Rattai v. The Queen

Rattai v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-07-17
Neutral citation
2020 TCC 55
File numbers
2016-967(IT)G, 2016-968(IT)G
Judges and Taxing Officers
Kathleen T. Lyons
Subjects
Income Tax Act
Decision Content
Docket: 2016-967(IT)G
BETWEEN:
DANIEL RATTAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Cynthia Rattai – 2016-968(IT)G on May 27, 2019 to May 29, 2019, at Calgary, Alberta
Before: The Honourable Justice K. Lyons
Appearances:
Counsel for the Appellant:
Duane R. Milot
Anna Malazhavaya
Counsel for the Respondent:
E. Ian Wiebe
JUDGMENT
The appeal from the assessment under the Income Tax Act for the 2010 taxation year is allowed and the assessment is vacated.
Costs are awarded to the appellant in accordance with Tariff.
Signed at Nanaimo, British Columbia, this 17th day of July, 2020.
“K. Lyons”
Lyons J.
Docket: 2016-968(IT)G
BETWEEN:
CYNTHIA RATTAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Daniel Rattai – 2016-967(IT)G on May 27, 2019 to May 29, 2019, at Calgary, Alberta
Before: The Honourable Justice K. Lyons
Appearances:
Counsel for the Appellant:
James Rhodes
Counsel for the Respondent:
E. Ian Wiebe
JUDGMENT
The appeal from the assessment under the Income Tax Act for the 2010 taxation year is allowed and the assessment is vacated.
Costs are awarded to the appellant in accordance with Tariff.
Signed at Nanaimo, British Columbia, this 17th day of July, 2020.
“K. Lyons”
Lyons J.
Citation: 2020 TCC 55
Date: 20200717
Docket: 2016-967(IT)G
BETWEEN:
DANIEL RATTAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2016-968(IT)G
AND BETWEEN:
CYNTHIA RATTAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lyons J.
[1] Daniel Rattai and Cynthia Rattai appeal the penalties assessed by the Minister of National Revenue (the “Minister”) under subsection 163(2) of the Income Tax Act (the “Act”). The penalties are in respect of fictitious business losses and fictitious capital losses (the “Losses”) reported in income tax returns in their names for the 2010 taxation year (the “Returns”), prepared and filed by DeMara Consulting Inc. (“DeMara”). The fictitious business losses resulted in claims for refunds in the 2010 taxation year (“2010”) and requests for such losses to be carried back to the three preceding years which would have generated refunds in those years. The fictitious capital losses would have resulted in net capital losses.
[2] The appellants contend they did not review, approve or sign the 2010 Returns filed by DeMara, nor knew that it was claiming fictitious Losses in the Returns. Thus, they submit they were not knowingly or grossly negligent and that the Minister should not have imposed the penalties.
[3] The nature of the Losses is similar to those claimed by a larger group of individuals whose income tax returns were also prepared and filed by DeMara for their clients.
I. ISSUE
[4] The issue is whether each appellant is liable to a penalty (the “penalties”) pursuant to subsection 163(2) of the Act. I must therefore determine whether the appellants knowingly or under circumstances amounting to gross negligence made or participated in, assented to or acquiesced in the making of false statements in the Returns filed by DeMara.
[5] The appeals were heard on common evidence and the appellants testified on their own behalf. Robert Larkin, a Canada Revenue Agency (“CRA”) appeals officer assigned to the appellants’ objections, testified on behalf of the respondent. These are common reasons for judgment for both appeals. To the extent that the facts and circumstances differ between Mr. and Mrs. Rattai, these will be differentiated in these reasons.
II. FACTS
[6] The appellants graduated from high school in 1980, married in 1986, raised four children, and separated in 2015.
[7] Mr. Rattai was employed as a power engineer spanning twenty years. Mrs. Rattai was a receptionist and bookkeeper for seven years commencing in 1985. From 2005 until 2012 she was a financial services administrator.
[8] The appellants started buying residential rental properties in Medicine Hat, Alberta, around 1987 with the purpose of earning rental income. Between 2010 to 2013, they had acquired 16 houses. Four were owned personally, with the remaining properties owned by their corporations incorporated in 2002. [1] The appellants held equal shareholdings in Dancin Holdings Incorporated (“Holdings”). Holdings then incorporated and held shares in two other corporations. [2] Mr. Rattai was the president of Holdings and the appellants were directors of their three corporations.
