Wynter, 2017 FCA 195: wilful blindness under subsection 163(2) does not require an intention to cheat

2017 FCA 195 · Federal Court of Appeal

Author: Sas Tullo

This is a penalty case from one of the tax-preparer schemes that claimed fictitious business losses to generate refunds. A retired factory worker let DSC Lifestyle Services prepare her 2009 return; it claimed a loss of some $447,000 from a business she never had, and the Minister imposed a penalty of about $51,500 under subsection 163(2) of the Income Tax Act. She disputed only the penalty, arguing that a taxpayer is wilfully blind only if she intended to cheat. The Federal Court of Appeal disagreed. Anyone who signs a return prepared by someone else should take note.

Facts

Rosetta Wynter appealed a Tax Court judgment upholding a penalty under subsection 163(2) in respect of a business loss of $447,148.31 claimed in her 2009 return; the Minister, after initially allowing the loss, reassessed and imposed a penalty of $51,569.49 (para 1). She conceded there was no business (para 2).

In 2006, after an unsolicited telephone call, she left her long-time accountant for DSC, paying it roughly $12,000 over four years and receiving refunds far larger than any in the previous thirty years. She asked once, in 2006, why the refund was so large, was told it was because of her charitable donation, and did not ask again (para 4). The Tax Court found that she did not question the figures showing a large business loss although she had never operated a business, signed the Request for Loss Carryback, and gave conflicting evidence about whether she noticed that her 2009 refund exceeded $30,000 (para 5), and it concluded that she was wilfully blind (para 6).

The decision under appeal

Before Rowe D.J., the appellant testified that she was a retired Chrysler assembly-line inspector, 65 years old in 2009, with a Grade 6 education and no training in tax, business, or accounting (TCC para 5). She had paid DSC a $6,000 membership fee out of a refund and signed her 2009 return and the carryback request where DSC’s representative indicated, without noticing the business figures or the size of the refund (TCC paras 5, 19). The Crown conceded there was no intentional acting but argued wilful blindness (TCC para 10); the burden under subsection 163(3) lay on the Minister (TCC para 11).

Applying the factors in Torres v. Canada, 2013 TCC 380 (TCC para 14), the judge found that even a cursory review would have shown business income of $204,999.65 and expenses of $447,148.31 for a business she had never operated, that the refund was unique in her filing history, and that she made no inquiry whatsoever (TCC para 23). He considered the argument that Sansregret and Hinchey required a finding of an intention to cheat (TCC paras 29-31) and adopted instead the Torres approach as upheld in Strachan (TCC paras 35-36). He found her naive and overly trusting, but held that before signing “she knew that she knew better,” and that she was wilfully blind and therefore grossly negligent (TCC para 36). The appeal was dismissed with costs fixed at $1,200 (TCC paras 44-45).

Issues

The appellant argued that the Torres test, although upheld in Strachan v. Canada, 2015 FCA 60, was “watered down,” and that the proper test was the criminal-law formulation in Sansregret v. The Queen, [1985] 1 S.C.R. 570 and R. v. Hinchey, [1996] 3 S.C.R. 1128, under which no penalty could be imposed without a finding that she intended to cheat (para 7). She also challenged the findings of fact (para 8). The issues were whether wilful blindness under subsection 163(2) requires an intention to cheat, and whether the findings disclosed reviewable error.

Holding

The appeal was dismissed with costs (paras 9, 27). An intention to cheat is not a prerequisite for a finding of knowledge through wilful blindness; the knowledge requirement is satisfied by the taxpayer’s deliberate choice not to inquire (paras 15-17). The finding of wilful blindness disclosed no error, and the challenge to the judge’s treatment of the appellant’s personal circumstances failed on the palpable and overriding error standard (paras 23, 26).

