Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
DATE October 31, 2016
TO
[Client]
FROM
Doug Campbell
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FILE
164696
SUBJECT : GST/HST INTERPRETATION
Calculation of the gross negligence penalty
Thank you for your [correspondence] of September 9, 2014, asking us to confirm our position on how the gross negligence penalty is calculated under section 285 of the Excise Tax Act (ETA) (Footnote 1) . […]. We apologize for the delay in providing you with a written response.
Section 285
The preamble of section 285 provides that, every person who knowingly, or under circumstances amounting to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return, application, form, certificate, statement, invoice or answer (each of which is in this section referred to as a "return") made in respect of a reporting period or transaction is liable to a penalty.
Thus, the first step is to determine whether gross negligence has occurred.
How is the penalty calculated?
If gross negligence has been determined, then the penalty under section 285 can be applied. The penalty will be the greater of $250 and 25% of the total of the amounts determined under paragraphs 285(a), (b) and (c); referred to as “the 25% calculation”. Thus, the minimum penalty will be $250 even where the 25% calculation is nil or less than $250.
As a note, under section 125, unless specifically otherwise provided, a negative amount that is calculated by or in accordance with an algebraic formula as required under Part IX is deemed to be nil.
Determining the amount under paragraph 285(a)
If the false statement or omission is relevant to the determination of the net tax of the person for a reporting period, then the amount under paragraph 285(a) is determined using the formula:
A – B
where
A is the net tax of the person for the period; and
B is the amount that would be the net tax of the person for the period if the net tax were determined on the basis of the information provided in the return.
Thus, the amount for A is the actual amount of net tax of the person for the reporting period. This is generally determined by audit during a review of the person’s books and records. The amount for B is generally the amount of net tax of the person that is determined based on the amounts entered on the lines for the net tax calculation on the person’s return for the reporting period. Therefore, under paragraph 285(a), it is the difference in these net tax amounts that is subject to the 25% calculation.
Determining the amount under paragraph 285(b)
Under paragraph 285(b), if the false statement or omission is relevant to the determination of an amount of tax payable by the person, then the amount to be determined is the amount, if any, by which that tax payable exceeds the amount that would be the tax payable by the person if the tax were determined on the basis of the information provided in the return.
For instance, a person may have tax payable under Division II, IV or IV.1 to remit and report on line 205 and/or line 405 of a return as a result of certain transactions. Where the person has, due to gross negligence, understated an amount of tax payable on such a line (or reported no tax payable at all), the amount under paragraph 285(b), corresponds to the difference between the actual amount of tax payable by the person and the amount that would be the tax payable of the person based on the information provided in the return.
Determining the amount under paragraph 285(c)
Under paragraph 285(c), if the false statement or omission is relevant to the determination of a rebate under Part IX, then the amount to be determined is the amount, if any, by which the amount that would be the rebate payable to the person if the rebate were determined on the basis of the information provided in the return exceeds the amount of the rebate payable to the person.
The 25% calculation applies to the total of the amounts determined under paragraphs 285(a), (b), and (c). The gross negligence penalty will be that total amount if it is more than $250. If it is not more than $250, the gross negligence penalty will be $250.
A comprehensive example involving the determination of amounts under paragraphs 285(a), (b) and (c) can be found in the Appendix at the end of this memorandum.
Gross negligence cases that go before the Tax Court of Canada (TCC) are generally decided on whether or not the Minister has correctly established that gross negligence has occurred based on the facts of the particular case. The issue of whether the gross negligence penalty has been correctly calculated as set out in section 285 is generally not addressed by the TCC.
