I'd stopped posting Fiscal Arbitrator cases quite a while back. Just too many, all the same, and all with the same result. But I'm back with Yongwoo because he stands out. He's been certified under bppa.me/wg6EeYRqE7a9ZAHgX6mF!!!
A bit of history on the Fiscal Arbitrators. Been a while and everybody but me has probably forgotten about them. It was an organized scam where taxpayers filed claiming huge, totally fake business losses. Actually that makes the scheme sound more credible than it actually was. There were no 'faked' business expenses, just numbers that the scheme's suckers put in their tax returns and claimed were expenses. Based on this they requested refunds for all of their taxes for the year in question and requested that the surplus losses applied to prior years to get refunds for taxes paid in those years too. As a general comment the participants in this scheme were relatively uneducated and doing non-professional type jobs. People who knew little or nothing about tax. I wrote about them extensively until I got overwhelmed by them all and gave up. I made this indexing topic to reference them all;
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I wrote in that discussion;
A judge in one case described the scheme as;Fiscal Arbitrators, on the other hand, advised its suckers to file tax returns and declare their income. However they also claimed that there are two of you. The Principal (Porisky's legal person) filed the tax returns but the natural person, acting as agent for the Principal, did all the bullwork of earning it. So the natural person was actually a business run by the Principal and, like all businesses, there were expenses. Specifically everything spent by the natural person to maintain life and lifestyle. Fiscal Arbitrator said that these lifestyle costs were deductible against income since they were necessary to keep the money-earning natural man alive and at the grindstone. One problem. Nobody wants to document every single dollar they spend day in and out for the entire year just to show the tax man. In any case unless you spent way more than you earned there would not be enough real expenses to wipe out your current tax burden and get refunds for prior years. So Fiscal Arbitrators threw their bullshit theory overboard and just gave the suckers a number to claim as a business expense without even a fig leaf of justification behind it. You need $300,000 to get everything back? Fine, go ahead and claim $300,000 as an expense. Never mind where the number comes from.
Apparently, since the FA suckers declared their income (almost impossible not to if you are an employee) the Canada Revenue Agency chose not to charge them with tax evasion although, in my opinion, it is a very close call because fake expenses are often the basis for evasion charges. The classic case is a contractor who has his company build him an extension to his house or put in a swimming pool. He then buries the labour, material, and equipment expenses in with his company's normal business expenses and writes them off against business income. If he's particularly aggressive he'll have his suppliers make him accommodation invoices giving the wrong addresses for materials delivery and have his company worksheets list the employees work locations at legitimate company jobsites. These can be, and often are, prosecuted as income tax evasion.
I'm guessing that the CRA didn't go the evasion route for a few reasons;
1 - The individual amounts were quite small. Most of the FA followers weren't making much so not much in the way of taxes at risk.
2 - It was so blatantly obvious. No attempt to conceal, no accommodation receipts, nothing at all except a number on an income tax return, huge in relation to declared income, claimed as a business loss. As soon as the CRA asked about it the story fell apart.
3 - Available resources to prosecute. There were just way too many of them. It is expensive to prosecute taxpayers for evasion. The huge mass of Poriskyites already convicted or currently in process is unique to my experience and is probably stretching the Department of Justice to it's limits. They just didn't have the capacity or resources to take on the Fiscal Arbitrator followers too.
So the Fiscal Arbitrator taxpayers were all just reassessed and, as punishment, hit with a 50% gross negligence penalty under subsection 163(2) of the Income Tax Act. The bulk of the Fiscal Arbitrator appeals have been to fight the penalty, not the reassessments. All have lost.
The 'Master Mind' behind this idiocy was a guy called Larry Watts. You'll meet Larry later in this posting. I wrote about him and his criminal conviction here;[5] The Appellant attended presentations given by Mr. Joanisse regarding FA. These presentations were meant to explain a tax savings scheme that would result in maximized refunds. The Appellant understood that he could claim all his personal expenses so as to offset revenues based on some theory of principal and agent. He understood that an individual could be split into two entities for tax purposes — André Mallette, the natural person who is the agent, and André Mallette, a fictional entity created by his social insurance number who is the principal. The agent generates revenues for the principal and the agent can deduct the expenses that were used to generate these revenues. Apparently, these expenses are all in the nature of the Appellant’s personal expenses that are spent to allow André Mallette, the principal, to earn revenues. The Appellant agrees that he was both the principal and the agent. The Appellant agrees that this was not any kind of a business relationship. FA charged an initial fee of $500 and the Appellant was also to pay to FA 20% (less the initial $500) of any tax refunds received by him. The Appellant recognized that FA were proposing a scheme that would result in not paying any income taxes over four years and there was even a possibility of being able to extend this tax holiday for 10 years back. He stated that at the time it all made sense to him to claim a large business loss on his tax return that he never even incurred. Describing this deduction as a business loss was the only way the CRA would accept it since the tax return forms did not permit of any other kind of description. The Appellant did not know who FA were and he had never heard of them before. He did some Internet searches on both FA and FF and he did not find anything negative so he assumed that they were on the level. However, he never did seek the advice of a tax accountant, a tax lawyer or the CRA regarding the legitimacy of this tax savings scheme.
