A recent Tax Court of Canada (TCC) decision confirms it’s never a good idea to make a false statement or omission on your income tax return in order to generate a tax refund. In Arbuckle v The Queen, the taxpayer participated in a tax avoidance scheme promoted by her tax preparer. The scheme involved the taxpayer claiming “fictitious business losses” even though she didn’t carry on a business or have any business losses.
In addition to disallowing the losses, Canada Revenue Agency (CRA) imposed gross negligence penalties. When CRA wants to impose gross negligence penalties, it must be able to show the taxpayer made false statements “knowingly or in circumstances amounting to gross negligence.”
In this case, the TCC found the factors relevant to gross negligence were present because the taxpayer:
Although the taxpayer argued her tax preparer “duped” her into participating in the scheme and added the fictitious business losses after she had signed the returns, the TCC found the evidence showed otherwise. In particular, the TCC judge found the taxpayer’s failure to do more than a cursory review of her returns was an abdication of “her responsibility for the correctness of the information contained in the returns” and showed her indifference “as to whether those returns complied with her obligations under the” Income Tax Act.
As well, had she reviewed the returns, the TCC judge found the fictitious business losses “would have been obvious” and inconsistent with the tax preparer’s explanation of her entitlement to “the large tax refunds he promised her.” So, the moral of this story is clear—if your tax preparer presents you with a proposal that seems too good to be true, it likely is! Moreover, if someone else prepares your income tax return for you, it is vital that you review the return thoroughly before signing and make sure you understand all of the claims you are making to ensure you don’t “knowingly or in circumstances amounting to gross negligence” make a false statement or omission.
Here’s the link to the case if you’d like to check it out: http://bit.ly/2hwRs2D.