completely non-responsive to the concerns raised by the
CRA. Again, these responses are complete and utter nonsense. It is to be
emphasized that all of these documents were supposedly prepared by Alex and yet
nowhere is he indicated as the author of any of the documents.
[16]
The Minister of National Revenue (the
“Minister”) disallowed the claimed business losses for both the 2008 and 2009
taxation years. Notices of reassessment for 2008 and notices of assessment for
2009 were sent to the Appellants. The Appellants were assessed penalties for
gross negligence pursuant to subsection 163(2) of the Act. As already
indicated, these penalties for gross negligence are the subject of the present
appeals.
[17]
Although they signed the documents, both
Florence and Brendan indicated that they did not understand them. They do not
know how the numbers in all these documents were calculated and they did not
understand what was involved. However, Brendan agrees that the numbers did not
look right. They testified that they did not know what “statement of agent activities”
meant or what the business activity of “agent” meant; they did not understand
any of this. They acknowledge that the box reserved for the identification of
the tax preparer was left blank. They trusted Alex to do the right thing even
though he did not identify himself on the returns as the professional tax
preparer. They did not ask anyone else about Alex. They did not seek counsel
from another tax preparer, an accountant, a lawyer or the CRA even though they
did not understand what Alex was doing or his explanations. They simply put all
their faith and confidence in Ms. Thompson and Alex in the hopes of
receiving large refunds. Florence acknowledges that she was expecting a refund
of about $9,500 for 2009 which seemed large to her given that she had never gotten
refunds in the past. Brendan simply went along with the scheme because he was
expecting big money — all his taxes for the last 10 years. They in fact
did not get any refund at all.
Legislative Dispositions
[18]
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 . . .
[19]
According to subsection 163(3), the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
Analysis
[20]
I will apply the same analysis as I did in the
case of Chartrand v. The Queen, 2012-3534(IT)G.
[21]
There are two necessary elements that must be
established in order to find liability for subsection 163(2) penalties:
(a) a false statement in a return, and
(b) knowledge or
gross negligence in the making of, assenting to or acquiescing in the making of
that false statement.
[22]
There can be no question that the Appellants’
2008 T1 adjustment requests, their 2009 tax returns and their related requests
for loss carryback contained false statements. The Appellants never owned or
operated any kind of a business during the years under consideration and
therefore could not have had any business income or business expenses. Their
claims for business losses have no foundation in fact and are patently false.
[23]
Did the Appellants make false statements either
knowingly or in circumstances amounting to gross negligence? I will restrict
this analysis only to the issue of gross negligence. The burden of proof 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 Appellants were 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. This definition of negligence is very well known in
Anglo-Canadian jurisprudence such that no authority need be cited for it.
However, gross negligence requires something more than mere negligence. 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 Venne, Justice Strayer of the
Federal Court (Trial Division) cautions that subsection 163(2) of the Act “is a penal provision and it must be interpreted
restrictively so that if there is a reasonable interpretation which will avoid
the penalty in a particular case that construction should be adopted” and
the taxpayer should be given the benefit of the doubt. 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 doctrine of wilful blindness is
well known to the criminal law. The concept of “wilful blindness” in the context of
the criminal law was fully 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. Stated otherwise, “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]
It has been held that 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 was
able to distill the governing principles to be applied and the factors to be
considered. I paraphrase his dicta found 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, or flashing red
lights as I called it in the Bhatti decision, include the following:
i) the magnitude
of the advantage or omission;
ii) the
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 ought to be considered depending on the
circumstances of any particular case. I am of the view that Justice C. Miller
provides an excellent template to be used in the analysis of cases of alleged
gross negligence. I go on to consider these factors.
Education and Experience of the Taxpayer
[30]
Florence Spurvey has a high school education and
had the intelligence to become a trained practical nurse, a profession that she
has enjoyed for some 28 years. Although she professes not to understand
accounting principles or income taxes, she understands the concepts of business
expenses and profit and loss since she did engage in a very small home based craft
business in the past.
