Fiscal Arbitrators strike out again!

[Burnaby49]

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.

Hey, don't blame me for the purple prose and mixed metaphors. The above is a quote from a recent Tax Court of Canada decision.

http://decision.tcc-cci.gc.ca/site/tcc- ... 7/index.do

It continues;

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 issue at court was the appeals of the various sad and sorry taxpayers. Not from their reassessments but from the gross negligence penalties imposed on top of the standard assessment. They apparently felt they had acted in good faith in trying to cheat the tax department.

The court went into some detail re Mary Torres, the head appellant. She was a nurse making about $70,000 a year with trivial tax refunds until she was introduced to Fiscal Arbitrators who told her they could do a lot better than that for her. How? By claiming fictitious expenses for a fictitious business! So elegantly simple! No fiddling around with obscure complex tax law. Just make it all up. In her case, out of the blue, she went from reporting standard everyday employment income to including a business with $15,800 of gross income and a $113,426 tax deductable loss.

Why had she acted in good faith? Because of the skeptical questioning probe she did of the figures presented to her to include in her tax return by a total stranger she'd not dealt with before;

She certified this information as correct. On being asked whether she reviewed this document before signing, she gave the same answer she would give to all documents she signed and submitted to the CRA, and that is, Mr. Watts prepared it, she read it and signed it without asking anything about it. She trusted him. He was a professional. She claims she understood so little of the tax return, she did not know what questions to ask.

The CRA didn't process the claimed loss but instead asked some questions about the business. You know, stuff that was none of their business like actual numbers and documents. Ms. Torres went back to Fiscal Arbitrators with the CRA letter and they gave her the appropriate response to the CRA's questions, refuse to answer and threaten to sue them.

[7] On September 19, 2008, the CRA responded to Ms. Mary Torres' adjustment request with a request to complete and return a business questionnaire, attaching receipts for the claimed expenses of $129,226. Mr. Watts prepared a letter dated October 14, 2008, for Ms. Mary Torres to send, in response, to the CRA. It forwarded no information the CRA were seeking.

[8] On January 21, 2009, the CRA again wrote Ms. Mary Torres advising they were proposing to deny the business loss and considering the imposition of penalties.

[9] Again, Ms. Mary Torres read the letter, provided it to Mr. Watts, who provided her with a letter of February 9, 2009, to send back to the CRA again providing no information and rejecting their proposal.

[10] On April 29, 2009, the CRA wrote to Ms. Mary Torres with their final position with respect to the losses and indicating they were applying gross negligence penalties. Again, Mr. Watts provided Ms. Mary Torres with a response dated May 2, 2009, to the CRA rejecting the CRA's position and seeking compensation from the CRA.

[11] In going over these documents, Ms. Mary Torres stated repeatedly that although she read them she did not understand what they meant, though acknowledging that she knew she was not engaged in any business activity.

While this was going on Fiscal Arbitrators advised her to double-down by submitting yet another false expense claim for her next tax year while dazzling the CRA with the profundity of their arguments;

[12] The communications with respect to the 2008 taxation year were similar, and it is unnecessary to repeat a document by document review. I do note, however, that she signed the 2008 return claiming $30,000 in business losses on March 20, 2009, two months after she had been notified by the CRA they were considering gross negligence penalties with respect to the 2007 taxation year. She signed her name on her return after putting in "per". The tax preparer did not complete the box in the return for professional tax preparers. She held firm in her testimony that, though she read the correspondences from the CRA, she simply forwarded everything to Mr. Watts without question, and then followed his instructions, including, for example, putting a three cent stamp on the bottom of one of the letters to the CRA, writing her name diagonally across it. She never contacted the CRA on her own accord or asked her former tax preparer to review the situation.

[13] To give a flavour of the verbiage used by Mr. Watts in the letters he instructed Ms. Mary Torres to sign, I reproduce part of a letter dated September 8, 2011, from Ms. Mary Torres, which she wrote with "ens legis" after her name. (translated as "an artificial being")

Any and all opinions offered in your letter are expressly rebutted for cause.

Please provide within 30 days to avoid Full Estoppel of any variance from your stated duty – the facts, reasons and assumptions and all presumptions upon which you are relying to make your offer only on a "under your penalty of perjury" and "under your full commercial and equitable liability under international law" basis to verify your accountability and uprightness, as previously agreed, and send all such information to the address as noted above for verification.

[14] Ms. Mary Torres, understandably, could not explain any of what Mr. Watts prepared for her, including her returns, adjustment requests or correspondences.

