Executive Summary: Key Legal and Evidentiary Issues

• Penalties under s. 163(2) of the Income Tax Act were imposed for false statements in the appellant's 2010, 2011, and 2012 tax returns claiming fictitious business and capital losses

• Reliance on two unscrupulous tax preparers — Fiscal Arbitrators and DeMara Consulting Inc. — resulted in claims of non-existent business losses and capital losses across three taxation years

• The appellant conceded that the business losses and capital losses claimed were never actually incurred, challenging only the imposition of penalties

• Email correspondence revealed the appellant's active engagement with DeMara's secretive "remedy" program, including use of coded language, non-disclosure agreements, and references to a non-existent business

• Multiple warning signs — including the magnitude of the claimed losses, incomprehensible explanations of the scheme, and unusual confidentiality requirements — should have prompted inquiry but did not

• Wilful blindness was established as the appellant deliberately avoided verifying the accuracy of his tax filings despite ample opportunity and sufficient red flags over a period of years

The background and the parties involved

William McCutcheon, a retired high school teacher who had taught physical education, health, and geography, appealed reassessments issued by the Minister of National Revenue for his 2010, 2011, and 2012 taxation years. The case was heard on March 16, 2026, at Kelowna, British Columbia, before the Honourable Justice Perry Derksen of the Tax Court of Canada. McCutcheon attended the hearing with his agent, Irene Harms (formerly known as Irene Beilstein), while the Crown was represented by counsel Nikhil Pandey. For about 15 years prior to the taxation years in question, McCutcheon had successfully relied on an accountant named Mr. Heney to prepare and file his income tax returns. However, he changed course and turned to unscrupulous tax preparers, first Fiscal Arbitrators and later DeMara Consulting Inc.

How the appellant became involved with Fiscal Arbitrators and DeMara

McCutcheon first learned of Fiscal Arbitrators through a "friend of a friend." In particular, his friend Mr. Krack referred him to an individual named Doug Ference, who set him up with Fiscal Arbitrators. When Fiscal Arbitrators filed his initial 2010 tax return, a business loss of approximately $57,826 was claimed. After offsetting the appellant's other income with the business loss, he obtained a refund. In previous years, the appellant had not received significant refunds. Ference later switched from Fiscal Arbitrators to DeMara Consulting Inc. and told the appellant he should do so as well. Documentary evidence confirmed that Ference introduced McCutcheon to DeMara through an email sent in early January 2012 in which more information was requested about "the remedy." The Court noted that Larry Watts, one of the principals operating Fiscal Arbitrators, was eventually convicted of fraud and sentenced to serve time in a federal penitentiary, as reported in R. v. Watts, 2016 ONSC 4843, affirmed at 2018 ONCA 148.

The DeMara program and the fictitious losses claimed

The Federal Court of Appeal in Canada v. Rattai, 2022 FCA 106, had previously described DeMara's program: DeMara promoted a program under which it prepared and filed income tax returns for clients (called members), using their personal living expenses and personal debt information to prepare T5 and T5008 forms, then deducting personal expenses as business losses and treating them as capital losses. McCutcheon never had in-person contact with the people from Fiscal Arbitrators, nor did he ever personally meet the people working with DeMara. DeMara operated out of Vernon, British Columbia, while the appellant had been dividing his time between two rural locations, one near Nelson, British Columbia, and the other near Nolalu, located west of Thunder Bay in Northwestern Ontario.

After hearing about the so-called "remedy" strategy available through DeMara, McCutcheon engaged DeMara to file an amended income tax return for 2010 — after concerns arose about the filing through Fiscal Arbitrators — and later engaged DeMara to prepare and file his 2011 and 2012 income tax returns. For the 2010 taxation year, DeMara filed a T1 adjustment request and an amended return claiming a revised business loss of $116,615 and a net capital loss from the disposition of capital property of $57,931, with requests to carry back both the non-capital loss and net capital losses to earlier taxation years. For 2011, DeMara filed a return claiming a business loss of $136,696, which was to offset his other income and leave a non-capital loss balance of approximately $62,648 to be applied to his 2009 taxation year, along with a net capital loss of $68,076. For 2012, the appellant claimed a business loss of $40,350. McCutcheon was not carrying on any business in the 2010, 2011, and 2012 taxation years; the business losses had no basis in reality. Likewise, the appellant did not incur any capital losses in the 2010 and 2011 taxation years. He accepted these facts and only challenged the imposition of penalties under s. 163(2) of the Income Tax Act.

