Income Tax Severed Letters - 2012-10-03

Principal Issues: 1. Is a paper return, filed by a tax preparer, still considered a validly-filed return for the purposes of the taxpayer?
2. Would a subsection 162(7.3) penalty apply in various scenarios involving a tax preparer that prepares a return for consideration, but for some reason, the taxpayer decides to file that prepared return or a different return in paper format?
3. Could an unfiled return result in the imposition of penalties pursuant to 162(7.2)?

Position: 1. Yes.
2. Yes
3. No.

Reasons: 1. Taxpayers are required to file a return of income in prescribed form which includes electronic and paper filing. For the purposes of subsections 150(1) and 162(1), a return filed using either of these methods is acceptable.
2. Subsection 150.1(2.3) states that the tax preparer must file “any return of income prepared by the tax preparer” electronically. Therefore the tax preparer could be liable to the subsection 162(7.3) penalty where the return is submitted in paper format.
3. It is our opinion that a subsection 162(7.2) penalty only applies in respect of tax returns that are, in fact, filed. In other words, in order for a subsection 162(7.2) penalty to apply, a tax return would have to be submitted in a method other than by way of electronic filing. The taxpayer may still be subject to late filing penalties pursuant to subsection 162(1).