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WILFUL BLINDNESS: SAME AS ACTUAL KNOWLEDGE

TO TAXPAYER'S CHAGRIN, "SHOULD HAVE KNOWN" SAME AS KNOWLEDGE

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In over 35 years of tax practice, we have had more than a few inquiries from taxpayers facing CRA Audits and Assessments maintaining that they did not actually know they were non-compliant with their tax obligations. The doctrine of “wilful blindness” is something that these taxpayers would have benefitted from understanding: that is the ability that Canada Revenue Agency (“CRA”) and the Tax Court of Canada (“TCC”) have to equate “knowledge” with “information that the taxpayer should have known but was perhaps ‘wilfully blind’ to”.

In this Tax Audit Series Report, we discuss the doctrine of “wilful blindness” and a recent TCC decision that upheld some $1.3 million in penalties and interest, on the basis that the taxpayer was wilfully blind to his tax non-compliance.

What is Wilful Blindness?

Many tax penalty provisions, including s.285 of the Excise Tax Act (“ETA”) and parallel s.163 of the Income Tax Act (“ITA”), require the CRA to establish a taxpayer’s knowledge or gross negligence.

However, a taxpayer cannot avoid these provisions by claiming a lack of knowledge. Under the doctrine of wilful blindness, Courts have held that knowledge may be imputed to a taxpayer whose suspicion is aroused to the point where he or she sees the need for further inquiries but deliberately chooses not to make those inquiries.

In coming to this determination, Courts consider factors including:

1. The education and experience of the taxpayer.
2. The magnitude of the tax advantage or omission.
3. How easily detectable the false statement or omission is.
4. “Red flags” related to the taxpayer’s advisor including: (1) unusual requests, (2) incomprehensible explanations, (3) warnings about the advisor, or (4) the advisor being previously unknown to the taxpayer.
5. Whether the taxpayer makes any inquiry of the tax preparer to understand the return, a third party, or the CRA itself.

Importantly, an intention to “cheat the system” is not a prerequisite for a finding of wilful blindness.

Burzuk v. The King

In Burzuk v. The King, 2026 TCC 95, the taxpayer (the “Appellant”) sought to claim over $1.6 million in false net business capital losses through adjustment requests prepared by a consultant. While the losses were disallowed, the CRA assessed approximately $350,000 in gross negligence penalties under s.163 of the ITA, on the basis that the Appellant was wilfully blind to his consultant’s false statements. By the time of the TCC hearing, the amount at issue, including accrued interest, had grown to approximately $1.3 million.

The TCC found several obvious “red lights” that warranted further inquiry, including the consultant’s use of signature stamps, a confidentiality agreement and the sheer magnitude of the losses being claimed. Given the Appellant’s formal business education and his failure to investigate these warning signs, the Court concluded that he was wilfully blind, and accordingly dismissed the appeal.

Takeaways

The Burzuk case is another reminder that taxpayers who ignore obvious warning signs of tax non-compliance may be treated as having knowledge through the doctrine of “wilful blindness”. When facing CRA Assessments involving allegations of wilful blindness, best to seek advice from Experienced Tax Counsel.

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For an updated Index of our Tax Audits Series Reports, click here.