[31]
Brendan Spurvey has a grade 11 high school
education and was able to learn four different skilled trades although he
states that he did not practice any of them. In my view, it is quite an
accomplishment to be able to learn four different trades.
[32]
They have had experience with tax preparers in
the past. The Appellants are intelligent, articulate and literate. They are not
so lacking in education or basic understanding of concepts such as business,
profit and loss or taxes as to claim ignorance. Education, experience and
intelligence are not factors that could relieve them of a finding they made
false statements under circumstances amounting to gross negligence.
Suspicion or Need to Make an Inquiry
[33]
There were ample and obvious warning signs or “red
flags” that should have aroused the Appellants’ suspicions and awakened in them
the need to make further inquiries.
The Absurd Nature of the Proposed Scheme
[34]
Florence and Brendan were both told that they
had a constitutional right to a tax holiday such that they could expect to
obtain a refund of all their taxes paid over the last 10 years if they
used the services recommended to them by Ms. Thompson. This is such a
ludicrous proposition in and of itself as to defy any semblance of credulity.
To blindly accept such a ridiculous assertion from a previously unknown person
whose last name they don’t know and whom they still have not met, without
verifying the legitimacy of what was being proposed is, quite frankly,
astounding. One does not have to engage in much thought before concluding that
if every citizen took advantage of this so-called constitutionally sanctioned
scheme, then the entire country would soon be bankrupt. The Spurveys should
have asked themselves, if this scheme was in the Constitution, why was it not
well known by the public and why was it not well publicized by the CRA and by
the government of Canada? Why would Softron or any other respected tax preparer
not have recommended this tax savings strategy to them? If this scheme was in
fact on the Internet, and it was not only legal but a constitutional right, why
was the Internet site taken down? These obvious questions just scream out for
answers. The specious nature of the proposed tax savings scheme is a factor
that weighs heavily towards a finding of wilful blindness.
The Fee Structure
[35]
The fee structure proposed by the tax preparer
is concerning. In prior years, the Appellants paid Softron from $40 to $120 to
prepare their returns. In the instant case, the tax preparer charged a fee of
45% of any monies refunded by the CRA — an extremely high fee given that the
Appellants were seeking the return of all of their taxes paid over the last 10
years. This fee structure was so different from that of their prior tax
preparer that it gives rise to the need to question the legitimacy of the tax
preparer. This is another factor indicating wilful blindness.
Anonymity of the Tax Preparer
[36]
There was always some distance that was
maintained between the Spurveys and the tax preparer. They in fact never met
Alex, whose last name they did not know. They never had any personal interviews
with him and they never attended Alex’s office in order to review their tax
situation or their returns — very unusual when dealing with a supposed
professional. Their only contact with Alex was essentially through Ms. Thompson
and no one else. Florence did have some telephone communication with Alex, but
Brendan never did. The fact that they never personally met the anonymous and
faceless Alex gives rise to a great deal of suspicion. This is another strong
factor that weighs in favour of a finding of wilful blindness.
Magnitude of the Advantage
[37]
The Appellants were hoping to receive all the
taxes that they had paid in the past 10 years. This was a significant
advantage compared to their true income and compared to what they were entitled
to in past years. This did or at least should have alerted them that something
was just not right. This was a bright red flag that weighs towards a finding of
wilful blindness.
Blatantly False Statement — Readily Detectable
[38]
The Appellants claimed huge business expenses
when they in fact were not even in business. The assertion that they were in
business and that they had incurred huge business expenses was patently false.
This blatant falsehood would have been easily and readily detected by simply
taking more than just a cursory look at the documents that Alex had prepared
for them. No one could reasonably believe that they could claim such large
business losses when not actually engaged in business. In and of itself, this
blatantly false claim of such large business expenses is sufficient to raise
more than a suspicion — it cries out for further investigation.
