This year, I wrote about a tax case involving Patrick Chartrand (see AER January, “Learn about the gross negligence penalty”).
Chartrand was “lured” by an organization called Fiscal Arbitrators, described by the judge as “unscrupulous tax preparers,” into using their services to prepare his tax return with the promise of receiving “huge tax refunds.” These refunds came about as a result of fictitious business losses the taxpayer knowingly or negligently claimed, despite never owning or operating a business.
The judge in the case (Chartrand v The Queen, 2015 TCC 298) upheld a federal gross negligence penalty of nearly $55,000, in addition to provincial penalties, plus interest, finding that Chartrand “either knowingly, or in circumstances amounting to gross negligence, made or acquiesced in the making of false statements in his return.”
The judge, in upholding the penalty, said, “It is difficult to feel any sympathy for the [taxpayer]; he was blinded by greed. Had he even bothered to consider the information that he, by his signature, certified to be correct and complete, he would have quite easily discovered that his return contained information that was patently false. He would have realized, with just a little bit of thought, that this kind of stratagem was a fraud perpetrated on the CRA and, by extension, on every other Canadian taxpayer.”
If you read that article, you may have wondered whatever became of Fiscal Arbitrators, the fraudulent tax preparers who played a critical role in this tax fraud affecting hundreds of clients.
The answer came in June 2016 when an Ontario Superior Court (R. v Watts, 2016 ONSC 4843) sentenced Lawrence Watts, 62, who operated under the business name Fiscal Arbitrators, to six years in a penitentiary. He was fined $149,129, equal to his net profit from charging 241 Canadian taxpayers to prepare their fraudulent tax returns.
A jury had found Watts guilty of fraud for reporting non-existent business losses from non-existent businesses. These losses effectively eliminated the taxpayers’ tax liability for the then-current and three previous calendar years. This resulted in taxpayers claiming substantial refunds of all taxes paid in the three previous years, and of the tax withheld at source by their employers for the then-current year.
The taxpayers who testified at trial stated they had not carried on a business or incurred the losses reported on their returns. Nor did they suggest to Watts that they had incurred losses, saying “they did not know where the numbers on their returns had come from.”
The total amount of federal tax revenue that would have been lost had all of the incorrect returns been assessed by CRA, as filed, was a staggering $10.5 million, based on the false reporting of $64 million in non-existent losses. Luckily, however, CRA caught on to the scheme and began to disallow the refund claims. The actual amount paid out in federal tax refunds, or otherwise credited to the taxpayers’ federal tax accounts, was $2.75 million.
The Crown argued that the motivation for the crime was “pure greed.” Watts objected, claiming that his “desire to earn a livelihood is not greed, and that what he was doing was providing ‘customized educational resources’ to his clients.” Both the jury and sentencing judge found “Watts was motivated by greed, in the sense that he broke the law, in order to obtain a greater share of wealth than he was legally entitled to, based upon his actions.”
While Watts accepted “complete, full and unconditional responsibility” for the amounts stated in the tax returns, he says he believed the statements made in the returns were true. The judge rejected this as “nonsense.”
At the sentencing hearing, the Crown argued, “Mr. Watts has caused immense emotional and financial devastation for the majority of his clients, including 65 personal bankruptcies, resulting from their liability to repay the refunds received, and to pay administrative penalties.” While the judge accepted that many of Watts’ clients were devastated, he said “they must shoulder a large portion of the blame: it was a ‘money for nothing’ scheme that was just too good to be true.”