Gross Negligence Penalties are meant to penalize taxpayers for their failure to meet tax obligations such as not reporting income or claiming false credits. If the alleged tax avoidance or evasion is related to GST/HST the penalty is 25%. For income tax, 50% is applied to any balance owing.
Technically, to uphold a gross negligence penalty, the Canada Revenue Agency (“CRA”) must prove that the taxpayer either knowingly made false statements or made those false statements under circumstances that amount to gross negligence. However, the onus to prove the application of the penalty is not truly enforced until the Tax Court appeal stage. In our experience, prior to that they are routinely applied based wholly or in part on factual assumptions.
Gross Negligence Penalties – A Reverse Onus
Because of the severity of Gross Negligence Penalties, it is up to the CRA to provide evidence to justify their application. This is referred to as a reverse onus. Under normal circumstances, taxpayers must prove that their tax filings are correct. For instance, a taxpayer must be able to provide the information and documentation proving a deduction when CRA asks. For the application of Gross Negligence Penalties, CRA has the burden to justify that they should be assessed. As per subsection 163(3) of the Income Tax Act, RSC 1985, c 1 (5th Supp), “where…a penalty assessed by the Minister under this section or section 163.2 is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister…”
Gross Negligence Penalties – Income Tax Act
Subsection 163(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp) imposes Gross Negligence Penalties in the amount of 50% of the balance owing. As per subsection 163(2), a penalty can be applied for “[e]very 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 example:
A taxpayer files a tax return but does not report $200,000 worth of income;
The CRA audits the taxpayer and adds the income and assesses a Gross Negligence Penalty; and
Assuming the taxpayer is assessed additional taxes of $100,000, the penalty amount will be $50,000 plus interest.
Gross Negligence Penalties – Excise Tax Act
Section 285 of the Excise Tax Act, RSC 1985, c E-15 imposes Gross Negligence Penalties where GST/HST is at issue. Using the above example, the penalty amount would be $25,000 plus interest.
Arguments Against Gross Negligence Penalties
Auditors must complete Gross Negligence Penalty reports (penalty recommendation reports) which are meant to outline CRA’s justification for the penalties. If the reports are not well reasoned, they can be refuted during the audit, objection, or Tax Court stage.
Additionally, taxpayers may argue against the application of these penalties by claiming their actions did not amount to gross negligence. For example, they may have been ordinarily negligent, but their actions do not cross the line into gross negligence.
Finally, there have been hundreds of Tax Court of Canada, Federal Court of Appeal, and even Supreme Court of Canada decisions discussing, and analyzing Gross Negligence. Facts from the relevant jurisprudence should be used in an attempt to link a taxpayer’s current situation to another similar case where penalties have been reversed.
Conclusion
Gross Negligence Penalties can devastate individuals and businesses. We have the expertise and the experience required to challenge CRA and prove they have not met the legal burden for application.
Contact us here if you require assistance.
SpenceDrake Tax Law – Tax Lawyers
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/blog. If you have legal questions, please consult a lawyer.