Gross Negligence or Knowingly Making False Statements – Penalties

Morton v The Queen, 2014 TCC 72

At issue was whether the statutory requirements for imposing penalties under Subsection 163(2) are met when a taxpayer knowingly provides false information as part of a T1 adjustment request.

The Court held that a T1-Adjustment request is a “return” and that, irrespective of a refund actually issues or not, the penalties were properly assessed.

FACTS

After the expiry of the normal reassessment period, the taxpayer utilized subsection 152(4.2) and filed a T1-Adjustment request which would have had the effect of turning profit years into loss years, and therefore would have generated a refund of taxes previously withheld at source.  The taxpayer has no documentation to support any of the income, expense or losses claimed in the request, but submitted the amounts knowing they were fictitious.  He said that he didn’t think that the CRA would act on the information, but that it would request supporting documentation (which he hoped at that point to possess or, if not, to foreswear the request).

The MNR denied the request, and calculated and applied penalties for each of the relevant tax years.

ANALYSIS

The Court found that the taxpayer intentionally, knowingly and without reliance on any other person supplied false information on the requests.  The taxpayer knowingly made such false statements and sought to use subjection 152(4.2) to adjust his returns.

Although the taxpayer argued that he acted under stress, he didn’t provide documentation to support a stress reaction sufficient to mitigate a finding of gross negligence (see Rohani v R, 2009 TCC 88).

The court held that the taxpayer made fraudulent misrepresentations in order to get money he needed.  This was not simply innocent misrepresentation of information that may be insufficient for a reassessment outside the normal reassessment period (see Ross v Her Majesty The Queen, 2013 TCC 333; and Park Motors v Her Majesty the Queen, 2009 TCC 409 – innocent false information in the course of audit or investigation).

The TCC rejected the taxpayer’s argument that the absence of a refund precludes the imposition of penalties.  This would be an absurd interpretation of the legislation.

The TCC also rejected the taxpayer’s argument that a T1-Adjustment request is not a return within the meaning of Subsection 163(2).  The purpose of Subsection 152(4.2) is to allow taxpayer to amend returns without needing to file full returns, and an argument that providing information for this purpose is not a return is “deficient of logic and meaning”.  A T1-Adjustment request, and the information certified therein to be accurate, is a “return” within the meaning of the imbedded definition (includes “form”, “certificate” or “statement”) of 163(2).

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