Manhue v. R. – TCC: Gross negligence penalty upheld in another Fiscal Arbitrators Case

Manhue v. R. – TCC:  Gross negligence penalty upheld in another Fiscal Arbitrators Case

Manhue v. The Queen (April 17, 2018 – 2018 TCC 71, Sommerfeldt J.).

Précis:  Mr. Manhue was another victim of Fiscal Arbitrators.  He claimed a business loss of $263,351.82 in 2009.  The loss was denied and CRA imposed a gross negligence penalty of $32,633.91 under subsection 163(2) of the Income Tax Act.  He appealed the imposition of the penalty unsuccessfully.  However the Tax Court did exercise its discretion and did not award costs against him.

Decision:    The decision of Justice Sommerfeldt is an extremely thorough exploration of the case law dealing with gross negligence penalties, particularly in the context of Fiscal Arbitrator decisions.  In the end however it simply boiled down to the conclusion that Mr. Manhue had not demonstrated that he had acted reasonably under the circumstances:

[56]  Some of the warning signs described in Torres were not present in Mr. Manhue’s situation. For instance, Mr. Manhue’s previous tax preparers had not completed Box 490 on the tax returns which they prepared for him, so Mr. Manhue saw nothing irregular in Fiscal Arbitrators leaving Box 490 blank on the 2009 income tax return. Similarly, there was no specific evidence to suggest that Mr. Manhue found any of the requests made by Fiscal Arbitrators to be particularly unusual or any of the explanations given by Fiscal Arbitrators to be incomprehensible. There was nothing in the conduct of Mr. Manhue’s friends and associates that may have alerted him to any concerns about Fiscal Arbitrators, nor did anyone warn him not to engage Fiscal Arbitrators.


[57]  On the other hand, there were several perceptible warnings signs that may have or should have put Mr. Manhue on his guard. After speaking with his friend at work, Mr. Manhue understood that his friend had obtained significant income tax refunds, and Mr. Manhue hoped to do so himself. Although Mr. Manhue had previously paid a relatively modest fee each year for preparation of his tax return, he was willing to pay an upfront fee approximately five to eight times greater than what he had previously paid, together with a percentage of any refund obtained, in the hopes of obtaining a sizable refund like his friend had obtained. Mr. Manhue did not understand the mechanism whereby he would obtain a tax refund, but he did not seek clarification.  When Mr. Manhue looked at the first page of the Statement of Business or Professional Activities, it did not make any sense with all the numbers on it, but he did not ask anyone to clarify what that document or those numbers meant.  When Mr. Manhue glanced at the 2009 income tax return, before he signed it, he wondered how he was entitled to such a refund, but he did not ask for an explanation.  It seems that he was suppressing a suspicion.

[Footnotes omitted]

Thus Mr. Manhue’s appeal was dismissed.  Under the circumstances however the Court did not award costs against him:

[70]  In recent years, due to the downturn in the automotive sector, Mr. Manhue’s financial position has not been strong. During his testimony, he indicated that lately he has been in a cycle of working for a few months, and then being laid off for a few months, before being called back to work. Accordingly, I anticipate that the penalty assessed against him under subsection 163(2) of the ITA, together with the accrued interest, will be difficult for him to satisfy. Therefore, in exercising the discretion conferred by subsection 147(1) and paragraph 147(3)(j) of the Tax Court of Canada Rules (General Procedure) (the “Rules”), I have determined that it is not appropriate to award costs against Mr. Manhue.

[Footnote omitted]