REASONS
FOR JUDGMENT
Russell J.
Introduction:
[1]
The Appellant, Katalin Kajtor, appeals a
reassessment raised June 25, 2010 under the federal Income Tax Act
(Act) for her 2008 taxation year, whereby she was denied a business loss and
was assessed a “gross negligence” penalty per
subsection 163(2) of the Act. The assessed amount for this penalty was $24,760
plus provincial penalty plus interest totalling approximately $41,000.
[2]
The only issue in this appeal is the gross
negligence penalty. The denial of the claimed business loss of $178,172 is not
contested.
[3]
Per subsections 163(3) of the Act, in section 163
penalty appeals, the burden of establishing the facts justifying the assessment
of the penalty is upon the Respondent Crown.
Evidence:
[4]
The Appellant, representing herself, testified
and documents were entered in evidence. She immigrated to Canada from Romania
approximately 25 years ago, having a high school education. In Canada she
worked as a seamstress, had a child and for the last 15 years as a single
parent has raised her son, who is now starting university, while she has been
employed as an associate in the southwestern Ontario warehouse of a
multinational corporation.
[5]
Her evidence was that some seven years earlier
her boyfriend Brian Shaw’s brother Jim Shaw called Brian Shaw to say Canada
Revenue Agency (CRA) had notified him that he would receive an approximately
$50,000 tax refund; this upon Jim Shaw having engaged a certain tax consultant
who had held himself out as able to obtain much increased income tax refunds
for primarily T4’d taxpayers. (In cross-examination of Brian Shaw, a manager in
the same warehouse in which the Appellant worked, he testified that brother Jim
Shaw was an employee at a car parts factory. He was not an accountant although
previously he had been a corporate auditor for 20 years.) The Appellant and
Brian Shaw were skeptical of Jim Shaw’s information, and waited to see if any
legal problems arose.
[6]
Two months or so later Jim Shaw apparently did
receive from CRA a cheque of approximately $50,000, reflective of an income tax
refund. The Appellant testified that Jim Shaw told them he had called CRA to
confirm if he could cash the cheque without problem, and was advised there
would be no problem. (Jim Shaw was not called as a witness, nor was he present
at the hearing.) Then, the Appellant and Brian Shaw travelled to another town
in which Jim Shaw lived, to view Jim Shaw’s cheque for themselves. The
Appellant said they saw the cheque and thus concluded this was legal.
[7]
The Appellant testified that she and Brian Shaw
decided to do this themselves; that is, engage the same tax return preparer in
their each likewise seeking to obtain an increased income tax refund.
[8]
The Appellant entered into evidence as Exhibit
A-1 a short compilation of documents including an extract of CRA’s Taxpayer
Bill of Rights. The Appellant drew attention to several of the briefly stated provisions
thereof, including item 14 headed, “You have the right
to expect us to warn you about questionable tax schemes in a likely manner”.
(Item 14 concludes with the statement, “We can only warn you about tax schemes
after we become aware of them and have determined that they may be
questionable.”)
[9]
The Appellant concluded her testimony in chief
stating she felt she has been mistreated by CRA, she did not do anything wrong,
she saw Jim Shaw’s cheque and he said he’d called CRA to ensure all was good.
Yes, she signed a piece of paper, and if she had known this was not honest she
would not have “listened”. She and her now
fiancé Brian Shaw are innocent people in this.
[10]
In cross-examination she confirmed she had attained
a grade 12 education when she left Romania 25 years ago, and she has been
working in manual employment in a warehouse for the last 15 years. She
confirmed her testimony re Jim Shaw and deciding to view his refund cheque. She
did not know any details as to how the claim for enhanced task refunds would
work. She always has had someone else do her returns - usually H&R Block
for a fee of $80 to $100 for typically a $1,000 or so refund. She never paid a
percentage fee, always a flat rate.
[11]
Also in cross-examination she acknowledged
(Exhibit R-2) her July 5, 2010 notice of objection with her signature,
plus attachments thereto. Part of this exhibit is a document that she signed,
headed “Financial Consulting Solutions” (FCS), with
a sub-heading, “Promise to Pay/Consulting Fee”
stating that she would pay FCS “30% of my income tax
amount for the 2008 tax year, when I receive my 2008 refund”. It further
provided that she, “agree[d] to request a loss carry
back for a refund of my taxes, for years 1999 to 2007, and agree to pay [FCS] 45%
of my net tax refund, for those carry back years [1999 to 2007], as they are
received.” Her signature on this is dated September 9, 2009 and her phone
number, S.I.N. and date of birth also are noted.
[12]
She testified she signed this at Jim Shaw’s
house, with no one from FCS present. She did not ask Jim Shaw questions. She
also acknowledged (Exhibit A-1) her CRA “T1 Adjustment
Request” form (T1-ADJ E 08/08), blank except for, just above the signature
block, the typed-in statement, “Please adjust above
return to include above amounts as per attached statement and original receipts”,
and with the word “Per” handwritten just to the left of where the Appellant was
to and did sign.
