Avoiding Taxes vs. Tax Avoidance

I hate paying taxes as much as the next person, but there is a fine line between legally avoiding taxes and tax avoidance.  One is legal, and I highly encourage planning to legally avoid paying more tax than necessary, while tax avoidance is illegal and will get you in lots of trouble.  Below are a couple of Court cases that were recently decided.  Now, firstly let me say I am not picking on the specific organization mentioned in the Court cases, nor am I saying that they did anything wrong.  However, I will say that I am unclear as to what legal (Tax law) basis they are purporting to use.  I will also say that I am unaware of any successful outcomes using this or similar strategies.  What I want you (the reader) to take from this is that if it sounds too good to be true it probably is. 

The natural person concept has some truth in the arguments being made, but not related to Income Tax.  It is like trying to argue tax law to get out of a speeding ticket, or trying to tell the cop that you don’t have to comply because you do not recognize his authority.  This is going to get you a real nice ride in the back of the shiny police car, and a date (no dinner or drinks involved) with a Judge.

My advice, for what it is worth, is to stay clear of organizations that promote strategies similar to this.  If you are not going to listen to me then at least make them prove to you that they have had success in the past, and make them explain exactly what they are going to do, so that you are informed.  I would also bring these Court cases along with you for them to read.  Bottom line is this.  Anyone can represent you or “sell” you on an idea, but at the end of the day the Courts are going to hold YOU responsible for the consequences of your choices and the choices of your representative.

Document Excerpt:
Janovsky v. The Queen. Tax Court of Canada (Informal Procedure), May 2, 2013. Neutral Cite: 2013 TCC 140. Court File No.: 2012-4340(IT)I. Miller, J. Penalties – Gross Negligence Penalty – Taxpayer was reassessed for his 2009 taxation year where he reported $21,583.30 of business income but claimed losses of $29,157 for “agent activities” for which he sought to carry back to his 2006 and 2007 tax years. He incurred various expenses related to his business as well as student loan interest and fees related to his education. The agent activities were related to a belief that a natural person was not liable to tax and that the “fictional person” could claim expenses that could be deducted by the natural person, so he was told by an organization called Fiscal Arbitrators (FA). Minister imposed gross negligence penalties as taxpayer knowingly or under circumstances amounting to gross negligence made false statements in his returns. TCC concluded that the taxpayer was grossly negligent as he ought to have known that the amounts reported in his return were fake. If he did not know, that he was willfully blind which would still attract gross negligent penalties. Appeal dismissed. I.T.A. ss. 163(2).  
 

Document Excerpt:
Bhatti, et al. v. The Queen. Tax Court of Canada (General Procedure), May 6, 2013. Neutral Cite: 2013 TCC 143. Court File No.: 2011-3755(IT)G and 2011-3754(IT)I. Miller, J. Penalties – Gross Negligence Penalties – Taxpayers failed to report rental income in 2007 and 2008 taxation year and Ms. Bhatti also failed to report a capital gain on the disposition of a rental property in 2007. Minister further argued that gross negligence penalties should apply because of fictitious business losses claimed in 2008 in the amount of $477,716. Taxpayers argued that they hired a tax preparer and any penalty should apply to them. The fictitious business losses were claimed by Mr. Bhatti following the advice of an organization called Fiscal Arbitrators (FA), despite warnings by his accountant and wife, Ms. Bhatti. At issue was whether gross negligence penalties should apply. TCC concluded that Mr. Bhatti was at least willfully blind in his conduct. Mr. Bhatti’s appeal was dismissed. Ms. Bhatti’s appeal for the 2007 tax year was allowed as no penalties applied pursuant to s. 163(2) of the ITA in respect of the capital gain on the sale of the rental property. I.T.A. ss. 163(2).