First an explanation is probably required as to who the Fiscal Arbitrators ("FA") were. I wrote in prior postings;
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.
FA was a very agressively promoted Canadian tax evasion/avoidance scheme run by a guy called Larry Watts who ended up with a hefty jail term for promoting it. However none of the taxpayers who tried to scam the Canada Revenue Agency through fake FA expenses were charged with tax evasion, a criminal offense. Instead they were hit with Section 163(2) gross negligence penalties which equal 50% of the amount of the taxes they attempted to avoid paying. Why weren't they charged with evasion for claiming fake business expenses? As I wrote, again in a prior post;Fiscal Arbitrators . . . 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.
With that as background on to Mr. Bhatti and his appeal of his income tax assessment. He was reassessed for the taxes he owed and a 163(2) penalty was imposed. He appealed on the penalty.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.
Bhatti v. The Queen
2013 TCC 143
http://canlii.ca/t/fxg04
The first paragraph of the decision waxed philosophical.
The second paragraph got down to business.[1] "I got greedy" – so acknowledged Mr. Bhatti in explaining how he could file a return claiming a $31,000 refund, an amount promised by a nefarious organization that prepared returns based on fictitious business losses. How often this Court suspects what Mr. Bhatti has blurted outright – greed can all too often be an unfortunate motivator.
Mr. Bhatti is unique within the FA taxpayers that I've reviewed because of two items in paragraph 2. He claimed the fake $477,716 business loss to avoid paying tax on his reported income but he also had additional income he chose not to report. He claimed that he didn't declare his rental income because;[2] Mr. Bhatti’s General Procedure case and Ms. Bhatti’s Informal Procedure case were heard together. In both matters the only issue is the penalties imposed by the Government. Ms. Bhatti’s penalties were imposed pursuant to subsection 163(2) of the Income Tax Act (the "Act") (commonly referred to as gross negligence penalties) based on her failure to report rental income in 2007 and 2008 and her failure to report a capital gain on the disposition of a rental property in 2007. Mr. Bhatti also faces subsection 163(2) penalties based on the same issues as Ms. Bhatti, but also based on failure to report business income in 2008 and also based on reporting $477,716 of fictitious business losses in 2008.
And he said that he didn't declare the capitol gain on the sale of his rental property because;[6] Mr. Bhatti testified that with respect to the rental income in 2007 and 2008 ($13,950 and $9,700 respectively) from the suites in their principal residence that he discussed this with Mr. Sidhu, in whom he had a great deal of confidence, who advised him that expenses would likely be greater than income, and it was therefore not necessary to report this income. This story did not accord with both what Mr. Bhatti said on examinations for discovery, nor what he raised in his Notice of Appeal. At discovery and in his Notice of Appeal, Mr. Bhatti suggests that he never actually advised Mr. Sidhu with respect to the rent from the suites in their home. I consider this discrepancy in light of the fact that Mr. Sidhu was not called to testify and conclude that Mr. Bhatti’s story at trial is simply not accurate. He may have believed that his expenses might have exceeded his rental income, but he did not hear that from Mr. Sidhu.
The story starts here;[9] Mr. Bhatti, however, was very much aware of the proceeds arising from the sale of the Rental Property. He did not advise Mr. Sidhu of the disposition, on a mistaken belief he was not aware such proceeds should be reported. This is not Mr. Bhatti’s first capital gain. Neither was it his only real property sale. Mr. Bhatti had not only built the home he and his wife lived in in 2004, but in 2006 he started a construction business, under the name Jivu Construction, with a partner, Mr. Gandhi. In 2007, the partnership constructed and sold a duplex in Surrey. In 2008, Mr. Bhatti, with Mr. Gandhi and a third partner, Mr. Gill, built and sold another home in Surrey. Mr. Bhatti earned a profit of approximately $23,160 on this sale, which he failed to report.
