Gross Negligence Penalties
CRA Must Prove Penalty Applies
What many people under audit find is that, in addition to proposing adjustments to income tax payable, the CRA will also apply penalties. There are various penalties the CRA may apply, depending on the circumstances, including late-filing and failure-to-report penalties. But the most severe and most controversial is the gross negligence penalty.
You may have to pay a penalty if the CRA believes you knowingly, or under circumstances amounting to gross negligence, have made a false statement or omission on your tax return. For the CRA’s position, click here.
The penalty is equal to the greater of:
- 50% of the understated tax and/or the overstated credits related to the false statement or omission
The introductory words of subsection 163(2) of the Income Tax Act state:
Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of $100 and 50% of the total of . . .
The introductory words identify the following two conditions that must be satisfied if the assessment by the Minister of a penalty under subsection 163(2) of the Income Tax Act is to be maintained:
The taxpayer must have made, participated in, assented to or acquiesced in the making of a false statement or omission in a return, form, certificate, statement or answer, referred to collectively as a “return”.
The false statement or omission must have been made by the taxpayer knowingly or under circumstances amounting to gross negligence, or the taxpayer must have participated in, assented to or acquiesced in the making of the false statement or omission knowingly or under circumstances amounting to gross negligence.
Under subsection 163(3) of the Income Tax Act, the Minister has the burden of proving on a balance of probabilities the facts that justify the assessment of a penalty under subsection 163(2) of the Income Tax Act. This is a very important point. Under usual circumstances, the CRA raises an assessment based on what it thinks is correct. The taxpayer then must disprove the CRA’s position. In other words, the taxpayer has the onus of proof to show that the CRA’s assessment is wrong. But when penalized under this section, the CRA must prove that the penalty applies.
The Case Law
What is “gross negligence” exactly? The phrase “gross negligence” as used in subsection 163(2) of the Income Tax Act was considered in the widely adopted decision of Venne v. The Queen, 84 DTC 6247 (FCTD), where the Court states:
. . . “Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. . . .
As stated in Venne, a finding of “gross negligence” requires a high degree of negligence.
Courts have also said that if a taxpayer’s conduct is consistent with two viable and reasonable hypotheses, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted: Farm Business Consultants Inc. v. The Queen 95 DTC 200 (TCC).
There are other defences available to the taxpayer when fighting gross negligence penalties, including the use of a tax professional to prepare the return, reporting all disputed amounts on the return, lacking the requisite skill to properly understand the filing position, etc.