20 September 2012 Internal T.I. 2012-0454821I7 - 163(2) Penalty with respect to the CCTB and GSTC

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether both spouses, who are cohabiting spouses, are liable to a gross negligence penalty under 163(2) of the Act with respect to the overpayment of the Canada Child Tax Benefit and the Goods and Services Tax Credit, where both spouses have unreported income or unsupported losses which are also subject to the 163(2) penalty.

Position: Yes.

Reasons: Wording of 163(2)(c) and 163(2)(c.1)

September 20, 2012

Appeals Division HEADQUARTERS
Windsor Tax Service Office Income Tax Rulings
Directorate
Attention: Colette Poisson Gillian Godson

2012-045482

Application of Gross Negligence Penalty

We are writing in reply to your email of July 9, 2012 requesting guidance concerning the calculation and application of the gross negligence penalty under section 163(2) of the Income Tax Act (the “Act”) in certain circumstances.

In your inquiry you have described a situation where cohabitating spouses or common-law partners have both been found to be grossly negligent with respect to the information filed in their tax returns. As a result, both cohabitating spouses are liable to a gross negligence penalty pursuant to paragraph 163(2)(a) of the Act with respect to the unreported income or, in some situations, unsupported losses. Furthermore, you have indicated that as a result of both cohabiting spouses falsely reporting their income on their returns, overpayments of the Canada Child Tax Benefit (the “CCTB”) and the Goods and Services Tax Credit (the “GSTC”) were received by one spouse.

Specifically, you have asked whether both cohabiting spouses are liable to a gross negligence penalty under paragraphs 163(2)(c) and 163(2)(c.1) of the Act with respect to the overpayment of the CCTB and the GSTC, where both spouses have unreported income or unsupported losses, which are also liable to a penalty provided by paragraph 163(2)(a).

Our Comments

The CCTB is paid to eligible individuals as defined in subsection 122.6(1) of the Act. Similarly, the GSTC is paid to eligible individuals as defined in subsection 122.5(1) of the Act. In a situation involving cohabiting spouses or common-law partners, both the CCTB and the GSTC are calculated based on the reported income of both spouses or common-law partners with only one spouse or common-law partner actually receiving the applicable benefit amount. A cohabiting spouse or common-law partner of an individual is defined in to section 122.6 of the Act to be the person who at the time is the individual’s spouse or common-law partner and who is not living separate and apart from the individual.

In general, every person who knowingly, or under circumstances amounting to gross negligence, makes a false statement or omission in their return (collectively the “False Statement”) is liable to a penalty under subsection 163(2) of the Act. Paragraph 163(2)(a) provides the calculation of the penalty with respect to the underpayment of taxes. In addition, paragraphs 163(2)(c) and 163(2)(c.1) provide that a gross negligence penalty is applicable to the overpayment of the CCTB and the GSTC, respectively, where a person has made a False Statement, which has resulted in the overpayment of these benefits.

With respect to the overpayment of the CCTB, the gross negligence penalty in paragraph 163(2)(c) is calculated as the greater of $100 and 50% of the total of all amounts deemed by subsection 122.61(1) of the Act to be an overpayment on account of the person’s liability under Part I of the Act or the person’s cohabiting spouse or common-law partner’s liability. The penalty provided by paragraph 163(2)(c.1) in respect of a GSTC overpayment is calculated similarly to the calculation under paragraph 163(2)(c).

In that regard, the gross negligence penalties provided by paragraphs 163(2)(c) and 163(2)(c.1) with respect to the overpayment of the CCTB and GSTC are calculated based on the amount of the overpayment of the benefit received by either the person or the cohabitating spouse or common-law partner of the person. In a situation where both cohabiting spouses have been found to be liable to a gross negligence penalty under 163(2)(a) due to the underreporting of their income on each of their returns, which has resulted in the overpayment of the CCTB and/or the GSTC, both cohabiting spouses would also be liable to the gross negligent penalty calculated in accordance with paragraphs 163(2)(c) and 163(2)(c.1) of the Act respectively. The penalty is applicable to both cohabiting spouses regardless of the fact that only one of the spouses actually received the overpayment of the benefit.

