Morgan - Tax Court vacates a s. 163(1) penalty where the taxpayer had a reasonable misunderstanding of the Act

The taxpayer was assessed a s. 163(1) penalty (repeated failure to report income) for the portion of a pension plan withdrawal that he had transferred to his wife's RRSP.  Woods J found that the penalty should be vacated under the due diligence defence notwithstanding a "troubling" lack of evidence.  This admittedly represented a "generous interpretation of the facts," but it was not intuitively obvious that funds transferred from one tax-exempt vehicle to another would give rise to income.

As stated by Woods J, the due diligence defence "can apply to [reasonable] mistakes of fact or if all reasonable measures have been taken to prevent the failure."  Given the absence of "reasonable measures" evidence, the taxpayer in effect got relief for a mistake of law.

Scott Armstrong.  Summary of Morgan v. The Queen, 2013 TCC 232, under s. 163(1).