The legal framework: wilful blindness and gross negligence

Section 163(2) of the Income Tax Act authorizes the imposition of a penalty where a taxpayer knowingly, or under circumstances amounting to gross negligence, has made or participated in, assented to or acquiesced in the making of, a false statement or omission in a return. The burden of establishing the facts justifying the imposition of a penalty is on the Minister under s. 163(3). The Court drew on the Federal Court of Appeal's decision in Wynter v. Canada, 2017 FCA 195, which distinguished between wilful blindness and gross negligence: wilful blindness is determined by reference to the taxpayer's subjective state of mind, while gross negligence is determined by an objective assessment of the taxpayer's comportment. A taxpayer is wilfully blind where the taxpayer becomes aware of the need for inquiry but declines to make the inquiry because the taxpayer does not want to know or studiously avoids the truth — a concept of deliberate ignorance. Gross negligence, by contrast, arises where a taxpayer's conduct is found to fall markedly below what would be expected of a reasonable taxpayer. Justice Derksen chose to analyze the case based on the doctrine of wilful blindness, which imputes knowledge to the taxpayer.

The Court's analysis of warning signs and red flags

Applying factors set out by Justice C. Miller in Torres v. The Queen, 2013 TCC 380 (affirmed by the Federal Court of Appeal in Strachan v. Canada, 2015 FCA 60), the Court examined multiple indicators of wilful blindness. The Court found McCutcheon to be educated, articulate, and intelligent, noting he had a career as a high school teacher and had been retired since about 1998. The Court rejected his portrayal of himself as an unsophisticated "bush bunny" living off the grid, finding that the appellant tried to downplay his educational experience and intelligence. His email correspondence with DeMara demonstrated he was quite capable of communicating and using technology.

Regarding the magnitude of the advantage, the losses claimed were not insignificant or minor. The business losses offset the entirety of the appellant's income from other sources, or nearly so as in 2012. The CRA appeals officer testified that if the loss claimed in 2011 was accepted, it would have resulted in a refund of about $10,000, and if the loss claimed in 2012 was accepted, it would have resulted in a refund of about $6,000. As for the blatantness of the false statements, McCutcheon was not engaged in any business, making the claims of large business losses self-evidently false.

DeMara also made unusual requests, including requiring a confidentiality and non-disclosure agreement, using a protocol of coded language around a "remedy," and requiring McCutcheon to listen to a pre-recorded call. The appellant confirmed in an email on January 14, 2012, that he had listened to the recording for one hour and 30 minutes and took over three pages of notes. McCutcheon's own emails further revealed that he already had a business number in respect of a non-existent business, had opened a business bank account on March 29, 2011, and was recording personal fund transfers as a "SHAREHOLDERS LOAN" — all without being involved in any corporation or business. Notably, on the member information sheet that the appellant completed and dated January 28, 2012, he answered "no" to the question of whether he was self-employed, even while that same sheet authorized DeMara to prepare his tax returns.

The appellant's failure to make independent inquiries

The Court found it significant that McCutcheon never made any inquiries of Mr. Heney, his long-time accountant, about the new path he was taking. Inquiring of Mr. Heney would have been an obvious choice considering the appellant had relied on him for around 15 years without problems. The appellant also did not seek any advice independent of DeMara before proceeding. By June 2011, the CRA had issued a tax alert on its website regarding the uncovering of a fraudulent scheme in which taxpayers claim large losses or expenses equal to their personal expenses, referring to the use of business numbers and T5008 slips. The appellant could have called the CRA or other tax professionals not associated with DeMara, but he did not. The Court also rejected the argument advanced in the appellant's notice of appeal that the CRA had failed to warn taxpayers, as this Court had similarly done in Torres.

The ruling and outcome

Justice Derksen concluded that wilful blindness was "self-evident on the evidence," finding that McCutcheon chose to suppress any suspicions and to not make inquiries about the accuracy of his tax filings in order to avoid verifying that which might be an inconvenient truth. What the Court found particularly notable was that the appellant did not just engage a single organization but went from Fiscal Arbitrators straight into the welcoming arms of DeMara — in effect, the appellant doubled down. He had ample opportunity over a period of years to make inquiries about the legitimacy of these organizations and the accuracy of the returns being filed. He simply did not want to do so. Knowledge was therefore imputed for the purpose of s. 163(2). The appeals from the reassessments for the 2010, 2011, and 2012 taxation years were dismissed in favour of the Crown (His Majesty the King), and the s. 163(2) penalties were upheld. The exact penalty amounts were not addressed in the judgment, as the appellant did not put the calculation of the penalties in issue. There was no award of costs. The judgment was signed on March 25, 2026.