TCC Finds Misrepresentation Through Lack of Due Diligence
In Gestions Cholette Inc.
(2020 CCI 75
the TCC confirmed that a taxpayer’s failure to verify its tax return
and question its tax preparer to ensure the accuracy of the data it
contains is evidence of the taxpayer’s lack of due diligence. It thereby
counts as a misrepresentation that triggers an extension of the normal
reassessment period. The court added that a taxpayer is liable for any
error made by the taxpayer itself, its legal representatives, and any
person authorized to file its tax return. The court further emphasized
that a taxpayer must verify its tax return before signing it.
The taxpayer, a corporation, mistakenly did not include taxable
dividends received during the fiscal year in its taxable income, but
still claimed the associated subsection 112(1) deduction. Consequently,
its taxable income was understated by the amount of the dividends. There
was no concealment, since the dividends had been entered on schedule 3
(among other places); thus, the error was apparently inadvertent. The
finance director confirmed that in order to meet deadlines, tax returns
were often filed electronically before they were reviewed and signed.
The company had been using the services of the same chartered accountant
for 20 years, and the accountant had over 40 years of experience.
Subparagraph 152(4)(a)(i) allows for an assessment after the normal
reassessment period where a taxpayer or the person filing the return
made a misrepresentation attributable to neglect, carelessness, wilful
default, or fraud. On one hand, the taxpayer claimed to have exercised
due diligence by entrusting the filing of the tax return to an expert
and providing all the necessary information. On the other hand, the
minister pointed out that subsection 152(4) is a remedial provision that
applies when a taxpayer’s carelessness or negligence has resulted in a
reported tax result that is inappropriately in its favour. In such
circumstances, a new assessment may be issued after the normal
assessment period to remedy the situation.
The minister had the burden of proving the misrepresentation
attributable to neglect or carelessness. The court was satisfied with
the evidence and concluded that the taxpayer subject to the provision
includes a tax preparer. The chartered accountant was careless—even
negligent—which was enough to trigger the application of subsection
152(4). The finance director was financially sophisticated enough to
able to detect this simple error, and the fact that he allowed the tax
return to be filed before verifying and signing it was evidence of
negligence on his part.
Thus, it appears that liability related to an income tax return is not
limited to its preparation. To meet their duty of responsibility,
taxpayers cannot simply have good-faith reliance on the tax preparer;
they must exercise due diligence by taking cognizance of their return
before signing it. This is consistent with Aridi
(2013 TCC 74
which established the following four-part test for avoiding a
misrepresentation through reliance on the tax preparer (quoting Robertson
, 2015 TCC 246
(1) the taxpayer submits all materials to the professional
advisor; (2) a discussion is had between the advisor and the taxpayer
touching upon the inclusion or exclusion from income of the item;
(3) that discussion gives rise to a review of the facts related to the
inclusion or exclusion; and (4) a clear, factual confirmation made by
the professional advisor leads to the misrepresentation.
Simply relying on the tax preparer to do the right thing falls far short of that standard.
Groupe RDL Victoriaville s.e.n.c.r.l.