[13]
Immediately above where the Appellant’s signature
and within the form’s signature block was this CRA form’s normal printed
statement, “I certify that the information given on
this form and any documents attached is, to the best of my knowledge, correct
and complete.” The Appellant signed this in blank and it was left for FCS. She
testified that she did not read the certification and she knew “Per” was there.
Also she testified she never saw this document with information filled in.
[14]
In the same exhibit is page 2 of 2 of a CRA 2008
loss carryback form (T1A E (08)). It also was left by FCS with Jim Shaw for the
Appellant’s signature, again completely in blank except for the handwritten word
“Per” just to the left of where the Appellant’s signature was to go and where
she in fact did sign. Immediately above the signature space and within the
form’s signature block was this CRA form’s usual printed statement, “I certify that the information given on this form is correct
and complete.”
[15]
The Appellant’s “Statement of Agent
Activities” form (Exhibit R-3), filed with the T1 Adjustment Request for 2008
taxation year, showed a claimed loss of $178,172. That statement as well has on
it the Appellant’s hand printed signature, appearing within the otherwise typed
phrase, “I certify that I am the principal for the agent
Katalin Kajtor and declare all information to be complete and accurate as of
2008-12-31.”
[16]
The one page statement otherwise is
replete with fictitious and statements such as that the Appellant’s “Business Service” is “Agent”,
and “Amount to principal in exchange for labour”
is “$185,177.10” - all this on top of her T4 reported income of $51,546. Also
at the bottom of the said Statement just above the Appellant’s printed
signature is the following, bolded and underlined: “This
Statement, prepared by the principal, is your original receipt!”
[17]
In
cross-examination the Appellant said she did not remember that there were any
numbers on this Statement when she signed it. She never thought this was
illegal. She referred again to having seen Jim Shaw’s cheque. She said CRA
should have warned them that a fraudulent program was in operation.
[18]
Brian Shaw also
testified, largely reiterating what the Appellant had said. He said his brother
Jim Shaw also had told them he had consulted with his wife’s son who was a
police officer, concerning a name – Tom Thompson – on a business card that he
had been given in conjunction with the FCS, and was advised that the police had
no information on him. He testified as well that Jim Shaw had told them he had
called “the CRA hotline” to learn if any issues with the Tom Thompson name, and
had not learned anything of concern or relevance. I consider this evidence not
hearsay as it was offered not for its truth but to help explain the Appellant’s
conduct and why she should not be considered liable for the assessed gross
negligence penalty.
[19]
He said also that
the Appellant was guilty only of trusting his brother and the government. He
said also that if not for him, the Appellant would not have participated in
this. “It breaks [his] heart that working people can be treated like this.”
[20]
In
cross-examination he described his brother Jim Shaw’s current and prior
employment positions (as noted above) and said he did not really know why Jim
Shaw would be entitled to a large refund. He was not present when his brother
called CRA. The “hotline” was just a recording.
[21]
The Appellant
called no further evidence and the Respondent called no evidence. The above
review of evidence in some detail is given because as noted the evidentiary
onus normally on the Appellant here is on the Respondent as the issue involves
a section 163 penalty.
Issue:
[22]
As stated, the herein issue is whether the
assessment of the subsection 163(2) “gross negligence”
penalty for the Appellant’s 2008 taxation year was correct.
Submissions:
[23]
In argument the Appellant submitted that she had
signed a piece of paper, she shouldn’t have and she believed other people. She
is being made responsible for a tax scam. She feels she is being punished for
something she did not intend to do. She never received any (refund) money,
unlike others. She trusts the government. Interest on the penalty is not right.
If she did wrong, the government did too. The government is not out any money. The
government should have warned her. She did see Jim Shaw’s cheque, which she
considered proved the whole program was legal, before deciding to use the same
tax preparer.
[24]
The Respondent’s submissions were, in brief,
that this is a case in the same pattern as others, termed “fiscal arbitrator” cases. If it looks too good to be
true, it usually is. In some cases, perhaps including Jim Shaw’s, CRA would
assess as filed, issue a corresponding cheque even of substantial amount, and
then on reassessment wholly reverse. In either type of situation the gross negligence
penalty can be applied. The distinctive feature of this case is that forms were
signed by the Appellant that had not been filled out. That’s how the trouble
began. The Respondent considered that here both witnesses (the Appellant and
Brian Shaw) were very credible and believable. The Appellant worked and always
paid taxes on time, recovering small refunds.