In spite of all this legal verbiage the CRA denied her business losses for 2007 and 2008 and imposed penalties.

Pretty much the same story for the rest of them with some variants. I particularly liked this comment:

[26] In October 2008, Mr. McNulty attended a Fiscal Arbitrators seminar at St. Paul's University in Ottawa, where he first met Mr. Watts. The meeting was private, and participants were asked to sign a form of non-disclosure. Mr. McNulty testified that Fiscal Arbitrators described a new way to file taxes by somehow separating the person from his social insurance number. The ultimate result would be substantial refunds. Mr. McNulty was skeptical but went to a second presentation with a friend. At that meeting, Mr. Watts advised that he was a former CRA officer and that CRA were aware of this arrangement. Mr. McNulty decided to go ahead feeling there was no downside, but recognizing it was not the type of thing he would normally do. He did not tell his wife as, according to Mr. McNulty, she would have set him straight.

He didn't tell his wife because he knew she would talk him out of it? But how couldn't it be on the up and up with CRA staff involved?

[28] The return listed business income as $128,147 with business losses of $392,880. Mr. McNulty said he knew he did not have a business and could not have spent $392,880. He also signed as correct a request for loss carrybacks to 2006 and 2007. Mr. McNulty did not understand his return which referred to business as an agent. He believed Fiscal Arbitrators, as former CRA officials, were legitimate and knew what they were doing.

The appellant's main argument at trial was that it was all the CRA's fault for letting them do it;

[59] The Appellants' counsel also raised the defence that, as the CRA did not warn taxpayers of the Fiscal Arbitrators' scam, as required to do under the provisions of the taxpayers Bill of Rights, the taxpayers had no reason to question the convincing presentations of Fiscal Arbitrators and cannot therefore be found to be grossly negligent, and should therefore be absolved of any liability.

Unfortunately the Tax Court didn't buy it;

b) Blatantness of false statement –readily detectable.

In all cases the nature of the falsehood, large business losses when none of the Appellants were actually engaged in business, is so blatantly untrue that no matter how firmly the Appellants believed that, pursuant to some process, they were entitled to refunds of all their taxes, they could not have believed they incurred large business losses. Being convinced of the refund does not automatically imply they believed they had business losses. They simply did not address their minds to it. Mr. Barrett suggested that tax experts could read the return and understand that reporting such business losses made no sense, but these people were not experts. I do not accept that argument. These are all intelligent people with good jobs with a given tax return filing history. None of their returns were elaborate with multiple sources of income. They (with the exception of Mr. Hyatali) all saw the major source of income showed up as an employment income on page 2 of their return. There were not many other numbers on page 2 of their returns and the negative number beside business income does not require a tax expert to comprehend. It is not that complicated. It is easily detectable. In and of itself this is sufficient to cause a suspicion, demanding an inquiry.

f) Explanation by tax preparer regarding false statement is incomprehensible.

None of the Appellants could explain how the process worked. While they all professed to have the utmost confidence in their tax preparers, they clearly did not understand what they had confidence in, other than an entitlement to large refunds. Some tried to explain that they were led to believe their social insurance number was a separate entity and could somehow incur expenses deductible to them as individuals, or in Fiscal Arbitrator terms, as fictional entities. The language is absurd, the concept is absurd. I can only conclude that the desire for money back outweighed the need to understand.

Mr. Barrett argues that the lack of understanding goes to the complexity of the tax system, and whereas he and I might appreciate the tomfoolery of it all, in the complex world of tax filings, otherwise intelligent people may actually believe they and their social insurance number are separate entities, that they are fiction, that they can legitimately claim business losses without a business and that they can receive full refunds that they had never ever received before. Mr. Gautier believed it had something to do with claiming household expenses yet never submitted any expense numbers to Fiscal Arbitrators. No, I simply do not buy it. Something as completely inexplicable as the Fiscal Arbitrators' scam can only be accepted holus-bolus by an indifference to the comprehension of it. As long as the refund is forthcoming there is no need to understand the detail appears to be the approach, no need to understand the Statement of Business Activities or Agent Activities, for example, which the Appellants certified as correct. This is simply not good enough.

The court didn't think much of the argument that it was the CRA's fault for not taking out full-page national nespaper ads to advise the appellants it was a scam:

[75] Yet, I would go further. Had any of the Appellants done some minimal snooping on the CRA's website to their Tax Alert section, they would have readily found the types of warnings set out earlier in these Reasons. If something is too good to be true, guess what? Mr. Barrett argues the warnings were not explicit enough, not publicized enough. He suggested a full page ad in the Globe and Mail specifically referring to Fiscal Arbitrators may be considered sufficient warning. In this modern age of electronic communication and websites for pretty much everything, it is not unreasonable to expect the CRA would have a website and warnings, if any, would be posted on that website.

