Vachon v. R. – TCC: Taxpayer relying upon corrupt tax preparer not subject to penalties

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Vachon v. The Queen[1] (September 24, 2013) involved a taxpayer who had been defrauded by his tax preparer:

[18]        He stated very early that his ignorance of tax matters led him to retain H&R Block to complete his annual tax returns. Mr. Simard, an employee of H&R Block, was responsible for his file when he worked as an employee.

[19]        When he became a self-employed worker, he continued to work with the same Mr. Simard, even though his career path was unstable and he had terminated his relationship with H&R Block, started his own business, and changed business names a few times. He also explained and insisted that the two of them had developed a relationship of trust.

[20]        As clear and precise as the first part of his testimony was, the second part was equally unclear, even confused at times. Moreover, it was even contradictory on certain points, in particular regarding the attention he paid to Mr. Simard’s work, which consisted of taking care of his accounting and tax returns.

[21]        The appellant explained that Mr. Simard took care of everything using the documents he brought him, such as invoices for fees, expenses, etc. Mr. Simard did the accounting work; the appellant prepared the cheques and signed them according to Mr. Simard’s instructions. At the beginning, the appellant seemed to pay Mr. Simard’s fees with a specific cheque and the taxes using separate cheques made out to the tax creditors. Then, it seems the method changed. The appellant admitted that, on many occasions, he wrote cheques to various entities Mr. Simard mentioned to him and with which he had no relationship of any sort. He simply executed Mr. Simard’s instructions.

[44]        Indeed, he was dealing with a con artist; however, I feel it is important to note that the con artist in question had a much easier time with his malicious scheme because of the appellant’s carelessness, lack of attention and excessive and unwarranted trust.

[45]        The appellant had to read and follow-up on correspondence the respondent prepared. He had to verify the quality of Mr. Simard’s work. He especially had to question his motives as to the cheques he was asked to prepare. It was his responsibility to understand and verify the accuracy and details of the fees paid, to ascertain what amount of the cheques was for the fees and what amount was for taxes.

[46]        It is human nature to be vulnerable before wise and savvy fraudsters, but not all have the same vulnerability and all must rely on their own resources to protect themselves from fraudulent initiatives, which are numerous and widespread in society, and particularly when faced with signs of trouble and behaviour that normally trigger a reflex of suspicion.

The court concluded that the appellant’s reliance on Mr. Simard was sufficiently negligent to permit opening up statute-barred years:

[66]        Similar contradictions undermine the appellant’s credibility with regard to the attention he paid or devoted to his tax obligations; this led to the validation of many elements that, overall, constitute a degree of fault severe enough to conclude that the respondent has met the burden of proof that allows for an assessment to be made outside the statutory period. In this case, the appellant’s excessive tolerance and unwarranted and disproportionate trust in Mr. Simard constitutes a fault sufficiently serious to allow the respondent to make an assessment outside the normal reassessment period. As a result, I feel that it is appropriate and warranted to conclude there was a severe enough fault or error to set aside the benefits of the limitation period provided for in subparagraph 152(4)(a)(i) of the Act.

Nevertheless, having been the victim of a fraud he was not subject to penalites:

[81]        In tax law, there is no requirement for proof beyond a reasonable doubt at all; there must, however, be a likelihood that the person being assessed has committed a fault to the degree that it could be considered gross negligence and not a fault resulting from a lack of vigilance.

[82]        In criminal law, unless the mandator is complicit or is associated implicitly or explicitly with the facts and behaviour attributed to the mandatary, or benefits from the scheme, the mandator cannot be responsible for the criminal responsibility resulting from the mandatary’s facts and behaviour, which benefited the mandatary to the detriment of his or her mandator.

[83]        In this case, it seems clear to me that there is no such complicity. The appellant’s negligence and carelessness are not sufficient to lead to a conclusion that there was wilful blindness; in fact, it would be unreasonable to accept that a person would voluntarily or involuntarily accept that amounts paid for his or her tax debts would benefit someone else.

[84]        For all these reasons, the appeal is allowed and the penalties are cancelled. With regard to the other elements of the assessments, they remain the same, all of which is subject to the attached consent entered into by the parties for the 2002 taxation year, with costs to the respondent.

[1] 2013 TCC 330.