Can You Trust Your Accountant?

As per statistics from the Canada Revenue Agency (CRA), 29.36 million returns were filed in 2023 by Canadian taxpayers. Almost 18.94 million returns (about 60%) were filed using the EFILE service, an authorized service provider, or tax filing services. This indicates that the majority of Canadians use tax filing service providers for their tax return submission.

Source CRA’s website

Most tax accountants are honest, hardworking individuals who make life easier for Canadians during the stressful time of tax filing. However, as in any field, some unscrupulous and greedy service providers also exist in the tax and accounting industry. These individuals or firms assume they can abuse the Canadian tax system and get away with it, which is not true. Sooner or later, CRA catches them, and they face the consequences of their actions.

Unfortunately, individual and business tax filers sometimes become victims unknowingly. The CRA audits, levies interest, and penalties for gross negligence. This is because they are ultimately responsible for the correctness of tax filing, regardless of the fact who filed the tax return for them. These innocent tax filers assume their only duty is to engage a tax filer and nothing more.

Does Engaging in a Tax Filing Service Absolve Tax Filers of Their Responsibility for Correct and Accurate Tax Filing?

The answer is NO!

Let’s walk through the case of Fiscal Arbitrators, to understand tax filer’s responsibilities. According to reports, as many as 1,800 Canadians were involved in the Fiscal Arbitrators program or were involuntarily victims of the scam.

On February 28, 2020, CRA issued a news release for this case. Here are some extracts.

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The Canada Revenue Agency (CRA) announced that Aurelius Carlton Branch of Brampton, Ontario, was sentenced on February 27, 2020, in the Ontario Court of Justice in Newmarket to four and a half years in jail, and to fines totalling $394,772.

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The release further said: –

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A 28-month CRA investigation revealed that Branch and his partner, Lawrence Watts, operated Fiscal Arbitrators, a Canada-wide tax preparation firm that promoted a tax protester scheme based on a fraudulent concept of a “created person,” leading clients to believe they could legally file tax returns claiming large false business losses, even though no such businesses existed. The fictitious losses enabled 241 clients to receive or attempt to receive approximately $10 million in federal tax refunds.

Since Branch could not be located, a Canada-wide arrest warrant was issued on January 29, 2013, and Interpol published a “Red Notice” on April 12, 2013, identifying Branch as wanted for prosecution in Canada. In co-operation with Costa Rican authorities, Branch was arrested on September 21, 2017, and was extradited to Canada on February 26, 2019 with the assistance of the Royal Canadian Mounted Police.

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In summary, Fiscal Arbitrators and their partners attracted taxpayers by promising large tax refunds by claiming false business losses and reducing the taxable income when no business existed. They even carried back fraudulent losses to previous years to claim the taxes paid in those years, thereby increasing refunds. Of course, any fraud cannot go on for long before the CRA cracks down on it. The CRA’s investigation team spotted the issue and prosecuted the culprits. Even though one of the culprits wasn’t in Canada, the CRA brought him back to Canada and prosecuted him. This case reflects the power that the CRA carries under the law.

As expected, in the next move, the CRA also initiated an investigation against all the taxpayers who used the services of Fiscal Arbitrator. During the tax audit, CRA inquired with taxpayers about the business losses, and they could not provide reasonable answers. Accordingly, CRA not only disallowed the business losses, resulting in the reversal of the refund claim, but CRA also imposed interest and penalties for gross negligence.

Since the business losses were fake and incorrect, the taxpayers did not challenge them. However, many taxpayers appealed against the CRA’s decision to charge a gross negligence penalty. Their point of view was that they relied on tax preparer and were not responsible for it. We will discuss two court cases as examples here.

• Anderson & The Queen [2016 TCC 93] (“Anderson”) — Copy of the judgment
• Sledge & The Queen [2016 TCC 100] (“Sledge”) — Copy of the judgment

In the case of Anderson (and some other cases), the Tax Court of Canada granted Anderson’s appeal and disallowed the CRA’s decision to levy the gross or willful negligence penalty. In the case of Sledge, the taxpayer’s request was disallowed. The court upheld the CRA’s finding that the taxpayer was responsible for gross negligence.

Why Two Different Decisions by Tax Courts?

The Canadian tax system is based on self-reporting and relies on the taxpayer’s honesty. Accordingly, it is the taxpayer’s duty to report complete and correct income, no matter who prepared the return. To maintain the integrity of the system, to encourage honest reporting of income, and to penalize those who misreport their income, the CRA conducts audits of the returns at its discretion (either randomly or when red flags are raised in the return). The Income Tax Act (“ITA”) provides CRA substantial power to audit, assess penalties, and even pursue criminal charges under the following sections: –

1. Section 162 failure to file
2. Section 163 for false statements or omission (either “knowingly” or under “gross negligence”)

 As such, for the application of section 163, one of the conditions has to be met: the false statement or omission was made with the taxpayer’s knowledge, or the taxpayer was grossly negligent.

In both cases, the appellants (taxpayers) took the position that even though there was a misstatement in the tax return, they were not aware of it because they relied on the tax preparer. Therefore, the condition of “knowingly” making false statements does not satisfy.

The burden was on the CRA to prove that even though the taxpayers did not know about the false statement, it was gross negligence on their part, and they failed in their duty of care and due diligence to ensure their returns were correct.

In the first case, the appeal was successful because the taxpayer was able to show that he made an effort to understand the tax return, asked questions within the limitation of his knowledge and education, inquired about the service provider’s reputation, and exercised due diligence. Accordingly, the court did not accept CRA’s stance, and the penalty for gross negligence was removed.

However, in the second case, the taxpayer confirmed that he did not look at the numbers on his return and also testified that he did not look at the refund amount he was claiming. The taxpayer did not ask any questions regarding the contents of the return. Accordingly, the court rejected the taxpayer’s appeal and upheld the decision of the CRA that the taxpayer was liable because of his negligence.

What are the Key Lessons From the Above Two Cases?

The takeaway from these cases and court rulings is that the taxpayer is ultimately responsible for the correctness of their return. They are not expected to be experts but must take it seriously.

One must exercise due care in selecting the corporate tax filing service provider; at the time of tax return preparation, one must review the contents of the returns based on one’s knowledge and skill level and ask questions where things look out of the ordinary.

In our other article, we discussed detailed guidelines everyone should use when selecting and working with their tax accountant. Using those guidelines, you can reduce your chances of being a tax scam victim. Also, in the worst-case scenario, where you are a victim of any tax scam or fraud, at least you have something to support you against CRA audit and protection and potential defense in a court of law.

If you need advice on your Corporate and business taxes or need assistance with bookkeeping, a Source Accounting Professional Corporation tax professional can assist you. Book a consultation by calling at 647-930-8130.

Source Accounting Professional Corporation (CPA) is a full-service accounting firm in Mississauga, dedicated to individuals, small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. If you are looking for an accountant Mississauga (Brampton, Toronto, GTA) or an accountancy firm Brampton, you are in the right place.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.