Preparation and processing of returns with former accountants
[9] Over the years, various accountants prepared the appellants’ tax returns. Except for one accountant, all were located in Medicine Hat. Each year Mr. Rattai gathered information from his den and gave it to the accountant to prepare the returns. [3] Their expenses were placed on credit cards held in their personal names. Their standard practice in dealing with their former accountants when their returns were ready was to meet with the accountant to review, discuss, sign their returns, sign an authorization for filing with CRA and then pay the accountant for services before the accountant filed the returns with CRA (“standard practice”). On signing the return, Mr. Rattai said he was confirming to the best of his knowledge that the returns reflected accurate income for the year.
[10] Between 1992 to 2002, Michelle Winger, a certified management accountant who largely prepared personal tax returns and did some bookkeeping, prepared the appellants’ personal tax returns. Mrs. Rattai was working with Ms. Winger on and off but did not want to prepare hers and her husband’s tax returns. The appellants met with Ms. Winger who explained the returns to them. The standard practice was followed.
[11] Attending a monthly Real Estate Investment Network group meeting in Calgary with like-minded investors until 2007, they learned about rental property and became aware of Merrilyn Reid, a certified general accountant. In 2002, the appellants hired Ms. Reid. She assisted them with incorporation and prepared their personal and corporate tax returns and corporate statements for 2002 to the 2007 taxation years. [4] They took the documentation to Ms. Reid’s bookkeeper whom put the information together for Ms. Reid to prepare their tax returns. Mrs. Rattai reviewed the completed return to ensure accuracy and met with Ms. Reid. She charged approximately $2,000 for each corporate return. Their subsequent chartered accountants, Schwab & Company (“Schwab”), charged in excess of $2,000. Each accountant charged between $200 to $300 for the preparation of each of their personal tax returns.
Unfiled 2010 returns prepared by Schwab
[12] Schwab prepared and filed the appellants’ corporate and personal tax returns with CRA for 2008 and 2009. It also prepared their corporate and personal tax returns for 2010 and filed the corporate returns but not their personal tax returns (“unfiled returns”). Mr. Rattai had reviewed his unfiled return, Mrs. Rattai had not. She presumed the unfiled returns had been prepared in early 2011. However, Mr. Rattai stated that they got their information in late. The unfiled returns are dated November 16, 2011.
DeMara
[13] DeMara promoted “The Remedy” program to clients (“members”) in an effort to reduce taxes payable to nil. It prepared and filed income tax returns for members and their spouses. All members were subject to the same process. Finalization of membership required listening to recorded calls and live question and answer calls. If members agreed to the information during the calls, a Member Kit (the “kit”) was sent to members consisting of a variety of documents for completion. The Member Information Sheet (“MIS”) was completed by a member with detailed personal and contact information which was given to DeMara, authorizing DeMara to prepare the members’ and spouses’ income tax returns using that information. [5] Members signed a Confidentiality and Non-Disclosure Agreement with DeMara. Once the kit was completed, members would sign Form T1013, Authorizing or Cancelling a Representative, authorizing DeMara to be a representative when dealing with CRA (“T1013 Authorization”).
[14] Other information to complete The Remedy came from the members. They were required to provide to DeMara copies of documents specified on its list titled Documents Required for Remedy (the “List”). These comprise personal living expenses and personal debt/financing obligations ultimately claimed as deductions on their income tax returns. Using a business number provided by CRA, T5 and T5008 slips were created by DeMara for such expenses and financing obligations.
DeMara authorized to prepare the appellants’ 2010 tax returns
[15] Mr. Rattai acknowledged in cross-examination that he had listened to DeMara’s pre-recorded information session and knew it was “private and confidential and may not be shared or given out to anyone without our express consent.” This is referenced in DeMara’s August 5, 2011 email to him which also notes that this is the first step in The Remedy process.
[16] After listening to that session, on August 31, 2011, Mr. Rattai informed DeMara, “…I want to become a member, please send me a package.” [6] At trial, he agreed a package was the next step in his participation with DeMara but claimed he did not know nor remember what the package was. His March 4, 2012 email to DeMara indicates, “Package Received #2”. Preceding that email, DeMara had sent two emails to him in 2011 which indicate a kit was attached to each email.