Tax Preparer does not Acknowledge Preparing Returns
[39]
It is obvious that the Appellants paid someone
to prepare their tax returns. Yet, the tax preparer did not complete the box
reserved for tax professionals. This box, on the last page of the return, is
right beside the line to be signed by the Appellants certifying the information
is correct and complete. This box labelled “For
professional tax preparers only” is obvious to the taxpayer who signs
the return. The fact that it was left empty should have alerted the Appellants
to the fact that the tax preparer may have wished to remain anonymous to the
CRA. This may not be a major point, but when considered cumulatively with all
the other warning signs, it should have aroused suspicion in the mind of the
Appellants.
Tax Preparer Makes Unusual
Requests
[40]
The Appellants were instructed to sign their
returns after the word “per” that was
handwritten on the signature line. Again, this is not a major factor, but the
word “per” should have raised some concerns in
the mind of the Appellants.
Tax Preparer Previously Unknown to Taxpayers
[41]
As I have already indicated, Alex was previously
unknown to the Appellants. The Appellants in fact never did meet him. The
Appellants only knew Alex through Ms. Thompson. This is perhaps a small
factor, but when taken together with all the other factors, it should have alerted
the Appellants to undertake further investigation with regard to Alex. The
Appellants did no due diligence; they were blinded by the desire to obtain huge
tax refunds.
Explanation by Tax Preparer Regarding False Statement is
Incomprehensible
[42]
Whenever Florence asked questions of Alex, the
explanations provided did not make any sense to her. She told him that she did
not understand. Rather than provide clarifications, Alex simply told her that
she did not need to understand. His incomprehensible explanations and his
statement that she did not need to understand give rise to much suspicion.
Brendan never even spoke to Alex and thus did not ask any questions. Brendan
was only interested in getting huge tax refunds.
Others do not do it or the Taxpayer is Warned Against it
or the Taxpayer is Fearful of Telling Others
[43]
This is not a factor in the circumstances of
this particular case.
Lack of Inquiries of Other Professionals or of the CRA
[44]
It is clear that the Appellants did not
understand their returns or how the numbers were calculated. Brendan admitted
that the numbers just did not look right. The explanations provided by Alex
were not satisfactory. Yet, the Appellants did not seek clarification from any
other professionals such as a tax accountant, a tax lawyer or from the CRA. I
conclude there were sufficient warning signs to cause the Appellants to make
further inquiries of other professionals. As stated by Justice V.A. Miller in Janovsky
v. The Queen, 2013 TCC 140:
24 . . . If he [the taxpayer]
indeed did not understand the terminology used by FA in his return and if he
did not understand how FA calculated his expenses, then he had a duty to ask
others aside from FA. . . .
[45]
In the instant case, if the Appellants truly did
not understand what the tax preparer was doing, then they should have sought
advice elsewhere. This, they did not do. Their failure to seek out advice from
other professionals or even from the CRA in the face of the highly questionable
information contained in their tax returns and the lack of appropriate
explanation is another indicator of wilful blindness.
CRA’s Demand for Information Regarding 2008
[46]
As already indicated, the CRA sent a letter
dated December 4, 2009 to the Appellants requesting documentation and
information in regard to their claimed business losses in 2008 and the related request
for loss carryback. This letter most certainly must have alerted the Appellants
to the fact that their 2008 T1 adjustment request and related request for loss carryback
were questionable. What is revealing, however, is that the letters sent by CRA
to Florence and Brendan, which clearly raise some obvious concerns, were sent
to them before they submitted their 2009 tax returns. Yet,
in spite of these obvious concerns, Florence and Brendan still allowed Alex to
prepare their 2009 tax returns in April 2010 when they knew that the CRA was
questioning their business expenses. The CRA letter was a clear indication that
there were serious problems, yet the Appellants chose to ignore this important
warning sign. They were wilfully blind.
Appellants’ Blind Trust in Tax Preparer
[47]
The Appellants simply indicated that they
trusted Alex.
[48]
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. However, cases abound where the 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 return.
[49]
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.
[50]
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.
[51]
In Laplante v. The Queen, 2008 TCC 335,
Justice Bédard wrote:
15 In any event, the Court finds that the Appellant’s negligence (in
not looking at his income tax returns at all prior to signing them) was
serious enough to justify the use of the somewhat pejorative epithet “gross”.
