Translation disclaimer
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: [TaxInterpretations translation] Application of the penalty in subsection 163(1) where the failure to report income in 2002 is assessed after the failure is assessed in 2004.
Position: Subsection 163(1) applies notwithstanding the order of (re)assessments.
Reasons: Wording of subsection 163(1).
December 3, 2009
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Jonquière Tax Service Office
T1 Client Services
Attention: Caroline Labrecque
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Headquarters
Business and Partnerships Division
André Gallant
2009-034495
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Penalty for repeated failure to report income
This is in response to your email of October 21, 2009 in which you asked for our opinion on the above subject regarding the situation described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where a reassessment was issued on December 28, 2005 to Mr. X to add amounts that were not included in computing his income for his 2004 tax return. Nearly six months after the 2004 reassessment was issued, on June 22, 2006, an audit of income for the 2002 return was performed. In your opinion, Mr. X voluntarily omitted business income and a penalty was imposed by virtue of subsection 163(2) for that taxation year.
You wish to know if you can reassess the 2004 year to add the penalty under subsection 163(1) since a failure to report income has now been established in one of the three previous taxation years (i.e., 2002). For the purposes of this question, we have assumed that the requirements of subsection 152(4), regarding the limitation periods for reassessment, are satisfied.
The relevant portion of subsection 163(1) is reproduced below:
"Every person who …fails to report an amount required to be included in computing the person’s income in a return filed under section 150 for a taxation year, and … had failed to report an amount required to be so included in any return filed under section 150 for any of the three preceding taxation years… “.
The penalty under subsection 163(1) is equal to 10% of the amount that should have been included in computing the taxpayer's income for a particular taxation year, unless that amount is already subject to a penalty by virtue of subsection 163(2). The penalty under subsection 163(2) was not applied in your case to 2004.
In this case, you had already established in December 2005 that Mr. X had not declared an amount in his 2004 return (the "first criterion at issue "). You also established in June 2006 that Mr. X failed to report an amount in 2002, one of the three taxation years preceding 2004 (the "second criterion at issue"). The fact that the first criterion at issue was satisfied before the second criterion at issue does not preclude the application of subsection 163(1) in your situation. Accordingly, Mr. X would be subject to a penalty pursuant to subsection 163(1) for his 2004 taxation year, subject to the requirements of subsection 152(4) being satisfied.
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.
We hope that these comments are of assistance.
If you have any questions regarding this request, please do not hesitate to contact us.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.
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