http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/67217/index.do 
Morton v. The Queen[1] (March 7, 2014) dealt with a quite peculiar fact situation. The appellant had filed his tax returns for 1998, 1999, 2000 and 2001 and they were assessed in the normal course. Then in 2008 he filed T1 Adjustment Requests[2] for each of these years. The Requests were largely premised on large expenses for “Money Paid to Principal as Agent” and, had they been granted, would have resulted in large refunds:
[1] Under subsection 163(2) of the
Income Tax Act (the “Act”), the Minister of National Revenue (the “Minister”) may impose a penalty where a taxpayer is grossly negligent or knowingly makes a false statement in filing a return, form, certificate or answer relating to a taxation year.
[2] The Appellant, Mr. Morton, filed his income tax returns for 1998, 1999, 2000 and 2001 (the “Relevant Years”); he paid taxes calculated on taxable income of $105,677.00, $118,529.00, $198,530.00 and $151,107.00 for each respective year. These returns were reassessed as filed by the Minister. The normal reassessment periods expired, but in 2008, the taxpayer, utilizing the provisions of subsection 152(4.2) filed T1 Adjustment Requests (the “Requests”) with the Canada Revenue Agency (“CRA”).
[3] Mr. Morton requested that his income, as previously filed and assessed in the returns, be adjusted to include the following amounts of business income and expenses for each tax year:
| 1 – Adjustment Request – Form T1-ADJE(08) |
|
|
|
| Tax Year |
Additional Other Income described in Requests as
“Additional Money Collected as Agent for Principal
|
Additional Other Expenses described in Requests as
“Money Paid to Principal as Agent”
|
Adjusted Net Income
(Loss)
|
| 1998 |
$25,689.00 |
($124,664.00) |
($98,975.00)
|
| 1999 |
$26,777.00 |
($159,518.00) |
($132,741.00) |
| 2000 |
$29,584.00 |
($247,449.00) |
($217,865.00) |
| 2001 |
$28,654.00 |
($186,509.00) |
($157,853.00) |
[4] Each amount in the final column in the chart above if, and when, applied by the Minister to the taxable income contained in the previously filed returns would have generated an aggregate refund amount of all tax previously withheld from the Appellant at source. If acted upon, the Requests would have generated refunds in excess of $202,000.00. This did not occur. The Minister denied the Requests and calculated and levied penalties (the “Penalties”). The amounts of the Penalties were agreed at the commencement of the hearing: $12,999.42, $16,365.84 $28,215 and $17,732.97 for each of the Relevant Years. Mr. Morton appeals to vacate the Penalties.
II. Testimony
[5] Mr. Morton admitted or testified that there was no documentation to substantiate any of the income, expenses or losses claimed in the Requests. Mr. Morton confirmed in testimony that he knew when he made the Requests that he did not receive the income nor incur the expenses claimed. The Appellant offered reasons for these knowing acts: stress related to financial difficulties, marriage breakdown and the loss of access to his business books and records in 2007 and 2008 some years after filing the returns. Accordingly, Mr. Morton submitted the Requests without a detailed review, knowing the massive amounts were fictitious. He stated he did so in the hope of initiating the Requests and thereafter filing accurate amounts with supporting documentation. He stated that he gave no thought to the fact the CRA would review and might rely upon the Requests. Instead, he stated that he felt that CRA would first request supporting materials. If he located same, he could adjust his Requests to conform to the then hopefully accessible documents. If he could not locate the documentation or it did not exist, he would simply forswear the Requests.
The court first made a factual finding that the taxpayer had engaged in knowingly making false statements in the Requests:
[7] Prior to a point by point analysis of the evidence in light of the Appellant’s submissions, the Court finds, as a matter of fact based upon admissions and testimony, that Mr. Morton intentionally, knowingly and without reliance on another person or advisor supplied false information in the Requests. He claimed quantitatively enormous amounts as fictitious expenses for the Relevant Years. Although gross negligence would be sufficient, the Court finds Mr. Morton sought to utilize subsection 152(4.2) and the Requests to adjust his tax returns by knowingly making such false statements. Further, no documentary evidence was tendered supporting the claimed stress reaction of sufficient seriousness to mitigate or explain such a finding of gross negligence (Rohani v R, 2009 TCC 88).
[8] Given the foregoing, unless the Appellant’s legal arguments are accepted, the Penalties shall stand. For the reasons that follow, the Court rejects these arguments, dismisses the appeal and upholds the Penalties.
