Torres v. The Queen

Torres v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2013-12-02
Neutral citation
2013 TCC 380
File numbers
2010-3047(IT)G
Judges and Taxing Officers
Campbell J. Miller
Subjects
Income Tax Act
Decision Content
Docket: 2010-3047(IT)G
BETWEEN:
MARY KHRISTINE TORRES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard consecutively with the Appeals of
Mary Torres (2012-258(IT)G), Eva Torres (2011-4103(IT)G),
Michael McNulty (2011-3223(IT)G), Andre Gautier (2011-3321(IT)G),
Carrol Strachan (2010-3044(IT)G) and Ansel Hyatali (2011-4093(IT)G)
on November 4, 5, 6 and 8, 2013, at Toronto, Ontario
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Dale Barrett
Counsel for the Respondent:
H. Annette Evans, Rishma Bhimji, Kathleen Beahen, Lindsay Beelen
____________________________________________________________________
JUDGMENT
The Appeal from the assessment made under the Income Tax Act for the 2007 taxation year is dismissed.
Signed at Toronto, Ontario, this 2nd day of December 2013.
"Campbell J. Miller"
C. Miller J.
Docket: 2012-258(IT)G
BETWEEN:
MARY TORRES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard consecutively with the Appeals of
Mary Khristine Torres (2010-3047(IT)G), Eva Torres (2011-4103(IT)G),
Michael McNulty (2011-3223(IT)G), Andre Gautier (2011-3321(IT)G),
Carrol Strachan (2010-3044(IT)G) and Ansel Hyatali (2011-4093(IT)G)
on November 4, 5, 6 and 8, 2013, at Toronto, Ontario
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Dale Barrett
Counsel for the Respondent:
H. Annette Evans, Rishma Bhimji
Kathleen Beahen, Lindsay Beelen
____________________________________________________________________
JUDGMENT
The Appeal from the assessment made under the Income Tax Act for the 2008 taxation year is dismissed.
Signed at Toronto, Ontario, this 2nd day of December 2013.
"Campbell J. Miller"
C. Miller J.
Docket: 2011-4103(IT)G
BETWEEN:
EVA TORRES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard consecutively with the Appeals of
Mary Khristine Torres (2010-3047(IT)G), Mary Torres (2012-258(IT)G),
Michael McNulty (2011-3223(IT)G), Andre Gautier (2011-3321(IT)G),
Carrol Strachan (2010-3044(IT)G) and Ansel Hyatali (2011-4093(IT)G)
on November 4, 5, 6 and 8, 2013, at Toronto, Ontario
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Dale Barrett
Counsel for the Respondent:
H. Annette Evans, Rishma Bhimji
Kathleen Beahen, Lindsay Beelen
____________________________________________________________________
JUDGMENT
The Appeal from the assessment made under the Income Tax Act for the 2008 taxation year is dismissed.
Signed at Toronto, Ontario, this 2nd day of December 2013.
"Campbell J. Miller"
C. Miller J.
Docket: 2011-3223(IT)G
BETWEEN:
MICHAEL McNULTY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard consecutively with the Appeals of
Mary Khristine Torres (2010-3047(IT)G), Mary Torres (2012-258(IT)G),
Eva Torres (2011-4103(IT)G), Andre Gautier (2011-3321(IT)G),
Carrol Strachan (2010-3044(IT)G) and Ansel Hyatali (2011-4093(IT)G)
on November 4, 5, 6 and 8, 2013, at Toronto, Ontario
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Dale Barrett
Counsel for the Respondent:
H. Annette Evans, Rishma Bhimji
Kathleen Beahen, Lindsay Beelen
____________________________________________________________________
JUDGMENT
The Appeals from the assessments made under the Income Tax Act for the 1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2008 taxation years are dismissed
Signed at Toronto, Ontario, this 2nd day of December 2013.
"Campbell J. Miller"
C. Miller J.
Docket: 2011-3321(IT)G
BETWEEN:
ANDRE GAUTIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard consecutively with the Appeals of
Mary Khristine Torres (2010-3047(IT)G), Mary Torres (2012-258(IT)G),
Eva Torres (2011-4103(IT)G), Michael McNulty (2011-3223(IT)G),
Carrol Strachan (2010-3044(IT)G) and Ansel Hyatali (2011-4093(IT)G)
on November 4, 5, 6 and 8, 2013, at Toronto, Ontario
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Dale Barrett
Counsel for the Respondent:
H. Annette Evans, Rishma Bhimji
Kathleen Beahen, Lindsay Beelen
____________________________________________________________________
JUDGMENT
The Appeal from the assessment made under the Income Tax Act for the 2008 taxation year is dismissed.