We recognize that a good number of cases that go before the Tax Court involve gross negligence penalties imposed under both the Income Tax Act (ITA) and the ETA. However, there is a fundamental difference in the wording between subsection 163(2) of the ITA and paragraph 285(a). In general, subsection 163(2) of the ITA provides for a penalty for a false statement or omission to be calculated as the greater of $100 and 50% of the increase in the tax that would be payable (after deducting any applicable tax credits) which is attributable to the false statement or omission. Thus, the penalty is calculated in reference to that portion of the person's understatement of income for the year that is reasonably attributable to the false statement or omission. This distinction is not made in paragraph 285(a). In other words, paragraph 285(a) does not refer to the portion of the understated net tax amount that is attributable to the false statement or omission for the reporting period for calculating the penalty. Rather, it provides that if there has been a false statement or omission relevant to the determination of the net tax of the person, then the amount of the difference between the actual net tax and the amount that would be the net tax for the reporting period (no apportionment) based on the information provided in the return will be subject to the 25% calculation.
[In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.]
If you have any comments or questions concerning the above, please contact me at 613-670-9882 or Patricia Taylor at 905-721-5123.
APPENDIX
Example
Registrant X is facing cash flow problems and decided to claim fictitious amounts as input tax credits (ITCs) in determining its net tax for its reporting period. Registrant X reported total GST/HST collected and collectible of $27,000 on line 105 of its GST/HST return for the reporting period and claimed ITCs of $40,000 on line 108 (which included a deliberate overstatement of $20,000) resulting in a reported net tax refund of $13,000 on line 109. There was also an accounting error made when Registrant X mistakenly recorded a business purchase and entered GST/HST payable of $50 on the purchase instead of actual GST/HST payable of $500. The full $500 was eligible to be claimed as an ITC for that reporting period but because of the unintended mistake, Registrant X only claimed an ITC of $50 in respect of that purchase, which was included in the $40,000 amount of ITCs claimed.
Registrant X also had Division IV tax to self-assess and report on line 405 of its GST/HST return for the same reporting period and purposely chose to report only half of the $10,000 amount.
In addition, Registrant X filed a general rebate application claiming a fictitious amount of $1,500 as a code 12 rebate on form GST189. Registrant X offset this amount on line 111 of its return for the reporting period and sent the rebate application in with the return.
Audit undertakes a review of the return and rebate application and determines gross negligence has occurred. Thus, at a minimum, the gross negligence penalty will be $250. However, the amounts determined under paragraphs 285(a), (b) and (c) must be totalled and the 25% calculation applied to see if the gross negligence penalty is a greater amount.
In applying paragraph 285(a), the auditor determines that the amount for A is $6,550 as follows:
Line 105 $27,000 no change
Line 108 (20,450) ITCs originally claimed of $40,000 adjusted to deduct the deliberate overstatement of $20,000 and to include an eligible ITC of $450 (difference between $500 and $50 due to an accounting error and not gross negligence)
Line 109 $ 6,550 Actual net tax amount owing determined by audit
B is the $13,000 net tax refund claimed on line 109 as reported on the return by Registrant X.
A - B = $6,550 - (-$13,000) = $19,550
Thus, the amount determined under paragraph 285(a) is $19,550. (Footnote 2)
Registrant X had Division IV tax payable of $10,000 but purposely only reported half ($5,000) of the actual tax payable that it was required to self-assess and report on line 405 of the GST/HST return for the reporting period.
Thus, the amount determined under paragraph 285(b) is $5,000.
Registrant X claimed a general rebate of $1,500 under code 12 in a general rebate application that it offset on its return and filed along with its return for the reporting period. Registrant X knew it was claiming a fictitious amount as it was not entitled to such a rebate.
Thus, the amount for paragraph 285(c) is $1,500.
The total of paragraphs 285(a), (b) and (c) is $26,050 ($19,550 + $5,000 + $1,500). That amount multiplied by 25% is $6,512.50.
Therefore, the gross negligence penalty is $6,512.50 as this amount is greater than $250.
[…].
FOOTNOTES
1 All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
2 In this example, by taking into account the extra allowable input tax credit amount of $450 that was due to an accounting error in determining actual net tax, this effectively reduces the gross negligence penalty. Otherwise, if the penalty had only been applied to the overstated amount of ITCs due to gross negligence ($20,000), the gross negligence penalty would have been higher.
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