[17] The MIS sent to Mr. Rattai served as an authorization for DeMara to prepare the appellants’ income tax returns as illustrated in the following excerpt from the MIS: [7]
I authorize DeMara Consulting Inc. to prepare my income tax return (including spouse and family if applicable) based on the information I provide with this Member registration. I understand that my tax return will be prepared with the full knowledge that a full CRA audit is possible and that the information provided is current and accurate to the best [of] my knowledge.
[18] Mrs. Rattai surmised that the appellants had agreed in early to mid-2011 that DeMara would prepare their 2010 personal tax returns. It was hired and authorized (per the MIS) as their representative in 2012. Mr. Rattai recommended to his wife that she engage DeMara as her representative. When the respondent suggested to Mr. Rattai that he spoke with DeMara in early 2011 but did not fully retain it until 2012, he initially responded he did not recall. Eventually, he agreed with that. The Returns filed in March 2013 indicate DeMara as the “tax preparer”. They were “still utilizing” DeMara as their “Tax Service Provider” up to July 2014 when Ms. Beilstein was hired. [8]
DeMara authorized to file Returns
[19] At trial, the appellants objected to a number of documents sought to be entered into evidence by the respondent. I reserved rulings only on CRA computer-generated printouts titled Client Other Party System, Retrieve Auth Rep Info and Business Number System, Retrieve Notice History (collectively, “CRA printouts”); these pertain to authorization of a representative and application for a business number, respectively. [9]
[20] The appellants argued that the CRA printouts should not be admitted into evidence because they do not have any signed documents or forms nor correspondence flowing between the appellants and DeMara or between DeMara and CRA showing the appellants authorized DeMara as their representative or that they requested business numbers from CRA. They contend the printouts are insufficient and merely show that DeMara filed authorizations and business numbers were issued. Mrs. Rattai submitted that the T1013 Authorization should be produced showing her signature. They assert the probative value will be outweighed by the prejudicial effect from this Court accepting or considering the CRA printouts.
[21] Earlier in the proceedings, the appellants had testified they could not recall reviewing or signing a T1013 Authorization. However, when asked by the respondent if in 2012 Mr. Rattai authorized DeMara to be his representative with CRA, he initially said yes it was possible. When he was queried as to whether the authorization involved filling out the T1013 Authorization, he said he did not recall.
[22] Mr. Larkin was confused in his testimony when he said that the T1013 Authorization had been updated to CRA’s records on January 10, 2012 (suggesting Mrs. Rattai had signed such authorization). It was established in cross-examination that the authorization form that he testified to having reviewed was a RC-59 form to file T5008 forms, not a T1013 Authorization.
[23] Mrs. Rattai said she did not sign a request for a business number in 2012 or make a request through DeMara. When Mr. Rattai was asked about the form “requesting for a business number (BN-required information)” and if it was the form referred to in the March 4, 2012 email, he said he never filled out the form. When redirected to the question, he said he did not know if that was the case. It was later put to him that a business number was registered in his name in 2012 with CRA, to which he responded he did not know.
[24] Given the appellants’ inability to recall, Mr. Rattai’s response, the confusion and the erroneous submission regarding the absence of correspondence for the application for a business number, the CRA printouts would provide some evidence with other evidence to prove facts in issue in the appeals. These would assist the Court in weighing matters and in its determination and assessment of credibility. On balance, the probative value outweighs the prejudicial effect. The CRA printouts are admitted into evidence as Exhibits R24, R25, R27 and R28.
[25] Mr. Larkin explained that CRA has separate departments responsible for requests for T1013 Authorization for a representative and requests for business numbers when requests come in. From CRA’s perspective, DeMara was acting on the appellants’ behalf, thus such authorization was not in question. Once a request is made for a business number, the respective department issues the number. That department enters information into the system, including dates, attached to the account by the social insurance number; it can then generate a printout. The printout for the authorizations shows when the request was received and accepted by CRA.