Signed at Toronto, Ontario, this 2nd day of December 2013.
"Campbell J. Miller"
C. Miller J.
Docket: 2010-3044(IT)G
BETWEEN:
CARROL STRACHAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard consecutively with the Appeals of
Mary Khristine Torres (2010-3047(IT)G), Mary Torres (2012-258(IT)G),
Eva Torres (2011-4103(IT)G), Michael McNulty (2011-3223(IT)G),
Andre Gautier (2011-3321(IT)G) and Ansel Hyatali (2011-4093(IT)G)
on November 4, 5, 6 and 8, 2013, at Toronto, Ontario
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Dale Barrett
Counsel for the Respondent:
H. Annette Evans, Rishma Bhimji and Kathleen Beahen, Lindsay Beelen
____________________________________________________________________
JUDGMENT
The Appeal from the assessment made under the Income Tax Act for the 2007 taxation year is dismissed.
Signed at Toronto, Ontario, this 2nd day of December 2013.
"Campbell J. Miller"
C. Miller J.
Docket: 2011-4093(IT)G
BETWEEN:
ANSEL HYATALI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard consecutively with the Appeals of
Mary Khristine Torres (2010-3047(IT)G), Mary Torres (2012-258(IT)G),
Eva Torres (2011-4103(IT)G), Michael McNulty (2011-3223(IT)G),
Andre Gautier (2011-3321(IT)G) and Carrol Strachan (2010-3044(IT)G)
on November 4, 5, 6 and 8, 2013, at Toronto, ON
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Dale Barrett
Counsel for the Respondent:
H. Annette Evans, Rishma Bhimji
Kathleen Beahen, Lindsay Beelen
____________________________________________________________________
JUDGMENT
The Appeal from the assessment made under the Income Tax Act for the 2009 taxation year is dismissed.
Signed at Toronto, Ontario, this 2nd day of December 2013.
"Campbell J. Miller"
C. Miller J.
Citation: 2013 TCC 380
Date: 20131202
Docket: 2010-3047(IT)G
BETWEEN:
MARY KHRISTINE TORRES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2012-258(IT)G
MARY TORRES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2011-4103(IT)G
EVA TORRES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2011-3223(IT)G
MICHAEL McNULTY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2011-3321(IT)G
ANDRE GAUTIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2010-3044(IT)G
CARROL STRACHAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2011-4093(IT)G
ANSEL HYATALI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent
REASONS FOR JUDGMENT
C. Miller J.
[1] This is a sad and sorry tale of taxpayers, Mary Khristine Torres, Eva Torres, Michael McNulty, Andre Gautier, Carrol Strachan and Ansel Hyatali, who are just six of many 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. All the Appellants put their unwavering faith in representatives of Fiscal Arbitrators to prepare their returns in a manner that would produce the sought after refunds. The Canada Revenue Agency ("CRA") denied the losses and penalized the taxpayers pursuant to subsection 163(2) of the Income Tax Act (the "Act"). These cases pertain only to the penalties.
[2] The issue is simply whether the taxpayers either knowingly, or in circumstances that amounted to gross negligence, made or acquiesced in the making of false statements.
FACTS
Mary Khristine Torres
[3] Ms. Mary Torres presented as a forthright, credible witness. She completed three years of a university degree in the Philippines, and in Canada she completed a Bachelor of Science in nursing and qualified as a registered practical nurse.
[4] In 2006, 2007 and 2008, Ms. Mary Torres worked as a nurse in the long‑term care sector, specifically completing health assessments. She dutifully reported her employment income from this work as well as some interest income. She always had tax preparers do her returns as she indicated she did not understand accounting, tax returns or even business. For the years 2002 to 2006, she filed and received refunds of $1,029, $814, $1,061, $1,312 and $29. In 2008, Ms. Mary Torres filed her 2007 return, again prepared by a tax preparer, reporting her employment income and investment income of $70,991 and $267. Shortly thereafter, however, she was introduced to Mr. Larry Watts with Fiscal Arbitrators. He was a co-worker of Ms. Mary Torres’ mother. According to Ms. Mary Torres, Mr. Watts had been able to obtain tax refunds for several of her mother’s friends.
