Failure to review a return does not help to escape a gross negligence penalty

A recent tax court case “Fransen”, the Tax Court of Canada finds that failure to review a return in the presence of red flags was willful blindness, not just gross negligence. Therefore, subject to the penalty under ITA subsection 163(2), up to 50% of the tax payable.

The Facts:

Fransen is involved with Financial Arbitrators pertaining to the 2009 taxation year, the name of its local franchise was DSC Lifestyles.
DSC’s office is like a regular, legitimate office doing tax business. DSC had put on a seminar in the winter that Mr. Fransen attended.
Fransen testified he signed the return without reviewing it.
The return included an unknown business loss of $421,008 reported on 3 separate lines and carried back the loss to prior years to obtain a tax refund.

Key Red Flags

Fransen was aware of the tax refund spanning 4 years. He chose not to inquire even though it was significantly larger than any refunds he historically received.
The fictitious losses were in excess of 4.5 times the employment income he had reported in 2009.
To pay Fiscal Arbitrators or its nominee a fee equal to 20% of the determined financial benefit amount, i.e., tax refund upon receipt of his refund cheque.
The tax return preparer Mr. Blair or DSC’s name is not completed on the tax preparer’s box.

The court concluded that even Mr. Fransen said he took the same approach when signing the return without reviewing it. There was no evidence he was incapable of understanding the obligation not to make a false statement in return, and concluded Mr. Fransen was both willfully blind and grossly negligent.

This article is intended for general information purposes only and does not constitute professional advice. Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or email us for further advice.