[25]
The Respondent further submitted that the
Appellant had signed the T1 Adjustment form for her 2008 taxation year in
blank. In reviewing “red flags” from Torres v. Her Majesty, 2013 TCC
380, a leading decision on application of the gross negligence penalty where
dishonest tax preparers had been used, the Respondent submitted that as to the
factor of “magnitude” of the tax refund claim, the Appellant was unaware; the
factor of “blatancy” of the submission the Appellant was unaware; the factor of
“lack of acknowledgment of the preparer on the return”
did not apply; the factor of “unusual requests by the
preparer” did not apply; the factor of “previously
unknown to the taxpayer” is major - she only knew Jim had used this person
and saw a business card. She knew a police background check had been done. She
took no real look into credentials. Yet she agreed to sign in blank, and trust.
[26]
The Respondent further submitted that the “red
flag” factor of “incomprehensible explanations”
did not apply as no explanations were sought or provided; the factor as being “warned against it” did not apply. Here her partner in
fact encouraged her to do this, and he did it too. The factor of “fee
structure” should have raised a red flag, as she was required to pay a
percentage fee. While she understood was that Jim had checked the CRA “hotline”,
which turned up nothing re this “scam”, no enquiries were made of reliable
professionals.
[27]
The Respondent cited several other cases as well,
noted below. It was submitted the Appellant had made no effort to comply with
the law, was hoping for a refund, so the penalty has been properly imposed. The
penalties are harsh, but that is not a factor in deciding the case. The
Respondent left the matter of costs to the discretion of the Court.
Analysis:
[28]
The subsection 163(2) “gross negligence” penalty
provision provides:
(2) Every person
who makes or furnishes, participates in the making of or causes another person
to make or furnish a statement that the person knows, or would reasonably be
expected to know but for circumstances amounting to culpable conduct, is a
false statement that could be used by another person (in subsections (6) and
(15) referred to as the “other person”) for a purpose of this Act is liable to
a penalty in respect of the false statement.
[29]
The two elements of subsection 163(2) to be
established are:
a)
a false statement in a return;
b) knowledge or gross negligence in the making of, assenting to or acquiescing
in the making of that false statement.
[30]
In accordance with Venne v. Canada,
[1984] F.C.J. 314 (TD), gross negligence requires something more than mere
negligence. It involves a high degree of negligence tantamount to intentional
acting or indifference as to whether the law is complied with or not.
[31]
I have considered the decisions of Torres
(supra); Strachan v. R., 2015 F.C.A. 60; Lauzon v. R.,
2016 T.C.C. 71; Lauzon v. R., 2016 F.C.A. 298; Tomlinson v. R.,
2016 T.C.C. 246; Chartrand v. R., 2015 T.C.C. 298. As noted in Torres
(supra) at paragraph 62, it is settled law that gross negligence can
include wilful blindness. See also Villeneuve v. Canada, 2004 D.T.C.
6077 (F.C.A.).
[32]
The Appellant has not contested that false
statements were made in her 2008 T1 adjustment return. The false statements
were to do with the claim that she had a business loss in that year, and that
it totalled $178,172. The Appellant’s is that she inadvertently participated or
caused another person to make that statement through unknowingly retained a
dishonest tax preparer. The remaining question is whether actual knowledge or
gross negligence including wilful blindness on the part of the Appellant led to
the making of, assenting to or acquiescing in the making of these false statements.
[33]
I note the evidence does not support that the
Appellant had any actual knowledge of false statements being made on her behalf
in her 2008 revised filing. Notable also is the Respondent’s view that the
Appellant and Brian Shaw were entirely credible in giving their evidence – a
view with which I concur.
[34]
Did the Appellant conduct herself in a negligent
manner tantamount to intentional acting or indifference as to whether the law
was complied with or not?
[35]
I would have answered this question in the
affirmative but for the Appellant’s clear and un-contradicted evidence that she
wanted to see Jim Shaw’s refund cheque before deciding herself to engage the
same tax return preparers. In my view this was a significant and reasonable
step taken by a person unsophisticated in tax matters to assure herself as to the
legality of work done by the tax return preparers that Jim Shaw had utilized. The
Appellant’s background and education are such that she would not be expected to
know that in administering the Act the Minister may well on occasion issue
substantial refund cheques based on initial assessment as filed, only to - on
reassessment a year or so later - completely reverse that initial assessment
and then abruptly require repayment of the previously paid substantial tax
refund.
[36]
The Appellant relied also upon information given
to her that Jim Shaw had spoken with CRA and had been advised he could go ahead
and cash the cheque, and that also the CRA “hotline” had been called and a
family member police officer had done a background check, both without anything
untoward being identified. The Respondent did not express doubt as to any of
these further steps. The Respondent did say they were not enough and that the
Appellant should have consulted with a reliable tax professional as to the
merits of these new tax return preparers.
