From Tax Court: Gross negligence in tax preparation

In the recent case of Hine v The Queen (2012),  the Tax Court of Canada considered whether the taxpayer, in this case Colin Hine, was "grossly negligentî as defined by section 163(2) of the Income Tax Act in relying on his tax preparer ó in this case, his spouse ó to prepare his tax return. And, in the circumstances, it found he was not.

Hine, a general contractor since the late 1990s, turned to "flippingî homes for profit in 2005. His spouse, Diane Prevost, who had a background in financial management and a reputation as competent and meticulous, kept Hine's business records and filed his tax returns. In 2006, Hine sold "Greyrock,î a house he had bought and renovated, for $319,000, but his tax return showed a loss of $131,653 for the year. In April 2008, the Canada Revenue Agency (CRA) audited Hine and found that he had failed to report $157,965 of business income on the sale of Greyrock. The CRA's June 2009 reassessment included taxes arising from the reassessment that, the court noted, was less than $5,200 and the gross negligence penalty of $28,111.

Hines appealed the reassessment and the Tax Court heard the case in June 2012.

Gross negligence is a phrase found in many areas of law; it is used to impose liability on those whose actions depart from the standard of reasonableness, usually viewed objectively. A high degree of negligence is required if a taxpayer is to be considered "grosslyî negligent under section 163(2) of the Act. In fact, the courts have held that the negligence involved is tantamount to acting intentionally.

The jurisprudence, however, is not so clear when it comes to the work of a tax preparer or accountant. It generally must be demonstrated that the tax preparer was grossly negligent and the taxpayer was in some way involved or was suspiciously, "willfully blindî ó that is, the taxpayer acquiesced in the making of the false statements or did not act in a responsible way when a reasonable observer would have been suspicious.

Under section 163(2), the CRA may impose a penalty equal to the greater of $100 and 50% of the avoided taxes when the taxpayer knowingly or under circumstances amounting to gross negligence make a false statement or omission in a return.

The court found Hines and Prevost credible; it was convinced that their intentions were to report their income diligently and that the mistake was an honest one, brought on by relying on the statement of their lawyer's trust account into which the proceeds of the Greyrock sale had gone. The spousal relationship between the parties did not affect the finding. The court stated that the taxpayer's "blind faith in his wifeî was not unreasonable, even though she was not a professional accountant but merely had experience with bookkeeping.