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Canadian Tax Court Upholds Contractor’s Negligence Penalties

POSTED ON Feb. 12, 2019
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A general contractor acted with gross negligence when he omitted hundreds of thousands of dollars from his tax returns after abruptly and unilaterally declaring his business to be a personal endeavor, a Canadian court ruled.

In a February 1 judgment, the Tax Court of Canada dismissed the appeal of Rolf De Geest, who argued that his 27-year-old construction and contracting business became a noncommercial pursuit in April 2006. De Geest insisted that his contracting activities were a “personal endeavor” and that his compensation was not reportable income, according to the judgment. He was assessed for over C $625,000 in unreported income between 2009 and 2011 and faces gross negligence penalties of over C $73,000 for the three years. 

De Geest testified that in 2006 he made the “conscious and purposeful decision to cease [his] concurrent pursuit of profit or commercial activities” to become “a general noncommercial contractor overseeing commercial and noncommercial subcontractors,” the judgment says. De Geest acknowledged that he received compensation for those "noncommercial duties," which varied by contract. 

De Geest was paid close to C $250,000 in both 2009 and 2010, and C $372,000 in 2011. He said he installed windows and doors and did carpentry, and admitted that his activities weren’t a hobby or for charity, the judgment says. He entered into what he alleged were private contracts and denied that they were “written up as a commercial contract for a business,” the judgment says. 

“I was not exercising a for-profit activity” for tax purposes, De Geest said. He had created an invoice for his clients with a disclaimer that payments received were received in his capacity as a natural person for his own benefit and were “not received and/or held for the benefit of the ‘taxpayer,’” according to the judgment. 

The court described a factually similar case, Meerman v. The Queen, which involved a heavy-duty mechanic who also ceased reporting his pay in 2006. Meerman alleged that he was “exercising his private rights to his labor for the purpose of providing a livelihood,” and that he intended only to conduct a “noncommercial personal endeavor,” according to the judgment. 

Both Meerman and De Geest were in contact with people associated with the Paradigm Education Group, the court noted. “There have been many cases in Canadian courts relating to individuals connected with the Paradigm Education Group,” Justice Henry Visser said in Meerman’s appeal. The founder of the group, Russell Porisky, received a 5½-year prison sentence in 2016 for tax evasion and related counseling activities. 

The Supreme Court of Canada said in Stewart v. Canada that “where the activity contains no personal element and is clearly commercial, no further inquiry is necessary,” the judgment notes. De Geest had argued that the activities he conducted during the years in question were not a source of income for purposes of the tests laid out in Stewart for determining a source of business or property income. 

“It is clear that the activities of the appellant relating to the installation of windows and doors and providing carpentry work were undertaken in pursuit of profit,” and that they didn’t have the characteristics of a hobby or personal activity, the judgment says. Judge Seven D’Arcy said he had “no difficulty finding that the appellant knowingly made [a] false statement or omission.” 

De Geest “carried on exactly the same business before and after April 21, 2006,” but considered that his activities were no longer taxable after that point, the judgment says. “This is patently absurd,” it adds. Recognizing the risk he was taking, De Geest asked both an accountant and a lawyer about declaring his activities to be a personal endeavor and neither thought it was a good idea, the judgment notes. He also attempted to alter his testimony about what was said between himself and his advisers, which “seriously damaged his credibility,” the judgment says. 

The amount of De Geest’s unreported income “would have raised significant suspicion in a reasonable person,” the court said. De Geest’s tax return submissions for the years in question were “such a marked and substantial departure from the conduct of a reasonable person in the same circumstances that it constitutes gross negligence,” it concluded. 

In January the Tax Court dispensed with the appeal of business owner Jeff Bradshaw, who similarly engaged with a disreputable tax advisory group called Fiscal Arbitrators, which claimed large, fraudulent business losses on Bradshaw’s behalf. The owner of Fiscal Arbitrators, who told a skeptical Bradshaw that “everybody is a corporation,” ultimately went to jail for fraud. Bradshaw was considered by the court to have acted with willful blindness and was subject to penalties.