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Back on track. Here's what Yongwoo was appealing;
Yongwoo, realizing what was at stake, retained a top-notch legal representative, the renowned tax litigator Yongwoo Kim! It paid dividends immediately when his representative came up with the winning strategy of telling the Tax Court judge that Yongwoo's taxes were none of the court's business![1] Yongwoo Kim, the appellant (“Appellant”), in these proceedings, appeals from notices of assessment for the 2009 and 2010 taxation years. The Minister of National Revenue (the “Minister”) denied business losses (as well as loss carry�backs for the 2006, 2007 and 2008 taxation years) and imposed gross negligence penalties pursuant to subsection 163(2) of the Income Tax Act (the “ITA”).
[2] The issues are whether the Appellant was entitled to claim business losses for the years in question and if not, whether the Minister was entitled to impose gross negligence penalties.
[11] In his 2009 tax return, the Appellant reported employment income of $81,568 and claimed a net business loss of ($265,374) resulting in total income of ($174,806). A Form T2125 was included, describing his main product or service as “agent”. He declared gross business income of $96,250 and expenses of $352,625 described as “amounts to principal from agent”, resulting in the loss of ($256,374).
[16] In his 2010 tax return, the Appellant reported employment income of $85,568 and claimed a business loss of ($114,848) resulting in a total income of ($29,280).
Since Yongwoo was claiming massive business losses his first challenge was to identify the business that was losing all of this money. Turns out that he'd found an entirely valid loophole;[5] During the relevant period, he was employed by Bombardier Inc. He described his duties as “quantity assurance” but otherwise refused to answer questions about his training or educational background as he viewed these matters as private and not relevant to the proceedings. He also refused to answer several other questions during cross�examination repeatedly asking the Respondent “Why do you ask that?” and expressing a concern that the Crown was trying to trick him into making admissions.
[6] It was apparent to the Court that the Appellant was an intelligent individual, able to understand and articulate certain complex concepts. But he also appeared to be working from a script. He attempted to read his answers delivered in response to written examinations for discovery. He often repeated his understanding of certain provisions of the ITA but generally ignored the reality of his own personal situation. He was argumentative and in the end, was not a very credible witness.
And Yongwoo had expert testimony backing up his interpretation of the Income Tax Act and how the Fiscal Arbitrators scheme fit within existing tax laws. He called on the assistance of THE MAN himself, Larry Watts! Since Larry had thought up and promoted the Fiscal Arbitrator scheme he was in a unique position to explain it to the court. But the court just brushed him aside as if his testimony was worthless! Larry got six years for fraud for promoting Fiscal Arbitrators and, for some incomprehensible reason, the court thought that fact relevant to the current hearing;[8] When asked to describe his business, the Appellant referred to the definition of “business”, as set out in subsection 248(1) of the ITA, which reads as follows:
[9] The Appellant pointed to the words an “undertaking of any kind whatever” and explained that it could be anything. He suggested that there was no need to be involved in any specific business activities. As the proceedings progressed, he simply referred to his “undertaking whatever”. Asked if he had any books and records, receipts or invoices, or any other documentary evidence to support the existence of his business, he pointed to the “Statement of Business or Professional Activities” (Form T2125) filed with his 2009 and 2010 tax returns as the best evidence available to prove this. He insisted that this document spoke for itself and that there was no need to provide additional evidence.“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment; (commerce)
Unfortunately Yongwoo Kim, the taxpayer, was let down by Yongwoo Kim, the Witness, who could not explain the basis of the numbers in Yongwoo Kim's (taxpayer) tax return;[25] Asked to tell the Court whether he had any reason to believe that the tax return filed by the Appellant contained a “false statement or omission”, Mr. Watts responded that there were none and that the returns were accurate.