[5] Ms. Mary Torres had a couple of meetings with Mr. Watts which led to her filing an adjustment request on May 26, 2008 for her 2007 tax return. It showed as follows:
Gross Business Income $15,800
Net Business Income ($113,426)
She certified this information as correct. On being asked whether she reviewed this document before signing, she gave the same answer she would give to all documents she signed and submitted to the CRA, and that is, Mr. Watts prepared it, she read it and signed it without asking anything about it. She trusted him. He was a professional. She claims she understood so little of the tax return, she did not know what questions to ask.
[6] It is helpful to review the documents and correspondence flowing back and forth between the CRA and Ms. Mary Torres, always bearing in mind that she never drafted the materials submitted to the CRA, though always read them, claiming not to understand.
[7] On September 19, 2008, the CRA responded to Ms. Mary Torres’ adjustment request with a request to complete and return a business questionnaire, attaching receipts for the claimed expenses of $129,226. Mr. Watts prepared a letter dated October 14, 2008, for Ms. Mary Torres to send, in response, to the CRA. It forwarded no information the CRA were seeking.
[8] On January 21, 2009, the CRA again wrote Ms. Mary Torres advising they were proposing to deny the business loss and considering the imposition of penalties.
[9] Again, Ms. Mary Torres read the letter, provided it to Mr. Watts, who provided her with a letter of February 9, 2009, to send back to the CRA again providing no information and rejecting their proposal.
[10] On April 29, 2009, the CRA wrote to Ms. Mary Torres with their final position with respect to the losses and indicating they were applying gross negligence penalties. Again, Mr. Watts provided Ms. Mary Torres with a response dated May 2, 2009, to the CRA rejecting the CRA’s position and seeking compensation from the CRA.
[11] In going over these documents, Ms. Mary Torres stated repeatedly that although she read them she did not understand what they meant, though acknowledging that she knew she was not engaged in any business activity.
[12] The communications with respect to the 2008 taxation year were similar, and it is unnecessary to repeat a document by document review. I do note, however, that she signed the 2008 return claiming $30,000 in business losses on March 20, 2009, two months after she had been notified by the CRA they were considering gross negligence penalties with respect to the 2007 taxation year. She signed her name on her return after putting in "per". The tax preparer did not complete the box in the return for professional tax preparers. She held firm in her testimony that, though she read the correspondences from the CRA, she simply forwarded everything to Mr. Watts without question, and then followed his instructions, including, for example, putting a three cent stamp on the bottom of one of the letters to the CRA, writing her name diagonally across it. She never contacted the CRA on her own accord or asked her former tax preparer to review the situation.
[13] To give a flavour of the verbiage used by Mr. Watts in the letters he instructed Ms. Mary Torres to sign, I reproduce part of a letter dated September 8, 2011, from Ms. Mary Torres, which she wrote with "ens legis" after her name. (translated as "an artificial being")
Any and all opinions offered in your letter are expressly rebutted for cause.
Please provide within 30 days to avoid Full Estoppel of any variance from your stated duty – the facts, reasons and assumptions and all presumptions upon which you are relying to make your offer only on a "under your penalty of perjury" and "under your full commercial and equitable liability under international law" basis to verify your accountability and uprightness, as previously agreed, and send all such information to the address as noted above for verification.
[14] Ms. Mary Torres, understandably, could not explain any of what Mr. Watts prepared for her, including her returns, adjustment requests or correspondences.
[15] The CRA denied her business losses for 2007 and 2008 and imposed penalties.
