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Roitelman: Fraud and the Due Diligence Defence

In Roitelman v. The Queen (2014 TCC 139), the Tax Court considered whether a director could establish that he had been duly diligent in his attempts to prevent his company’s failure to remit source deductions where he had delegated responsibility for the company’s bookkeeping and tax filings to an employee.

Background

The taxpayer owned an electrical contracting business that focused primarily on commercial and industrial contracting, installations and service work. Initially, the taxpayer personally completed all payroll and remittance filings. As his business expanded, the taxpayer was required to travel more frequently, thus spending less time in his office. Consequently, the taxpayer hired and trained a bookkeeper. He oversaw her work and at the outset ensured remittances were made in a timely fashion. After the employee assumed responsibility for the bookkeeping, the corporation did not remain current in its remittance obligations.  From August 2005 to March 2008, the CRA sent five letters to the corporation regarding repeated failures to remit. From October 2006 to March 2008, the CRA sent seven Notices of Assessment in respect of the unremitted source deductions. The taxpayer did not receive nor was he personally aware of many of these letters and assessments. Later, after the bookkeeper had been dismissed, the taxpayer discovered hidden documents and unsent remittance cheques in various locations in the office.

For 2006 and 2007, the CRA assessed the taxpayer for directors’ liability for unremitted source deductions under subsection 227.1(1) of the Income Tax Act. The taxpayer appealed to the Tax Court and relied on the due diligence defence under subsection 227.1(3) of the ITA.

Tax Court

The Tax Court allowed the appeal. The Court found the taxpayer established a due diligence defence and thus he was not personally liable for the unremitted amounts.

The Court reviewed the key decisions on the issue, and noted that the applicable test from Buckingham v. The Queen (2011 FCA 142) is objective and contemplates the degree of care, diligence and skill exercised by the director in preventing a failure to remit. The Court also cited Balthazard v. The Queen (2011 FCA 331) for the proposition that after-the-fact behavior and corrective measures can be relevant in certain circumstances.

In Roitelman, the Court compared the personal actions of the taxpayer to the reasonably prudent person and emphasized that the director’s interaction with the bookkeeper should not be analyzed on in hindsight but, rather, with a view of the circumstances that existed during the relevant period:

[28] The test does not dictate that the positive steps taken must be effective in ensuring future compliance but only that a director takes those steps and that those steps would be the proactive steps that a reasonably prudent person would have exercised in comparable circumstances.

The Court stated that it was reasonable for the taxpayer to expect his bookkeeper to bring any essential correspondence to his attention, and it was reasonable for him to believe that when he signed remittance cheques that they were being forwarded to the Receiver General. There was no evidence that the taxpayer benefited or intended to benefit in any way from the company’s failure to remit.

Despite his actions (i.e., hiring and training the bookkeeper, delegating responsibility, etc.), the taxpayer was unable to discover or ascertain the extent of the remittance failures. The bookkeeper thwarted his attempts to ensure compliance. The Court held that the taxpayer could not reasonably have known that the bookkeeper would engage in fraudulent and misleading activities.

Roitelman is an interesting case because there are very few decisions in which a taxpayer is able to establish a due diligence defence where he/she delegates responsibility for bookkeeping/remittances and relies on the work of that other person. In Kaur v. The Queen (2013 TTC 227), the Tax Court stated, “… The director’s oversight duties with respect to [remittance obligations] cannot be delegated in their entirety to a subordinate, as was done in the present case.” In Roitelman, the taxpayer had admitted that he relied on “blind faith” that the remittances had been made in a timely fashion. However, the result in Roitelman reminds us that such reliance may still be reasonable where there was deceit and fraud perpetrated on the director by a subordinate.

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Roitelman: Fraud and the Due Diligence Defence

Regulation of Bitcoin Around the World

Governments and tax authorities continue to develop their fiscal and tax positions relating Bitcoins. Many countries are releasing warnings about the risks associated with the use of Bitcoins, with some providing more concrete guidance on regulation and tax treatment of the digital currency.

Earlier this year, the United States Law Library of Congress surveyed over 40 countries for their official stances on Bitcoin to determine whether and how Bitcoins are used, regulated and taxed in those foreign jurisdictions. Most of the comments addressed three main themes: Bitcoin’s status (or lack thereof) as legal tender, consumer protection, and taxation.

Most notable in the survey are China and Brazil: Both countries have imposed significant regulations with respect to Bitcoins. In China, Bitcoins are treated as a special virtual commodity. It is not considered a currency, and banks and payment institutions are prohibited from dealing in Bitcoin. Brazil enacted a law in late-2013 that has created the possibility of normalization of electronic currencies like Bitcoin. The law lists the principles that must be observed by the payment arrangements and institutions, according to the parameters to be established by the Brazilian Central Bank.

Brazil stands alone with its Bitcoin regulation amongst its Central and South American counterparts. Neighboring jurisdictions have not provided for any formal regulation of the virtual currency despite its increased use. In Chile, a group of American Libertarians founded an organic farming community with an economy based on Bitcoins. In Nicaragua, an American banker bought a plot of land in one of the most important tourist areas in the country for 80 Bitcoins (roughly USD $72,000 at the time) and has since been encouraging the adoption of Bitcoin.

The United Kingdom announced that it will treat Bitcoins like any other form of payment for tax purposes: Value Added Tax will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoins. The European Union (EU) has passed no specific legislation relative to the status of the Bitcoin as a currency. In France, Germany, Finland and Estonia, the authorities have stated that Bitcoin is an alternative means of payment but not an official currency, and as a result revenues generated are subject to taxation.

The Central Bank of the Russian Federation stated that services of Russian legal entities aimed at assisting the exchange of Bitcoins for goods, services, or currencies are a “dubious activity” associated with money laundering and terrorism financing. The statement recommended that Russian individuals and legal entities refrain from transactions involving Bitcoins. Similarly, the Reserve Bank of India issued a public notice to users, holders and traders of virtual currencies (including Bitcoins) regarding the potential risks, financial and otherwise, to which they are exposed. Following the advisory, India’s largest Bitcoin trading platform suspended its operations, citing the notice.

At present, Hong Kong has no legislation directly regulating Bitcoins and other virtual currencies. However, existing laws provide sanctions against unlawful acts involving Bitcoins, such as fraud or money laundering. Singapore has reportedly published tax advice with respect to Bitcoins, noting that the digital currency is not considered a good nor does it qualify as currency but will be assessed under the Goods and Services Tax. Malaysia and Japan have not issued statements regarding Bitcoins.

As for the countries not surveyed by the United States or countries that have yet to take an official position on Bitcoins, time will tell as to how the digital currency will be adopted and integrated in different jurisdictions.

For now, the regulatory and tax discussions are as young as the currency. As Bitcoin use and acceptance increases, fiscal and tax authorities will face a more complex debate that will demand more than simply providing public warnings of the risk of Bitcoin use.

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Regulation of Bitcoin Around the World