If you’re like most Canadians, the looming April 30th tax filing deadline for getting your 2017 return submitted is of little consequence, as you’ve likely already filed — and received your tax refund — weeks ago. Indeed, as of mid-April, the Canada Revenue Agency had received more than 15 million of the estimated 29 million personal tax returns that will be filed this tax season.
But there are still millions of taxpayers that will spend the final weekend of tax season trying to gather all the information necessary to file by Monday’s deadline, especially if you’re among the estimated one-in-five Canadians that owes the CRA money.
But if you’re overwhelmed by the task and prefer to hand over your tax filing to a professional tax preparer or accountant, don’t think you can then just blindly sign on the proverbial dotted line and leave all the responsibility for a correct and complete return in the hands of your tax preparer. You have an obligation to review your return before submitting it to the CRA to ensure that it’s both complete, in that it includes all of your income, and also that any expenses, deductions and credits claimed are appropriate.
If you knowingly claim inappropriate expenses or deductions, or make a false statement on your return, the CRA could decide to hit you with a “gross negligence penalty” equal to 50 per cent of the tax you sought to avoid. The courts have found that being “willfully blind” amounts to gross negligence, as confirmed again, just last week, in Tax Court.
The taxpayer went to court to challenge a gross negligence penalty assessed for his 2009 tax return. In prior years, the taxpayer, an employee at General Motors in Oshawa, had hired a variety of tax-return preparers. When the time came for him to have his 2009 return prepared, a friend at work referred him to a representative of Fiscal Arbitrators.
If the name Fiscal Arbitrators sounds familiar, that’s because it was a tax preparation firm run by Larry Watts, who was found guilty of fraud in 2016 and was sentenced to six years in federal prison and ordered to pay a fine of $150,000.
The scheme involved taxpayers — some 1,800 in 2009 — who reported non-existent business losses from non-existent businesses. These losses effectively eliminated the taxpayers’ tax liability for the then current and three previous calendar years. This resulted in taxpayers claiming substantial refunds of all the taxes paid in the three previous years and of the tax withheld at source by their employers for the (then) current year.
After meeting with the representative from Fiscal Arbitrators, the taxpayer decided to use their services and paid them $500 by cheque for tax-return preparation services and provided the company with copies of his T4 slips for 2006 through 2009. Shortly thereafter, Fiscal Arbitrators prepared his 2009 income tax return and mailed it to him for signature and filing with the CRA.
Fiscal Arbitrators also sent him a Statement of Business or Professional Activities (Form T2125) and a Request for Loss Carryback (Form T1A), as well as an envelope within which to mail the signed return and accompanying documents to the CRA.
In 2009, the taxpayer reported gross business income of $86,757 and a net business loss of $263,352. With his 2009 income tax return, he submitted a Request for Loss Carryback (Form T1A), which showed a business loss of $263,352 and requested that $190,687 of that loss be carried back and applied to his three previous tax years.
As the taxpayer had never operated a business, those statements on his tax return were false (as was his Request for Loss Carryback.) The CRA hit him with a gross negligence penalty of $32,634.
While the taxpayer didn’t dispute the CRA’s denial of his business loss, he went to court to challenge the gross negligence penalty. The sole issue before the court, therefore, was whether the taxpayer “knowingly, or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of, a false statement in his 2009 income tax return and related documents.”
The taxpayer testified that he did not go through his income tax return before filing it, but merely turned to the signing page, glanced at it and then signed it. When asked why he didn’t review it, his response was, “I did not go through it, page by page, because it was, like, this thick…. I just look for … where they said I had to sign, and I signed it…. And I … fold it back and send it off.”
Apparently, the taxpayer was impressed by the name “Fiscal Arbitrators.” As he testified, “when I hear the name ‘arbitrators’ or ‘tax arbitrators’ or ‘fiscal,’ I thought they are professional…. To my knowledge, I trust these organizations and I thought that’s why I am paying the money, because these are professionals. I don’t know anything about filing taxes or tax laws or nothing like that. So I put my trust with these guys.”
So, was the taxpayer willfully blind?
Prior court decisions have found that a taxpayer is willfully blind “in circumstances where the taxpayer becomes aware of the need for inquiry but declines to make the inquiry because the taxpayer does not want to know, or studiously avoids, the truth. The concept is one of deliberate ignorance.”
Furthermore, “taxpayers cannot avoid penalties for gross negligence by placing blind faith and trust in their tax preparers without at least taking some steps to verify the correctness of the information supplied in their tax returns.”
The judge, upholding the gross negligence penalty, found that the taxpayer “placed undue trust in Fiscal Arbitrators, and made no effort to verify the accuracy of his income tax return before signing it and filing it with the CRA. Accordingly, (he) failed in his duty to ensure that his income and expenses for 2009 were correctly reported.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice in Toronto.