[26] Shortly before the hearing, Mr. Larkin had reviewed CRA’s system records and made a comparison with the CRA printouts to see if the information was consistent; he confirmed there were no discrepancies. Although he was unable to say who signed or submitted the requests, the respective CRA printouts indicate that DeMara was authorized as a representative of the appellants and that business numbers were issued in the appellants’ names on the dates indicated as follows:
Mr. Rattai
Authorized representative
April 4, 2012
[BLANK]
Business number
April 6, 2012
Mrs. Rattai
Authorized representative
February 22, 2012
[BLANK]
Business number
February 22, 2012
[BLANK]
Business number
March 2, 2012
[27] It is clear from Mr. Rattai’s email exchange with DeMara in March 2012, which predated the issuance of his business number on April 6, 2012, that DeMara was involved in the application for his business number, issued two days after CRA had accepted DeMara as his authorized representative. I find that the appellants had authorized DeMara as their representative with CRA and that DeMara either acted on the appellants’ behalf in directly applying for business numbers or assisted them in that regard. The dates of acceptance and issuance, respectively, are set out in paragraph 26 of these reasons. The payment made by Mr. Rattai in March 2013, in paragraph 45 of these reasons, served as confirmation of these authorizations, consistent with the admissions in their pleadings that DeMara was the appellants’ representative at the time of filing the Returns. [10]
DeMara filed T5 and T5008 Summaries and information slips with CRA
[28] Identified as the appellants’ representative on the T5 Summary Return of Investment Income and T5008 Summary Return of Securities Transactions (the “Summaries”) for each appellant, DeMara prepared and filed same with CRA NCR on September 14, 2012 with the accompanying T5 slips, Statement of Investment Income, and T5008 slips, Statement of Securities Transactions (the “information slips”). When sent to CRA, Mr. Larkin said the information slips are inputted into CRA’s system and an option screen. Affidavits filed by the appellants show the T5008 stamped as received by the mailroom at the National Capital Region of CRA, as confirmed by Mr. Larkin in his testimony. [11]
[29] During his review, Mr. Larkin had looked at the Summaries and information slips that had been filed several months in advance of the Returns. This did not strike him as unusual because there is a legal obligation on the issuer of information slips to send these to CRA by a certain due date. On closer scrutiny, he observed that the Summaries were unusual in that personal receipts were being used to create the information slips.
DeMara filed the Returns with fictitious Losses
[30] On March 15, 2013, DeMara sent the Returns, as the appellants’ authorized representative, to CRA for filing. According to the appellants’ pleadings, DeMara reported the following in the Returns: [12]
[BLANK]
Mr. Rattai
Mrs. Rattai
Total income
($371,628)
($512,758)
Net business losses
$482,258
$580,941
Capital losses
$481,858
$580,539 [13]
[31] Included in the Total income are the amounts of $84,011 and $63,183 for employment income, respectively. In examining the Returns for 2010, Mr. Larkin noted that for each appellant the Total income is in a negative amount, and refunds of $25,674 and $13,172 were claimed for Mr. and Mrs. Rattai, respectively.
[32] The business losses reported, Mr. Larkin explained, are reported on Form T2125, Statement of Business or Professional Activities (the “Statement”), filed with each Return. These losses consist of interest paid of $481,858 and $580,941.06 (“Interest”) for Mr. and Mrs. Rattai, respectively, with the additional amount of $400 (for each appellant) as legal, accounting and other professional fees. Each Statement indicates the operation of a “Consulting” business with no revenue realized.
[33] Mr. Larkin identified the Request for Loss Carryback forms, in the appellants’ names and included in the Returns, which were made for each appellant for the business losses to be distributed in 2007, 2008 and 2009 to reduce taxes in those years (“Requests”); he examined these in his review. [14] References to the Returns in these reasons will include such Requests unless otherwise specified.
[34] When he conducted his review, Mr. Larkin reviewed the T5 Summary and the T5008 Summary, each stamped “CRA Copy”, with related information slips and understood the latter to be reporting transactions (the “Summaries with CRA Copy and related information slips”). He was unsure if these were included in the Returns or submitted later.