Eva Torres
[16] Ms. Eva Torres is an insurance broker with Canada Protection Plan, dealing with health, dental and travel insurance. She has a Bachelor of Commerce and Economics from the Philippines. Mr. Watts, a representative of Fiscal Arbitrators, was also a broker with the insurance company. They had worked in the same company for approximately 18 months when Ms. Eva Torres was advised by a colleague that Mr. Watts was successfully obtaining tax refunds for others. Ms. Eva Torres hired Mr. Watts to prepare her 2008 return in March of 2009. She reported approximately $40,000 of employment income, $13,647 of commission income and a business loss of $39,523 on gross business income of $71,828. The Statement of Agent Activities, filed with her return, indicates:
Business Service: Agent
Gross receipts:
A. *Money Collected as Agent for Principal and
reported by third parties and Already Posted on lines
101-130 via T4’s, T5’s, T3’s, other slips, etc. $47,223.55
*T4a’s and other money reported by 3rd
Parties and collected as agent $13,647.83
*TOTAL Money Collected as Agent for Principal and
Reported by third parties: $60,871.38
*Additional Money Collected as Agent for principal and NOT
Reported by third parties: $10,956.85
B. Line 162 *Total money collected as Agent for
Principal: $71,838.23
Minus
Sub contracts and labour
*Amount to principal in exchange
For labour $50,456.85
Gross profit $21,371.38
Subtract: (from ‘A.’ above)
*Money Collected as Agent for Principal and
Reported by third parties and Already Posted
On lines 101-130 via T4’s, T5’s, T3’s,
Other slips, etc. $60,871.38
C. Line 135 Net Amount (- Loss) ($39,500.00)
[17] Ms. Eva Torres acknowledged she was not in any agent business. She could not say what any of the numbers represented. She did not understand how the business losses arose.
[18] Ms. Eva Torres did read her return before certifying it correct. She never questioned Mr. Watts about any of it, as she was confident what he was doing was correct. She, like the others, followed Fiscal Arbitrators’ instructions to sign her name after "per" on her return. The box for completion by professional tax preparers was left blank.
[19] In a letter of November 2009, the CRA asked Ms. Eva Torres for information supporting the business losses, including completing a business questionnaire. She simply handed this on to Fiscal Arbitrators who provided a form of response which she signed and dated December 4, 2009, providing no further information.
[20] In June 2009, the CRA proposed denying the business losses and imposing penalties. Ms. Eva Torres again simply forwarded this correspondence to Fiscal Arbitrators who again provided a template response, which Ms. Eva Torres signed and, as requested by Fiscal Arbitrators, affixed a three cent stamp with her name across it at the bottom of the letter. She never attempted to contact CRA of her own accord, nor did she ask Fiscal Arbitrators about the response she was told to sign.
[21] Ms. Eva Torres, after receiving the Notice of Assessment dated March 3, 2011, denying losses and imposing penalties, had Fiscal Arbitrators prepare a Notice of Objection. She read it and signed it. It still maintained the returns were accurate.
[22] The CRA wrote to Ms. Eva Torres in response to the Notice of Objection asking again for support for the $39,500 business loss claimed. In accordance with her modus operandi she simply signed what Fiscal Arbitrators told her to. The response letter of September 8, 2011 read the same as that sent by Ms. Mary Torres on the same date (see paragraph 13).
[23] In the five years prior to 2008, Ms. Eva Torres’ tax returns showed she was entitled to a $310 refund in 2003 and owed $576, $1,423, $5,168 and $7,822 respectively in the subsequent years.
[24] By Notice of Confirmation dated November 10, 2011, Ms. Eva Torres was assessed penalties of $4,127 for the 2008 taxation year.
Michael McNulty
[25] Mr. McNulty has a Bachelor of Arts in Civil Engineering and a diploma in Civil Technology. For many years, he acted as a project manager on construction sites for Taggart Construction. Until filing his 2008 return, he had always prepared and filed his own returns, obtaining refunds anywhere from $100 to $2,500. In filing such prior returns, he never reported any business income or loss. As with all the other Appellants, he claimed to be adverse to risk.
[26] In October 2008, Mr. McNulty attended a Fiscal Arbitrators seminar at St. Paul’s University in Ottawa, where he first met Mr. Watts. The meeting was private, and participants were asked to sign a form of non-disclosure. Mr. McNulty testified that Fiscal Arbitrators described a new way to file taxes by somehow separating the person from his social insurance number. The ultimate result would be substantial refunds. Mr. McNulty was skeptical but went to a second presentation with a friend. At that meeting, Mr. Watts advised that he was a former CRA officer and that CRA were aware of this arrangement. Mr. McNulty decided to go ahead feeling there was no downside, but recognizing it was not the type of thing he would normally do. He did not tell his wife as, according to Mr. McNulty, she would have set him straight.
[27] Mr. McNulty signed his 2008 return, prepared by Fiscal Arbitrators, on May 21, 2009, certifying it as correct. It, too, did not indicate it was prepared by professional tax preparers. He testified he browsed the return and, as requested by Fiscal Arbitrators, put "per" before his signature.