The court then rejected the argument that the years in question were statute-barred:
[9] As to the absence of misrepresentation on a return or fraud under subsection 152(4) of the Act, the factual findings of this Court simply do not support such an assertion. The Appellant is an electronic systems engineer, schooled in England and a professional engineer in good standing in this country and of similar designation in the United Kingdom. By his own testimony, he analyses systems from a high level, focusing on their supervision from inception to conclusion. By contrast, his testimony that he was not aware of the object, intent and consequences of filing the Requests belies certain obvious and conflicting facts. Firstly, Mr. Morton fastidiously and accurately filed all his previous tax returns including those for the Relevant Years. Secondly, he experienced inexplicable premonitions of unclaimed income, expenses and potential losses which coincidentally and conveniently arose after losing possession of the alleged records, rather than during the six to eight previous years he had custody of same and during which period he accurately filed his tax returns. Thirdly, he knew exactly the form to complete and submit in order to make the Requests purportedly without assistance from others. This is in contrast to the proclaimed uncertainty, ignorance and naïveté of the process otherwise knowingly initiated without supporting information or the disclosure to the Minister of Mr. Morton’s alleged predicament (loss of records) against the looming ten year limitation under subsection 152(4.2).
The court then rejected the argument that no penalties could be imposed since no refunds were issued by the Minister:
[16] Further, if the combined effect of subsections 152(4.2) and 163(2) were such to preclude imposing a penalty unless a notice of reassessment or refund indicates reliance by the Minister upon the fraudulent misrepresentation, the absurdity is additionally manifest. Where the precondition for reassessment under 154(2) exists (in this appeal, fraudulent misrepresentation), the period for reassessment is limitless. In this very appeal given such facts, the Minister could issue a reassessment tomorrow, revoke it by further reassessment the day following and with the latter impose the Penalties. Instead, the Minister has rightfully evaluated the Appellant’s ploy for what it was and assessed the Penalties in one step.
[17] Moreover, when one examines the context and purpose of the section, it allows the Minister, “
for the purpose of determining”…“,the amount of a refund or a reduction of an amount payable,”…“to reassess tax, interest or
penalties” …“
payable by the taxpayer in respect of that year”(
underscoring added). Simply put, for the purpose of determining the amount of the refund request, the Minister denied the Request and imposed a penalty, but both actions related to the determination of the amount of a refund, as requested by the taxpayer when instituting the Requests. Subparagraph 152(4.2)(a), as reproduced above, includes reference to penalties and does not by its plain wording limit the Minister to “reduce”, but to “reassess” tax, interest and penalties.
Next the court rejected the argument that a T1 Adjustment Request was not a “return”:
[23] Plainly and clearly, a T1-Amendment Request, and the information certified within it by the taxpayer to be accurate, is a “return” within the meaning of the imbedded definition of subsection 163(2) of the Act. In this appeal, save for the taxpayers name and address, all of the information included in such a “form”, “certificate” or “statement” (collectively defined in the subsection as a “return”) was knowingly, unilaterally and falsely made solely to generate a refund and lessen tax otherwise correctly assessed and payable. The plain meaning of subsection 163(2) and its context and purpose within the Act, when coupled with the fraudulent misrepresentations of the Appellant, yearn for the imposition of the Penalties.
Finally the court dismissed the taxpayer’s reliance upon certain administrative publications:
[24] Lastly, Appellant’s counsel indicated that a certain Information Circular (IC07-1 Taxpayer Relief Provisions) and CRA Technical Interpretation Documents (2010-035651117 and 2009-034429117) provide guidance to the Court to the effect that penalties are not to be imposed on T1-Amendment Requests. Information Circular IC07-1 and specifically paragraph 74 therein as referenced by Counsel, states that CRA will not generally accept a request where the adjustment of a statute-barred year of an individual would result in the increase of taxes, interest or penalties to the returns of other individuals that are statute-barred from reassessment. Even if the wording were unequivocal (i.e. if the word “generally” did not appear), it would be inapplicable to this case since no other taxpayer is involved. As to the advance rulings cited, one relates to a CRA instituted audit and the other to the methodology of calculation of penalties. Neither of these fact situations is analogous to that before the Court, even if either were binding authority.
Accordingly the court dismissed the appeal and upheld the imposition of penalties. The taxpayer was probably lucky that the court made no order as to costs.
[1] 2014 TCC 72.
[2] The court sometimes refers to these as “T1 Amendment Requests” but nothing seems to turn on this.