The court’s reasoning

Rennie J.A., for a panel that also included Pelletier and Woods JJ.A., began with the text of subsection 163(2), which penalizes a person who “knowingly, or under circumstances amounting to gross negligence” makes a false statement in a return (para 10). Because Parliament does not repeat itself, knowledge and gross negligence presumptively differ in meaning (para 11); the first is subjective, the second objective (para 12). Wilful blindness arises where a taxpayer becomes aware of the need for inquiry but declines to inquire because the taxpayer does not want to know the truth; it is deliberate ignorance, and it imputes knowledge, citing R. v. Briscoe, 2010 SCC 13 at paras. 21 and 23-24 and Sansregret at para. 24 (para 13).

The jurisprudence does not make an intention to cheat a prerequisite. Guindon v. Canada, 2015 SCC 41 removed any doubt: the Supreme Court agreed with Canada v. Guindon, 2013 FCA 153 at para. 37 that a penalty under section 163.2 is not the equivalent of a criminal charge, and endorsed Venne v. The Queen (1984), 84 D.T.C. 6247 and Sidhu v. The Queen, 2004 TCC 174 at para. 23, where the burden is not to prove beyond a reasonable doubt a mens rea to evade taxes (para 15). The requirement is met “through the choice of the taxpayer not to inquire, not through a positive finding of an intention to cheat” (para 16). References to an intention to cheat are a distraction; the gravamen is the making of a false statement knowing, actually or constructively, that it is false (para 17).

Gross negligence is distinct: if the wilfully blind taxpayer knew better, the grossly negligent taxpayer ought to have known better (para 18). It is a marked departure from what is expected, not mere carelessness, as stated in Zsoldos v. Canada (Attorney General), 2004 FCA 338 at para. 21 (para 19). A taxpayer who turns a blind eye is both wilfully blind and grossly negligent, but the converse does not follow, and the label “gross negligence penalties” blurs the fact that the penalty may rest on either heading, a usage the court said ought to be avoided (para 20). The test is objective, and the caution in Guindon at paragraph 61 that these penalties capture serious conduct, not ordinary negligence or simple mistakes, applies (para 21).

Although the judge at times used the two terms interchangeably, his reasons showed a finding of wilful blindness, and the court saw no error in it (paras 23-24). The appellant was aware of many suspicious circumstances, including the denial of her 2006 donation claim; that awareness called for a review of her return, and she deliberately chose not to make one (para 25). The complaint that the judge ignored her personal circumstances raised questions of mixed fact and law reviewable only for palpable and overriding error under Housen v. Nikolaisen, 2002 SCC 33, and none was shown (para 26).

Practical implications

The decision settles, at the appellate level, that the “knowingly” branch of subsection 163(2) can be met by wilful blindness without proof of a dishonest purpose. For taxpayers caught up in preparer schemes, limited education, trust in apparently professional advisers, or being victims of the scheme themselves will not displace a penalty where the return on its face showed an obviously false and lucrative claim and no question was asked.

The reasons also insist that the two branches of the provision be kept separate. In my view, the Crown should identify the heading it relies on, and a judge who finds wilful blindness should say so rather than folding it into an objective analysis. The opening words of subsection 163(2) and the text of subsection 163(3) remain as the court quoted them, although other parts of section 163 have since been amended.

The court did not say whether, absent wilful blindness, the conduct would have met the objective gross negligence standard. Whether an appeal was taken is not verified here.

For anyone who signs a return prepared by someone else, the lesson is that the signature carries the knowledge the signer would have had by reading the return. A refund many times larger than usual, a loss from a business that does not exist, or a blank preparer box are all reasons to ask, and a taxpayer who chooses not to ask will be treated as if she knew.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

Wynter v. Canada, 2017 FCA 195, judgment delivered September 22, 2017 (heard February 16, 2017). Panel: Pelletier, Rennie, and Woods JJ.A.; reasons by Rennie J.A. Appeal from Wynter v. The Queen, 2016 TCC 103 (Rowe D.J., April 22, 2016).

Reasons on the Federal Court of Appeal’s site. Also on CanLII.

Decision under appeal: Reasons on the Tax Court’s site. Also on CanLII.