[35] As clients of DeMara, Mr. Larkin understood that the appellants would have provided all receipts they had, including those for personal expenses (“receipts”), and then DeMara created the information slips as if these were business expenses. The T5 slips totalled $481,858.36 and $580,541 (on the T5 Summaries) for Mr. and Mrs. Rattai, respectively. These purport to be interest paid by the appellants, as payers, to third parties as the recipients. [15]
[36] Also included in each Return is Schedule 3 which reported the capital losses. Mr. Larkin understood that they were reporting these losses arising from the disposition of securities on the T5008 slips which purport to show the appellants as recipients of amounts in respect of security dispositions involving the identical third parties in the T5 slips. [16] In cross-examination, he was asked about one T5008 slip issued to CRA. He understood this to mean that Mr. Rattai paid an amount to CRA in 2010 as an expense. Similarly, CRA is described as the recipient of the T5 slip reflecting it earned investment income from Mr. Rattai. He agreed that when receiving the T5 slips it did not have typical content.
[37] Mr. Larkin had compared Schedule 3 to the Statement that shows “Interest” in the same amount plus $400 for legal, accounting and other professional fees that amounts to the business loss. [17] Thus, the T5 and T5008 slips filed do not constitute interest paid in a business nor the disposition of securities, respectively.
[38] In 2010, Mr. Rattai held credit cards with Desjardins Visa, ATB and possibly CitiFinancial, and Mrs. Rattai held cards with Hudson’s Bay, CIBC, TD Canada Trust and Sears but does not recall dealing with the National Bank of Canada. She held a chequing account and line of credit with CIBC and a bank account and mortgages with TD Canada Trust. The corporate accounts were held at HSBC Bank of Canada, a business chequing account, and MCAP Mortgage Servicing Centre and Merix Financial, mortgage accounts. These account numbers are included in the information slips attached in the Affidavits and the CRA copies in the Returns.
[39] The appellants admitted they never operated a consulting business, thus did not incur business losses. There were no dispositions of securities, thus they did not incur capital losses.
DeMara’s March 11, 2013 email and Attachments
[40] Mr. Rattai claims he never saw nor recalls receiving or reviewing DeMara’s March 11, 2013 email (“2013 email”), and attachments sent to him regarding “Daniel and Cindy Rattai - 2010 Remedy Tax Package”. [18] He did not see these until the discovery process. I reject Mr. Rattai’s evidence that he did not receive nor review the 2013 email and Attachments. The 2013 email and other email exchanges Mr. Rattai had with DeMara were produced by him as part of the satisfaction of answers to undertakings given by him during the discovery process.
[41] In the 2013 email under the subheading “T1 summary (remedy)” for each appellant, it highlights parts of the content of the Returns that DeMara planned to file with CRA once DeMara received the “processing contribution request” (that is, payment) from the appellants. The email states, in part:
Hi Daniel & Cindy,
Please find attached the following in respect to your 2010 remedy:
1. T1 summary (remedy) - for Daniel:
Refund:
• The highlighted Refund highlighted indicates the estimated refund you should receive from CRA if this was the first filing for 2010.
• Please keep in mind that if you have previously received a refund from CRA, the amount on this form will be less the amount previously received.
• If you have previously made payments to CRA for a balance owing, that amount should be refunded and is not included in the amount shown on this form
[…]
2. Request for Loss Carryback/Carryforward - for 2007, 2008 & 2009
• The yellow highlighted years are carrybacks which are the excess credits from the remedy filed. The credits can be used for up to 3 years carried back, reducing your taxable income to zero if there are enough credits.
• This may result in refunds from taxes already paid to CRA during those years.
• The green highlighted amount is the carryforward credits available to be carried forward to future remedy years
3. T1 Summary (Remedy) - for Cindy:
Refund:
[…]
4. Request for Loss Carryback/Carryforward – for 2007, 2008 & 2009
[…]
5. 2010 processing contribution request
• Once this has been received we will file your remedy to CRA
• Once we have filed your return(s) to CRA, we are not able to track it’s progress and CRA does NOT provide updates voluntarily. If you have not received your NOA/NOR from CRA within 5 months of us filing your return(s) to CRA, please contact us and we will in turn contact CRA and request an update.
[42] Two of the attachments are documents titled 2010 Tax Return Summary and a Request for Loss Carryback prepared by DeMara for each appellant, each marked “CLIENT COPY” (“Attachments”). The Attachments contain DeMara’s proposed filings as reflected in the Returns.
[43] The 2010 Tax Return Summary [19] prepared by DeMara shows the net business loss of $482,258.36, and a refund of $25,674.17 is highlighted. The 2013 email states, “The Highlighted Refund highlighted indicating the estimated refund you should receive from CRA if this was the first filing for 2010.”
