Canada’s self-reporting tax system relies on taxpayers to identify and report their income. Because of this, taxpayers are often confronted with the decision of how to report a certain stream of income – for example, whether a certain transaction should be treated as business income or capital gain, tax deductible or non-deductible or what proportion of a property is related to personal vs business use. Given the complexity of our tax law, it can be difficult making these determinations. In some cases, an application to the Voluntary Disclosures Program (“VDP”) may be available to the taxpayer to become compliant. If not, and the CRA disagrees with the taxpayer’s characterization of income, or the taxpayer was non-compliant by forgetting to report certain information or income, it has seemingly become commonplace for CRA to assess gross negligence penalties against the taxpayer.
Gross negligence penalties, also known as a subsection 163(2) assessment, are penalties that should be applied against a 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”.
The amount of the penalty is the greater of $100 and 50% of the amount of tax owing (it is almost always the latter).
So what is gross negligence? One definition that the courts have consistently turned to requires “greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not”. Although this analysis is ultimately decided on the specific facts of each case, the courts have often turned to the framework laid out in DeCosta v The Queen, considering (1) the magnitude of the omission in relation to the income declared; (2) the opportunity the taxpayer had to detect the error; and (3) the taxpayer’s education and apparent intelligence. None of the three factors are conclusive, and each must be weighted based on the circumstances of the taxpayer.
If an auditor is proposing to assess gross negligence penalties, you should not wait for a Notice of Reassessment before disputing the penalty. The onus of proof is on the CRA to demonstrate the taxpayer’s gross negligence, and that onus should be put to the CRA as early as possible in the audit process. In turn, CRA must establish that you acted with gross negligence, which goes beyond ordinary negligence. The burden of proof on the CRA is greater than that of a balance of probabilities.
Ultimately, there is no bright-line test for whether a taxpayer has acted with gross negligence. However, the abundance of case law surrounding this issue operates as a helpful guide to understand what factors have been considered by the courts in the past, what factors have been given heavy or little weight, and what sorts of behaviors seem to support or oppose findings of reckless behavior or wilful blindness. If you have been assessed gross negligence penalties by CRA, or an auditor has proposed to assess you with gross negligence penalties, contact one of our tax lawyers for a consultation.