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Taxpayers who promoted Paradigm Tax-Avoidance Scheme appealed the CRA's decision on the basis that there was no income
From 2004 to 2008, the Appellants, Ms. Elaine Gould and Mr. Russell Porisky, promoted and distributed Mr. Porisky's tax avoidance theories to the public through the Paradigm Education Group. The Paradigm system asserted that tax laws could be interpreted to permit individuals to opt out of paying income tax and collecting and paying GST.
The Appellants organized and sold tickets to Paradigm seminars led by Mr. Porisky, marketed Paradigm books, manuals, and videos, and implemented a tiered fee structure that entitled them to a portion of the fees earned by educators teaching Paradigm's concepts. Over the five years in question, they earned more than $1.4 million in gross revenues while reporting no income and paying no income tax or GST.
After being convicted of criminal tax offences and serving their sentences, the Appellants appealed the related tax assessments to the Tax Court of Canada. At issue was whether, as a partnership, the Appellants:
- failed to collect and remit net GST totalling $67, 165.17 for the period from January 1, 2004, to December 31, 2008,
- failed to file GST returns for the same period and were liable for penalties under s. 280.1 of the Excise Tax Act (ETA),
- were properly assessed as a partnership for gross negligence penalties under s. 285 of the ETA, and (iv) were jointly and severally liable under s. 272.1(5) of the ETA for the partnership's failure to pay/remit net GST, penalties, and interest totalling $98, 632.09.
At issue with respect to Ms. Gould and Mr. Porisky individually was whether:
- (i) they each earned unreported income totalling $569, 277 in the 2004 to 2008 taxation years, and (ii) they were properly assessed penalties under s. 162 of the Income Tax Act for failing to file their 2004 to 2008 returns; and
- (ii) Also, whether Ms. Gould was properly assessed gross negligence penalties for 2004.
The Tax Court clarified the Legal framework regarding Business source of income
The Tax Court held that, under the Income Tax Act (ITA), income can only exist for a taxation year if it arises from an identifiable source. When the source is a business, a taxpayer's income for a given year is the profit earned from that business during that year. The court then clarified that the litmus test for whether there is an income source continues to be the two-step approach set out by the Supreme Court of Canada in Stewart1, i.e.:
(i) Is the activity in question undertaken in pursuit of profit, or is it a personal endeavour?
In other words, does the taxpayer intend to carry on the activity for profit and is there objective evidence to support that subjective intention? The taxpayer must show that their predominant intention is to make a profit from the activity and that the activity has been conducted so as to be consistent with objective standards of business-like behaviour.
(ii) If it is not a personal endeavour, is the source of the income a business or property?
Where the activity: (a) appears to be clearly commercial, (b) contains no personal or hobby element, and (c) the evidence is consistent with the view that the activity is conducted for profit, then a source of income exists for the purposes of the ITA. However, where the activity could be considered a personal pursuit, then one must ask if the activity is being carried on in a sufficiently commercial manner so as to be a source of income.
The Tax Court found that the evidence clearly showed Paradigm Education Group constituted a business source of income for the taxpayers, who operated as equal partners. Because they provided no evidence to challenge the assessed amounts, the income was properly allocated between them. Ms. Gould filed a return only for the 2004 taxation year—and only after receiving a demand from the CRA—so the CRA correctly imposed failure-to-file penalties. Mr. Porisky's choice to report no income and no tax payable on his 2004 return constituted a false statement or omission, warranting the gross negligence penalty.
GST Gross negligence penalty
Regarding the imposition of a gross negligence penalty against Ms. Gould, the Tax Court first clarified the standard of gross negligence penalty under section 285 of the ETA:
False statements or omissions – Every person who knowingly, or under circumstances amounting to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return, application, form, certificate, statement, invoice or answer (each of which is in this section referred to as a "return") made in respect of a reporting period or transaction is liable to a penalty...
The Court noted that, aside from differences in verb tense and GST-specific terminology, the gross negligence provision in the Excise Tax Act mirrors the one in the Income Tax Act. Accordingly, the same legal principles and thresholds apply: gross negligence requires more than a mere failure to exercise reasonable care—it reflects a high degree of negligence approaching intentional conduct and a disregard for legal obligations.
Regarding the GST issues, the Court found that the Appellants also operated PEG as an equal partnership for GST purposes. Because their supplies exceeded the small-supplier threshold and a partnership qualifies as a "person" under the ETA, they were required to register, collect, and remit GST on taxable supplies. Their failure to file returns, despite carrying on commercial activities that required them to do so, satisfied the conditions of s. 280.1 of the Excise Tax Act. The Court held that their belief that PEG's activities fell outside the ETA was so unreasonable and illogical that their failure to register, collect, remit, or report GST constituted culpable omissions.
Accordingly, the partnership was grossly negligent for GST purposes, and as partners, the Appellants were jointly and severally liable for the GST owing.
The Federal Court upheld the Tax Court's decision
Mr. Porisky then appealed to the Federal Court of Appeal in Canada regarding the Tax Court's decision that confirmed the CRA's tax assessments for unpaid income tax and unpaid GST. The Federal Court found there was no merit to the taxpayers' argument that because they had no subjective intention to earn a profit, their activities were a personal endeavour and not a source of income.
Pro tax tips
Taxpayers should be cautious of schemes that claim income or GST can be avoided through "alternative" interpretations of tax law. As illustrated in this case, promoting or participating in such arrangements can lead to significant consequences, including reassessments, penalties for failure to file, and gross-negligence penalties where conduct shows disregard for legal obligations. To stay compliant, taxpayers should ensure that any income-earning activity—especially one carried on with commercial elements—is reported as business income, and confirm whether GST registration is required once revenues exceed the small-supplier threshold. Therefore, it is highly recommended that taxpayers should always verify tax positions with qualified professionals, such as an experienced Canadian tax lawyer, to prevent costly disputes, penalties, and court actions later.
FAQ:
What is the legal test to determine whether there is a source of income?
To determine if an activity is an income source, Canadian tax law uses a two-step approach:
- first, determining if the activity is undertaken in pursuit of profit or is a personal endeavour; and
- second, if not personal, identifying if the source is business or property income.
When is the CRA justified in imposing gross negligence penalties on a taxpayer?
Under both the ITA and ETA, gross negligence requires more than a mere failure to exercise reasonable care—it reflects a high degree of negligence approaching intentional conduct and a disregard for legal obligations. Still, the burden of proof is on the CRA.
Footnote
1. Stewart v. Canada, 2002 SCC 46 (CanLII).
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