http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/135306/index.do
Brathwaite v. The Queen (February 1, 2016 – 2016 TCC 29, Rowe D.J.).
Précis: Another fictitious business loss case where the only issue was the imposition of a gross negligence penalties to various taxation years. In an unusual twist Ms. Brathwaite was successful in having the largest penalty (2008) deleted. Her co-appellant, Mr. Thompson had his penalty for 2008 deleted. The appeals were allowed in part with one set of costs to the Crown in the amount of 60% of the Tariff.
Decision: I think this is the only recent example of taxpayer being relieved of gross negligence penalties where fictitious business losses were claimed:
[57] In the within appeals, both Brathwaite and Thompson were motivated by assurances provided by Morlee – the self-styled expert - that substantial tax refunds were available if they accepted without question his advice. Both appellants trusted Morlee that this novel method – which they did not understand or attempt to verify - was legitimate and made possible by applying special expertise he had acquired in the course of prior employment with CRA. Neither appellant comprehended the material provided by Lachapelle to be submitted in response to inquiries from auditors and other officials at CRA but that did not prevent them from sending letters and documents that abounded in nonsense, twaddle, jargon, drivel and babble sprinkled with random Latin words or phrases. Brathwaite and Thompson were intrigued initially by the lure of receiving tax refunds and when each received a substantial cheque in relation to the 2007 taxation year, they promptly accepted Morlee’s advice to file or re-file tax returns for previous years with the expectation this would entitle them to similar refunds. The profound trust the appellants placed in Morlee and Lachapelle went beyond reason and their conduct throughout the period relevant to their appeals was fuelled by their desire to obtain tax refunds as part of an overall plan to amass wealth for their future. This consistent and egregious suspension of rational thinking constituted wilful blindness.
[58] Both appellants are decent, hard-working, citizens and a loving couple who were duped by unscrupulous individuals who were part of a widespread fraud perpetrated by various persons acting alone or with one or more associates or as part of a larger well-organized entity that targeted professionals and other higher‑income taxpayers who were interested in recouping most – or perhaps all – of income tax already paid or in reducing the amount payable for the current year.
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Brathwaite
[60] With respect to the appeal of Brathwaite for the 2008 taxation year, the Crown has failed to discharge the requisite onus as there is no proof she made or participated in, assented to or acquiesced in the making of any false statement or omission in the tax return she did not sign and did not know that it had been submitted by someone without any instructions or authorization issued by her or by anyone on her behalf.
[61] The appeal for the 2008 taxation year is allowed and the Minister is directed to issue a reassessment in which the penalty previously imposed pursuant to subsection 163(2) of the Act is deleted.
[62] With respect to the appellant’s appeal for the 2005, 2006 and 2007 taxation years, the evidence supports a finding that the imposition of penalties pursuant to subsection 163(2) in each of those years is justified and each assessment for each year is confirmed and the appeal with respect to those years is dismissed.
Thompson
[63] As conceded by counsel for the respondent at the outset of her submissions, the penalty imposed under subsection 163(2) for the 2008 taxation year is not justified as the evidence established that no loss had been claimed that would have the effect of reducing the amount of tax payable and therefore could not trigger the process to levy a penalty. The appellant’s appeal is allowed and the Minister is directed to issue a reassessment for that year and to delete the penalty previously imposed.
[64] With respect to the appellant’s 2007 taxation year, the evidence supports a conclusion that the assessment of the Minister is correct and it is confirmed and the appeal is dismissed.