http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/179869/index.do
Kalryzian v. The Queen (August 26, 2016 – 2016 TCC 186, Jorré J.).
Précis: Mr. Kalryzian, who was self-represented, claimed deductions exceeding 50% of his gross income from his employment as a salesperson in each of the 2007 and 2008 taxation years. CRA denied the bulk of the expense claims, including a claim of roughly $9,000 in 2008 from a partial rental property (he and his girlfriend jointly owned the property and lived in a portion of it). Mr. Kalryzian appealed to the Tax Court. The Tax Court rejected the bulk of the claims but allowed him roughly $1,000 in each of the two taxation years under appeal. He was also allowed roughly $1,500 in rental losses in 2008. The Court sustained the imposition of gross negligence penalties. There was no order as to costs since this was an informal procedure appeal.
Decision: Mr. Kalryzian was quite aggressive in terms of the deductions under appeal:
[8] In the 2007 taxation year the Appellant filed a tax return showing some $44,781 in employment income and claiming $26,571 of employment expenses. These expenses were about 59% of his employment income. An amount of $1,858 was claimed on line 221, carrying charges and interest expense.
[9] As filed, the Appellant’s 2007 return, Exhibit R‑1, showed was no federal or Ontario tax payable. As a result the Appellant claimed a refund of all income tax deducted as well as certain refundable credits.
[10] In the 2008 taxation year the Appellant filed a tax return showing employment income of some $45,623 and employment expenses of $25,012. These expenses are slightly less than 55% of the employment income. He also claimed a deduction of $2,308 for carrying charges and interest expense on line 224 as well as a rental loss of $9,241.28; this rental loss was his half of a $18,482 loss for the entire rental property.
The Court found that most of the expenses claimed were either fictitious or unproven. The bulk of the rental expenses claimed were on account of capital. The Court upheld the imposition of gross negligence penalties:
[74] Finally, there is the matter of the gross negligence penalties under subsection 163(2) of the Act. There are two essential elements before such a penalty can be applied. The first is that there must be a false statement in the return. There is no question that there are a number of false statements in the two returns.
[75] The second element is whether the Appellant “… knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of …” the false statements. It is well settled that gross negligence includes wilful blindness, see Panini v. Canada, 2006 FCA 224.
[76] When signing his return the Appellant certified that the information given was correct, complete and fully disclosed all his income. While taxpayers are not expected to be tax experts they are expected to make a reasonable effort at ensuring the accuracy of their return.
[77] Here, there are numerous red flags that should have raised questions in the Appellant’s mind: for example, the claim for large sums under the heading “Boots & Gloves” when the Appellant had no expenses for boots and gloves, the claim for employment use of the totality of his motor vehicle expenses, the claim for the totality of his mobile, Internet and satellite television expenses and the failure to allocate any expenses to personal use of the house he bought as opposed to the portion used for rental income.
[78] The only possible explanation for this failure to ask questions is wilful blindness on the part of the Appellant. Accordingly, the penalty is properly levied.
The appeal was allowed only to the extent of some modest additional deductions:
[79] Consequently, the appeal will be allowed but only for the purpose of the Minister making the following changes:
a. In the 2007 taxation year, employment expenses totalling $1,045.05 are to be allowed;
b. in the 2008 taxation year, employment expenses totalling $963.89 and rental expenses totalling $1,426 are to be allowed;
c. in both taxation years the penalties under subsection 163(2) of the Act are to be adjusted to take account of the expenses allowed.
There was no order as to costs since this was an informal procedure appeal.