Four Tax Court judgments on cases involving income tax fraud as a result of false statements on Canadian tax returns were recently issued. Each of those tax cases is an appeal of the income tax assessment of a gross negligence penalty by the Canadian Revenue Agency ("CRA") against the Canadian taxpayer. All of the T1 tax returns filed were tax audited by CRA and found to contain blatant income misstatements. Despite those clearly false tax statements contained in their tax returns, in three of those tax cases the taxpayers won and the gross negligence penalties were deleted. While many factors were argued by their Canadian tax lawyers, taxpayer efforts with respect to verifying the amounts submitted on their tax returns and how the taxpayer came into contact with the tax return preparer were extremely relevant to these types of tax court decisions. Similar activities carried on by different taxpayers may yield opposite results in gross negligence penalty appeals since the background of each individual is relevant. It is very much a threshold analysis where the tax court will take multiple factors into account in order to determine if the taxpayer crossed the line from "carelessness" or "naiveness" into willful blindness, which is a test for imposing gross negligence penalties. In summary, what is significant is whether a need for inquiry about the prepared tax return existed in the individual taxpayer’s case, how strong that need to inquire was, and how the taxpayer responded to that need to inquire. Generally, if there is a significant lack of effort on the part of a taxpayer to verify blatantly obvious misstatements on his or her tax returns the tax court will likely uphold the penalty.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."