REASONS
FOR JUDGMENT
Paris J.
[1]
These are appeals from reassessments of the
Appellant’s 2008 and 2009 taxation years. In those years, the Appellant
participated in a tax avoidance program known as the “Detax”
program.
[2]
The Minister of National Revenue (the “Minister”) disallowed the Appellant’s claim for
business losses of $209,664.62 and $167,111.43 in those years respectively, and
disallowed the Appellant’s request to carry back unused balances of those
losses to apply to her 2005, 2006 and 2007 taxation years. The Minister also
imposed gross negligence penalties under subsection 163(2) of the Income
Tax Act (the “Act”) in respect of the
disallowed amounts.
[3]
The Appellant admits that she did not carry on a
business or have any business losses in the years under appeal and is only
disputing the imposition of the gross negligence penalties.
[4]
She takes the position that she was duped by the
person who prepared and filed her tax returns and who convinced her to
participate in the Detax program. While she believed that she would be entitled
to large tax refunds under the program, she says that she did not understand
that fictitious business losses would be reported, and claims that the tax
preparer added the figures for the business losses and loss carry backs without
her knowledge after she had signed the returns in issue. She maintains that she
took all reasonable steps to investigate the tax preparer and the program he
was promoting and therefore that her conduct in relying on him to prepare her
returns did not amount to gross negligence on her part.
[5]
Three witnesses testified at the hearing: the
Appellant, her father, Barry Arbuckle, and Jolaine Guignard, a friend of the
Appellant.
Relevant Statutory Provisions
[6]
In order to impose the penalties under
subsection 163(2), the Minister has the onus to show that the Appellant
made false statements in her 2008 and 2009 tax returns and that she did so
knowingly or in circumstances amounting to gross negligence. The relevant point
in time for the determination is the time of filing of the returns. The
applicable statutory provisions read as follows:
163(2) False statements or omissions. Every person who, knowingly, or under circumstances amounting to
gross negligence, has made or has participated in, assented to or acquiesced in
the making of, a false statement or omission in a return, form, certificate,
statement or answer (in this section referred to as a “return”) filed or made
in respect of a taxation year for the purposes of this Act, is liable to a
penalty of the greater of $100 and 50% of the total of
(a) the amount, if an, by
which
(i) the
amount, if any, by which
(A) the
tax for the year that would be payable by the person under this Act
exceeds
(B) the
amounts that would be deemed by subsections 120(2) and (2.2) to have been
paid on account of the person’s tax for the year
if the
person’s taxable income for the year were computed by adding to the taxable
income reported by the person in the person’s return for the year that potion
of the person’s understatement of income for the year that is reasonably
attributable to the false statement or omission and if the person’s tax payable
for the year were computed by subtracting from the deductions from the tax
otherwise payable by the person for the year such portion of any such deduction
as may reasonably be attributable to the false statement or omission
exceeds
(ii) the
amount, if any, by which
(A) the
tax for the year that would have been payable by the person under this Act
Exceeds
(B) the
amounts that would be deemed by subsections 120(2) and (2.2) to have been
paid on account of the person’s tax for the year had the person’s tax payable
for the year been assessed on the basis of the information provided in the
person’s return for the year,
. . .
163(3) Burden of proof in respect of
penalties. Where, in an appeal under this Act, a
penalty assessed by the Minister under this section or section 163.2 is in
issue, the burden of establishing the facts justifying the assessment of the
penalty is on the Minister.
Facts
[7]
The Appellant is 37 years old and has a diploma
in human resources management from Durham College. While attending college, she
worked part‑time as a customer service representative at General Motors.
She graduated in 2004 and has since that time worked for the Ontario government,
first in the Human Resources Department at the Ontario Ministry of Finance and,
more recently, at the Ontario Ministry of Government Services.
[8]
The Appellant first began filing tax returns at
age 17 in 1997. Her father prepared all of her tax returns for her up to 2005.
