Torres et al. v. R. – TCC: Court Upholds Penalties for Fictitious Loss Claims

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Torres et al. v. The Queen[1] (December 2, 2013) is another in a recent spate of Tax Court cases involving a group known as Fiscal Arbitrators.

[1]             This is a sad and sorry tale of taxpayers, Mary Khristine Torres, Eva Torres, Michael McNulty, Andre Gautier, Carrol Strachan and Ansel Hyatali, who are just six of many taxpayers who were led down a garden path, with the carrot at the end of the garden being significant tax refunds. The tax refunds were the result of claiming fictitious business losses. All the Appellants put their unwavering faith in representatives of Fiscal Arbitrators to prepare their returns in a manner that would produce the sought after refunds. The Canada Revenue Agency (“CRA”) denied the losses and penalized the taxpayers pursuant to subsection 163(2) of the Income Tax Act (the “Act”). These cases pertain only to the penalties.

[2]             The issue is simply whether the taxpayers either knowingly, or in circumstances that amounted to gross negligence, made or acquiesced in the making of false statements.

The court reviewed the penalties assessed against each of the taxpayers and concludes that in each case they were justified.  In so doing, the court sets out a useful checklist of principles applicable in such cases:

[65]        Based on this jurisprudence and the evidence that I have heard in the six Appeals before me, I draw the following principles:

a)       Knowledge of a false statement can be imputed by wilful blindness.

b)      The concept of wilful blindness can be applied to gross negligence penalties pursuant to subsection 163(2) of the Act and it is appropriate to do so in the cases before me.

c)       In determining wilful blindness, consideration must be given to the education and experience of the taxpayer.

d)      To find wilful blindness there must be a need or a suspicion for an inquiry.

e)       Circumstances that would indicate a need for an inquiry prior to filing, or flashing red lights as I called it in the Bhatti decision, include the following:

i)                   the magnitude of the advantage or omission;

ii)                the blatantness of the false statement and how readily detectable it is;

iii)              the lack of acknowledgment by the tax preparer who prepared the return in the return itself;

iv)              unusual requests made by the tax preparer;

v)                the tax preparer being previously unknown to the taxpayer;

vi)              incomprehensible explanations by the tax preparer;

vii)           whether others engaged the tax preparer or warned against doing so, or the taxpayer himself or herself expresses concern about telling others.

f)       The final requirement for wilful blindness is that the taxpayer makes no inquiry of the tax preparer to understand the return, nor makes any inquiry of a third party, nor the CRA itself.

The court rejected counsel’s argument that the taxpayers were unwitting dupes:

[70]        I readily conclude there were sufficient warning signs to cause the Appellants to make further inquiries of the tax preparers themselves, independent advisers or even the CRA, prior to signing their returns. None of the Appellants made such inquiries before making the false statements. Mr. Barrett argues there were no warnings justifying an inquiry. As I have made clear, the evidence does not support that argument. He then seems to suggest the warnings were not so evident or strong as to demand an inquiry. Again, I have found otherwise – the evidence simply does not support that position. Then he suggests that even if there were warnings, the Appellants were so conned by Fiscal Arbitrators they may have been blind to those warnings, but they were not wilfully blind. There was no wilful or intentional wrongdoing punishable by such harsh penalties. Negligence perhaps, Mr. Barrett would argue, but not such cavalier disregard for the law as to attract gross negligence. They were simply duped.

[71]        The Appellants argument in this regard would be more persuasive where the circumstances do not suggest so strongly the need to inquire. It is difficult to counter wilful blindness with a defence of no wrongful intention when the concept of wilful blindness imputes knowledge regardless of intention (see Panini). Perhaps it might be better stated that such strong circumstances as I find exist here, that scream for an inquiry, impute the wilful element of wilful blindness. Blindness is evident. The strong circumstances effectively preclude a defence that “I believed what I was doing was okay”, even where that belief arises from being duped by others.

In the result the court dismissed the appeals but under the circumstances did not award costs against the taxpayers:


[77]        It is difficult to feel a great deal of sympathy for the Appellants notwithstanding some presented as most sympathetic characters, simply duped by the bad guys. Yet, underlying this purported duping is a motivation attributable to all of them to not have to pay taxes. Fiscal Arbitrators was not hired just to prepare their returns – it was hired to prepare their returns in such a way as to produce a significant refund; in fact, a refund that would result in no tax in the year in question, and with respect to some, prior years as well. I question how an individual, regardless of the level of education, who has worked in Canada, paid taxes and benefited from all the country has to offer, can without question enter an arrangement where he or she claims fictitious business losses and therefore simply does not have to pay his or her fair share, indeed, does not have to pay any share of what it takes to make the country function. I am not unsympathetic to spouses and family who may suffer from the significant negative financial consequences these penalties will heap upon them by the actions of the Appellants: the Appellants’ penalties are indeed harsh. I however cannot pretend the specific 50% penalty called for by subsection 163(2) of the Act can be something less. That is only something the Government can consider.

[78]        It was clear to me these Appellants have paid a huge price, not just economically, as a result of Fiscal Arbitrators’ deceitful ways. I have concluded, however, that penalties are clearly justified, though I am concerned about the devastating effect the magnitude of the penalties will have on the Appellants. I recognize this consideration is not a factor cited in Rule 147 of Tax Court of Canada Rules (General Procedure), but I do not view the list of factors as exhaustive. Add to this the fact that few General Procedure cases have been heard regarding Fiscal Arbitrators, that I view these matters akin to test cases, though acknowledging the Parties did not present them as such, and that a novel argument was presented by the Appellants’ counsel, I exercise my discretion to not award costs. Having said that, I make no representation that not awarding costs is something I would consider in future Fiscal Arbitrators’ cases.

[79]        The Appeals are dismissed.

[Emphasis added]

[1] 2013 TCC 380.