You may be aware of Fiscal Arbitrators. The organization convinced many Canadians to let self-described tax experts prepare and file their tax returns, or amendments to their previous year’s returns, in order to take advantage of fictional expense deductions. The effect was to lower the amount of the taxpayer’s taxable income, resulting in a tax refund for participants in the scheme.
Canada Revenue Agency’s (“CRA”) response has been to audit the taxation years at issue, deny the deductions and levy gross negligence penalties against the participants. Those penalties are calculated as a percentage of tax owing and can be quite substantial. For instance, a recent news report refers to one Canadian couple that owe CRA approximately $125,000 in penalties alone. They also have to pay back the tax refund they received on account of the improperly claimed expenses.
In another example, Fiscal Arbitrators advised participants that, due to a legal loophole, every individual is registered as a business with CRA. Normally if you are running a business you can deduct business expenses incurred to earn business income. For example, if you are a travelling salesman and use your car for your sales business you are eligible to deduct motor-vehicle expenses from your taxable income.
On account of the fictional presumption that the CRA considers every individual to be a business, the participants were advised to file their tax returns as an independent business entity. In turn, they were told that they could deduct all their living expenses as business expenses. Also, business losses could be carried back 3 years, further reducing taxable income and entitling the participants to a large tax refund. A percentage of the refund was then remitted to Fiscal Arbitrators as payment.
Anyone with knowledge of tax law or accounting would immediately recognize the Fiscal Arbitrator’s advice as improper, but there are many Canadian taxpayers who were genuinely conned. However, in a related decision before the Tax Court of Canada, Chénard v. The Queen, 2012 TCC 211, the Court found that, even though the taxpayer insisted that he was unwittingly duped by Fiscal Arbitrators, due to the large amount of business expenses claimed, in proportion to the taxpayer’s income, the taxpayer was liable to pay thousands in gross negligence penalties. According to the Court, the taxpayer should have been or was aware that the scheme was fraudulent.
Following the advice of Fiscal Arbitrators, the taxpayer in Chénard filed T1 adjustments for the 1998 through 2004 taxation years. In each of the aforementioned years he claimed net business losses in the range of approximately $48,000 to $62,000. His appeal was based solely on disputing the gross negligence penalties, totalling approximately $40,000. The impugned expense deductions were not in dispute as they were clearly not supported by the law.
CRA assessed penalties on the basis that the appellant, who did not operate a business and had not reported business income in the past, claimed his personal expenses as business expenses. As a result of the expenses claimed, the losses ranged between 81 to 88 percent of the appellant’s income in each year, substantially reducing his taxable income and making him eligible for a tax refund. The taxpayer was grossly negligent, according to the Court, because he signed off on the adjustments prepared by Fiscal Arbitrators. Furthermore, the Minister argued, he should have been aware that the adjustments were not factual. The aforementioned facts, according to the Minister, suggested gross negligence on the part of the taxpayer.
The taxpayer’s defence centred on his presumed lack of sophistication and knowledge of tax. He failed to graduate high school, relied on third parties (Fiscal Arbitrators) to prepare his returns and signed the returns without review. However, the Court noted, in the past the taxpayer bought and sold a property without using the services of a real estate agent and remortgaged his home with the bank without the help of an agent, all suggesting a certain level of sophistication and therefore the presumed ability discern the fallacy of the Fiscal Arbitrators scheme.
Even though the Chénard case was heard under the informal procedure and therefore does not have precedential value, CRA is relying on the decision to deny the appeals of taxpayers who participated in the Fiscal Arbitrators scheme. Of course, many taxpayers were unwitting dupes and genuinely believed what Fiscal Arbitrators told them. These taxpayers do not deserve to be subject to penalties that may lead to financial ruin and can and should appeal their penalty assessments to the Tax Court.
If you require an experienced tax lawyer to advise you on your dealings with Fiscal Arbitrators, or any other tax matters, please contact us
"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."