[44] The Request for Loss Carryback is virtually identical to the one included in the Return. [20]
Payment
[45] An invoice was issued the same date as the 2013 email (“Invoice”), addressed to “Member: Dan & Cindy Rattai” for “Processing contribution and tax amendments for 2010 – For Daniel” and “Payable to DeMara”. [21] Mr. Rattai indicated he did not recall the Invoice nor recalled paying DeMara. Mrs. Rattai, however, was unequivocal that her husband had paid $400 for each of them, but could not recall when that occurred.
[46] A Receipt was issued, dated March 13, 2013, indicating the “Contribution received” from both appellants regarding Number: M/C- 2010 Remedies (the “Receipt”). It relates to the process contribution payment referenced in paragraph 5 of the 2013 email as the last step in the process before filing the Returns. This accords with DeMara’s stipulation of “Payment required before filing” in the MIS. The $400 amount is on the Statement filed with each Return and is referenced in DeMara’s November 1, 2011 email as the amount for filing The Remedy with CRA. [22]
[47] In argument, the appellants had suggested that the Invoice and/or the Receipt might be for something other than for payment for the preparation and filing of the Returns. That is not supported by the evidence. The Invoice was issued. Mr. Rattai then paid DeMara (as confirmed by his wife) per the last step in the process before filing and in compliance with DeMara’s stipulation of payment before filing. The Receipt is dated two days before DeMara sent the Returns to CRA. I find that the Invoice is for preparation and filing of the Returns and the Receipt, which I infer included the $400 for the preparation and filing fees for each appellant, and is clearly in recognition of the payment of the Invoice. Payment before filing also conforms with one part of the appellants’ standard practice.
Other emails between Mr. Rattai and DeMara
[48] Questions were put to Mr. Rattai in cross-examination about the following email exchanges between him and DeMara.
[49] On September 1, 2011, the day after Mr. Rattai informed DeMara he wished to become a member, DeMara sent an email to him that states:
[…]
Please find attached our newest member kit/forms required for completion for a file with DeMara Consulting Inc. The forms can be faxed, mailed or dropped off at the office, along with all documents/receipts.
If a couple is filling out the paperwork, the individual with the highest earnings may complete the forms for the process, however, we may need to get the other spouse to complete some forms, as well. [23]
[50] Mr. Rattai denied a kit was attached to that email. Similarly worded to that email is the second email dated November 1, 2011. He testified he did not listen to the recording to guide members in filling out the documents attached in the kit in the second email nor recalled reviewing or filling in the documentation. He does not recall reviewing or filling out the Business Consent Form nor recalls reviewing the documents titled Authorization to Release Personal Tax Information to a Third Party and Frequently Asked Questions.
[51] DeMara had indicated to him, “When we request a Business Number (BN #), we enter ‘Consulting’ as the business type. The only thing we need to know from you is what type of consulting; it is usually based on the type of work you do/have done […].” While he may not have filled in documentation, it is obvious from his March 4, 2012 email to DeMara that he had reviewed the business number document and DeMara was planning to fill in the document as it relates to the document titled Requesting for a Business Number (BN) – REQUIRED INFORMATION. This is captured in his March 4, 2012 email to DeMara, in which he states:
Hi Manda
When we sent are [our] material to you we sent are 2010 tax returns, which were completed but not sent in, can they get all the information off those tax returns or do we need to send mortgage statements, utilities, etc also. plus you sent me a form- requesting for a business number (BN) - required information, it has please confirm your consulting type, which would be either -- real estate marketing consultant or just marketing consultant which ever works best. […] [24]
[52] Mr. Rattai was unable to explain what he meant by his comments in that email when he selected the type of business entity to be entered on the application form for the business number even though no business existed per the appellants’ admissions.
[53] DeMara’s response to Mr. Rattai on March 5, 2012 makes it obvious that he would not have been able to finalize membership to authorize DeMara to prepare their tax returns without reviewing the documents in the kit, providing it with the requested information and complying with its requirements and process. In addressing his initial query, DeMara responded it still required all of the documents as noted in its List, not only for calculation but as back-up for The Remedy filing. The types of documents listed on the List that a member is required to provide include personal expenses to claim as business expenses on their tax returns which are reported on T5 slips created by DeMara to complete The Remedy. I found Mr. Rattai to be evasive in his responses on this and on other points during his testimony.
