In part one of this series, I considered the situation of a hypothetical wealthy client who was involved in the KPMG tax scheme promoted by a big accounting firm. In the end, the taxpayer signed a settlement with the CRA. Part two relates the story of a typical client of the Fiscal Arbitrators tax scheme (which can be found in Torres v. Canada 2013 T.C.J. No. 332). While the general fact patterns between the groups are similar in broad strokes, the outcomes are not.
The Fiscal Arbitrators Client
The client is a working-class individual who is employed at a factory. He has $125,000 of equity in his home and savings and investments of $23,000. The taxpayer has a grade 12 education and has never taken any tax, business or accounting classes. The taxpayer was sold on the idea of the Fiscal Arbitrators program during a seminar by a flashy salesman and con man who would end up going to prison for his part in the scheme. The taxpayer bought the story hook, line and sinker and likely had no reason to doubt what he had been told.
The taxpayer sought to obtain tens of thousands of dollars of tax savings and paid fees to Fiscal Arbitrators to participate in the scheme. The Canada Revenue Agency claimed that this was a scheme and reassessed the taxpayer for $210,000 with tax penalties and interest. According to the court, the taxpayer should have known better — was willfully blind — and thus the gross negligence penalties were warranted. The taxpayer should have sought a second opinion.
The judge was sympathetic but was unable to vary the penalty. He indicated that despite his sympathy towards the spouses and family “who may suffer from the significant negative financial consequences … the Appellant’s penalties are indeed harsh. I, however, cannot pretend the specific 50% penalty called for by subsection 163(2) of the Act can be something less. That is only something the Government can consider.”
Participation in the Fiscal Arbitrators scheme to try to save tens of thousands of dollars of tax per year has ruined the taxpayer.
The system seems to have, by design, ignored the concept of fairness in tax matters in order to have universal application of the law — so that we can have the one-size-fits-all approach. This, in turn, prompts the question: if the tax system was painstakingly designed in such a manner as to tie the hands of the judiciary with respect to discretion, and encourage consistent and universal application of the law regardless of the identity of the taxpayer, why would the CRA so blatantly undermine our system — which is built on the pillars of consistent and universal application of the law — by allegedly settling KMPG court actions in a secret settlement (something that clearly and inherently is an unfair advantage not available to most taxpayers)?
Don’t answer that. It was rhetorical. Unfortunately, such a settlement and its secretive nature suggests that we already have a two-tiered system: one for the general public and one for wealthier taxpayers.
The Taxpayer Bill of Rights promises taxpayers that they “have the right to have the law applied consistently.” It also says that taxpayers have the right to expect the CRA “to be accountable.” As I ponder whether the CRA’s behaviour is more Canadian or North Korean in nature, at the end of the day, from where I stand, there appears to be no sign of either the consistency or the accountability that I would expect to see from a Canadian institution.
This is the final part of a two-part series. Part One: A Tale of Two Taxpayers: the Wealthy Client.
Dale Barrett is a Canadian tax lawyer, managing partner of Barrett Tax Law, founder of Lawyers & Lattes Legal Cafe, author of Tax Survival for Canadians, editor of Lexis Nexis’ Family Law and Tax Handbook, tax columnist at The Lawyer’s Daily and frequent tax lecturer, primarily for accountants and other financial professionals.