A gross negligence penalty (“GNP”) is a discretionary penalty applied by the Canada Revenue Agency (the “CRA”) when the CRA believes that a person has knowingly, or in circumstances amounting to gross negligence, made or participated in the making of a false statement or omission in a return. The penalty is severe and is the greater of $100 or 50 percent of the understated tax or overstated credits.
“Gross negligence” must involve greater neglect than simply the failure to use reasonable care. It must involve a high degree of negligence rising to intentional acting or an indifference to whether the law was complied with or not. In evaluating whether a person’s false statement or omission rises to “gross negligence,” the CRA looks at the magnitude of the omission, the opportunity the person had to detect the error, the person’s education and apparent intelligence.
Tax planners and preparers can be assessed with a GNP if the CRA believes that person knowingly, or in circumstances amounting to culpable conduct, made false statements in respect of another person’s taxes.
Usually, if a tax return is challenged by the CRA, the onus is on that taxpayer to prove the claims they made. However, the onus of proof for a GNP is on the CRA. As a practical matter, this onus reversal will have little effect when you are assessed with the GNP. If you contest it, the CRA will expect to you persuade them that you ought not to have been assessed. If you appeal the matter to Tax Court, the CRA will have to justify the penalty and you will be able to respond to their evidence.
Voluntary Disclosure Program
If a taxpayer believes that a return may include a false statement or omission, that person can take advantage of the voluntary disclosure program and disclose the false statement or omission to the CRA. If all the conditions for a valid disclosure are met, the CRA won’t assess GNPs. One of the conditions of a valid disclosure is that the disclosure involve the application or potential application of a penalty. The penalty can be a discretionary penalty, such as a GNP.
Notice of Objection
If the CRA has assessed a gross negligence penalty, a taxpayer may be able to have the penalty removed is through a taxpayer relief application or a successful notice of objection or Tax Court appeal. At the objection stage, a CRA appeals officer will expect you to persuade him/her that the penalty was incorrectly applied. However, the onus to justify the penalty is on the CRA. At Tax Court, the CRA’s counsel, the Department of Justice, will have to demonstrate that the penalty was properly applied.
Under the “taxpayer relief” provisions, the CRA has the discretion to cancel penalties and interest assessed in the ten taxation years before the request is made. The CRA has established guidelines (which do not have the force of law) for administering the taxpayer relief provisions. The CRA will consider relief for events beyond the taxpayer’s control, reliance on incorrect information from the CRA, delay on the part of the CRA and when a taxpayer suffers financial hardship.
The CRA will cancel a GNP under the relief provisions, but the taxpayer will have to persuade the CRA that there are grounds under the guidelines to cancel the penalty. A GNP assessed under the Excise Tax Act cannot be waived under the taxpayer relief provisions in that Act.