https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/236046/index.do
Dingman v. The Queen (October 12, 2017 – 2017 TCC 206, Favreau J.).
Précis: Mr. Dingman got involved in a “leased employee” scheme under which he assigned all of his income from services to Dannea Business Services Inc. (“Dannea”). Dannea maintained an account from which Mr. Dingman was able to draw the funds (less a 7% commission). Mr. Dingman reported no income from employment or business income in the years under appeal. CRA included the amounts paid to Dannea in his income and imposed gross negligence penalties. The Tax Court upheld CRA’s reassessments and dismissed Mr. Dingman’s appeal with costs of roughly $5,000.
Decision: This was simply a case of a blatant sham:
[40] Concerning the second issue, my conclusion is that the amounts of $3,861.59, $80,456.50 and $82,014.50 paid by Graham’s Backhoe for services provided by the appellant should have been included in his income pursuant to subsection 9(1) of the Act for the 2009, 2010 and 2011 taxation years for the reasons that follow.
[41] These amounts are in respect of services provided directly by the appellant to Graham’s Backhoe and the appellant had unfettered access to these amounts as they were deposited in Dannea’s and Browncliff’s bank accounts for his own and exclusive benefit. The appellant had full control over this money. These amounts were not received by him as loans from his employer.
[42] There was no contractual relationship between Graham’s Backhoe and Dannea and between Graham’s Backhoe and Browncliff. There was no agreement between the parties setting out the terms and conditions of the work to be performed by the appellant. Dannea and Browncliff were empty shells. The appellant had to prepare the invoices on their behalf for the services he provided to Graham’s Backhoe. Dannea and Browncliff did not report the amounts that Graham’s Backhoe paid them on their income tax returns.
[43] There was no true employer-employee relationship between Dannea and the appellant and between Browncliff and the appellant despite the employment agreements entered into by the parties. Dannea and Browncliff were not in a position to exercise any form of control or supervision over the services provided by the appellant to Graham’s Backhoe. If the parties would have intended to create a true employer-employee relationship, Dannea and Browncliff would have taken source deductions from the amounts paid to the appellant.
[44] There was no true creditor-debtor relationship between Dannea and the appellant and between Browncliff and the appellant despite the promissory notes and the assignments of security for the loans that the appellant supposedly signed in favour of Dannea and Browncliff.
[45] If the intention of the parties was that the amounts would be repaid, they would have done so from future payments to be received from Graham’s Backhoe by way of set-offs or compensation and not from the assignment of the appellant’s contractual rights and obligations arising from the payments already made by Graham’s Backhoe in the year. In fact, there is no debt payable in the future and no reimbursement of the loans made by Dannea and Browncliff to the appellant up to the time of the hearing.
[46] The true nature of the arrangement between the appellant and Dannea/Browncliff is a sham transaction and the employment agreements, the notes and the assignments of the appellant’s contractual rights and obligations should be disregarded. The appellant, Dannea and Browncliff misrepresented their relationships to Graham’s Backhoe and to the Minister so that the appellant could avoid paying income tax and so that Dannea, Browncliff and their respective shareholder could profit from the misrepresentation. The “sham” concept was applied by the Federal Court of Appeal in Faraggi v. The Queen, 2008 FCA 398 and Antle v. The Queen, 2010 FCA 280. The true nature of the leased employee scheme was easily found by the CRA’s auditor on the website of Graycliff Financial Corporation (tab 24 to 28 of the Joint Book of Documents).
[47] Concerning the third issue, I come to the conclusion that the gross negligence penalties assessed against the appellant pursuant to subsection 163(2) of the Act are justified in the circumstances.
[48] In his 2009 income tax return, the appellant is noted as a tax protester because he signed his income tax return with the following affirmation: “I, commonly called Stanley-Blake of the Dingman family for Stanley Blake Dingman, for Her Majesty in Right of Canada”. He also signed his 2010 and 2011 tax returns in the same manner.
[49] The appellant knew that his income for the 2009, 2010 and 2011 taxation years was much higher than the $3,500 reported in each of these years. He knew exactly how much he was earning in any given year as he prepared the invoices for the services he personally provided to Graham’s Backhoe.
[50] The appellant has been grossly negligent in dealing with a person who has pleaded guilty in a $5.2 million tax fraud case in 2008 and by not exercising care and accuracy in the completion of his tax returns and not making any effort to verify the accuracy and completeness of his returns for the 2009, 2010 and 2011 taxation years, after being audited for the period from January 1, 2006 to December 31, 2008.
In the result the Tax Court upheld CRA’s reassessments and dismissed Mr. Dingman’s appeal with costs of roughly $5,000.