Insights & Articles

< Back to Insights & Articles

Taxpayers who fail to inform themselves of the contents of their returns can be penalized

With tax season fully underway, many individuals turn to accountants and other tax preparers to assist in completing their returns. However, hiring someone to assist in the preparation of a return does not absolve the Taxpayer of their responsibilities in ensuring the information is complete and accurate. 
In the recent decision, Gray, E. v. The Queen, the Tax Court of Canada rejected an appeal by an 85 year old Taxpayer who was assessed gross negligence penalties as a result of the significant errors in his return. 
The Appellant, a retired pilot, had always hired an accounting service to prepare and file his returns without issue. When it came time to file his 2008 returns, his accountant suggested a new method of filing his taxes which would get him a large return. His accountant proposed working with a firm of professional accountants called “Fiscal Arbitrators” (“FA”). The Appellant was connected with some of the accountants, and they prepared his return for him to sign. Despite only receiving income from his pension and Canada Service payments, the return indicated that the Appellant had over $480,000 in business losses. 
The accountants from FA were smooth talkers, explaining to the Appellant that he was a natural person, and could therefore claim large amounts of business losses. The Appellant’s accountant from the previous years, a close friend, ensured that the method was completely above board and legal. Had Canada Revenue Agency accepted the return, the Appellant would have received a refund in excess of $40,000. 
When CRA contacted him with questions about his return, he passed all of the letters onto his accountant, who told him it would be taken care of, although it never was.
As a result of the falsehoods in the return, the Appellant was assessed gross negligence penalties under subsection 163(2) of the Income Tax Act
In order to find a person liable for gross negligence penalties, two criteria must be met. There must be:
     (1) A false statement in a return; and 
     (2) Knowledge or gross negligence in the making of, participating in, assenting to or acquiescing in the making of, that false statement. 
The claimed business losses were blatantly false, the Appellant was retired and had not operated a business at any time. 
At trial, the Appellant argued that he did not fully understand his tax return, that he had placedhis trust in the accountant, and although he had signed the return, he did not possess the requisite knowledge. 
However, the Court cited Laplante , where Justice Bédard makes this pointed statement:
The Appellant cannot avoid liability in this case by pointing the finger at his accountant. By attempting to shield himself in this way from any liability for his income tax returns, the Appellant is recklessly abandoning his responsibilities, duties and obligations under the Act. In this case, the Appellant had an obligation under the Act to at least quickly look at his income tax returns before signing them.
Justice Masse determined that the Appellant was wilfully blind in failing to verify that the information in his return was complete and accurate. This finding falls squarely within the existing case law which says that Taxpayers who fail to review their returns are subject to gross negligence penalties.  
Long story short, if it sounds too good to be true, seek further advice from accountants or lawyers. If you are a Taxpayer who has questions about an income tax return or may have made an error when filing your return, we can help. Contact myself, or my colleagues, Keith Trussler or Linda Smits.

Mar 14, 2016