The Appellant’s attitude was cavalier enough in this case to be tantamount to
total indifference as to whether the law was complied with or not. Did the
Appellant not admit that, had he looked at his income tax returns prior to
signing them, he would have been bound to notice the many false statements they
contained, statements allegedly made by Mr. Cloutier? 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. In this case, the Appellant had an obligation
under the Act to at least quickly look at his income tax returns before signing
them, especially since he himself admitted that, had he done so, he would have
seen the false statements made by his accountant.
[Emphasis in original.]
[52]
In Brochu v. The Queen, 2011 TCC 75,
gross negligence penalties were upheld in a case where the taxpayer simply
trusted her accountant’s statements that everything was fine. She had quickly
leafed through the return and claimed that she did not understand the words “business income” and “credit”,
but yet had not asked her accountant nor anyone else any questions in order to
ensure that her income and expenses were properly accounted for. Justice
Favreau of this Court was of the view that the fact that the taxpayer did not
think it necessary to become informed amounted to carelessness which constituted
gross negligence.
[53]
In Bhatti, above, Justice C. Miller
pointed out:
30 . . . It is simply insufficient
to say I did not review my returns. Blindly entrusting your affairs to another
without even a minimal amount of verifying the correctness of the return goes
beyond carelessness. So, even if she did not knowingly make a false omission,
she certainly displayed the cavalier attitude of not caring one way or the
other . . . .
[54]
In Janovsky, above, Justice V.A. Miller
stated:
22 The Appellant said he reviewed his return
before he signed it and he did not ask any questions. He stated that he placed
his trust in FA as they were tax experts. I find this statement to be
implausible. He attended one meeting with the FA in 2009. He had never heard of
them before and yet between his meeting with them and his filing his return in
June 2010, he made no enquiries about the FA. He did not question their
credentials or their claims. In his desire to receive a large refund, the
Appellant did not try to educate himself about the FA.
23 Considering
the Appellant’s education and the magnitude of the false statement he reported
in his 2009 return, it is my view that the Appellant knew that the amounts
reported in his return were fake.
[55]
Another recent example can be found in the
matter of Atutornu v. The Queen, 2014 TCC 174, where the taxpayers
simply blindly relied on the advice of their tax preparer without reading or
reviewing their returns and without making any effort whatsoever to verify the
accuracy of their returns.
Conclusion
[56]
There is no doubt that the Appellants’ 2008 T1 adjustment
requests, their 2009 tax returns and the related requests for loss carryback
contained false statements — the Appellants did not carry on a business and
they did not incur any business losses whatsoever. I can come to no other
conclusion than that the Appellants were wilfully blind as to the speciousness
of these statements. There were many red flags or warning signs and they simply
ignored them all. I am satisfied that the Crown has discharged its burden of
proof and I am satisfied that the Appellants made the false statements in their
returns in circumstances amounting to gross negligence. As such, they are
properly subject to the penalties imposed pursuant to subsection 163(2) of the
Act.
[57]
The Appellants are people of modest means and
the penalties are very harsh. The Appellants will certainly suffer hardship as
a result of these penalties. However, I can offer no relief against the
harshness of the penalties. The only question I can decide is whether the
penalties are well founded or not.
[58]
The Court draws to the Appellants’ attention the
fact that a waiver of the penalty and interest may be sought from the CRA
pursuant to the taxpayer relief provisions in subsection 220(3.1) of the Act. This
Court has no role to play in relation to such applications and it should be
made clear that a waiver of penalty and interest lies entirely in the
discretion of the Minister. Such an application is made to the CRA; the CRA
publishes an information circular (IC07‑1) as well as a form (RC4288) for
making taxpayer relief applications.
[59]
For all the foregoing reasons, these appeals are
dismissed. The Respondent is entitled to her costs if she wants them.
Signed at Toronto, Ontario, this 1st day of
December 2015.
“Rommel G. Masse”
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