[28] The return listed business income as $128,147 with business losses of $392,880. Mr. McNulty said he knew he did not have a business and could not have spent $392,880. He also signed as correct a request for loss carrybacks to 2006 and 2007. Mr. McNulty did not understand his return which referred to business as an agent. He believed Fiscal Arbitrators, as former CRA officials, were legitimate and knew what they were doing.
[29] Mr. McNulty also submitted to the CRA an adjustment request, seeking adjustments to his 1998 to 2001 taxation years, by claiming losses ranging from $61,000 to $89,000, resulting in a request for a refund of $104,000 against which Fiscal Arbitrators charged a fee of $18,000.
[30] On March 29, 2010, CRA reassessed the 1998 to 2001 taxation years imposing penalties. Upon receiving those reassessments, which totalled approximately $110,000 in penalties and interest, Mr. McNulty said he felt like a dead man. He sought no other advice, but felt had to rely on Fiscal Arbitrators and respond their way as he "desperately needed them to get him out of this crap". He felt tied into them. He felt he had no choice. So, Mr. McNulty signed the letters and Notice of Objection prepared by Fiscal Arbitrators, followed their instructions to a tee (including not talking to the CRA), but confessed to being uneasy and worried.
[31] In July 2008, the Minister of National Revenue (the "Minister") issued a Notice of Confirmation confirming the penalties for 1998 to 2004 of approximately $42,537 as well as a penalty of $56,749 for 2008.
Andre Gautier
[32] Mr. Gautier is an HVAC technician having qualified as such at a trade school. He has worked in that industry for over 30 years, the last few years as a service manager. He is the sole shareholder of a holding company which has a 10% interest in his employer’s company. He would always have tax preparers, specifically an accountant by the name of Mr. Gervais, complete his tax returns for him, which he said he usually simply signed and sent off. He obtained refunds in the prior several years of between $500 and $2,500. During 2008, he and his brother owned a rental property but carried on no other business.
[33] Mr. Gautier was introduced to Fiscal Arbitrators through a contact of his brother. He attended an office where he met Carlton Branch of Fiscal Arbitrators, who explained how the process worked; in effect, people got refunds due to the individuals’ social insurance number being a business entitled to some expenses such as clothes, food and other personal expenses. Mr. Gautier never provided Fiscal Arbitrators with any dollar amount representing such expenses. As Mr. Gautier stated, he was not exactly sure of all the details, but he was satisfied Fiscal Arbitrators were professionals and knew what they were doing. He felt no need to run it by anyone else.
[34] Fiscal Arbitrators prepared Mr. Gautier’s 2008 return which Mr. Gautier signed (again, after "per", as requested), and certified as correct on May 28, 2009. The return showed his employment income of $81,538, rental income of $9,000 and a business loss of $301,000. He had no idea what that represented.
[35] A Statement of Agent Activities was attached to his return. Mr. Gautier acknowledged he did not know why it showed an agent business or what subcontractors of labour referred to. He believed it was all just part of the process, as he called it.
[36] Mr. Gautier also claimed loss carrybacks to 2005, 2006 and 2007, of $62,423, $71,942 and $76,953 respectively, which, if allowed would have resulted in a refund of all taxes for those years.
[37] On April 9, 2010, the CRA sent Mr. Gautier a letter requesting information with respect to his business losses, including a business questionnaire for him to complete. He did not fill it out but simply had Fiscal Arbitrators prepare responses for him. Fiscal Arbitrators told him it was all part of the process. He was starting to have concerns and went to Mr. Gervais, his previous accountant, who could not explain the numbers to him.
[38] Several correspondences went back and forth between the CRA and Mr. Gautier in 2010. All Mr. Gautier’s responses were crafted by Fiscal Arbitrators. He followed their instructions, including placing a stamp with his name through it at the bottom of his response letter, which read in part:
The terms of the private contract of agency between the free will man commonly called Andre, of the Gautier family, who is the principal, the contributing beneficiary and the real party in interest for the fictional entity/person/trust called ANDRE GAUTIER, which, by necessity, has become the agent in commerce for the principal; is not subject to the scrutiny of a third party entity, and therefore; any private dealings between the principal and agent cannot be released to the Canada Revenue Agency.
