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.

Valérie Goudreault
Groupe RDL Victoriaville s.e.n.c.r.l.
Victoriaville, Quebec

Canadian Tax Focus
Volume 11, Number 1, February 2021
©2021, Canadian Tax Foundation