CRA
[54] The Returns were selected for review by CRA audit. Each appellant received a letter from CRA dated October 2, 2013 (“October 2013 letters”) in which it indicated that it was reviewing the requests for the Losses in Returns and attached a questionnaire for completion, seeking supporting documentation. [25] No information was provided to CRA. Five months later, CRA sent proposals letters to the appellants to disallow the Losses and impose federal penalties pursuant to subsection 163(2). Mr. Rattai said he did not recall but said it is possible he received the proposal letters. [26]
[55] Without response from the appellants, the Minister assessed them in accordance with the proposal letters to deny the Losses claimed in the Returns. Federal penalties were also imposed in the amounts of $99,217.00 and $120,271.60 for Mr. and Mrs. Rattai, respectively. Mr. Larkin indicated that the option C printouts show the Returns were filed on March 19, 2013 and assessed on May 30, 2014. He had checked the CRA system to ensure the printouts were accurate in these matters. [27]
[56] After unsuccessfully attempting to contact DeMara regarding the October 2013 letters, around July 2014 the appellants hired Irene Beilstein at Evident Tax Alternatives, recommended to them by Marcel. Ms. Beilstein’s suggestion to request CRA reverse the tax filings in the Returns was accepted by the appellants. She filed Notices of Objections dated July 30, 2014 with CRA. [28] The next day she filed the T1 Adjustment Requests (“T1 Adjustments”) in which she asked CRA to disregard the Returns filed so that the Tl Adjustments would constitute new returns.
[57] On the T1 Adjustments form, Mr. Larkin said the column described as “previous amount” reflects the amount(s) reported on the Return by DeMara and the new amount requested by Ms. Beilstein. These request that the Losses be reduced to nil and reductions to total income from ($371,628) to $110,155 and from ($512,758) to $67,707 for Mr. and Mrs. Rattai, respectively. [29]
[58] Mr. Larkin reviewed the appellants’ objections, copies of the Returns with related documents in his file and the T1 Adjustments to determine if the appellants made false statements in the Returns knowingly or were grossly negligent.
[59] In examination-in-chief, Mr. Larkin identified the Returns in the appellants’ names filed by DeMara and confirmed he had reviewed these as an appeals officer as part of the file he received. CRA’s normal process for late-filed returns was followed. A stamp was placed on the first page (“WTC”) and the last page (stamped received March 19, 2013, with a penalty) on each Return. Satisfied with the explanation, given the appellants’ admissions in their pleadings that DeMara had filed false Returns and noting the unusual features, these were entered into evidence. [30]
[60] When asked in cross-examination if the Return in Mr. Rattai’s name had been taken apart and possibly documents inserted into it, Mr. Larkin said he did not know. Invariably, he said he works from the copy of the tax return in the file assigned to him, which is what he did. I found Mr. Larkin to be a credible witness.
[61] Mr. Larkin acknowledged that:
a) the language in the certification box on page 5 of the Return refers to the information on and any document attached is correct, complete and fully discloses all his income;
b) similar language is found in the Request and the T5008 Summary;
c) neither the Return nor the documents included were signed or initialled by Mr. Rattai; and
d) a shipping label shows that DeMara sent a package to CRA, Winnipeg Tax Centre on March 15, 2013.
[62] All references to provisions that follow are to the Act.
III. ANALYSIS
Law
[63] Pursuant to subsection 163(3), the Minister has the burden of proving the facts justifying the assessment of the penalty against a taxpayer under subsection 163(2).
[64] The relevant part of subsection 163(2) reads:
(2) 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 […] in a return, form, certificate, [or] statement […] ([…] a “return”) filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty […]
[65] The Federal Court of Appeal in Wynter v Canada, 2017 FCA 195, 2017 CarswellNat 5049 (“Wynter”) discussed the distinction between knowledge and gross negligence and the interplay of these requirements to wilful blindness within the meaning of subsection 163(2). [31] The governing principles are summarized below.
