Gross Negligence Penalties – 163(2) – Fictitious Business Losses Claimed, But No Refunds Obtained.
Chenard v The Queen, 2012 TCC 211
At issue was whether the MNR was empowered to impose gross negligence penalties pursuant to subsection 163(2) despite the taxpayer having been deceived by fraudsters and not having actually obtained a refund.
The TCC held that the taxpayer should have realised that claiming business losses in excess of 80% of his income from employment was suspicious when he did not run a business. The taxpayer ought to have inquired of others about the plan. The penalty was properly assessed.
The taxpayer requested a re-adjustment for past tax years by claiming fictitious business investment losses. The minister rejected the request and imposed gross negligence penalties.
The taxpayer was employed during the years in question, he did not finish high school, his spouse prepared his tax returns and used third party services, did not understand tax returns and trusted the individuals who prepared them, and never reviewed returns before signing them. The taxpayer never reported business income and admitted to never having owned a business.
The taxpayer was introduced to “fiscal arbitrators” (FA) through a person he got to know, and it was FA that showed him how to obtain tax refunds by claiming business losses. The taxpayer thought he was part of a corporation, but admitted he never understood the plan and didn’t attempt to gain a better understanding by getting information from others. The representatives claimed that the scheme was legal, and the taxpayer trusted FA’s representatives as they were tax experts. He signed a number of agreements including one to stop communicating with the CRA and to request communication in English (which he did not understand) to be forwarded to FA.
The taxpayer argued that he did not obtain any “tax Advantages” from the adjustment request.
The court reviewed the words of subsection 163(2) which read:
False statements or omissions – 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:
The TCC found that the taxpayer was negligence in signing his returns, but then looked at the concept of “gross negligence”. In Venne v. The Queen,  C.T.C. 223, 84 DTC 6247 (FCTD), it was stated that:
… “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. …
… 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.
What do we have here? A highly intelligent man who declares $30,000 in employment income and fails to declare gross sales of about $134,000 and net profits of $54,000. While of course his accountant must bear some responsibility I do not think it can be said that the appellant can nonchalantly sign his return and turn a blind eye to the omission of an amount that is almost twice as much as that which he declared. So cavalier an attitude goes beyond simple carelessness. …
The TCC said that when a taxpayer places trust in a third party, and the third party makes a false statement or omission, one must determine whether the false statement or omission can be attributed to the taxpayer. Was the taxpayer grossly negligent or willfully blind (amounting to gross negligence) in choosing to trust the third party. The TCC held that the taxpayer here should have been more prudent, and that his behaviour demonstrated gross negligence. Given the fact that the losses claimed were in excess of 80% of the taxpayer’s income, a reasonable person would have questioned the legitimacy of those losses. The Court stated that the “concepts of business and loss are not so obscure that a reasonable person could think it was legal to report unrealistic business losses.”
The TCC differentiated this case from that in Therrien v. R. (2002 CarswellNat 87,  3 C.T.C. 2141 (T.C.C. [informal procedure]), because in this case the taxpayer did not provide evidence that he was concerned about the honesty of the procedure. Despite not speaking English and not understanding the plan, he chose to participate, being careless and indifferent. The Court said that the appellant should have made an effort to consult other people besides those proposing the plan.
The TCC did not address the argument that the taxpayer didn’t receive a tax advantage since no return was received, but it’s likely that the potential advantage attempted was sufficient to ground the penalty amounts.
– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3
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