By Jacqueline M. Demczur

In the case of Osborne v. The King, 2023 TCC 98, decided on July 13, 2023, Clare Osborne (“Appellant”) appealed the CRA’s assessment of his 2006 taxation year, together with subsequent penalties levied under s. 163(2) of the Income Tax Act (“ITA”), in relation to donations made to an alleged charitable donation scheme.

The Appellant had received the contact information of an accountant, Fais Khan, through a co-worker. As the Appellant traveled for work, he asked his wife (“Mrs. Osborne”) to contact Mr. Khan. The two met and Mr. Khan gave a presentation about various charitable causes to which he recommended that the Osbornes make donations. Following these presentations, Mrs. Osborne, throughout 2006, gave Mr. Khan tens of thousands of dollars, either in cash or cheques made out to him personally, to donate on their behalf to these charities.

In April 2007, the Appellant met Mr. Khan for the first time when signing their 2006 tax returns prepared by him. The Appellant was not impressed with Mr. Khan, describing him as “greasy” to the court. While he decided against using Mr. Khan as the family accountant in future years, he felt that, with the tax deadline looming, there was no choice but to allow Mr. Khan to file on their behalf for the 2006 year. The Appellant then signed the tax return information slips without reviewing their contents.

Prior to 2006, the Appellant had never donated more than $300 to charity in any taxation year and only to charities in which they were involved. However, in 2006, he donated $60,003 to various charities, all of which were unknown to him.

In early 2008, Mr. Khan was arrested for financial crimes and, shortly after, the CRA and law enforcement agents arrived at the Osborne house. The family was detained, and their premises searched extensively. Although they were charged with income tax evasion as a result of the search, these criminal charges were later dropped for procedural reasons.

At trial, the Osbornes claimed that they were victims of Khan, a conman, and had assisted the CRA once they knew their dealings with Mr. Khan were illegitimate. The CRA did not see it this way, characterizing the Osbornes’ actions as “complicit surrender of those involved with something to hide.” In response, the Appellant claimed that the CRA had a “personal” vendetta against him and his wife.

There were four grounds on which the Appellant challenged the disallowed donations and the imposition of penalties, namely:

1. he is an honest, law-abiding person, hoodwinked and ‘conned’ by a convicted criminal;
2. the CRA has treated victims of Khan’s fraud unequally;
3. Mr. Osborne had no intention to misrepresent, knowingly file a false return, or avoid paying income taxes; and,
4. he neither anticipated, expected nor suspected the dealings of Khan were fraudulent.

The court sought to answer the questions if the Appellant was entitled to the disallowed charitable tax credits and if the s. 163(2) penalties were justified due to gross negligence on his part.

Regarding the Osbornes’ treatment during the criminal investigation, the court stated that it does not have, “and cannot have any, legal bearing on the issue of the correctness of the assessment for tax and imposed penalties.” The court continued that the Minister of National Revenue (“Minister”) is not held to a standard of “treating one taxpayer the same as or less fairly than another.” Finally, the court stated that penalties under the ITA do not revolve around intention or (un)ethical behavior, but rather is determinate on the tax liability of a taxpayer and the presence of gross negligence is a factor in this analysis.

The court found various deficiencies with the “donations” made by the Appellant and this was enough for noncompliance with the ITA. Further, the court found no intent to donate on Mr. Osbourne’s part because he could not speak to any details about the organizations receiving the donations. In addition, the “donations” were never actually made to these charities and instead went to Mr. Khan personally. For these reasons, the tax credits were disallowed.

The court then reviewed the penalties imposed on the Appellant, which the Minister justified on the basis of gross negligence. It concluded that the Appellant, an executive at a major bank at the time, should have known when he met Mr. Khan that something was awry. The court found that even though the Appellant immediately did not trust Mr. Khan, he still decided to sign the tax information return slips without examining them and this was conclusive proof of gross negligence. For these reasons, the court found that the penalties were justified.

This case serves as a reminder to taxpayers that tax professionals and those holding themselves out as such might not be reliable and therefore taxpayers must always do appropriate due diligence before retaining a tax advisor. In addition, the fact that a taxpayer’s agent acts in a fraudulent manner will not necessarily shield the taxpayer from liability, especially when they are grossly negligent in their own financial affairs.

​Read the Sept 2023 Charity & NFP Law Update