[26] In the cross-examinations that followed, Mr. Watts acknowledged that he had helped the Appellant in the preparation of the questions prior to the hearing. He was also asked if he had a criminal record and whether he had been found guilty of fraud in connection with his activities involving Fiscal Arbitrators. He responded in the affirmative. It follows that this Court must conclude that his testimony is inherently unreliable.
[17] The Appellant also included a T5 Summary of investment income of $114,848 signed by him as “authorized representative”. This amount was somehow supported by a number of T5 Slips purportedly issued by a number of well�known entities including The Bank of Nova Scotia, Industrial Alliance, Enbridge, etc. Only the slips purportedly issued by The Bank of Nova Scotia contained a dollar amount, with the notation “tax withheld… unclaimed proceeds of disposition account”. All slips referred to “section 85.1”, though it was not apparent if this referred to the ITA. The amount of $114,848 was then claimed as an interest expense on the Form T2125 to ostensibly support the claim for a business loss of ($114,848). The main product and service was again described on the form as “agent”.
[18] These calculations resulted in a claim for a refund of $21,837. The signature line contained the notation “Certified under bppa.me/wg6EeYRqE7a9ZAHgX6mF”, which the Appellant could not explain.
[19] During cross-examinations, the Appellant was unable to explain why his expenses for 2010 consisted of interest charges. He explained that the various T5 slips had been prepared by DSC. As with the 2009 return, he understood that his tax returns had been prepared and reviewed by Fiscal Arbitrators, although in both cases, the tax preparer box had not been completed.
The judge wasn't entirely on board with Yongwoo's interpretation of the word 'business' for tax loss purposes;
And what of Larry Watts and his invaluable testimony? He'd put himself out there to help Yongwoo by giving an expert's analysis of how Fiscal Arbitrator worked. Who'd know better how the Fiscal Arbitrator plan worked than the man who made the scheme up? But the court just crapped on him;[27] Subsection 248(1) of the ITA defines a business to be “a profession, calling, trade or manufacture or undertaking of any kind whatever” including “an adventure in the nature of trade but does not include an office or employment”. It is trite law that a business must include the notion of profit and while it may include an “undertaking of any kind whatever”, as argued by the Appellant, it must also be a discernable commercial activity involving the provision of goods or services for a profit. A business cannot exist in the abstract.
[41] Did the Appellant operate a business? Clearly he did not. As noted above, the definition of “business” in subsection 248(1) of the ITA includes an “undertaking of any kind whatever”. Indeed, a business can be anything but it must also be something, as long as the activity is undertaken with a profit motive. It cannot simply exist in the abstract or in some form of virtual reality.
[42] The Appellant has suggested that he was entitled to operate a business as a person or human being, distinct from what he referred to as the fictional entity attached to his social insurance number. It is plain an obvious that a person or human being can operate a business under Canadian law but there is no distinction between that person and the individual who has a social insurance number and earns employment income.
[43] It follows that the suggestion by the Appellant that income was received or that business expenses were incurred as agent for a principal, is completely nonsensical. In this instance, the Appellant, the agent and the principal were clearly one and the same.
[44] The Appellant claimed business expenses of $352,625 for 2009 and $114,848 for 2010 and yet was unable to provide one scintilla of evidence. In the end, the Court must conclude that the business income and expenses were entirely fictitious. They were simply fabricated (with the assistance of the Fiscal Arbitrators) for the purpose of generating a tax refund. Had CRA not refused to process the subject returns, the Appellant would have received tax refunds in excess of $100,000 for the 2006 to 2010 taxation years.
[45] Did the Appellant make a false statement or omission? According to the fresh Notice of Appeal filed with respect to both taxation years, each of the tax returns “was filed and was correct and complete and contained no false information”. This is consistent with the position taken by the Appellant in correspondence to the CRA, as noted above, that all information in his tax returns had been “certified to be correct, complete and true”.
[46] During cross�examinations, the Appellant admitted that he had filed the tax returns for the 2009 and 2010 taxation years, including the Statement of Business Activities and Request for Loss Carryback. He recognized his signature even though he had added the expressions “per” or “authorized representative”.
[47] Since I have already concluded that the Appellant did not carry on a business and did not incur the business expenses in question, it logically follows that the Court must also find that he knowingly made a false statement in his tax returns.