Lesser informed individuals, who didn't understand tax law like Mr. Bhatti, had problems with him participating in the FA scam;[11] I turn now to Mr. Bhatti’s testimony regarding the fictitious business losses claimed by him, that resulted in a $31,000 refund for his 2008 taxation year. Mr. Bhatti and his co-workers were drawn to a poster by an organization known as Fiscal Arbitrators, a poster that had been displayed at their workplace. One of Mr. Bhatti’s co-workers, Mr. Bal, confirmed the poster and its appeal to their co�workers, which led to several of them meeting with Fiscal Arbitrators. This meeting was with Mr. John Gillespie who was later joined by Mr. Larry Watts, who explained that expenses could be claimed to obtain significant tax refunds. Mr. Gillespie and Mr. Watts appeared professional to Mr. Bal and Mr. Bhatti as well as being knowledgeable, one of them even claiming to have worked for some period of time for the Canada Revenue Agency ("CRA"). Mr. Bhatti and his co�workers were advised by Fiscal Arbitrators to obtain assessments going back 10 years from the CRA. Mr. Bhatti proceeded to do this and took that information to Mr. John Gillespie with Fiscal Arbitrators. Mr. Bhatti was advised that he would get a refund of all of his 2008 taxes that had been remitted through his employment (some $31,000). At some later point, Fiscal Arbitrators provided Mr. Bhatti with a schedule indicating that losses could be used to offset prior years’ taxes to the tune of approximately $103,000. Mr. Bhatti was also advised that he would have to pay $500 for the initial preparation of his return if he wanted to proceed, and ultimately he would have to pay 20% of any refund he received from the CRA to Fiscal Arbitrators, but that the $500 would be taken off that 20% amount. Mr. Bhatti did in fact pay 20% of his $31,000 refund to Fiscal Arbitrators less the $500.
[12] Mr. Bhatti did not sign up right away with Fiscal Arbitrators, but received calls from Mr. John Gillespie pressuring him to do so. He discussed this with both his wife and his accountant, Mr. Sidhu, who both advised against it. At his examination for discovery, Mr. Bhatti acknowledged that both his wife and accountant suggested he would be engaging in fraud: Mr. Bhatti did not have such a clear memory of that at trial.
But he wasn't deterred!
He was forthright about his motives but he had a medical problem. He was brainwashed![13] Mr. Bhatti ignored his wife and accountant and advised Mr. Sidhu not to prepare his 2008 return, and instead he proceeded to have the return prepared by Fiscal Arbitrators. He was sent his tax return by Fiscal Arbitrators, which had yellow stickers where he was supposed to sign. The package included instructions that he was to write "per" before his signature. The return included a "statement of agent activity" showing money "collected as agent for principals" of approximately $1,000,000 with costs of goods sold and expenses of Jivu Construction of $744,000 plus $612,000 for "amount to principal in exchange for labour", leaving a loss of some $477,000. This was sheer nonsense.
[14] Mr. Bhatti forthrightly acknowledged these were all simply made up numbers. He had no idea what they meant and he certainly knew they did not pertain to any of his business or employment income: in fact, he had no idea what it meant other than it would result in a significant return. As he said, "all I was happy about was getting my money". At the time, he paid little attention to the numbers.
[15] Mr. Bhatti signed the return. He never called CRA, a tax lawyer or any other accountant. He maintains he was brainwashed by Fiscal Arbitrators.
Then disaster;
The judge had no problem with the penalty being applied to the FA "nonsense";[16] Mr. Bhatti obtained his $31,000 refund. The CRA then reassessed and disallowed Mr. Bhatti the fictitious business losses of $477,716, assessed additional income in both Mr. Bhatti’s and Ms. Bhatti’s 2007 and 2008 returns to include the net rental income of $4,471 and $2,943 each respectively, assessed a taxable capital gain of $39,418 arising on the sale of the rental property against each of Mr. and Mrs. Bhatti and added $23,116 in 2008 to Mr. Bhatti’s income from business, from the sale of the Surrey home he and his partners had constructed. The CRA also assessed penalties pursuant to subsection 163(2) of the Act based on these amounts. It is the penalties that are at issue before me.
His appeal against the penalties imposed because of his unreported income was just as bluntly dismissed.[21] Given this state of the law, have Mr. Bhatti and Ms. Bhatti properly been assessed penalties pursuant to subsection 163(2) of the Act?
[22] I will first address the penalties in connection with the $477,000 fictitious business losses claimed by Mr. Bhatti. First, is this claim a false statement? Yes, Mr. Bhatti admitted this. Second, did he make it knowingly or under circumstances amounting to gross negligence? Mr. Bhatti saw and signed his return. I believe he saw the $1,000,000 income and $477,000 loss. He knew they were simply not true. He knowingly made a false statement in this regard.
[23] Even if I accept his explanation that he did not review the return in such detail as to have known the refund was drawn from made up numbers, then his conduct was so wilfully blind, not caring whether or not he complied with the law, that it constituted gross negligence.
[24] The reason I reach this conclusion is because:
a) The magnitude of the claim was huge compared to his overall income.
b) He had many opportunities to detect the false assertion:
i) just the size of the refund alone should have raised suspicions.
ii) both his wife and his accountant told him it smacked of fraud.
iii) a cursory review of the return itself would reveal the completely unaccountable $500,000 loss.
iv) the request to sign the return with the insertion of "per".
