CRA finds that where sequential returns are simultaneously filed, each return can be penalized for income omitted from the preceding (but simultaneously filed) return

S. 163(1) generally imposes a penalty if there is failure to report income over $500 in a return and there was a comparable failure in any of the returns for the three preceding taxation years.

2005-0133411I7 F concerned an individual who filed his T1 income tax returns (each omitting over $500 of income) for the 2001, 2002, and 2003 taxation years at the same time in the 2004 calendar year. CRA found that (assuming there had been no failure to report income in any of the 1998, 1999 and 2000 returns) s. 163(1) did not apply to any of the 2001 to 2003 returns because they had been filed simultaneously, so that there was no “preceding” return with unreported income. If instead, it was assumed that he had been reassessed for failure to report over $500 of income for his 1998 taxation year, then only the amount of income omitted for his 2001 taxation year could be subject to the s. 163(1) penalty.

CRA has now reversed this position based on Whissell where (dealing with similar facts) “the Court concluded that the fact that the returns for the taxation years in question were filed simultaneously is not relevant for the purposes of subsection 163(1)” (i.e., there should be the same result as if the three subsequent returns had been filed sequentially). In the first scenario, the s. 163(1) penalty would be applicable to the 2002 and 2003 taxation years because in the “preceding” (albeit, filed simultaneously) 2001 taxation year there was omitted income. In the second scenario, his 2001 taxation year was now also subject to the penalty because of the omitted income for the third preceding year (1998); and his 2002 and 2003 taxation years were penalized for the same reasons as in the first scenario.

Neal Armstrong. Summary of 30 December 2024 Internal T.I. 2024-1032121I7 F under s. 163(1).