Gross Negligence Penalties Upheld Against Wilfully Blind Sophisticated Taxpayer

In Melman (2016 TCC 167), the Tax Court of Canada ("TCC") upheld gross negligence penalties on the basis that Mr. Melman was wilfully blind to a substantial omission in his tax return by admittedly not reviewing the return before it was filed. The appeal appears to have been filed as a mitigation strategy in the context of Mr. Melman's civil claim against his accounting advisors. Consequently, despite perhaps limited likelihood of success, Mr. Melman may have been obligated to advance the TCC appeal to demonstrate efforts to mitigate his damages.

Mr. Melman's 2007 return omitted $18,850,000 of taxable dividends (apparently grossed-up from dividends paid by two holding companies). According to the TCC, Mr. Melman was deeply involved in the declaration, calculation, payment and receipt of the dividends and, to facilitate paying the associated tax, he temporarily invested $4,725,000 in an instrument with a maturity date at the end of April, 2008. Mr. Melman was described as extraordinarily well-educated and successful and he frequently closely engaged with his tax and accounting advisors. The TCC's reasons included a factual summary that indicated timing challenges for preparing his 2007 return in April, 2008 and, in related communications between Mr. Melman and his accountants, an inexplicable absence of any reference to the taxable dividends and funds held to pay the tax. Mr. Melman's 2007 return was delivered to him at his home while a taxi waited for a member of the accounting firm to return her to the office once the return was signed. The preparation and signing of the return was rushed, as Mr. Melman was going out of town and the TCC described the execution of the return as a "drive-by signing". Mr. Melman did not review either a draft return or the version he signed that day. The omitted taxable dividend was detected during a CRA audit of Mr. Melman's holding companies about three years later and the CRA naturally reassessed. Mr. Melman did not contest the reassessment, other than the gross negligence penalties.

The TCC summarized well-established principles in penalties cases: gross negligence means neglect greater than failing to use reasonable care and is a high degree of negligence tantamount to intentional acting or indifference to compliance; wilful blindness may constitute gross negligence; and the criteria for finding wilful blindness include the magnitude of the error, opportunity for detection and the taxpayer's intelligence...