Written on behalf of Feigenbaum Consulting
People typically don’t like paying tax, at least certainly not more than they are supposed to pay. It’s not uncommon for people to make claims of expenses or losses in order to reduce their tax burden. Of course, it’s also illegal to file tax returns that are not accurate. On occasion, people may hire third parties to prepare their taxes for them. What happens when a taxpayer hires a company who makes false statements on a tax return on their behalf? In a recent decision from the Tax Court of Canada, an elderly woman asked the court to waive a fee imposed on her by the Canada Revenue Agency when such an incident occurred.
False information provided on tax returns
The taxpayer involved in the matter is an elderly woman who had retired but still worked as an assistant pastor at her church. For years, her husband had been responsible for preparing her taxes. In 2011 her taxes were filed and her return stated she made $78,798.
In 2012 the taxpayer’s husband found out about a consulting firm referred to as “DeMara.” The taxpayer and her husband met with DeMara and were convinced to allow them to assist with her taxes, including her 2010 tax return. She had to sign a number of documents when becoming a client, including a confidentiality and non-disclosure agreement. After agreeing to her DeMara, the taxpayer’s husband conducted all affairs related to her returns.
Business losses claimed
DeMara filed an amended income tax return on behalf of the taxpayer for the 2010 tax year. Included in the amended filing were $666,447 of losses attributed to a “consulting business.” While she signed the documents prepared by DeMara, she said she did not know what they pertained to.
She eventually found out about what DeMara had done on her behalf and attempted to correct the false statements. However, the CRA fined her a gross negligence penalty of $139,032.
Did the taxpayer knowingly make a false statement?
The CRA stated that the taxpayer signed the forms and either knew what they contained or willingly remained ignorant of what they contained. However, the taxpayer said that she did not actually “make” the false statements since she did not have knowledge of what they contained.
The court reviewed the circumstances of the false claim and looked at a number of factors, including that she signed documents she understood to be related to a “membership kit” but were eventually used to make false statements.
That said, the court can establish willful blindness if it is established on a balance of probabilities that the taxpayer has concerns or suspicions of DeMara. While the CRA argued she met the threshold of willful blindness, the court did not agree.
The court found that the taxpayer had no specific knowledge of taxes, and relied on the services of others to assist her in them. The court also found that the taxpayer’s visit to DeMara’s office did not indicate the company was acting in a fraudulent capacity.
In this case, the court found the taxpayer did not knowingly participate in making false returns and declined to enforce the penalty.
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