Escaping Penalties After Admitting False Statements
When taxpayers reduce or eliminate their tax liability by using
obviously baseless tax-protester arguments, the government generally
chooses to assess on the basis of the gross negligence penalties of
subsection 163(2), since proof of intent is required for tax evasion
(but see R v. Klundert, 2004 CanLII 21268 (ONCA)).
Normally, the most economical and advisable response is simply to pay
the penalty; however, in a few situations a taxpayer’s appeal has been
successful at the TCC.
The specific legal arguments made for the purported tax savings are not
typically at issue in such appeals, since the parties have already
agreed that the arguments have no merit. In Torres v. The Queen (2013 TCC 380),
for example, some of the taxpayers said that they were led to believe
that a social insurance number was a separate entity that could incur
expenses that would be deductible to an individual even if the
individual did not previously have any business activities. The claimed
losses far exceeded the taxpayers’ income, resulting in significant tax
refunds for the current year and for previous years after loss
carrybacks were claimed.
Gross negligence penalties under subsection 163(2) may be imposed when a
taxpayer knowingly, or in circumstances amounting to gross negligence,
has made or has participated in, assented to, or acquiesced in the
making of a false statement in a return. The penalties generally amount
to 50 percent of the tax avoided. In these loss-claim cases, the
penalties are imposed not only on the taxpayer’s T1 return, but also on
the T1 adjustment request for a non-capital loss carryover deduction,
regardless of whether a refund is ever issued to the taxpayer (Morton, 2014 TCC 72).
Many of the cases have involved Fiscal Arbitrators, a tax- preparation
firm operating in Ontario. Certain individuals associated with the firm
have been convicted of fraud in the preparation of income tax returns
(see, for example, R v. Watts, 2015 ONSC 7375).
There are a total of 27 TCC decisions referring to this firm. In
addition, according to the current appeals docket on the TCC website,
there are 381 related Fiscal Arbitrators appeals (for example,
2013-742(IT)G and 2013-1340(IT)I). At least 3 active appeals are at the
FCA (Maynard, A-95-16, appealing 2016 TCC 21; Wynter, A-156-16, appealing 2016 TCC 103; and Grier, A-135-16, TCC decision unreported).
A clear majority of the Fiscal Arbitrators appeals have been dismissed
by the TCC and, in most cases, the concept of wilful blindness was
applied to uphold the subsection 163(2) gross negligence penalties. In
finding wilful blindness, the TCC has considered the education and
experience of the taxpayer and has reviewed a number of warning signs
that strongly indicated a need for inquiry by the taxpayer before he or
she filed the return, including the magnitude of the advantage claimed
and the blatant false statement made in the return (Torres).
The TCC has also rejected the argument that the government has a duty to
warn taxpayers about these scams and that a failure to warn precluded
the imposition of penalties (Torres).
Only eight of the Fiscal Arbitrators appeals have been successful at the
TCC, and just four of those decisions have provided written reasons. In
two cases (Anderson, 2016 TCC 93, and Morrison, 2016 TCC 99), the court found that the tax preparer had inserted pages into the return after the taxpayer had signed. In another case (Brathwaite, 2016 TCC 29), the return had not been put into evidence by the Crown. In yet another case (Sam, 2016 TCC 98),
the taxpayer’s long-time tax preparer had died; the taxpayer had not
based her choice of the new preparer on the promise of a refund but
rather on a referral. The court found that her acts and omissions were
attributable to human failure and carelessness, not to negligence.
Parlee McLaws LLP, Calgary