Gross Negligence Penalties are penalties meant to punish taxpayers such as for their failure to report income or in claiming false credits. Depending on whether they are GST/HST, or Income Tax related, the penalty will add 25% or 50% to any balance owing.
To issue a gross negligence penalty, the Canada Revenue Agency (“CRA”) must prove that taxpayers either knowingly made false statements or made those false statements under circumstances that amount to gross negligence.
Gross Negligence Penalties – A Reverse Onus
Since Gross Negligence Penalties are so severe, it is actually up the CRA to prove that they should apply. This is called a reverse onus. In normal circumstances, taxpayers must prove that the way they filed is correct. You must have the documentation available proving your deductions, and credits. When it comes to Gross Negligence Penalties, it is up to the CRA to justify that they should be assessed. This is extremely important in any audit, objection, or Tax Court situation because it provides taxpayers the ability to argue the CRA has not met their burden, and the penalty should not apply.
Gross Negligence Penalties – Income Tax Act
Subsection 163(2) of the Income Tax Act discusses Gross Negligence Penalties. It is under this Act where the penalty is 50% on top of the balance owing. Here is an example:
Cindy files a tax return but does not report $200,000 worth of income;
The CRA audits Cindy, adds the income to her taxes, and assesses the Gross Negligence Penalty;
Assuming Cindy is assessed additional taxes of $100,000 on the income of $200,000, the penalty amount will be $50,000; and
Interest is added on top.
Gross Negligence Penalties – Excise Tax Act
Section 285 of the Excise Tax Act is the section that imposes Gross Negligence Penalties where GST/HST is at issue. If we use the previous example, the penalty amount would be $25,000, before any interest is added.
Arguments Against Gross Negligence Penalties
First, audit working papers must be reviewed. Auditors must complete Gross Negligence Penalty reports which justify the issuance of these penalties. If the reports are not well reasoned, they can be refuted during the audit, objection, or Tax Court stage of any dispute.
Additionally, taxpayers may argue against the issuance of these penalties by claiming their actions did not amount to gross negligence. They may have been ordinarily negligent, but they do not cross the line into gross negligence.
Finally, there have been hundreds of Tax Court, Federal Court of Appeal, and even Supreme Court of Canada cases discussing, and analyzing Gross Negligence. What does it mean, and should such a harsh penalty be applied. This jurisprudence should be used to link a taxpayer’s current situation to another, or several cases where the penalty was not justified.
Conclusion
Here at SpenceDrake Tax Law we will explore every avenue to argue that you should not be assessed with Gross Negligence Penalties. These penalties can devastate individuals, and businesses. We have the expertise, and the experience needed to fight the CRA, and prove they have not met their burden. Give us a call today to see what we can do for you.
Jeff Kirshen, BA, JD(US), JD(CDN)
Partner & Tax Lawyer
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/bog. If you have legal questions, please consult a lawyer.