Repeated Failures to Report Lead to Harsh 163(1) Penalty

 Polubiec Decision


The Appellant was reassessed a 163(1) penalty in 2015 in respect of his 2014 taxation year for failing to report income (RRSP withdrawal).  The Appellant argued it was a mistake of fact and that he was duly diligent.  The Court disagreed and dismissed his appeal.


The Appellant was assessed a 163(1)[1] penalty for the 2014 taxation year for failing to report RRSP income (and smaller dividend amounts) in the amount of almost $700K.  The financial institution had withheld 30% for tax purposes.  The Appellant had believed that the withholding by the institution satisfied his tax obligations, such that he was not required to take any further steps to report the withdrawal.   The penalty applied since he had also failed report income in the preceding three years.  In fact, he had failed to report all his income in 2007, 2008, 2009, 2010 and 2011 (although no penalty was assessed in 2009).

Decision & Analysis

Was There a Failure to Report?

The first question to be decided by the Court was whether there was a failure to report.  The Appellant argued that based on the Khalil ratio, no amount had been unreported.  In Khalil, the Court enunciated the following principle:

I cannot conclude that a person has “failed to report an amount” within the meaning of subsection 163(1) when the person knows (i) that the amount was payable to her as income by a particular payor; (ii) that the payor withheld a certain portion of the amount as income tax to remit to Revenue Canada; (iii) that the payor actually paid to the person only the balance remaining after deducting the tax withheld; and (iv) that the payor was required to report to Revenue Canada on a form prescribed by Revenue Canada the gross amount payable to the person and the portion withheld and remitted as tax…[2]

The Court disagreed, because although the Khalil ratio applied, that ratio was obviated by the Appellant’s admission during cross-examination that he did in fact fail to report amounts. Furthermore, Khalil has been distinguished in subsequent decisions, such that the Court did not consider it a “universal principle”.

Was the Appellant Duly Diligent?

To establish that he was duly diligent, the Appellant was required to show he made a reasonable mistake of fact, or that he took reasonable precautions to avoid the event leading to the imposition of the penalty.  The mistake of fact has both a subjective and objective element.  Meaning there must be an actual mistake of fact and that mistake must be reasonable.

Justice Sommerfeldt found no mistake of fact.  The Appellant mistakenly thought that the withholding and remittance of tax by the financial institution satisfied his tax reporting obligations. His mistake thus pertained to his obligation under the Income Tax Act to report all his income. This was found to be a mistake of law, not a mistake of fact.

Secondly, the mistake was not reasonable, since he had reported his employment income in the past, despite tax being deducted at source from those amounts.

Thus, given that Mr. Polubiec was familiar with the concept of income tax being withheld from various sources of income, such as his employment income in 2010 and 2011, and was aware that the withholding of such tax did not absolve him from reporting that employment income, it was not reasonable for him to have concluded that there was no obligation to report his RRSP withdrawal in 2014 merely because tax at the rate of 30% had been withheld therefrom. In other words, a reasonable person would have understood that the withholding of an instalment in respect of an income tax liability does not excuse the particular taxpayer from the statutory requirement to report the income in question.[3]

Finally, Justice Sommerfeldt found that the Appellant had not taken reasonable precautions in 2011 or 2014.    The Appellant’s repeated failures to report in the past, his failure to convince the Court that he had not received the tax slips at issue, and his failure to implement any type of system for collecting his mail, organizing all his tax documents, including T slips, and ensuring that none of his tax documentation was misplaced all lead the Court the conclude he did not take reasonable precautions to avoid the failure to report.

Key Takeaway

Interestingly, Justice Sommerfeldt invited the Minister to cancel the penalties pursuant to 220(3.1), citing financial hardship and the harsh penalty as reasons.

I am of the view that this would be an appropriate situation for a favourable exercise of the discretion granted to the Minister by subsection 220(3.1) of the ITA.[4]

Justice Sommerfeldt also alludes to the importance of viva voce testimony, by repeatedly citing the Appellant’s failure to call relevant witnesses to testify.  This should be noted by litigants propounding the due diligence defence.[5]


Call Ummat Tax Law if you are assessed a penalty you disagree with.  (905) 336-8924.

[1] 163(1)Every person who

(a) fails to report an amount required to be included in computing the person’s income in a return filed under section 150 for a taxation year, and

(b) had failed to report an amount required to be so included in any return filed under section 150 for any of the three preceding taxation years

is liable to a penalty equal to 10% of the amount described in paragraph (a), except where the person is liable to a penalty under subsection (2) in respect of that amount.

[2] Khalil v The Queen, [2003] 1 CTC 2263, at 13.

[3] Polubiec v. the Queen 2019 TCC 146, at para. 34.

[4] Ibid, at para. 50.

[5] See paragraphs  38, 44 and 45.