For example, both Mr. X and Mrs. X are liable to a gross negligence penalty provided by paragraph 163(2)(a) due to the False Statements made in each of their returns with respect to their income. These False Statements also resulted in an overpayment of the CCTB, which was received by Mrs. X. Therefore, although only Mrs. X actually received the benefit amounts, both Mr. X and Mrs. X are liable to the penalty provided by paragraph 163(2)(c) for the overpayment of the benefit. The penalty for each spouse is calculated based on the False Statement they have provided and the amount of the over payment of the benefit attributable to their False Statement. Continuing with the example, Mr. X and Mrs. X have both underreported their income, and as a result, Mrs. X has received a $1,500 overpayment of the CCTB. Mr. X’s underreported income in his return resulted in an overpayment of the CCTB of $500. Therefore, the penalty Mr. X is liable to is calculated as 50% of the $500. In addition, Mrs. X’s underreported income in her return has resulted in an additional overpayment of the CCTB of $1,000. As a result, the penalty Mrs. X is liable to is calculated as 50% of the $1,000 overpayment attributable to her False Statement.

However, it should be noted that the gross negligence penalties provided by subsection 163(2) may be applied to a person who has “participated in, assented to or acquiesced in the making of a false statement or omission in a return, form, certificate, statement or answer filed or made” for the purposes of the Act. To illustrate, in the previous example, Mr. X and Mrs. X are both liable to a penalty for the False Statements each has made in their returns. However, Mr. X is found to have also knowingly participated in the False Statement provided in Mrs. X’s return. Although Mrs. X is liable to a penalty for her False Statement, Mr. X is also liable to a penalty under paragraph 163(2)(c) for participating in Mrs. X’s False Statement. Therefore, Mr. X’s penalty for the overpayment of the CCTB would be calculated as 50% of the total amount of the benefit overpayment of $1,500 attributable to the False Statements made by both Mr. X and Mrs. X.

An additional situation where the penalty each spouse is liable to under paragraphs 163(2)(c) and (c.1) may be calculated based on the entire amount of the benefit overpayment may occur when each spouse’s understatement of income is such that, when considered on its own, it is directly attributable to the full amount of the benefit overpayment. For example, Mr. X and Mrs. X have both understated their income in the amount of $400,000 each and, as a result, Mrs. X has received a CCTB overpayment in the amount of $1,500. However, had Mr. X reported his actual income, the CCTB would have been nil due to the fact that his actual income alone exceeded the amount required to qualify for the CCTB. Therefore, in this case Mr. X is liable to a penalty provided by 163(2)(c), which is calculated as 50% of the total amount of the benefit overpayment, or 50% of $1,500. Similarly, had Mrs. X reported her actual income, they would not have been entitled to receive a CCTB amount. As a result, Mrs. X is also liable to a penalty calculated as 50% of the total CCTB overpayment of $1,500.

We have been asked whether applying the penalties to both spouses based on the full amount of the overpayments is unfair or against tax policy. In our view, there is no unfairness or tax policy concern in doing so. The penalties apply, not because a person received an overpayment, but because a person or persons made a False Statement. The fact that two persons were assessed penalties calculated based on the same overpayment is not relevant.

A further example of a situation where a person may be assessed a penalty for participating in the making of a false statement or omission of another person is illustrated by subsection 163.2(4) of the Act. Subsection 163.2(4) provides that a tax preparer is subject to third party penalties in circumstances where they have counseled others to file their returns based on false or misleading information, or who use false information provided by their clients for tax purposes. Therefore, even though a taxpayer may be subject to a penalty provided by subsection 163(2) in respect of a False Statement, it does not preclude the Minister from assessing a penalty under 163.2(4) to a third party for the same False Statement.

We trust these comments will be of assistance.

Yours truly,

Terry Young, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch