The appeals brought by three taxpayers — Thor Choptiany, Sandra McPherson and Wayne Richter — were the lead cases in a larger challenge of gross negligence penalties issued by the Canada Revenue Agency (CRA) against hundreds of people who had filed their tax returns through the consultancy firms Fiscal Arbitrators and DeMara Consulting, the principals of which have been jailed for fraud.
Under the Income Tax Act, the CRA can assess a gross negligence penalty when it believes that a person has knowingly, or under circumstances amounting to gross negligence, made or participated in the making of a false statement or omission in a return. The penalty is usually either $100 or 50 per cent of the tax the person avoided, whichever is higher.
But the cases led to years of foot-dragging and delay, with Tax Court Justice Patrick Boyle writing the CRA had “adopted and demonstrated a consistent pattern of non-compliance with this Court’s Orders and Rules” with respect to its audits and investigations (Choptiany et al. v. His Majesty the King 2022 TCC 112, released Oct. 5).
“I find this to have been intentional and deliberate, and that it was undertaken to frustrate these Appellants’ rights to pre-trial discovery on the subject of CRA’s investigation involving them relevant to their appeals,” wrote Justice Boyle, who was serving as case management judge in the matter.
Justice Boyle noted the CRA has “repeatedly failed” to comply with the requirements of an October 2019 order for further disclosure, and subsequent orders and directions related to it. He also called out the tax agency for not having its nominees for discovery be properly prepared, citing one as being “uncooperative, obstructive, obfuscatory and evasive,” and added the CRA’s failure to notify Choptiany about the absence of a page in a report on his investigation leaves questions of procedural fairness.
“The Respondent [CRA] remains not fully complying with what was ordered. No satisfactory explanation has been given. If the Respondent thought my Orders were unclear, they could have returned to me for clarification,” he wrote. “If they thought my Orders were wrong, they could have appealed them. The Respondent chose to do neither.”
The CRA is represented by the Department of Justice “which is essentially Canada’s largest law firm,” Justice Boyle wrote.
“[It] employs a large number of tax litigation lawyers who are wholly familiar with this Court’s Rules and processes and the rules generally applicable to pre-trial discovery,” he wrote. “CRA’s Criminal Investigations Division is part of Canadian law enforcement.”
Justice Boyle then allowed the appeals, writing he was “left with no reason to think that ordering further discovery and disclosure, oral or written, before a judicial officer or not, on the same terms as previously ordered twice already could reasonably be expected to cause the Respondent to properly and fully comply.”
“No party in such a position, appellant or respondent, should expect to simply be ordered again to comply with the Court’s discovery rules and orders already made,” he wrote. “To make such an order would conjure up memories of the Pythonesque skit of the British bobby of another era yelling at a scofflaw: ‘Stop! Stop! Stop, or I’ll yell stop again!’”
Laurie Goldbach, a tax lawyer with Borden Ladner Gervais LLP in Calgary, said the delay in the case was “really next level in terms of how many years and how long it went on for.” She said the result is frustrating because it does not deal with the underlying issue of whether the taxpayers were liable for gross negligence “but this is what abuse of process can result in.”
“I do think the message is pretty clear, and it is that the court will not stand for this kind of gamesmanship and Canadians expect better from their tax authorities,” said Goldbach, who was not involved in the case. “We hear about the tax gap and how the money which is being invested in trying to close it and prosecute tax evasion, but in doing that we need to have a system where those who are charged with enforcing the rules follow the same ones that taxpayers have to follow.”
Jeff Pniowsky of Thompson Dorfman Sweatman, who represented the three appellants in the case, said the CRA “engaged in gymnastic machinations untethered to the rules of court in order to deny people basic discovery rights.” He said a motion for the rest of the appeals to be allowed is being considered.
“There are a significant number of clients who have gone bankrupt because they just couldn’t await the outcome of this matter,” he said. “The stress hanging over these people was immense while the CRA was playing games. No litigant should have to endure three rounds of discovery amidst gameplaying, but certainly not appellants facing life-destroying penalties.”
In a statement, the CRA said it could not comment on the details of the case due to the confidentiality provisions of the Income Tax Act but added that it was “disappointed” by the outcome of the case.
“We are reviewing the judgment and deciding on next steps,” the statement said. “The courts provide Canadians with a further independent review of disputed issues, and court decisions serve to clarify the law or resolve disputes between the CRA and taxpayers.”
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