Volume 7, Number 3
The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting and TSG member firms cannot assume any liability for persons who act on the basis of information contained herein without professional advice.
Do Taxes Give You A Headache? Get Help Or Pay The Price!
In 1997, the Canadian Taxpayers Federation called for simplification of the Canadian tax system, citing a survey that showed 81% of Members of Parliament sought help to complete their own income tax returns. Ten years later, the tax system has become even more difficult to navigate, with a myriad of new rules affecting individuals and corporations alike.
With all the increasing complexity, how does the average Canadian taxpayer cope? Some become overwhelmed and bury their heads in the sand, paying little or no attention to their income taxes. As the recent case of Christiane Le Tremble (2006TCC568) points out, however, this approach can invite significant penalties.
What follows is based on the official translation of the judgement, since the case was originally reported in French.
Christiane Le Tremble was a self-employed psychologist who worked long hours in a private clinic. Although she had someone who managed her files and prepared her billings, Ms. Le Tremble did not maintain accounting records for her business. She stated that she was not interested in anything to do with the accounting of her income; all that mattered was to have enough income to meet her obligations. Concerning her taxes, she did not have the interest, the knowledge, the will to understand or the time to do so, given the demands of her workload. Ms. Le Tremble collected all professional fees herself and deposited them in her personal bank account. As long as the deposits enabled her to cover her expenses, whether personal or professional, she did not ask any questions.
At year-end, she put documents concerning her fees and expenses into a plastic bag and submitted them to an accountant who completed her tax returns. While Ms. Le Tremble admitted that the accountant prepared her tax returns correctly, based on the information submitted, an audit revealed that significant income had been omitted. In 2001, only 43% of deposits were reported and her 2002 tax return included only 58% of deposits. Ms. Le Tremble was assessed under subsection 163(2) of the Income Tax Act, which imposes a penalty equal to 50% of underpaid taxes where a person "knowingly, or under circumstances amounting to gross negligence, has made… a false statement or omission in a return."
Ms. Le Tremble appealed the assessment, claiming in her defence, "I never had any intention of not reporting my income to the tax authorities and I find your claim that I ‘knowingly’… made an omission in my returns is offensive, out of place and false." In her Notice of Appeal, Ms. Le Tremble stated, "I was never informed by anyone that the deposits were required to determine my income since the invoices and stubs from my clients’ cheques seemed to be sufficient for my returns." She also pointed out that at the time of the tax audit, she and her new accountant promptly provided all the documents that were requested. She concluded, "I consider that if I had wanted to ‘knowingly’ make omissions, our work methods would have been very different."
The Court, however, upheld the penalties. In rendering his decision, Justice Alain Tardif said, "To conclude that there was gross negligence, it is not necessary to demonstrate the intentional or deliberate aspect or the setting up of a system designed to hide part of her income." He further stated, "However, commission of gross negligence can result from carelessness, negligence or simply unjustifiable disinterest in one’s tax obligations, or, what often summarizes all of these qualifiers, very convenient voluntary blindness."
He noted that Ms. Le Tremble’s discomfort with taxes did not diminish in any way her duty to report all of her income. Being unable to meet this obligation on her own, she had the responsibility to find an alternative that would have allowed all of her income to be reported. "Not being interested in the tax treatment of one’s income, not understanding it or even not wanting to understand it is not, in itself, reprehensible. However, taxpayers are required to do what is necessary to compensate for this shortcoming by entrusting the task to a competent person and, in particular, provide that person with all relevant documentation required to prepare an income tax return corresponding with the actual revenues and expenses."
"Although … taxation can be complex, this is not different from other fields of activity. Indeed, automobile mechanics, construction, electricity and anything relating to good health are fields where it is necessary to rely on skilled individuals to solve certain problems."
Since we cannot rely on the tax system becoming simpler, it is essential to consult a qualified tax advisor if you do not have the time, expertise or desire to manage your own taxes. It is also important to maintain complete financial records and provide all relevant information to your advisors. As the Le Tremble case demonstrates, failing to do so could vastly increase your tax bill!