[48] Even if the Court considers for a moment that the Appellant mistakenly believed that he had a business, which defies credulity, he must have known that he had not in fact incurred the business expenses in question. There is little doubt that he was motivated by a desire to avoid paying income taxes and by the prospect of receiving a substantial tax refund.
And what about Yongwoo's solid gold bppa.me/wg6EeYRqE7a9ZAHgX6mF certification? Surely that counted for something. But the judge didn't even mention it in the decision! Obviously the fix was in against Yongwoo even before his case was heard. How else can you explain this vague, meaningless explanation why Yongwoo, while doing an exemplary job of managing of the vital business of taking care of Yongwoo, wasn't in an actual business for tax purposes;[52] What can be said about the testimony of Mr. Watts who, unbeknownst to the Court at the time of the hearing, had been found guilty by a jury of fraud in connection with his activities with Fiscal Arbitrators, as reported at 2016 ONSC 4843. On June 6, 2016, he was sentenced to six years in jail and ordered to pay a fine of $149,129. The trial judge indicated that:
[1] Following a twenty-three-day jury trial, Lawrence Watts was found guilty of one count of fraud, in an amount exceeding $5,000, contrary to section 380(1)(a) of the Criminal Code. The charge arose from the preparation, by the offender, of one or more income tax returns for 241 Canadian taxpayers. In each case, a non-existent business loss, of a non-existent business, was reported which had the effect of extinguishing the taxpayer’s tax liability for the then current, and three previous years. This resulted in a claim for a refund of all of the tax paid in the three previous years, and of the money withheld at source by their employers for the then current year. The taxpayers who testified at trial gave evidence that they had not carried on a business, or incurred the losses reported on their returns, had not suggested to Watts that they had incurred losses, and did not know where the numbers on their returns had come from.
[2] The total amount of federal tax revenue that would have been lost had all of the returns been assessed as filed was $10,507,131, based upon the reporting of $64,253,889 of non-existent losses. However, at some point, Canada Revenue Agency 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 $2,750,288.
[3] In preparing the tax returns, Mr. Watts used the business name “Fiscal Arbitrators”. For his services, the taxpayers were charged twenty per cent of the tax refunds, or credits, received from CRA. Documents seized from Watts’ office showed projected revenue of $1,902,227.
[53] Despite the foregoing, Mr. Watts was happy to step forward as a witness for the Appellant and repeat his mantra that each and every Canadian was entitled to claim business losses to eliminate income tax they might have paid on their employment income. Having acknowledged that he had been involved in the preparation of the Appellant’s tax returns, he was asked by the Appellant if he could point to a false statement or omission in the tax returns. Mr. Watts responded by assuring the Court that there were none. As indicated above, his testimony is inherently unreliable and of no probative value whatsoever. In any event, his responses go to the heart of the issues that must be determined by this Court and not by Mr. Watts.
"It can be anything but it must be something." Is the Tax Court run by Zen monks?Indeed, a business can be anything but it must also be something, as long as the activity is undertaken with a profit motive. It cannot simply exist in the abstract or in some form of virtual reality.
Anyhow that analysis determined that Yongwoo was not entitled to deductions for business losses. What about the gross negligence penalty?
And, by Tax Court standards, a fairly heavy costs awarded for what I assume was a fairly short hearing;[50] Referring to the various factors set out by Miller J., in Torres, supra, notably 1) the Appellant’s general level of intelligence, 2) the magnitude of the advantage as compared to tax refunds received in previous years, 3) the blatantness of the false statement, 4) the lack of former knowledge of the tax preparer, 5) the incomprehensible and nonsensical explanations made by the tax preparer, 6) the failure to make enquiries of third parties, an accountant or the CRA. These factors taken together suggest that the Appellant was either wilfully blind or grossly negligent in the preparation of his tax returns.
[51] On that basis, I find that the Respondent has met the burden set out in subsection 163(3) of the ITA and I conclude that the Appellant knowingly or in circumstances amounting to gross negligence made a false statement in his 2009 and 2010 tax returns. As a result, the Minister is entitled to the gross negligence penalties.
YONGWOO KIM,[55] For all the foregoing reasons, the appeals are dismissed with costs to the Respondent fixed in the amount of $5,000 payable within 60 days from the date hereof.
and
HER MAJESTY THE QUEEN
https://decision.tcc-cci.gc.ca/tcc-cci/ ... 2/index.do
