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Jim Maroney

:: Tax Court of Canada decisions impose penalties on taxpayers making false statements or omissions

:: Shortly before closing the books on 2002, the Tax Court of Canada rendered decisions in a series of cases concerning the application of certain penalty provisions of the Income Tax Act. Court cases where taxpayers contest the imposition of penalties are not unusual but what piqued my curiosity in this situation was a common thread through each of the cases.

Technically speaking, the penalty provisions the Minister of Revenue sought to impose in each of the subject court cases are those concerning the making of false statements or omissions. The applicable section of the Income Tax Act imposes a penalty where taxpayers “knowingly” or “under circumstances amounting to gross negligence” participate in or acquiesce in the making of, a false statement or omission.

The quantum of the potential penalty is the greater of $100 and 50 per cent of the difference between the correct amount of tax and the falsely reported tax. A similar penalty is calculated based on certain tax credits (e.g., child tax benefit, GST credit) the amount of which is dependent on information derived from personal income tax returns.

This particular section is somewhat problematic for the Minister since the onus of proof resides with the Minister and not the taxpayer as one may expect.

Turning to the specific court cases, the first case concerned a taxpayer who claimed the equivalent-to-married credit and child tax credits “through the fraudulent intervention of a third party and an employee”. The taxpayer admitted that he had no children in his custody during the 5-year period (1988 – 1992) in question.

In the second case, the taxpayer claimed an allowable business investment loss deduction for 1994, and non-capital loss deductions for 1995, 1996, and 1997, “through the fraudulent intervention of a friend and certain persons”. In this case the taxpayer admitted that he had never carried on any business to entitle him to the deductions that were claimed.

The third case involved a taxpayer who falsely claimed a deduction for certain support payments during the years 1989 through 1994 “paying a third party a commission”.

Finally, in the fourth case the taxpayer admitted that he falsely claimed credits on line 256 of his personal tax return “in return for a promise to pay”. For those who care, line 256 is typically used for some rather obscure deductions including certain foreign income that is tax-free in Canada because of a tax treaty.

So, beyond the obvious false claim of tax credits and deductions, what’s the common thread to each of these cases? Could it be the admission by each taxpayer that the disputed claims that were made on their tax returns were false? Perhaps, but that’s not what caught my eye. What I wanted to know was the identity of the mysterious “friend”, “employee” and “third party” referred to in each of the above cases. As it turns out this mystery person is none other than an employee of the Canada Customs and Revenue Agency? Yes, that’s right, an employee of CCRA was scamming the system from inside by taking a commission based on the resulting tax saving for his or her efforts. In at least one of the cases the commission paid to an employee of the Crown was equal to 66 per cent of the “credits received”!

What I find particularly disconcerting in these cases isn’t just the fact an employee of CCRA was colluding to rip-off Canadian taxpayers but that the corruption appears to have occurred for at least ten-years before being detected – the first year under the microscope was 1988 whereas the last year was 1997. One can’t help but ask what kind of checks and balances are in place to protect the integrity of the tax system when CCRA, the entity charged with the administration of the Income Tax Act, takes ten years to happen upon some in-house shenanigans?

Equally surprising though is the decision rendered in each of the above cases. Would you believe that, despite admitting they various claims they made were bogus, each taxpayer was found not to have participated in the making of a false statement or omission in their tax filings thereby escaping the imposition of penalties and interest to boot? Well it’s true.

In each decision the Tax Court of Canada found “(a) that the Revenue Canada officials having put together the scheme to get the credits, and not the taxpayer himself; (b) that taxpayer not having acted with a guilty mind, but rather through ignorance, and an error in judgment; (c) that taxpayer having fallen into a trap, but not having formed the guilty intention required to justify the imposition of penalties under subsection 163(2) of the Act; and (d) that, as a result, such penalties to be deleted, along with the interest referable thereto.” Notice the reference to Revenue Canada “officials” indicating the involvement of more than one trusted public servant. I’d be really interested in knowing what happened to these individuals.

As I said, the provisions concerning penalties for false statements or omissions have been problematic from the Minister’s standpoint. Now I’m not a judge or even a lawyer for that matter nor am I the brightest crayon in the box but it’s almost beyond my limited comprehension that the Minister couldn’t succeed in cases involving collusion between its own employees and taxpayers – particularly in a situation where the taxpayers admitted there was no basis to the representations made in their tax filings. In the end the judge felt the taxpayers did not operate with a guilty mind and had done little more than make an “error in judgement”. Now where have I heard that phrase before? Errors in judgement seem to be the operative excuse these days.

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Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

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