Our tax system depends to a large extent upon the diligence and honesty of taxpayers to self-assess and self-report all necessary information to determine appropriate taxes due. Clearly there is a significant element of trust in our relationship with the Canada Revenue Agency (CRA).Of course, errors and omissions can occur, most often (we would hope) attributable to innocent mistakes. Other times, the taxpayer’s conduct may be considered negligent. In either such case, the tax record will need to be corrected, interest would generally apply on overdue amounts, and some penalties may also be assessed.
In the most egregious situations, there could be a finding of gross negligence against a taxpayer. Our Income Tax Act and courts are not tolerant of such blatant transgressors, and very harsh penalties are likely to follow.
Section 163(2) of the Income Tax Act (ITA)
A taxpayer who is found to have made a false statement or omission in a tax return that amounts to gross negligence, is liable to a penalty of the greater of $100 and 50% of the tax payable on the understated income.
Panini v Canada 2006 FCA 224
The concept of wilful blindness is well developed in criminal law. Rather than inquire into a suspicion in order to find certainty, a defendant shuts his eyes to the fact. Not wishing to know the truth, he prefers to remain ignorant.
Gross negligence may be established through proof of wilful blindness.
These concepts also apply in tax cases. Basically, “the law will impute knowledge to a taxpayer who, in circumstances that dictate or strongly suggest that an inquiry should be made … refuses or fails to commence such an inquiry.”
Torres v. The Queen, 2013 TCC 380
The judgment begins, “This is a sad and sorry tale of taxpayers … who were led down a garden path, with the carrot at the end of the garden being significant tax refunds. The tax refunds were the result of claiming fictitious business losses.” CRA denied the losses and assessed penalties for gross negligence.
These seven appeals as to the gross negligence penalty assessments were heard together. All of the taxpayers had used the services of “Fiscal Arbitrators” (FA) to prepare their tax returns. As can be inferred from the judge’s comments, these cases are just the tip of the iceberg of FA clients whose loss claims have been denied by CRA, and who may similarly be facing gross negligence penalties.
The factual summaries are replete with actions and assertions from FA that push beyond the boundaries of common sense. The core activity though is fairly straightforward: Representatives of FA prepared the taxpayers’ returns, all of which included false expense claims for non-existent businesses. The taxpayers then filed the returns, leading to substantial tax refunds. Not only were none of taxpayers actually in business in any manner; the expense claims were way out of proportion to their actual income, sometimes many multiples of it.
As to the taxpayers’ culpability, the judge summarized circumstances that would indicate a need for an inquiry prior to filing, what he termed “flashing red lights”, including:<
- 1- the magnitude of the advantage or omission;2
- the blatantness of the false statement and how readily detectable it is;3
- the lack of acknowledgment by the tax preparer who prepared the return in the return itself;4
- unusual requests made by the tax preparer;5
- the tax preparer being previously unknown to the taxpayer;6
- incomprehensible explanations by the tax preparer;7
- whether others engaged the tax preparer or warned against doing so, or the taxpayer himself or herself expresses concern about telling others.
In the end, the judge had little sympathy for these appellant taxpayers. Gross negligence penalties were upheld.
In the conclusion of the Torres case, the judge repeats the old adage that if it’s too good to be true then it most likely is.
The CRA warns on its website against tax scams of the nature perpetrated by Fiscal Arbitrators.
Engaging a tax preparer does not absolve a taxpayer from being diligent in filing a tax return. Even if unintentional errors occur, the properly due tax will have to be paid, generally accompanied by interest. Where a taxpayer participates in or is wilfully blind to false or questionable claims, gross negligence penalties