Carphin v. The Queen
(June 23, 2015 – 2015 TCC 158, Woods J.).
Mr. Carphin earned considerable commission income between 2001 and 2006 selling investments through the Institute of Financial Learning an organization which proved to be a part of a traditional Ponzi scheme. In those years he earned commissions of $12,200, $266,401, $127,347, $243,420, $130,500 and $21,676, respectively. He failed to report any of this income and was reassessed including the imposition of gross negligence penalties. Much of the money was paid to an offshore company, Ciclon S.A., which was controlled by Mr. Carphin and/or his wife. Some of it was used to buy cash cards.
The Court held that the commissions were payable to Mr. Carphin and therefore taxable to him, irrespective of where he directed the amounts be paid. He was a well educated man with a masters’ degree in mathematics and philosophy as well as considerable business experience. The appeal was dismissed and the penalties affirmed except with respect to the 2003 taxation year where there had been a double-counting of $25,187.62; that year was referred back to the Minister to delete the double-counting and reduce the gross negligence penalty accordingly. Costs were awarded to the Crown.
There is not much to be said about his case as it is unclear why Mr. Carphin believed he had any defence:
 At the outset, I would mention that in the notice of appeal Mr. Carphin submits that commissions not received by him should not be included in his income. This is not the correct test. Mr. Carphin must report and is taxable on commissions that were payable to him or payable at his direction. In this case, it is clear that Mr. Carphin had the ability to direct how the commissions were paid.
 I would conclude based on the evidence as a whole that Mr. Carphin wrongly omitted from his tax returns commission income that was payable to him or as he directed.
 It does not matter where the unreported commissions were directed to be paid. As far as the evidence reveals, at least some of the unreported amounts were directed by Mr. Carphin to be paid to Ciclon S.A., an offshore corporation owned by Mr. and/or Mrs. Carphin. It appears that some or all of the funds transferred to Ciclon S.A. were then invested in SGD [Syndicated Gold Depository S.A.]. Other commissions were directed by Mr. Carphin to be transferred to non-Canadian cash cards. The cash cards could be converted to cash or used for purchases.
The gross negligence penalties were appropriate:
 The circumstances as a whole strongly suggest that Mr. Carphin’s failure to report this income was made knowingly. Mr. Carphin was highly educated, with a masters’ degree in mathematics and philosophy. He was an experienced businessman with a background in financial matters. Moreover, Mr. Carphin did not have any credible explanation for not reporting this income, especially the commissions directed to cash cards. The only reasonable explanation of the facts is that Mr. Carphin was keeping significant amounts of commission income out of Canada in order to avoid paying tax on these amounts. He knew that the commissions were taxable in Canada and had to be reported on Canadian tax returns.
 I would also comment that the tests do not require actual knowledge of wrongdoing. Wilful default (s. 152(4) and gross negligence (s. 163(2)) are sufficient. Without doubt, these requirements are satisfied.
 As for the amount of commission income that was unreported, the CRA auditor undertook a thorough analysis of the documents that she had available and she made an estimate of the unreported commission income revealed by them. The auditor’s calculations are well-documented and are reasonable in the circumstances of this case.
 Mr. Carphin made no attempt to dispute these amounts.
The appeal was dismissed with the exception of the 2003 taxation year where there had been a double-counting of $25,187.62; that year was referred back to the Minister to delete the double-counting and reduce the gross negligence penalty accordingly. Costs were awarded to the Crown.