http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/145654/index.do
Gorman v. The Queen (June 22, 2016 – 2016 TCC 153, Ouimet J.).
Précis: The taxpayer was persuaded by a promoter to acquire shares of 629900 Saskatchewan Ltd. (“629900”) in her RRSP. She relied upon the promoter’s promises of a 50% to 100% return on her investment within one to two years. CRA assessed her on the basis that the shares were not qualified investments for an RRSP and imposed gross negligence penalties. The Tax Court upheld both the assessment and the penalties. Costs were awarded to the Crown.
Decision: The taxpayer simply was not able to adduce evidence that the shares of 629900 were qualified investments:
[37] The Appellant failed to adduce evidence to demolish any of the assumptions of fact mentioned in paragraph 34 above. I was not presented with any evidence that would allow me to determine the business in which 629900 was involved. No evidence was presented to me that demonstrated that 629900 was an operating company or that it conducted any activities other than selling its shares. The simple fact that shares of the corporation were being sold does not prove that the corporation was operating and was an active business.
[38] Since the Appellant has failed to meet the onus of demolishing the assumptions of fact made by the Minister, I must accept those assumptions. I must accept that 629900 had not filed any income tax returns, had not produced a prospectus for the distribution of shares, and had not provided a business plan, a budget or any financial statements to support the share transactions, and that it held no property, had no employees and no bank accounts, and most importantly, did not conduct any business activity.
[39] On the evidence before me, I conclude that 629900 was not an active business; it was not carrying on a business. Therefore, 629900 was not a qualifying active business within the meaning of the Regulations and thus the purchase of its shares by the Appellant’s self-direct RRSP trust was a non‑qualified investment. Given that conclusion, the application of subsection 146(10) is automatically triggered and the fair market value (“FMV”) of the shares at the time of their acquisition must be included in the Appellant’s income.
[Footnote omitted]
The Court also sustained the gross negligence penalties:
[50] The Appellant clearly acted with indifference as to whether the law was complied with or not. Her negligence was such, in my opinion, that it can be qualified as gross negligence. In the circumstances surrounding this case, there were sufficient warning signs to cause the Appellant to make, prior to filing her return for the 2000 taxation year, further inquiries regarding the nature of the investment her self‑directed RRSP trust was making in 629900 and regarding the tax impact of that investment. In my opinion, the Appellant intentionally kept herself unaware of the facts by not making such inquiries because she did not want to know the truth about her investment in 629900.
[51] I can summarize these circumstances as follows:
1. The Appellant was told that she could expect a 50% to 100% return on her investment within one to two years. The Appellant did not ask Mr. Chilton and Mr. Cahill how they could achieve such returns.
2. The Appellant was not given any information or any relevant financial documents concerning 629900 or its future investments.
3. The Appellant placed complete trust in Mr. Henderson, Mr. Chilton and Mr. Cahill after only a few meetings. The Appellant did not know anything about Mr. Henderson, Mr. Chilton and Mr. Cahill, including their qualifications or experience, before deciding to trust them with her money and her investments.
4. The Appellant’s financial advisor, Mr. Price, told her that the investment made him nervous and he suggested that she not go through with it.
5. The Appellant knew that there was a foreign content limit in RRSPs and she was aware that there were as many as six foreign projects in the investment.
6. Between February 9, 2000 and April 10, 2002, the Appellant received a number of e-mails whose contents, she admitted, caused her concern: Among them were the e-mails from Mr. Chilton. The e-mails from Mr. Cahill and Mr. Neuls on February 12, 2001 and March 8, 2001, respectively, confirmed that there were serious problems with the investment and the people who were promoting it.
7. The Appellant had other RRSP funds and received yearly statements for those funds, but did not receive the same type of statements for this investment.
8. When the Appellant opened her self-directed RRSP trust account with CWT, she acknowledged on the application form that it was her responsibility to determine the eligibility of each investment for her plan under the provisions of the applicable tax legislation, and she attested that she was aware of the adverse tax consequences of including investments which did not qualify under such legislation.
9. In the letter of indemnity to CWT that she signed, she confirmed and certified that this investment was a “qualified investment” as that term is defined in the ITA, acknowledged that she had sought and obtained independent financial, investment, legal and tax advice to the extent she deemed necessary, and further acknowledged that it was her responsibility to evaluate the investment.
10. In the Freedom Foundations Inc. Humanitarian Project Funding Agreement, she acknowledged that she had been advised and was now being advised to consult and retain her own experts and representatives to advise her on the legal and tax effects of any transaction entered into.
[52] Despite all these circumstances and red flags, the Appellant did not ask Mr. Price or anybody else for formal advice on this investment and its tax consequences prior to filing her income tax return for the 2000 taxation year.
[53] I conclude that the Appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or an omission in her 2000 tax return when she failed to include in her income the amount of $52,880.00 used by her self-directed RRSP trust to purchase the shares of 629900. The circumstances of this case were such that the Appellant was aware of the need for some inquiry. Yet despite her knowledge of investments and her prior work experience, she chose to make none.
The Court also dismissed the argument that the taxpayer somehow realized a capital loss on the shares of 629900:
[55] In her oral submissions, the Appellant raised an issue that was not raised in her Notice of Appeal. The Appellant suggested that she might be entitled to claim a capital loss for the 2000 taxation year. Given the fact that the Appellant was not represented by counsel, I consented to hear her submissions on that issue. Both the Appellant and the Respondent were given the opportunity to provide written submissions on the issue.
[56] Pursuant to paragraph 38(b) and subsections 39(1)(b) and 40 (1)(b), in order for a taxpayer to claim a capital loss in a taxation year, there must first be a disposition of property. In the present case, and in light of the evidence before me, the Appellant’s self-directed RRSP trust did not dispose of its 629900 shares or of any other property in the 2000 taxation year. As there was no disposition of property, a capital loss is not allowable.
As a result the appeal was dismissed with costs.