[9]
For the 2006 to 2009 taxation years, she engaged
Muntaz Rasool to prepare and file her returns. She was introduced to Rasool by
her father. Mr. Arbuckle had received a large tax refund for his 2005 taxation
year that year as a result of participating in a tax program known as “Destiny Health” which Rasool had promoted. Mr. Arbuckle had been referred to Rasool
by co-workers who had used Rasool’s services and received large tax refunds.
[10]
The Appellant testified that she understood
Rasool to be an accountant who had previously worked at H&R Block and who
had prepared tax returns for many years. She also said that her father told her
that Rasool was very knowledgeable about the Income Tax Act. She admitted that she had never checked into his professional
credentials, although she did say that she did internet searches of his name on
a regular basis each year that she used his services.
[11]
At her first meeting with Rasool in December
2006, she agreed to participate in another tax program he was promoting called “StockLogics”
which was designed to produce large tax refunds.
[12]
It appears that the Appellant claimed a loss
related to StockLogics in her 2006 tax return and obtained a tax refund of
approximately $10,000 as a result. The Appellant’s father also participated in
the program that year, too.
[13]
In December 2007, the Appellant met with Rasool
regarding the preparation of her 2007 return and agreed to participate in a new
tax program he was promoting called “Stock Market Live”. As a
result, the Appellant obtained a tax refund of approximately $13,000 for her
2007 taxation year.
[14]
Both Ms. Guignard and the Appellant’s father
also participated in the Stock Market Live program and received refunds that
year. Ms. Guignard said that she was put in touch with Rasool by the
Appellant in December 2007 and that after meeting with him she checked Ontario
government databases at her work to check that Rasool was “legit” and that he
was using his real name. She was able to find out his name, address, driving
record, and that the house at the address he was using belonged to his spouse. However,
she did not make any attempt to verify Rasool’s credentials as an accountant.
[15]
In December 2008, the Appellant met with Rasool
to discuss another program he was promoting for the 2008 taxation year, which
she said he called the “Detax” program. The Appellant testified that she met
Rasool at the home of her friend, Jolaine Guignard, who was also interested in
participating in the program. During the meeting, which the Appellant said
lasted a couple of hours, Rasool explained to them that there was a loophole in
the Income Tax Act that would allow them to get a large tax refund
because of an account held by the Canada Revenue Agency (the “CRA”) for
each person born in Canada. He said that every baby born in Canada had a serial
number on the back of his or her birth certificate that relates to an account
number with the government and that the account was opened by the CRA and that
money was put into it and that the government was earning interest on the
money. He said that people could withdraw money from this account against their
income to receive a refund every year but that nobody knew about the loophole
and no one claimed the refunds. The Appellant also understood from Rasool that
the loophole was based on each person having two separate identities from the
time of birth. She testified that Rasool convinced her and Guignard that they could
get a large tax refund as a result of the loophole.
[16]
The Appellant testified that she and Guignard
asked Rasool many questions at the meeting and that after the meeting she did a
lot of on-line research about the Detax program. She specifically said that she
searched the term “Detax” and that a lot of information came up validating what
Rasool had told her and Ms. Guignard. She also said that she talked to her
father about the program. He had also spoken to Rasool about it and had spent
over five hours reviewing material on a website called “detaxcanada.org” and had
contacted the operator of the website, Eldon Warman by email. The Appellant
said that her father told her that it looked like a good program and that there
should not be any issues with it. As a result, she said that she decided to
participate in the program.
[17]
This testimony of the Appellant was contradicted
in a number of respects by that given by Ms. Guignard and the Appellant’s
father. Both of those witnesses said that Rasool never used the name “Detax”
for the program and that it was the Appellant’s father who came across the name
when he was trying to find out more about what he said Rasool called the “Pay
no tax” program. He conducted this research in late March 2009 and said that he
did not discuss what he learned from it with the Appellant until a couple of weeks
later, after she had already decided to participate in the program.
