The Tax Court of Canada allowed appeals of three taxpayers from gross negligence penalties on the basis that the Canada Revenue Agency(“CRA”), with the assistance of Crown Counsel from the Department of Justice, had frustrated the Appellants’ rights to pre-trial disclosure and to provide documents relevant to the Appellants’ appeals.
The Appellants had been assessed $3 million in gross negligence penalties for misstatements made in returns filed by two tax consulting companies. The principals of both companies were jailed for tax fraud for their part in promoting fraudulent tax schemes. The scheme involved claiming personal expenditures and debts as expenses and capital losses for a non-existent business.
From the judgement it appears that the CRA and the Department of Justice had tried to hide from the Appellants the fact that they had been the subject of a criminal investigation by the CRA which had been dropped, and the reasons that it had been dropped, by producing a CRA representative who had no knowledge of the investigation, failing to provide relevant documents, producing documents with missing pages, refusing to answer questions, and giving incorrect or incomplete answers on discovery.
In allowing the taxpayers’ appeals, with costs on a solicitor-and-client scale, Justice Patrick Boyle stated:
I am allowing these five appeals as there is no less drastic remedy than allowing the appeals that can reasonably be expected to remedy the Respondent’s pattern of non-compliance with this Court’s rules and orders, and to provide procedural fairness to these Appellants and allow their appeals proceed to be decided on the merits. Accordingly, these appeals are being allowed, even though these Appellants are contesting penalties assessed for having participated in tax schemes that resemble in many respects the de-taxation practices of sovereign citizens, though with less of the non-fiscal cultish aspects – schemes for which at least one promoter has been convicted and sentenced to a jail term. …
The Respondent has adopted and demonstrated a consistent patter of non-compliance with this Court’s Orders and Rules with respect to CRA’s audits and investigations involving the Appellants. I find this to have been intentional and deliberate, and it was undertaken to frustrate these Appellants’ right to pre-trial discovery on the subject of the CRA’s investigation involving them relevant to their appeals.
The Respondent’s egregious history of defaults and non-compliance in these appeals, that there is no alternative available that could reasonably be expected to cause the Respondent to now comply, and that this has caused prejudice to the Appellants, are reasons enough to allow these appeals. This disposition is necessary to protect the integrity of the judicial process and the rules of law that apply to all parties.”
This could have an impact on other taxpayers who were assessed gross negligence penalties arising from the same bogus tax scheme. The three Appellants in this appeal were selected to be the lead Appellants out of a larger group of taxpayers who were also appealing their assessments. The Judge said those people will have to speak with their lawyers to see how this ruling affects them.
One thing the judge didn’t do in his judgement, and I would have liked to have seen, is refer a professional misconduct complaint against the CRA’s attorneys to their respective Law Societies. Under the Rules of Professional conduct, all attorneys in adversarial proceedings have a duty to act with candour and fairness in a way that promotes the parties’ right to a fair hearing and not to suppress what out to be disclosed (Rule 5 of the Rules of Professional Conduct, Law Society of Ontario). In addition to his comments above, Justice Boyle described the conduct by the CRA and its lawyers as “outrageously misleading and inappropriate” , “might be contemptuous”, “I don’t believe it is reasonable/arguable”, “highly inappropriate” and “I don’t think you were reasonably mistaken”.
Given that this case has had national media attention, I think this is an appropriate case for the Law Society of Ontario, (or whatever Law Society the lawyers at the DOJ on this case are members of) to open an investigation on their own motion. I’ve seen the Law Society investigate and prosecute lawyers for less egregious conduct.