Again, he was advised it was all part of the process. He did not contact the CRA though indicated he and his wife had concerns. He continued, however, to rely on Fiscal Arbitrators who prepared his Notice of Objection, again, a template in which the reason for the objection read in part as follows:
- This notice is rescinding all signatures and/or assumed acceptances regarding this reassessment of this taxation year, nunc pro tunc
- Proper notice was not received to provide the opportunity to reject and dispute the terms of the proposal or offer.
- All information received by CRA was certified as correct, complete and fully discloses all income.
[39] Mr. Gautier acknowledged that it did not make sense at the start and he is embarrassed by his involvement with Fiscal Arbitrators.
[40] The CRA issued a Confirmation July 22, 2011, confirming penalties of $14,117 with respect to the 2008 taxation year.
Carrol Strachan
[41] Ms. Carrol Strachan is a long time Air Canada flight attendant who claimed to have a fair to good understanding of accounting, though did not prepare her own tax returns. She has never owned or operated her own business that yielded any reportable income. Before 2007 she never claimed any business loss. She would typically receive tax refunds of between $1,000 to $2,400. For a number of years, Ms. Strachan had Carlton Branch prepare her returns without any problem. She described him as a former CRA official who prepared tax returns and handled mutual funds. In 2008, she was introduced by Mr. Branch to Mr. Watts at Fiscal Arbitrators. He came to her home to make a presentation explaining he used to work for the CRA. He advised her that he could get more back on taxes and had done so successfully for others. She recalled him explaining something about principals and agents entitled to deductions, though described them as "dancing around a lot of stuff". Although they wanted her to "do more years" she decided to just do the one year, 2007. As she indicated - "I am cautious".
[42] Ms. Carrol Strachan had Fiscal Arbitrators prepare her 2007 return. Mr. Branch advised her to sign after "per". She reviewed the return, but not in detail. The return reported her employment income of $76,998 as well as gross business income of $15,000 and business losses of $62,068. She confessed she does not know what that means. At the time, Fiscal Arbitrators told her she was entitled to monies back from the Government, and that they made it sound believable. She felt she did not need to pay tax as both Mr. Branch and Mr. Watts said she did not have to. She trusted them but displayed some concern even prior to her return.
[43] In going over the Statement of Business Activities filed with her return, it was clear Ms. Carrol Strachan did not understand the use of agent or monies collected as agent for principal or other expenses described as paid to principal as agent. This is not surprising given it is basically nonsense. She maintains that though not understanding, she felt it was legal. She indicated she filed a "normal" return for 2008.
[44] In December 2008, Ms. Carrol Strachan received a request from the CRA for information with respect to the business losses. She called Mr. Branch and Mr. Watts who indicated they would take care of it. She asked them what did you get me into. However, she signed the responses to CRA they prepared for her.
[45] What followed was the correspondences back and forth between the CRA and Ms. Carrol Strachan, each time Ms. Strachan relying on the template provided by Fiscal Arbitrators. She kept being advised they would take care of it, and that she remained entitled to the monies. This continued right up to Fiscal Arbitrators drafting her appeal after the Notice of Confirmation. Even in an Answer to the Reply she is still being referred to as a fictional entity.
[46] Ms. Carrol Strachan did get a refund though kept it in the bank as she was not comfortable spending it.
[47] Ms. Carrol Strachan never called the CRA to inquire of the correctness of the arrangement. She never saw or heard of any warning from the Government about this, but neither did she search for anything on their website.
[48] The Minister issued a Notice of Confirmation June 25, 2010, denying the losses and applying penalties against her 2007 taxation year.
Ansel Hyatali
[49] Mr. Ansel Hyatali has worked as a lead hand at a paint distribution centre for 25 years. He has a Grade 12 education and a welding certificate. He has never owned or operated a business and consequently never, until the years in issue, reported business losses, just employment income. He normally got a $2,000 to $4,000 refund on his returns. Prior to 2007, he used the firm of Steve Tax Services to prepare his returns.
[50] Mr. Ansel Hyatali had been put in touch with Mr. Carlton Lewis in 2007 by a workmate who advised Mr. Hyatali that Mr. Lewis attended church. There is some confusion from Mr. Hyatali’s testimony as to who prepared what returns, though it seems Mr. Lewis prepared Mr. Hyatali’s 2007 return, someone else prepared his 2008 return and a Mr. Frikki prepared the 2009 return, the return in question. Mr. Hyatali testified, however, that it was Mr. Lewis who told him to simply sign the 2009 return. Mr. Hyatali gave no evidence of Mr. Frikki’s background.