[76] I reject Mr. Barrett's argument that the CRA failed to warn. I further reject the notion that if they did fail to warn, penalties cannot be assessed. They can be assessed.

Other Quatloos discussions of Fiscal Arbitrators can be found at:

viewtopic.php?f=46&t=9443&p=160048&hili ... rs#p160048

viewtopic.php?f=46&t=9396&p=158492&hili ... rs#p158492

[grixit]

So, is there an entry in Black's Law Dictionary for "Tomfoolery"?

[Burnaby49]

So, is there an entry in Black's Law Dictionary for "Tomfoolery"?

Not to mention "holus-bolus".

[LaVidaRoja]

WOW! That one has been around down here for a LONG time. Back in the last century, I remember working a project on a "gentleman" who claimed phony losses. Before he could be indicted, his partner was killed in a car accident. He blamed all of the fraud on his partner. Then, shortly before I retired (this century) I got a call from CI Guess who they were (again) investigating for claiming phony losses? Old, old scam. More difficult to do today with all of the available computer-checking (business license, State sales taxes, etc) But still around. (Don't you claim providing of in-home child care?)

[Burnaby49]

WOW! That one has been around down here for a LONG time. Back in the last century, I remember working a project on a "gentleman" who claimed phony losses. Before he could be indicted, his partner was killed in a car accident. He blamed all of the fraud on his partner. Then, shortly before I retired (this century) I got a call from CI Guess who they were (again) investigating for claiming phony losses? Old, old scam. More difficult to do today with all of the available computer-checking (business license, State sales taxes, etc) But still around. (Don't you claim providing of in-home child care?)

What can I say, we're slow to follow in the steps of the masters. In any case it is a perennial, cropping up in a new guise from year to year, mutations on a theme.

What's this stuff about fancy high-tech computer checking? The CRA nailed the taxpayers through a paper questionnaire sent by snail-mail. We like the old tried and true.

[Burnaby49]

This whole gang of losers (seven in all) have appealed their Tax Court loss to the Federal Court of Appeal. As an ex-tax auditor who has followed schemes like this for decades I can give a reasoned prediction of their chances on appeal. None. As in, not a hope in hell. The Tax Court decision was based on a determination of fact rather than law. An appeal of a claimed error in law is reviewed on the basis of "correctness" but a review of a determination of fact is based on "palpable and overriding error", a very high standard. The Supreme Court of Canada, in Housen v. Nikolaisen, was adamant that lower court decisions based on findings of facts were not to be overturned by appellate courts except where there had been blatant errors in the decision. As the Supreme Court said in Housen v. Nikolaisen;

Since an appeal is not a re‑trial of a case, consideration must be given to the standard of review applicable to questions that arise on appeal. The standard of review on pure questions of law is one of correctness, and an appellate court is thus free to replace the opinion of the trial judge with its own. Appellate courts require a broad scope of review with respect to matters of law because their primary role is to delineate and refine legal rules and ensure their universal application.

The standard of review for findings of fact is such that they cannot be reversed unless the trial judge has made a “palpable and overriding error”. A palpable error is one that is plainly seen. The reasons for deferring to a trial judge’s findings of fact can be grouped into three basic principles. First, given the scarcity of judicial resources, setting limits on the scope of judicial review in turn limits the number, length and cost of appeals. Secondly, the principle of deference promotes the autonomy and integrity of the trial proceedings. Finally, this principle recognizes the expertise of trial judges and their advantageous position to make factual findings, owing to their extensive exposure to the evidence and the benefit of hearing the testimony viva voce. The same degree of deference must be paid to inferences of fact, since many of the reasons for showing deference to the factual findings of the trial judge apply equally to all factual conclusions. The standard of review for inferences of fact is not to verify that the inference can reasonably be supported by the findings of fact of the trial judge, but whether the trial judge made a palpable and overriding error in coming to a factual conclusion based on accepted facts, a stricter standard. Making a factual conclusion of any kind is inextricably linked with assigning weight to evidence, and thus attracts a deferential standard of review. If there is no palpable and overriding error with respect to the underlying facts that the trial judge relies on to draw the inference, then it is only where the inference‑drawing process itself is palpably in error that an appellate court can interfere with the factual conclusion.

