Tax Return Accountability 

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Tax Return Accountability

Where do an accountant’s responsibilities end and a taxpayer’s begin?

FROM: NOV-DEC 2007 ISSUE | BY DON GOODISON

Taxpayers who don’t review their tax return after their accountant has prepared it can run into problems if the accountant makes a mistake - especially if the mistake is a big one.

In Jack Hougassian v. Her Majesty the Queen [2007 DTC 823], the court was asked to get the Minister of National Revenue to reverse penalties imposed for gross negligence assessed to the appellant.

In 2000, the appellant filed his income tax return showing interest income of $985. The actual amount was $276,420. The minister added $275,435 to his income and assessed penalties under subsection 163(2) for gross negligence. Hougassian did not dispute the inclusion or the taxes owing, but did object to the imposition of penalties. When the minister refused to remove them, he appealed to the Tax Court of Canada.

In court, the appellant stated that his wife sorted their income tax information into folders for their accountant. He stated that he did not look at the prepared return because he was not a details person. He argued that the unreported interest was only a small percentage of his total income in 2000, which was $3,154,851. As such, the omission didn’t stand out. He also advanced the idea that, since he hadn’t prepared the return or reviewed it, he was not to blame for the omission.

The Precedent

In 1970, the Exchequer Court of Canada ruled in Udell v. Minister of National Revenue [70 DTC 6019] that negligence by the taxpayer’s accountant could not be attributed to the taxpayer. In that instance, the taxpayer had provided the accountant with accurate and complete records.

However, in DeCock v. Minister of National Revenue [84 DTC 1523], the Tax Court of Canada dismissed the taxpayer’s appeal with the following comments:

But a taxpayer, in particular a businessman who knew his various sources of income, cannot and does not exculpate himself from liability by handing over his tax affairs to a professional and blindly, without question, and in this case without even any interest, accepting what the professional has done.

In DeCosta v. Regina [2005 DTC 1436], the court stated:

While of course his accountant must bear some responsibility I do not think it can be said that the appellant can nonchalantly sign his return and turn a blind eye to the omission of an amount that is almost twice as much as that which he declared. So cavalier an attitude goes beyond simple carelessness.

The courts have decided that a taxpayer’s failure to notice obvious errors amounts to indifference toward compliance with the law. In such circumstances, the taxpayer is not absolved of blame by the fact that another person had prepared the returns.

The Outcome

In coming to its decision, the court looked at Hougassian’s sources of income and whether or not the omission of $275,435 would stand out. His total reported income had come from five separate sources. Since interest income is a separate line item, the court found it difficult to believe that the omission would not be obvious. Hougassian was a very successful businessman who knew how much cash he had in the bank. Evidence showed that he had arranged a higher interest rate than normal with his bank, and that the bank had supplied T5 slips accounting for the interest each year.

In the end, Hougassian’s appeal was dismissed with the comments:

Any quick review of the line items in the tax return would have identified the fact that the interest was understated. The failure of the Appellant to detect the error and to ensure that the correct amount of interest was reported in this case was more than simple carelessness, it showed that the Appellant was indifferent with respect to whether he complied with the Act.

Notwithstanding the third-party penalties, the Canada Revenue Agency takes the position that the taxpayer is the one solely responsible for the preparation and submission of his or her return. Engaging someone to prepare the return does not absolve the taxpayer from that responsibility. Ninety per cent of the time I agree with that position. Some taxpayers will jump at the chance to pin the blame for errors and omissions on their accountant. In the vast majority of those cases, it is the taxpayer who has failed to provide complete information, and the accountant can only go by what is provided.

Unfortunately, there are cases in which the person preparing the return has been negligent and the taxpayer lacks the sophistication to spot an omission, or is under the impression that the preparer knows something they don’t. In these cases, the taxpayer is not responsible and really shouldn’t have to go to court to have penalties removed or seek civil remedies.

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