[51] In the 2007 and 2008 returns, Mr. Ansel Hyatali claims some significant charitable donations, which were questioned by the CRA. Mr. Hyatali asked Mr. Lewis to assist him with that issue. Mr. Hyatali claims to have never had any contact with Fiscal Arbitrators, though was advised by Mr. Lewis that correspondence from the CRA to Mr. Hyatali would be passed on to Fiscal Arbitrators.
[52] Mr. Ansel Hyatali did not prepare his 2009 return though he did sign it and certify it. It did not show that it was prepared by a professional tax preparer. The 2009 return indicated Mr. Hyatali’s employment income was $64,881 and that he also had business income of $76,910 and a business loss of $232,159. Mr. Hyatali has no idea where that came from. He had no business. He did not ask anyone about the numbers. Similarly, he had no idea what the numbers on the Statement of Business Activities meant. He just signed where told, without reviewing the documents. He knew he did not have a business when he signed. Likewise, in claiming loss carrybacks of $57,402, $60,021 and $52,152 he had no idea what it meant.
[53] In October 2010, Mr. Ansel Hyatali received a request for more information from the CRA regarding the business losses. He simply handed this over to Mr. Lewis, who said he would take care of it. He was given a letter to sign in response to the CRA on October 14, 2010, which read in part:
These proposals are conditionally accepted upon receipt of truthful answers to each of the questions below by close of business, thirty (30) days from the date of this letter; absent the answer to any one of the questions, acknowledges your office’s agreement to compensate the animator pursuant to the animator’s fee schedule for responding to any review or audit.
Mr. Ansel Hyatali had no idea who the animator was, referred to in the letter. He never spoke to the CRA directly. The usual back and forth correspondences followed between the CRA and Mr. Hyatali, who relied totally on answers provided by Mr. Lewis. Mr. Hyatali never questioned why he owed money. He never sought additional help. He simply let Mr. Lewis deal with it. In the Notice of Objection of April 28, 2011, which Mr. Lewis had Mr. Hyatali sign, there is reference to establishing a home business. Mr. Hyatali acknowledged he had no idea why that was put in.
[54] Mr. Ansel Hyatali never went to the CRA website or contacted the CRA directly. He agreed that he blindly followed Mr. Lewis’ advice.
[55] By Notice of Confirmation November 1, 2011, the Minister denied the business loss of $232,159 and levied penalties of $28,111.
CRA Publications
[56] The CRA introduced into evidence several excerpts from their website. Many indicated they were modified in 2011 or 2012 so it cannot be determined if they were on the site in 2007, 2008 or 2009. There are a handful, however, that appear to have been on the website during the relevant period. I will reproduce some excerpts from the CRA website:
a) Tax Alert: Aggressive Tax Planning (2005-11-10)
If it sounds too good to be true, or whenever you are dealing with a situation that is out of the ordinary for you, you might want to consult with a trusted and knowledgeable tax advisor who will explain to you the risks and consequences of various tax planning arrangements.
b) Tax Alert: Warning: Schemes that promote big tax losses or deductions are not worth the risk.
If it sounds too good to be true, it probably is. Unregistered tax shelters can take many forms, but they typically involve buying a tax loss that is well in excess of the cash investment. ...
However, don’t be fooled; simply buying a tax loss does not mean it is deductible. …
Get professional, independent advice…
Come to us before we come to you.
c) News Release: The CRA takes action to enforce tax laws – April 3, 2009
Some Canadians are finding out the hard way that they cannot avoid paying their share of taxes. …
The CRA is reminding all taxpayers when they file their 2008 return to be sure to report their income, deductions and credits accurately.
d) Tax Alert: Don’t get involved in illegal tax filing.
If you hear about a tax preparer offering larger refunds than other preparers, don’t be fooled! While most preparers provide excellent service to tax filers, a few unscrupulous return preparers file false and fraudulent tax returns and ultimately defraud their clients. Remember that even if someone else prepares your tax return, you are the one responsible for all the information on the return. …
Failure to follow tax laws will result in consequences. In addition to fines imposed by the courts, which can represent up to 200% of the taxes evaded, and in jail time, you still have to pay the taxes owed and all other civil penalties and interest imposed the CRA.
