Matthew v The Queen, 2012 TCC 289

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Use of Settlement Agreement for Personal Injury to “Camouflage” Income.

Matthew v The Queen, 2012 TCC 289

There were two issues in this case:

  •  was the minister entitled to reassess the 2001 and 2002 years beyond the normal reassessment period; and
  • was the taxpayer liable for penalties pursuant to s 163(2) of the ITA for all the tax years

The taxpayer claimed that the amounts were damages for pain and suffering due to a personal injury he suffered on the premises of a company owned by his mother, and payable pursuant to a settlement agreement.  The decision hinged on the Court’s finding that the purported settlement agreement was not bona fide, and that the amounts were really income received for services performed.  The Court made this finding by analyzing in detail the evidence surrounding the apparent injury and the settlement agreement. The Court found the evidence to be problematic and troubling for a number of reasons.  The Court held that the agreement was entered into as an attempt to camouflage substantial amounts of income from work as damages for pain and suffering.

Based on this finding, and based on the taxpayer’s admission that he received the amounts, and the link between the amounts and a business of the taxpayer, the court held that the failure to include amounts was due to “neglect, carelessness, or willful default”, making both the assessment beyond the normal period and the gross negligence penalties proper. However, the MNR had not presented any evidence that the amounts in 2004 were received by the taxpayer or that he performed any work in that period, thus the appeal for that year only was allowed.

The court did not analyze the gross negligence penalty question in any detail, but seems to have relied on the lack of bona fide and the use of a settlement agreement and a consent judgement used as camouflage to meet the threshold for the penalties under subsection 163(2).

One legal argument advanced was that the MNR had failed to prove that the failure to report income was due to “neglect, carelessness, or willful default”.  The taxpayer relied on the decision in Jencik v. The Queen, 2004 TCC 295, in arguing that the MNR has not met the onus of proving that the taxpayer made a misrepresentation attributable to neglect, carelessness, or willful default in reporting income, thus allowing the minister to reassess beyond the normal period.  The Court noted that in Jencik the MNR had presented no evidence linking the unexplained deposits to the business income, and as such the inference could not be drawn from the evidence.  In this case, however, there was evidence connecting the amounts to business income of the taxpayer.

The Court held that the taxpayer admitted to receiving the amounts in 2001-2003, and that there was evidence to support the ministers assumption that the amounts were received as income for work performed.  The taxpayer did not admit receiving the payment in 2004, and the MNR did not provide evidence that there the amounts were in fact received or that the taxpayer performed any services in that year.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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