On April 22, 2016, the Tax Court of Canada released its decision in the case of Wynter v The Queen, which dismissed a taxpayer’s appeal of a gross negligence penalty imposed under subsection 163(2) of the Income Tax Act (“ITA”) for the 2009 taxation year.
While the facts in this case are lengthy and complicated, in summary, the taxpayer became involved in a charitable donation program that was promoted by the tax preparer, DSC Lifestyle Services (“DSC”). Although both counsel for the taxpayer and the respondent effectively agreed that the evidence “did not establish that [the taxpayer] set out to cheat the administration of justice or knowingly participated in a scheme to evade tax,” the taxpayer hired DSC to prepare her tax returns and in doing so ended up filing false statements regarding charitable donations made in 2006, and business losses incurred in 2009. These false statements gave rise to the reassessment of those tax years, and the resulting gross negligence penalty imposed by CRA for the 2009 return.
In determining whether the penalties under subsection 163(2) applied to the taxpayer, the Court noted that the Minister had to establish “1. a false statement in a return; and 2. knowledge or gross negligence in the making of, assenting to or acquiescing in the making of the false statement.” The Court relied upon a number of the factors set out in Torres v The Queen to make this determination. The factors present in this case included the taxpayer’s education and experience; suspicion or need to make an inquiry about the tax preparer; the tax preparer’s fee structure, anonymity, unusual requests, and lack of acknowledgement in preparing the returns; whether a blatantly false statement was readily detectable; lack of inquiries of professionals or officials at CRA; and, the appellant’s trust in the tax preparer and his or her cohort. Ultimately, the Court noted that, unfortunately, the taxpayer “chose not to undertake … reasonable steps to verify the accuracy of the information she was submitting to CRA and was willfully blind.” As a result, the Court found that “in the context of all the evidence” that the taxpayer was “grossly negligent as defined by the relevant provision.”
Of particular interest is the Court’s critique of CRA’s fraud detection procedures. While it is unusual for the Court to comment on CRA’s procedures in this regard, the comments highlight the procedural gaps that allow fraudsters to evade responsibility for their actions. More specifically, the Court stated:
The problem arising from these long delays in contacting taxpayers and the lack of a meaningful early-warning system at CRA is that it provides fodder to the scam artists who have assured their clients that they are on top of the problem and that their experts will battle CRA so effectively there will be nothing to worry about. The absence of prompt follow-up and the issuance of form-letter reminders months later is in effect a golden opportunity for the fraudsters to say, “I told you we would fix your problem with CRA.” Then, by the time CRA issues an assessment and the collection department takes over, the con artists are long gone or – in some cases – have been arrested or convicted and – rarely, I suspect – sent to prison for any significant period. […] Human nature being what it is, there will always be con artists and no shortage of potential victims ready and eager to obtain the golden ticket to wealth but there has to be better detection techniques put into place by CRA as soon as possible to reduce the incidence of these tragedies. Perhaps, it is already underway. I hope so.
It will be of interest to note how CRA responds to the Court’s statements encouraging CRA to implement better fraud detection techniques.