Issue
Are the Appellants subject to penalties pursuant to subsection 163(2) of the Act?
Analysis
[57] Subsection 163(2) of the Act reads in part as follows:
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
[58] There are two elements necessary to find liability for penalties in the cases before me:
a) a false statement;
b) knowledge or gross negligence of making, assenting to or acquiescing in the making of a false statement in a return.
[59] The Appellants’ counsel also raised the defence that, as the CRA did not warn taxpayers of the Fiscal Arbitrators’ scam, as required to do under the provisions of the taxpayers Bill of Rights, the taxpayers had no reason to question the convincing presentations of Fiscal Arbitrators and cannot therefore be found to be grossly negligent, and should therefore be absolved of any liability.
[60] In all cases there is no question there is a false statement. None of the Appellants had losses arising from a business.
[61] Turning then to the issue of whether the Appellants knew or acted in a grossly negligent manner, I will review some case law with respect to gross negligence penalties generally and then refer to the few Fiscal Arbitrator cases that our Court has already heard.
[62] Justice Bédard in the case of Laplante v Canada[1] provides a good summary of the general principles regarding gross negligence:
11. The concept of "gross negligence" accepted in the case law is that defined by Mr. Justice Strayer in Venne v. Canada (Minister of National Revenue - M.N.R.)(F.C.T.D.), [1984] F.C.J. 314:
..."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....
12. In Da Costa v. Canada , [2005] T.C.J. No. 396 (TCC informal procedure), the Honourable Chief Justice Bowman referred to the decision in Undell v. M.N.R. , [1969] C.T.C. 704, 70 DTC 6019 (Ex. Ct.), and two other decisions by Mr. Justice Ripp (as he then was) and made the following remarks:
…
11. In drawing the line between "ordinary" negligence or neglect and "gross" negligence a number of factors have to be considered. One of course is the magnitude of the omission in relation to the income declared. Another is the opportunity the taxpayer had to detect the error. Another is the taxpayer's education and apparent intelligence. No single factor predominates. Each must be assigned its proper weight in the context of the overall picture that emerges from the evidence.
…
13. Further, in Villeneuve v. Canada , 2004 DTC 6077, the Federal Court of Appeal made it clear that "gross negligence" could include wilful blindness in addition to an intentional act and wrongful intent. In that decision, Mr. Justice Létourneau said the following in this regard, at paragraph 6:
With respect, I think the judge failed to consider the concept of gross negligence that may result from the wrongdoer's wilful blindness. Even a wrongful intent, which often takes the form of knowledge of one or more of the ingredients of the alleged act, may be established through proof of wilful blindness. In such cases the wrongdoer, while he may not have actual knowledge of the alleged ingredient, will be deemed to have that knowledge.
[63] The Federal Court of Appeal addressed the concept of wilful blindness in more detail in the case of Panini v Canada,[2] also citing Justice Létourneau in the Villeneuve v Canada[3] case, but going on to draw on the criminal case of R. v Hinchey:[4]
42 In R. v. Hinchey, [1996] 3 S.C.R. 1128, Cory J. discussed the concept of "wilful blindness" in the context of criminal law. At paragraphs 112 to 115 of that decision, he wrote the following:
…
In other words, there is a suspicion which the defendant deliberately omits to turn into certain knowledge. This is frequently expressed by saying that he "shut his eyes" to the fact, or that he was "wilfully blind."
…
114. In Sansregret, supra, this Court held that the circumstances were not restricted to those immediately surrounding a particular offence but could be more broadly defined to include past events. McIntyre J. distinguished wilful blindness from recklessness and quoted with approval a passage from Glanville Williams with regard to its application (at pp. 584 and 586):
Wilful blindness is distinct from recklessness because, while recklessness involves knowledge of a danger or risk and persistence in a course of conduct which creates a risk that the prohibited result will occur, wilful blindness arises 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. He would prefer to remain ignorant.
…
43. Although Cory J.'s comments were made in the context of a criminal law case, they are nonetheless, in my view, entirely apposite to the facts of the present case. Consequently, 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.
[64] The Tax Court of Canada has had several occasions to apply the concept of wilful blindness to Fiscal Arbitrator type cases, and there has developed a similarity