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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Whether, in a given fact situation, the calculation of the "understatement of income," on which the additional tax and the amount of the 163(2) penalty are based, is correct.
Position: Yes.
Reasons: Application of the law. Amounts were required to be included in computing the individual's income for the relevant years under subsections 11(1) and 34.1(1). Furthermore, with respect to one of the taxation years, an amount would have to be considered under subparagraph 163(2.1)(a)(ii) because such amount would have been deductible by the individual in computing his or her income for the relevant year under subsection 34.1(3). Finally, all of the "understatement of income" was attributable to the false statements or omissions.
April 21, 2004
XXXXXXXXXX Tax Services Office
XXXXXXXXXX
Attention: XXXXXXXXXX |
Income Tax Rulings Directorate
S. Prud'Homme
(613) 957-8975
2004-007090 |
Request for Opinion - Subsection 163(2) of the Income Tax Act
This is in response to your memorandum of April 8, 2004, requesting our opinion with respect to the calculation of the penalty under subsection 163(2) of the Income Tax Act (the "Act") in a particular situation.
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
1) Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for an opinion.
An individual carrying on a business, at the appropriate time, made an election under subsection 249.1(4). The individual's fiscal period end was March 31 of each year.
The individual did not report in his tax returns for the XXXXXXXXXX and XXXXXXXXXX taxation years amounts of XXXXXXXXXX in the course of carrying on his business. Specifically, the individual omitted reporting XXXXXXXXXX in the amount of $15,000 in respect of the fiscal period ending March 31, XXXXXXXXXX, as well as XXXXXXXXXX in the amount of $50,000 in respect of the fiscal period ending March 31, XXXXXXXXXX.
The penalty under subsection 163(2) was determined to be applicable to that taxpayer in respect of the non-reporting of those amounts.
2) Your position on the Particular Situation
You are of the view that the "underreported income" on which the additional tax and, therefore, the subsection 163(2) penalty calculation would be based is to be calculated as follows for each of the XXXXXXXXXX and XXXXXXXXXX taxation years
XXXXXXXXXX
XXXXXXXXXX
Additional income
as of March 31 (XXXXXXXXXX)
$15,000
$50,000
Additional business income XXXXXXXXX (s. 34.1(1))
- $15,000 x 9/12
- $50,000 x 9/12
$11,250
$37,500
Deduction under s. 34.1(3)
(Amount included pursuant to s. 34.1(1) for the preceding taxation year)
($11,250)
Understatement of Income
$26,250
$76,250
You pointed out that the individual's failure to report XXXXXXXXXX in the amount of $65,000 for the XXXXXXXXXX and XXXXXXXXXX taxation years ($15,000 + $50,000) would result in "underreported income" of $102,500 in total ($26,250 + $76,250). The difference between those two amounts is $37,500, which is the amount that the individual could deduct in computing his business income for the XXXXXXXXXX taxation year pursuant to subsection 34.1(3).
3) Your question regarding the Particular Situation
You requested our opinion regarding the calculation of the penalty pursuant to subsection 163(2) in the Particular Situation. Specifically, you wish to know whether, in the Particular Situation, the "understatement of income" was correctly determined in (2) above respecting the XXXXXXXXXX and XXXXXXXXXX taxation years.
4) Our comments on the Particular Situation
We are of the view that, for the purposes of the Particular Situation, "understatement of income" has been correctly determined in (2) above with respect to the XXXXXXXXXX and XXXXXXXXXX taxation years. Our position in this regard is based on, inter alia, the following.
In very general terms, subsection 163(2) provides, inter alia, that every person who, knowingly, or under circumstances amounting to gross negligence, has made a false statement or omission in a return filed in respect of a taxation year is liable to a penalty of the greater of $100 and 50% of the total of the tax for the year that would be payable by the person under the Act by that person for the year if that person's taxable income reported in the return for the year were increased by that portion of the person's "underreported income" for the year that can reasonably be attributed to the false statement or omission.
The "understatement of income" of a person is defined in subsection 163(2.1) and includes the amount determined under paragraph 163(2.1)(a). The amount determined under paragraph 163(2.1)(a) is the amount, if any, by which the total of all amounts that the person did not report on the person's return but that were required to be included in computing the person's income for the year (subparagraph 163(2. 1)(a)(i)) over the total of all amounts that the person was entitled to deduct in computing the person's income for the year under the Act that were wholly applicable to the amounts referred to in subparagraph 163(2.1)(a)(i) and that the person did not deduct in computing the person's income for the year in the person's return (subparagraph 163(2.1)(a)(ii)).
We are of the view that for the taxation year XXXXXXXXXX, $15,000 and $11,250 would fall within subparagraph 163(2.1)(a)(i) in the Particular Situation. Those two amounts should have been included in the individual's income for the XXXXXXXXXX taxation year under subsection 11(1) and subsection 34.1(1) respectively. In addition, subparagraph 163(2)(a)(i) would apply to those amounts of $15,000 and $11,250 since it would be reasonable to attribute all of those two amounts to the individual's misstatement or omission.
With respect to the XXXXXXXXXX taxation year, we are of the view that subparagraph 163(2.1)(a)(i) would apply to the $50,000 and $37,500 in the Particular Situation. Those two amounts should have been included in the individual's income for the XXXXXXXXXX taxation year under subsection 11(1) and subsection 34.1(1) respectively. In addition, the amount of $11,250 would be subject to subparagraph 163(2.1)(a)(ii) in the Particular Situation. Indeed, the individual would have been able to deduct this $11,250 in computing his income for the XXXXXXXX taxation year under subsection 34.1(3) and this amount would be fully applicable to the $50,000 amount referred to in subparagraph 163(2.1)(a)(i). However, we are of the view that the $37,500 that would be deductible in computing the individual's income from a business for the XXXXXXXXXX taxation year pursuant to subsection 34.1(3) would not be subject to subparagraph 163(2.1)(a)(ii) in the XXXXXXXXXX year since the latter amount would be deductible in computing the individual's income for the XXXXXXXXXX taxation year, and not XXXXXXXXXX . In conclusion, we are of the view that a net amount of $76,250 ($50,000 + $37,500 - $11,250) would come within subparagraph 163(2)(a)(i) since it would be reasonable to attribute all of this net amount to the individual's misstatement or omission.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Should you require additional information regarding this matter, please do not hesitate to contact us.
Stéphane Prud'Homme, Notary, M.Fisc
for the Director
Corporate Reorganizations and Industrial Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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