Klopak – Federal Court confirms an apparent denial of penalty relief for voluntarily disclosing a tax return error
Although the facts are quite unclear, what may have happened is that the Canadian-resident individual, who worked in the U.S. as a subcontractor to a rock band, originally filed late Canadian tax returns on the basis that his Canadian tax liability was offset by foreign tax credits for the U.S. taxes payable on his income. However, on getting advice, he later determined that he was Treaty-exempt on that income, sought a refund of the U.S. taxes, and filed amendments to his Canadian returns, showing Canadian taxes payable. CRA (in addition to assessing the Canadian income taxes payable and interest) also assessed him penalties since it now appeared that at the time of the original filing of his “nil” returns, Canadian taxes in fact had been owing.
The taxpayer argued inter alia that as he “came forward with a voluntary disclosure in a timely fashion … it was unreasonable for the [CRA] Delegate to not exercise discretion in waiving the penalties.” McVeigh J denied penalty relief essentially on the basis that the taxpayer did not fall within the conventional narrow criteria of CRA in IC-07 for penalty relief, e.g., no extraordinary circumstances justifying the late filing of the returns, such as natural disaster, had been established, and that this situation also did not fall within the four corners of CRA’s published voluntary disclosure program.
It is unclear why it was reasonable for the Delegate not to consider that the Applicant presumably could have received relief if he had formally applied under the voluntary disclosure program rather than simply sending in a T1 adjustment.
This case illustrates that the common practice of sending in nil returns quite late is fraught.
Neal Armstrong. Summary of Klopak v. Canada (Attorney General), 2019 FC 235 under s. 220(3.1).