These are not subtle signs of a possible problem, but glaring flashing red lights. Mr. Bhatti did nothing.
c) Mr. Bhatti was not inexperienced when it came to knowing what business income and losses were. He not only had employment income, but also business income from his construction business. As well, he had some investment income and rental income. He was not inexperienced commercially.
He had the opportunity, the experience and the knowledge to appreciate this $31,000 could only be triggered by false assertions. This is a classic case of wilfull blindness to which penalties should apply.
So, on to part two. Mr. Bhatti apparently took this comment to heart;[27] Next, with respect to the rental income from the suites in their principal residence, I do not accept Mr. Bhatti’s assertion that because the rent was derived from his principal residence, he was not aware he had to report it. He had other rental income: he knew what rent was. He collected the rent himself from his tenants. He knowingly made this false omission.
[28] Finally, with respect to the failure to report the capital gain on the disposition of the Rental Property, Mr. Bhatti was no stranger to capital gains nor to proceeds from the disposition of real property. He was in the house construction business and knew the proceeds from such sales were business income. He would have known an $80,000 gain on the sale of a rental property would attract some tax consequences. Even if he was not sure, to assume there were no tax ramifications goes beyond simple carelessness. It is the very sort of cavalier attitude or nonchalance as to whether or not to comply with the law that jurisprudence suggests is gross negligence that attracts the subsection 163(2) of the Act penalties.
[29] While I have no doubt the result of these penalties imposes a severe financial burden on Mr. Bhatti, one he claims he may never be able to satisfy, that is no reason to not impose a penalty that is clearly justified. It is a harsh result and a painful lesson to Mr. Bhatti. One can only hope that this will be a lesson for others attracted by a tax deal that seems too good to be true. It inevitably will be just that.
So he declared bankrupcy. Although he had an excellent income, a strong asset base, and, even including his taxes owing, fairly modest debts.While I have no doubt the result of these penalties imposes a severe financial burden on Mr. Bhatti, one he claims he may never be able to satisfy, that is no reason to not impose a penalty that is clearly justified.
Bhatti, (Re)
2018 BCSC 213
http://canlii.ca/t/hqg66
Bhatti made a trivial essentially symbolic offer to his creditors;[1] Rajpal Singh Bhatti, hereinafter (“the bankrupt”), applies for a conditional discharge from bankruptcy pursuant to the provisions of s. 172.1 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3, (hereinafter the “BIA”). This is a tax-driven bankruptcy, as the bankrupt declared more than $200,000 of personal income tax debt which represents more than seventy five percent of the total unsecured proven claims in his bankruptcy.
The Crown however wanted almost all of his debts paid;[2] Counsel for the bankrupt submitted that an appropriate order for discharge would be for the bankrupt to pay $20,000 to his trustee for the benefit of his creditors.
The hard-hearted CRA didn't care that the poor guy was just thinking of his family;[3] Counsel for the Minister of National Revenue submitted that the bankrupt’s discharge should be conditional upon him paying to his trustee the sum of $188,000 in minimum monthly payments of $2,000 along with a tax compliance clause as a term of the order.
These were his financial obligations;[5] The Canada Revenue Agency (hereinafter the “CRA”) claims $210,608.55 against the bankrupt as a result of a reassessment of the bankrupt’s 2008 tax return in which CRA disallowed business losses, assessed additional personal and business income, and assessed a taxable capital gain arising from the sale of a rental property. CRA has also imposed penalties against the bankrupt on the basis of the reassessed amounts. Due to the bankrupt’s obligations to support his family and his obligations to make payments towards the tax debt, the bankrupt was unable to meet his financial obligations.
As to his income;[6] On February 6, 2014, the bankrupt filed a proposal with the trustee. By its terms, the bankrupt offered, among other things, to pay a maximum of $72,000 to the trustee. Thereafter, as a result of CRA rejecting the proposal, the bankrupt made a deemed assignment into bankruptcy. At the date of bankruptcy there were two proven claims as follows:
(a) $23,996.03 to MBNA, a division of the Toronto Dominion Bank;
(b) $210,608.55 to CRA, including $51,567.72 in principal, and $159,040.83 in interest and penalties.
So I make that to be an average of almost $160,000 a year in income and under $50,000 a year in expenses. That doesn't seem bankrupt to me even when you factor in total debt of about $245,000. This gives him a debt to income ratio of 1.53 when the average Canadian household has a debt to income ration of 1.71;[9] The bankrupt is currently 52 years old. He is employed by the BC Maritime Employers Association as a machinist. Most recently the bankrupt has earned the following annual income:
• for 2014, $167,816;
• for 2015, $162,114.11;
• for 2016, $141,754.12.