Questions of mixed fact and law involve the application of a legal standard to a set of facts. Where the question of mixed fact and law at issue is a finding of negligence, it should be deferred to by appellate courts, in the absence of a legal or palpable and overriding error. Requiring a standard of “palpable and overriding error” for findings of negligence made by either a trial judge or a jury reinforces the proper relationship between the appellate and trial court levels and accords with the established standard of review applicable to a finding of negligence by a jury. Where the issue on appeal involves the trial judge’s interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error. A determination of whether or not the standard of care was met by the defendant involves the application of a legal standard to a set of facts, a question of mixed fact and law, and is thus subject to a standard of palpable and overriding error, unless it is clear that the trial judge made some extricable error in principle with respect to the characterization of the standard or its application, in which case the error may amount to an error of law, subject to a standard of correctness.

http://www.canlii.org/en/ca/scc/doc/200 ... ZW4AAAAAAQ

And the decision in this case isn't one of those maybe yes, maybe no, Solomonic judgments that could have fallen either way. The judge, correctly, was very decisive that the appellants had been grossly negligent in preparing their returns, a decision fully supported by the evidence reviewed by the court.

The Federal Court of Appeals won't touch it. I'd predict about a three line decision saying the FCA had reviewed the submissions and found nothing to indicate that the trial judge had committed a palpable and overriding error in making his decision and that the evidence at trial more than supported his conclusions. Costs to the Crown.

[notorial dissent]

None!!! Not even a teeny tiny iddy biddy showball's worth??? Well gosh darn it all to heck and back!!!!!

[Burnaby49]

One of our Fiscal Arbitrator suckers, not happy with the Tax Court of Canada treating her stupidity and greed so harshly, decided to look for justice at the Federal Court of Appeal. This is the FCA decision in its entirety;

DAWSON J.A.
STRATAS J.A.
SCOTT J.A.

COURT/JUDGE/DATE:

Federal Court of Appeal, , March 2, 2015. (Docket: A-6-14)

COUNSEL:

Jeffrey Radnoff and Igor Kastelyanets, for the Appellant.
H. Annette Evans and Lindsay Beelen, for the Respondent.

REASONS FOR JUDGMENT OF THE COURT

(Delivered from the Bench at Toronto, Ontario, on March 2, 2015).

DAWSON J.A.:—

[1] Subsection 163(2) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) renders a taxpayer liable to payment of a penalty when the taxpayer knowingly, or under circumstances amounting to gross negligence, makes a false statement in a return.

[2] For reasons cited as 2013 TCC 380, a judge of the Tax Court of Canada dismissed an appeal brought by the appellant from the assessment of a gross negligence penalty in respect of the 2007 taxation year. The facts giving rise to the imposition of the penalty were that the appellant, at the behest of an unscrupulous tax preparer, claimed a fictitious business loss in an amount sufficient to generate a complete refund of all taxes paid by the appellant in respect of her employment income.

[3] While counsel for the appellant asserts various errors on the part of the Judge, the appellant has failed to establish any basis for interfering with the judgment of the Tax Court. We reach this conclusion on the following basis.

[4] First, as conceded in oral argument by counsel for the appellant, the Judge made no error in articulating the applicable legal test. Gross negligence may be established where a taxpayer is willfully blind to the relevant facts in circumstances where the taxpayer becomes aware of the need for some inquiry but declines to make the inquiry because the taxpayer does not want to know the truth (Canada (Attorney General) v. Villeneuve, 2004 FCA 20, 327 N.R. 186, at paragraph 6; Panini v. Canada, 2006 FCA 224, [2006] F.C.J. No. 955, at paragraphs 41-43).

[5] Contrary to counsel for the appellant's submissions, the Judge's reasons demonstrate that he properly considered the appellant's background and circumstances.

[6] Second, the appellant has failed to establish that the Judge misapplied the correct legal test. No palpable and overriding error has been shown in the Judge's finding of mixed fact and law that given the numerous "warning" signs, the appellant was required to make further inquiries of her tax preparer, an independent advisor or the Canada Revenue Agency itself before signing her tax return. Nor has any palpable and overriding error been shown in the Judge's conclusion that the circumstances precluded a defence that, based upon the wrongful representations of her tax preparer, the appellant believed that what she was doing was permissible.

[7] In the result, the appeal will be dismissed with costs.

"Eleanor R. Dawson"

Strachan v. Canada 2015 FCA 60
http://canlii.ca/t/ggmd2

I'm not feeling the love.