When do Gross Negligence Penalties Apply to Non-existent Business Losses?

Sep 21, 2017

On June 27, 2017, the Tax Court of Canada rendered its judgment in Bradshaw v. The Queen, 2017 TCC 123. After determining that business losses reported by Bradshaw were properly denied on the basis that no business existed, the court considered whether the taxpayer was grossly negligent under section 163(2) of the Income Tax Act.What can we learn from this key decision? Our Tax Foresight analysis of the case follows. If you would like to try your own, please login to Tax Foresight here.

Bradshaw v. The Queen, 2017 TCC 123

Bradshaw claimed approximately $1.5 million in business losses over four years, including a loss of $946,479 in 2008. The Minister denied the losses and an associated carry-back request, and assessed gross negligence penalties. Bradshaw appealed to the Tax Court of Canada.

The first issue before the court was the deductibility of the business losses. The losses were not supported by the documentation that would generally be expected. In claiming that he carried on a business of acting as agent for himself, Bradshaw relied solely upon a “Statement of Agent Activities” consistent with a tax plan presented by a group known as the Fiscal Arbitrators. The basis for the plan was that each person has a corresponding “fictional entity” that could carry on business as an agent for the person. Justice D’Arcy described this “purported explanation” as “absurd.” As no business existed, the court found that the business losses were properly denied.

The second issue was whether gross negligence penalties should apply. In finding that Bradshaw made a false statement, the court noted that he had reviewed and signed the relevant tax returns. Given his previous involvement in a legitimate family business, he should have known that the purported agency did not constitute a business. The court emphasized the absurdity of the plan presented by the Fiscal Arbitrators and stated that no reasonable person should have accepted the explanation for it or filed a return based on it. The magnitude of the amounts involved and the fact that Bradshaw did not seek additional professional advice when presented with the scheme were additional factors in the court’s decision to uphold the gross negligence penalties assessed by the Minister.

Tax Foresight Case Analysis

  • Tax Foresight correctly predicts with 95%+ confidence that Bradshaw was grossly negligent.
  • If the false statement or omission was the result of changes made by the tax preparer after the taxpayer’s final review, Tax Foresight predicts gross negligence with 80% confidence.
  • If the taxpayer was not fluent in French or English and suffered from a medically diagnosed condition that negatively affected his cognitive abilities, Tax Foresight predicts a finding of not grossly negligent with 63% confidence.
  • If the taxpayer used the same tax preparer, with an accounting designation, for 20 years, and had made inquiries of a third party that did not indicate any problems, Tax Foresight predicts gross negligence with 60% confidence.

Gross Negligence Insights

  • 80% of cases on the issue of gross negligence have resulted in a finding of gross negligence.
  • The Tax Court has never found a person incapacitated with a mental illness to be grossly negligent.
  • Over 500 cases address gross negligence under subsection 163(2). In 2016 alone, 26 new gross negligence cases were decided. Over half of the cases are from the year 2000 or later.
  • Each time you run our Gross Negligence Classifier, or Case Finder you apply the entire body of case law to your client’s situation.
  • Want to make sure you are considering all the new gross negligence cases when you give your advice? Tax Foresight reflects the newest case law and takes every case into account when providing its prediction.