[37]
But while in hindsight obviously desirable, I do
not agree that this was necessary in this context of considering sufficiency of
enquiries that were made. The Appellant was not used to dealing with tax
professionals other than H&R Block tax return preparers and she had no compellingly
obvious reason to further the enquiries noted above that she already had made
and or had been advised of.
[38]
The matter of application of a subsection 163(2)
penalty is very fact specific.
[39]
In respect of the guiding jurisprudence of Torres
(supra) which proposes a check-list of items to be considered as “red
flags” suggestive of an enquiry, absent such enquiry wilful blindness
constituting gross negligence may be found, I refer to paragraphs 25 and 26
herein which set out that the Respondent considered that many of these red flag
factors did not apply in this present case.
[40]
The major consideration for the Respondent was
that the Appellant had signed two documents in blank. That is major
consideration for me as well. However I consider that in the full context of
this case, the enquiries she made and otherwise relied upon to confirm in her
mind legitimacy of these tax return preparers keep the Appellant from crossing
the line to gross negligence including wilful blindness that is tantamount to
intentional acting.
[41]
I do not attach much weight to her signing after
the inserted word “per” or whether she specifically read the accompanying
certification on the CRA signature blocks. With respect to the latter she would
have known in any event that her signature represented truthfulness of content,
although through the unscrupulous person(s) with whom she was dealing this turned
out to not to be so. The fact is that she trusted them, having satisfied
herself through enquiries as noted above in this regard. While these enquiries
always could have been more extensive, I consider they were extensive enough to
suffice for purposes of negating a finding of wilful blindness in the context
of her decision that she could trust the new tax return preparers.
[42]
I do not attach much weight to the Appellant’s
expectation that CRA could have done more to warn the public about fraudulent
tax return preparers. I expect that CRA does what it can in this regard. But I
have noted that as part of the enquiries made by or reported to the Appellant
so as to satisfy herself that this tax return preparer was or was not “on the up and up”, two were enquiries directed
specifically to CRA (phone call regarding the Jim Shaw cheque and call to the
“hotline”); neither of which apparently raised any issues of concern.
[43]
Turning back to the Statement of Agent
Activities, the evidence was she could not specifically remember signing this,
and whether numbers (all lined up at the right of the single page) were on it
when she signed. It includes language as to the “Agent” and “Amount to principal
in exchange for labour.” The Appellant has a grade 12 education and modest employment
record. She is an immigrant from Eastern Europe (albeit 18 years ago at the
relevant time) and English is not her first language. Again whether the
Appellant ever saw this in complete form before it was submitted on her behalf
is uncertain. And of course the onus was on the Respondent for proof of facts
in this penalty matter.
[44]
There are two more points to be noted. First,
one of the Torres red flag factors is whether anyone close to the
particular taxpayer, such as a spouse, warned the taxpayer against engaging the
new tax return preparer. Here this did not happen. But, the opposite did. As
Brian Shaw affirmed in his testimony, he had urged the Appellant to proceed
with this (as he himself did, subsequently to his own chagrin). So, if this
factor is relevant in one direction, when a spouse warns against involvement,
it should be relevant going the opposite way - when the relationship partner
urges in favour of participating. In testifying, the Appellant did not overtly
seek to attribute blame or responsibility to Brian Shaw; however her basic
position remains that she got caught up in this because of mis-placed trust.
[45]
Second, in closing argument Respondent’s counsel
Ms. Gallant fairly stated that having heard the Appellant’s testimony including
in her own cross-examination of her, the Respondent now accepted that the
Appellant had not known that she actually was signing a fictitious claim for a
substantial business loss. That is my view too, and my view further is that she
had not signed through wilful blindness, given the circumstances as to
enquiries she had made and or been advised of. And also as noted above, the
Respondent acknowledged that the Appellant had testified credibly.
[46]
The Appellant repeated that she received no
refund money and others did and she nevertheless was assessed the same penalty.
I attach no weight to this; it reflects simply the misconception of a layperson
unsophisticated in tax matters that the Minister of National Revenue (Minister)
would not make vigorous efforts for recovery of wrongfully paid tax refunds,
with interest.
[47]
I am aware the majority of these types of
appeals are dismissed. However, each appeal is different and the issue itself
is certainly fact specific. In the particular and unique matrix of factual
circumstances in this appeal, reviewed above, I am unable to clearly conclude
that the Appellant should be liable for the subject subsection 163(2) penalty. This
is a harsh penalty that Parliament has provided, and so it must follow that
Parliament intended it for, in the view of the adjudicating judge, clearly
deserving circumstances.
Conclusion:
[48]
Accordingly this appeal is allowed, albeit
without costs, and the appealed June 25, 2010 reassessment is referred back to
the Minister for reconsideration and reassessment on the basis that the
Appellant should not be assessed a penalty per subsection 163(2) of the Act in
respect of her 2008 taxation year.
Signed at Quebec City, Quebec, this 5th
day of January 2018.
“B. Russell”
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