[18]
The Appellant’s father, himself, decided not to
participate in it because, he said, he had “already made enough money” from
Rasool’s programs in other years. In cross-examination, he admitted, though,
that at some point before March 2009 he had been reassessed to disallow the
Stock Market Live loss he had claimed in his 2007 taxation year.
[19]
The Appellant also testified that she checked to
see if there was anything about the program on the CRA website, but she did not
find anything to indicate it might be a scam. Ms. Guignard thought that it was
the Appellant’s father who had gone on the CRA website, rather than the
Appellant.
[20]
When the Appellant met with Rasool in late March
2009 to review and sign her return, she said she did a quick “page flip”
and signed where indicated. She said that when she reviewed the return she did
not see the entry for the business loss of $209,664.62, the Request for Loss Carryback
form or the Statement of Agent Activities which purported to set out the
calculation of the business loss.
[21]
The Statement of Agent Activities shows the
Appellant apparently acting as agent for herself as principal, and paying
amounts to herself and collecting amounts from herself in the course of the
supposed activity. It contains statements regarding “T-4a’s (sic)
and other money reported by 3rd parties and collected as agent” and “Money
Collected as Agent for Principal and reported by third parties”. It also
states that “This Statement, prepared by the principal, is your original receipt!” It is quite
obvious from even a brief look that the information in the form is nonsense.
[22]
Rasool filed the return and the Appellant
received a refund of approximately $15,000 for her 2008 taxation year.
[23]
On November 13, 2009, the CRA sent a letter to
the Appellant requesting information about the business loss claimed for her 2008 taxation year. She forwarded
the CRA’s request for information about the loss to Rasool, along with an email
message in which she asked Rasool whether it would delay receipt of her “income tax money”,
which I take to mean the refunds that she expected as a result of her pending
claim to carry back losses to her earlier tax years. She also asked for an
explanation of what was happening with the CRA and said she wasn’t sure she
understood what was going on.
[24]
Rasool provided a letter to the Appellant to
send to the CRA in response to the request for information and she signed it
and faxed it to the CRA on December 11, 2009. That letter contained typical
Detax language, including statements that the Appellant was “not a
‘person’ in Canada, nor in a Province, and thus, not subject to any laws of
Canada” , that “JENNIFER ARBUCKLE is a fictional entity with no physical body or
mind”, that she was “a free will adult man” and that:
All assets and property held in the name of
JENNIFER ARBUCKLE, or any variation of that name thereof, the trustee in trust
and agent in commerce are for, are the property under claim in equity of the
free will adult man, commonly called Jennifer of the Arbuckle family, the
principal and beneficiary of the said trust.
[25]
The Appellant sent the letter to the CRA despite
not understanding what it meant.
[26]
In December 2009, she met Rasool concerning her
2009 tax return and the same program as the previous year. She testified that,
since there were no changes to the program, there was not much discussion about
it, and she simply agreed to participate in the program once again.
[27]
Subsequent to their meeting, the Appellant said
she did another on-line search of Rasool and the Detax program and she visited
the CRA website. She said she found nothing that would have alerted her to any
problem with the program.
[28]
On March 5, 2010, the CRA responded to the
letter that the Appellant had sent in on December 11, 2009. The CRA proposed to
disallow the 2008 business loss and loss carry back request. The letter also
indicated that consideration was being given to imposing gross negligence
penalties.
[29]
On March 10, 2010, the Appellant met with Rasool
to review and sign her 2009 return. She said that the review and signing
process for the return was much the same as the previous year. Again, she said
she did not see the business loss claim, or the Loss Carryback Request form or
Statement of Agent Activities that were attached to her return that was filed.
[30]
On April 2, 2010, the Appellant sent in another
letter to the CRA that Rasool had given her, in response to the CRA’s letter of
March 5, 2010. That letter as well contained nonsensical Detax statements.
[31]
On June 10, 2010 the Minister reassessed the
Appellant for her 2008 taxation year to disallow the business loss and the
request to carry back losses to her 2005, 2006 and 2007 taxation years and
gross negligence penalties were imposed. Her return for 2009 was assessed on
March 3, 2011. The business loss and loss carry back request were disallowed
and gross negligence penalties were imposed.