[10] The bankrupt’s current monthly expenses amount to $4,095.
https://www.thestar.com/business/econom ... -says.html
So, if we use the statistics and accept that Bhatti was bankrupt then, on average, every Canadian household is bankrupt including my two adult children.
He does seem to have made some effort to pay a part of the debt;
I think "surplus income" is a calculated amount the debtor makes above the amount necessary to maintain a reasonable lifestyle. So he's paid some out to his creditors but not bothered to pay the bulk of it. But, unfortunately for Mr. Bhatti, he's special;[12] The trustee in his s. 170 report to the court confirmed the amount of the two proven unsecured claims in the bankruptcy from CRA for $210,608.55 and MBNA for $23,996.03. He also confirmed that the bankrupt had paid $20,000 in surplus income and still owed another $33,000 for outstanding surplus income. The bankrupt’s monthly surplus income under the BIA guidelines was calculated to be approximately $2,500. The trustee confirmed that the bankrupt has completed all of his other duties under the BIA and has filed all his required tax returns to date.
And the judge was less than sympathetic given Bhatti's current solid financial situation;[14] High personal income tax debts are the only category of debt in a bankruptcy where Parliament has explicitly precluded a bankrupt from receiving an automatic discharge. It is also the only category of debt where a bankrupt is specifically precluded from receiving an absolute discharge.
[17] The purpose of the BIA is to permit an honest but unfortunate debtor to obtain a discharge from his debt subject to reasonable conditions and to permit the debtor to rehabilitate himself free from the overwhelming burden of debts. The terms “honest” and “unfortunate” are conjunctive. A debtor must be both honest and unfortunate to receive a discharge from his debts. A debtor who is not honest or who is not unfortunate is treated differently than one who is both honest and unfortunate. Bank of Montreal v. Giannotti, [2000] 21 CBR (4th ) 199; and McRudden (Re), 2014 BCSC 217 (CanLII).
[18] The courts have repeatedly held that failure to pay income tax on income is misconduct and cannot be classified as a misfortune. Zinkiew (Re), 2004 BCSC 1831 (CanLII); and McRudden (Re), supra. It is a principle of long standing that a discharge is not conferred as a matter of right but is determined by the facts of the case with consideration being given to the cause of the bankruptcy, the forthrightness of the insolvent person, the performance of the duties required by the BIA and whether the discharge and the conditions imposed, if any, are congruent with the integrity of the bankruptcy process and the public perception of this integrity. Furlotte (Re), 2007 NBQB 37 (CanLII).
[19] Counsel for CRA submitted that this bankruptcy was not caused by any misfortune. The bankrupt did not fail to pay any taxes because of misfortune. There was no job loss, no health crisis, no family emergency. He failed to pay taxes because that was what he intended. In the bankrupt’s own words, he “got greedy.” The bankrupt is not an unfortunate debtor because he attempted to hide his tax debt, the full extent of which was only discovered when the CRA started its own investigation of the bankrupt’s business dealings. He took advantage of the self�reporting nature of the tax system.
[20] On considering all of the evidence I accept that characterization of the matter.
[21] This bankruptcy has some other very unusual features to it.
[22] While the bankrupt was not able to pay the taxes and penalty and interest when he was reassessed by CRA for his unreported income and improper refund amounting to approximately $210,000 in September 2010, his financial circumstances as they exist today are not at all bleak. He has full time employment earning between $140,000 and $160,000 annually. He owns a one�third interest in a rental property that generates income and he has current equity in excess of $100,000.
[23] He resides with his spouse in the family home that has equity of at least $500,000. The bankrupt transferred his one�half interest in the home to his spouse shortly after the 2010 reassessment with the result that CRA has placed a charge on the property pursuant to s. 160 of the Income Tax Act, R.S.C. 1985, c. 1, for the outstanding amount due from the bankrupt.
[24] Viewing the matter objectively I conclude that the bankrupt has more than sufficient assets to satisfy all of his creditors in the current bankruptcy in full.
[26] Applying the factors that I have referred to in Westmore v. McAfee and Re, Kaleniuk, and recognizing the bankrupt’s present and continuing ability to satisfy the claims of the proven creditors and with a credit for the surplus already paid of approximately $20,000, I order the bankrupt be discharged upon the payment of the further sum of $170,000 in monthly installments of $2,500 commencing on February 15, 2018, and on the 15th day of each month thereafter with the right to prepay in part or in full at any time. The two additional orders that counsel for CRA has sought being the tax compliance clause and the provision allowing the trustee to apply for his discharge if more than three aggregate payments are missed, are also to be made part of the order.
