CRA Gross Negligence Penalty
What is a Gross Negligence Penalty?
The Canada Revenue Agency (CRA) routinely applies gross negligence penalties following an audit. The financial penalty can be as high as 50% of the tax owing. If a CRA auditor has increased taxable income, a gross negligence penalty will likely be added as an indication that CRA believes the taxpayer deliberately failed to report income.
Unfortunately in practice, at the audit stage, CRA does not need actual evidence of gross negligence to apply the penalty because under the law they can assume facts until those facts are rebutted by the taxpayer. However, when the taxpayer appeals the application of the CRA gross negligence penalty, the onus shifts to CRA to prove that the facts justify the assessment.
The Legislation
Pursuant to subsection 163(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp), a gross negligence penalty can be imposed upon any any person who has been grossly negligent in reporting income for taxation. This includes falsify or omitting information in a tax return and applies to a person who CRA believes was aware, or should have been aware, of the alleged misconduct. The penalty is the greater of $100 or 50% of the alleged unreported tax.
A similar 25% penalty exists for GST/HST liabilities pursuant to section 285 of the Excise Tax Act, RSC 1985, c E-15.
Burden of Proof - The Onus is on CRA to Prove Gross Negligence
In Venne v The Queen, 84 DTC 6247 (FCTD), the court held that the impugned actions must be intentional in order for gross negligence to be found. The behaviour of the taxpayer must indicate an indifference to complying with the law.
In Venne, which is the prevailing authority on the application of a CRA gross negligence penalty, the Federal Court stated that since the penalty provisions are penal provisions, if there is a reasonable interpretation in favour of the taxpayer that should be adopted.
For the application of a CRA gross negligence penalty to survive an appeal, CRA must prove that the taxpayer deliberately made an error or omission, or made an error that was so blatant, it should have been noticed if the taxpayer was acting reasonably careful.
The standard of reasonable care has not been interpreted as a standard of perfection. The taxpayer does not have to be perfect, the taxpayer’s behavior must be compared with that of a wise and prudent taxpayer. A mistake made in good faith is also acceptable (Reilly v The Queen, 84 DTC 6001 (FCTD)).
Credible & Rational Explanation to Rebut the Accusation of Gross Negligence?
The taxpayer will satisfy the balance of probabilities standard if they can provide a credible and rational explanation for the conduct that attracted CRA’s gross negligence penalty. This is pursuant to the Federal Court of Appeal decision in Baynham et al v The Queen, 1998 CanLII 8430 (FCA), [1998] DTC 6648 (FCA)
The Benefit of the Doubt must be Given to the Taxpayer
In Lacroix v Canada, 2008 FCA 241 (CanLII), [2008] FCJ 1092, the Federal court, quoting the decision in Farm Business Consultants Inc. v. Her Majesty the Queen, [1994] 2 C.T.C. 2450, 95 D.T.C. 200, reiterated that if there are two competing reasonable explanations for the impugned conduct the benefit of the doubt must be given to the taxypayer.
File a Notice of Objection to Dispute a CRA Gross Negligence Penalty
If you are facing a gross negligence penalty, following a CRA audit for example, you can dispute it once the CRA has sent you their Notice of Assessment, Reassessment or Confimation (“Notice”). To do so, you must file a Notice of Objection indicating that you do not agree with CRA’s position.
To be successful, your position must include relevant legal arguments and supporting facts and evidence. The objection must be filed in the correct form and before the deadline. Note, you have 90 days from the date on the Notice to file. Extension requests can be made within 1 year and 90 days of the Notice.
Baynham v. Canada, 1998 CanLII 8430 (FCA), [1999] 1 CTC 87, 52 DTC 6648
Lacroix v. Canada, 2008 FCA 241 (CanLII), 384 NR 171, 302 DLR (4th) 372, AZ-50505447, [2008] FCJ No 1092 (QL), [2009] DTC 5029
Reilly v The Queen, 84 DTC 6001 (FCTD)
Venne v The Queen, 84 DTC 6247 (FCTD)
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