Position of the Respondent
[32]
The Respondent’s counsel submits that the
evidence demonstrates that the Appellant was wilfully blind to the claims for fictitious
business losses made in her 2008 and 2009 tax returns and the request to carry
back the losses. Alternatively, the Respondent takes the position that the
Appellant was grossly negligent in failing to adequately review the returns
prepared for her by Rasool prior to filing.
[33]
Counsel points to the Appellant’s education and experience,
to the minimal review she made of her returns, to her failure to make inquiries
into how the Detax program worked, to her blind acceptance of the
incomprehensible explanation given by Rasool concerning the program, and to the
magnitude of the losses claimed, as demonstrative of the Appellant's gross
negligence.
Position of the Appellant
[34]
The Appellant's counsel submitted that, while
wilful blindness on the part of a taxpayer to misrepresentations made in the
taxpayer’s return is sufficient to support a finding of gross negligence within
the meaning of subsection 163(2), the conduct of the Appellant in this case
does not rise to that level. He argued that the Supreme Court of Canada had, in
the case of Sansregret v.The Queen, [1985] 1
S.C.R. 570, set out a narrow approach to wilful
blindness, stating that, in order for a court to find wilful blindness, the
evidence must be such that “it can almost be said that the defendant actually
knew” and that the court must be satisfied that “the defendant intended to
cheat the administration of justice.” The Supreme Court described the doctrine
of wilful blindness as a rule of very limited scope.
[35]
Counsel maintained that a finding of wilful
blindness should only be made in extreme cases since it is intended to be an
equivalent to actual knowledge by taxpayer, and that the evidence must
therefore disclose deliberate conduct or deliberate ignorance on the part of
the Appellant.
[36]
The Appellant’s counsel argued that the Respondent
has not established that the Appellant was wilfully blind to the false
statements made in her returns because it has not been shown that the Appellant
set out to cheat the administration of justice or was deliberately ignorant of
the need for some inquiry into the basis for the business loss and loss carry back
claims made in her returns.
[37]
In his view, the decision of this Court in Torres
v. The Queen, 2013 TCC 380,
which also dealt with the application of gross negligence penalties in the case
of a claim for fictitious business losses, misstates the test for wilful
blindness and applies a lower standard than the test as enunciated by the
Supreme Court of Canada in the case of Sansregret.
[38]
Counsel submitted that even if the Court were to
apply the Torres factors for determining wilful blindness, the evidence
in this case would still point away from a finding that the Appellant was
wilfully blind. Counsel stated that the Appellant’s lack of sophistication in
tax matters meant that she was unable to understand the significance of entries
on her tax return forms, and that she did not know enough to know she had to
inquire. In any event, it could not be said that she closed her eyes to the
false statements because they were added by Rasool after the Appellant reviewed
the returns.
[39]
In addition, she took steps to investigate
Rasool and the Detax program and even checked the CRA website for references to
the program. She therefore exercised reasonable diligence to ensure the
information on her return was correct. Counsel maintained as well that there
were no flashing red lights in the case of Rasool because he had previously
prepared returns for the Appellant’s 2006 and 2007 taxation years that were
assessed as filed and which had not been reassessed at the time the returns in
issue were filed.
[40]
The Appellant believed that the fees charged by
Rasool were justified by the large refunds he obtained for her, and by the
additional legal and accounting services he provided. Further, the refund
received by the Appellant was consistent with what she had received for the
2006 and 2007 years. Taking all of these factors into account, the Appellant’s
trust in Rasool was understandable. Finally, counsel stated that, while the
false statements in the Appellant’s returns were blatant, the evidence showed
that the false statements were added after the Appellant reviewed and signed
the returns.
Analysis
[41]
Since the Appellant admits that the business
loss claims and loss carry back requests in her 2008 and 2009 tax returns
constituted false statements, the only issue before the Court is whether the
Appellant made those statements knowingly or under circumstances amounting to
gross negligence.
[42]
The most frequently quoted definition of gross
negligence in relation to subsection 163(2) of the Act is that found in
the case of Venne v. The Queen, 84 D.T.C. 6247. At paragraph 37 of that
decision, Strayer J. wrote that 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...”
[43]
In discussing the concept of gross negligence in
subsection 163(2) of the Act, the Supreme Court of Canada in Guindon
v. The Queen, 2015 SCC 41 (at paragraph 60), cited the following comments
of this Court in Sidhu v. The Queen, 2004 TCC 174:
Actions “tantamount” to intentional actions
are actions from which an imputed intention can be found such as actions
demonstrating “an indifference as to whether the law is complied with or not”.
. . . The burden here is not to prove, beyond a reasonable doubt, mens rea to
evade taxes. The burden is to prove on a balance of probability such an
indifference to appropriate and reasonable diligence in a self-assessing system
as belies or offends common sense. [para. 23]…
[44]
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 misrepresentation 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) the genuine effort to comply.
[45]
No single factor
predominates. Each must be assigned its proper weight in the context of the
overall picture that emerges from the evidence (DeCosta v. The Queen, 2005 TCC 545.)
[46]
For the following reasons, I am satisfied that
the Respondent has succeeded in showing on a balance of probabilities that the
Appellant was grossly negligent in claiming large fictitious business losses on
her 2008 and 2009 tax return, and in requesting loss carry back to her earlier
taxation years.
[47]
The evidence shows that the Appellant signed
both her 2008 and 2009 returns after only a cursory review. She did what she
referred to as a “page flip” of the returns, stopping only to sign where she
was directed to do so, and not stopping to look at the entries made on the
return. In her own words:
THE WITNESS: I did a quick check, you know,
just to make sure my name was on there, and then, where I saw -- where, he told
me, he had a sticky note of where to sign, and I would sign it. It was a quick
review of the return. That's just how I've always done it. I always -- I
don't understand the return. I don't know what the numbers represent, so I
don't really look at that because I just -- this is what you're supposed to do,
and you're supposed to sign it and send it off.
MR. MILOT: Did you do a page flip of the
return?
THE WITNESS: Yes, like a quick flip of the
pages because there were a few areas that you had to sign.
(page 32 transcript)
[48]
In proceeding as she did, she abdicated her
responsibility for the correctness of the information contained in the returns,
and was indifferent as to whether those returns complied with her obligations
under the Act. In other cases involving penalties under subsection
163(2), this Court has repeatedly found that a taxpayer’s failure to review a
return before filing it constituted gross negligence. For example, in Brown v. The Queen, 2009 TCC 28, Bowie J. stated at paragraph
20 that:
Quite apart from all of that, in respect
of the gross negligence penalties under the Income Tax Act, the Appellant in his own evidence
early on made it clear that he signed his returns for each of the four years
under appeal without having paid the least attention to what income was
included in them and what expenses were claimed in them. He said that he kept the
records that he kept, prepared spreadsheets from them and gave them to a tax
preparer who, in each year, prepared the returns for him based on the material
that he gave her. We did not hear from her on that, but taking that statement
at its face value, it still leaves the Appellant with an onus to look at the
completed return before signing it and filing it with the Minister. The
declaration that the taxpayer makes when he signs that form is,
I certify that the information given on
this return and in any documents attached is correct, complete and fully
discloses all my income.
To sign an income tax return and make that
certification without having even glanced at the contents of the return,
because that is what I understood his evidence to be is of itself, in my view,
gross negligence that justifies the penalties.
[49]
Similarly, in Bhatti v. The Queen, 2013
TCC 143 at para 30, C. Miller J. wrote:
…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…
[50]
Had the Appellant taken the time to read through
her returns for 2008 and 2009, it would have been obvious to her that she was
claiming business losses, even though she acknowledged that she did not carry
on any business. It would also have been obvious that the claim for business
losses and the information set out on the Statement of Agent Activities could
not be reconciled with the explanation of the tax loophole given to her by
Rasool as the means of obtaining the large tax refunds he promised her. In no
way does the Statement of Agent Activities appear to be a claim against a
secret account registered under the serial number on the back of the
Appellant’s birth certificate.
[51]
I do not accept counsel’s suggestion that the
false business loss claims and loss carry back requests were added by Rasool
after the Appellant reviewed and signed her 2008 and 2009 tax returns. There is
little credible evidence upon which to draw the conclusion that Rasool altered
the returns without the Appellant's knowledge.
[52]
First, the Appellant herself admitted that she
paid little attention to what was in the returns when she reviewed them. She
flipped quickly through the pages and apparently only stopped at the places
where she needed to sign. Also, the fact that she signed the loss carry back
request forms that were attached to both her 2008 and 2009 returns directly
contradicts her statements that she had not seen those forms. Therefore her
testimony that she did not recall seeing the business loss claims and related
statements, or the loss carry back requests before her returns were filed
carries little weight.
[53]
It also seems to me, that if the Appellant had
not seen the business loss claimed on her 2008 return, she would have brought
this up to Rasool after receiving the November 13, 2009 CRA letter questioning
the business loss claim. In court, the Appellant was clear that she had never
carried on a business, and there was no suggestion that she did not know what a
business was when she signed the returns in issue, and I infer that she knew
when she received the November 13, 2009 letter that she had not carried on a
business in 2008. However, in her email to Rasool attaching the CRA letter, she
does not express concern or surprise that a business loss had been claimed, nor
does she suggest that it had been done without her knowledge.
[54]
I would have expected that, if the Appellant had
been unaware of the business loss and loss carry back requests made in her 2008
return, she would have brought it to the attention of the CRA as soon as she
found out. Instead, it appears that she proceeded to have Rasool prepare her
return for 2009 in the same manner as he had done for 2008. The Appellant’s
testimony that there was little discussion of the Detax program between herself
and Rasool when she met with him in December 2009 seems hard to reconcile with
her recently having learned that he had claimed business losses in her return
without her knowledge.
[55]
Finally, there was no evidence to show that, prior
to the hearing, the Appellant had ever represented that Rasool had altered her
returns after she signed them. I note that, in a letter to the CRA written by
the Appellant's representative in the course of the objection process, the
representative stated that “the company Detax, who originally prepared Jennifer Arbuckle’s 2009
tax return assured Ms. Arbuckle that the business venture she was claiming was
legal.” This is clearly inconsistent with the Appellant's position with the
losses were claimed without her knowledge.
[56]
In addition to the difficulty I have accepting
the Appellant’s testimony that she believed that the loss claims were added to
her return without her knowledge, other inconsistencies between her testimony
and that given by her father and by Ms. Guignard lead me to question the
reliability of the Appellant’s testimony generally concerning her
investigations into Rasool and the programs he was promoting. I find it
difficult to accept her assertions that she repeatedly searched Rasool’s name
on the internet. This would appear to show that the Appellant was suspicious of
Rasool throughout the period in issue, but is inconsistent with her blind
acceptance of the explanation he gave concerning the secret account linked to
her birth certificate. It is also inconsistent with the Appellant’s assertions
that she had no reason not to trust Rasool when he prepared her returns.
Summary
[57]
In summary, the fictitious losses and loss carry
backs were many times the amount of the Appellant’s income for the years in
issue, she had ample opportunity to review the returns in which the claims were
made, she is educated and from my observation, of at least average
intelligence. Finally, in failing to review the entries on her returns, she
made no effort to comply with the requirements of the Act that the
information in her returns be complete and accurate.
[58]
Given my conclusions set out above, it is not
necessary for me to address the parties’ submissions relating to the issue of
wilful blindness.
[59]
For all of these reasons, the appeals are
dismissed, with costs to the Respondent.
Signed at Montreal,
Quebec, this 18th day of September 2017.
“B.Paris”
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