Knowledge requirement
[66] Knowledge of a false statement in a return can be actual, through an intention to cheat, or can be imputed to the taxpayer by a finding of wilful blindness through the choice of the taxpayer not to inquire. [32]
[67] Wilful blindness pivots on a finding that the taxpayer deliberately chose not to make inquiries to avoid verifying that which might be an inconvenient truth thus was deliberately ignorant. [33] Deliberate ignorance, the Court notes, connotes suppression of a suspicion. The Court set out the wilful blindness test as follows:
13 A taxpayer is wilfully blind in circumstances where the taxpayer becomes aware of the need for inquiry but declines to make the inquiry because the taxpayer does not want to know, or studiously avoids, the truth. The concept is one of deliberate ignorance: […] In these circumstances, the doctrine of wilful blindness imputes knowledge to a taxpayer: […] [34]
[68] Wilful blindness engages a subjective determination. As such, personal attributes (subjective belief or personal characteristics) of the taxpayer may be considered in determining whether a taxpayer is wilfully blind. If there is a finding of wilful blindness, knowledge is imputed, thereby satisfying the knowledge requirement under subsection 163(2). [35]
Gross negligence
[69] Subsection 163(2) also applies where a taxpayer makes a false statement under circumstances amounting to gross negligence.
[70] As articulated by Justice Strayer in Venne v The Queen,[1984] C.T.C. 223, 84 D.T.C. 6247 at paragraph 37:
“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.
[71] A finding of gross negligence requires proof of a high degree of negligence. Thusly, it can arise “[…] where the taxpayer’s conduct is found to fall markedly below what would be expected of a reasonable taxpayer” and “requires a higher degree of neglect than a mere failure to take reasonable care” [36] or is a marked or significant departure from what would be expected.
[72] Whether a high degree of negligence exists or not, it engages an objective determination such that personal attributes of the taxpayer are not to be factored into the analysis. [37] In Peck v the Queen, 2018 TCC 52, 2018 CarswellNat 970 (“Peck”), Justice Owen articulates this as “the objective standard against which the conduct of the [taxpayer] is measured […] is the expected conduct of a reasonable person in the same circumstances as the [taxpayer]” against whom the penalty is assessed. [38] The only exception to that standard is if the taxpayer is incapable of understanding the obligation not to make a false statement or omission in their income tax return.
Wilful Blindness can lead to Gross Negligence
[73] Although distinct, gross negligence and wilful blindness may merge to some extent in their application such that gross negligence can result from a taxpayer’s wilful blindness. [39] The converse is not, however, necessarily true. A grossly negligent taxpayer is not necessarily wilfully blind. [40]
Preliminary matter
[74] I will first address a preliminary matter raised by the appellants. They submitted that the existing two-element test under subsection 163(2), established in the jurisprudence, should be modified to a three-element test. Assuming I understood the wording of test proposed by the appellants, they suggest as follows:
a) Is there a false statement?
b) Is there is a false statement under circumstances knowingly or amounting to gross negligence?
c) Did the appellants participate in making the false statement under circumstances amounting to gross negligence, knowingly or by wilful blindness?
[75] I disagree. The Court in Strachan v Canada, 2015 FCA 60, 2015 D.T.C. 5044 (“Strachan”) recently affirmed the two-element test in Torres v R, 2013 TCC 380, 2014 D.T.C. 1028 (“Torres”). [41] In differentiating between “knowingly or wilful blindness” as the appellants propose in paragraph (c), that runs counter to the guiding principles in Wynter in that wilful blindness, once found, imputes knowledge. Apart from that, the proposed test fails to fully capture the wording in the legislation. For example, “assented to” and “return” are not included.
[76] Two elements must be established under subsection 163(2) for a finding of liability for a penalty:
a) a false statement (or omission) in a return; and
b) knowledge or gross negligence in the making of, participating in, assenting to or acquiescing in the making of that false statement (or omission) in a return.
[77] The respondent’s position is that the information in the Returns is false and the facts demonstrate that the appellants chose to ignore the warning signs and therefore were wilfully blind. Alternatively, they were grossly negligent.
[78] With the foregoing test and principles in mind, I now turn to consider if the respondent proved, firstly, that a false statement was made in each of the Returns and, secondly, if the appellants knew about it or were grossly negligent.
A. False statements
[79] As to the first element of subsection 163(2), the appellants argued that they neither approved, consented to or participated in the preparation of