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: 1. Whether a penalty under subsection 163(1) is applicable in a situation where a taxpayer has earned employment income in a year but has failed to file the return of income required under section 150 of the Act, and two years previous the taxpayer filed a return of income in which he had failed to report dividend income he received in the year. 2. Request for comment on the perceived unfairness of the penalty provided by subsection 163(1). 3. Whether a due diligence defence is available with respect to a penalty under subsection 163(1) of the Act. 4. Whether the CRA will provide relief under the taxpayer relief provisions of the Act in situations where a taxpayer has been assessed a penalty under 163(1), however the taxpayer was not duly diligent in respect of the omission.
Position: 1. No. 2. General Comment provided. 3. Yes. 4. Yes, in certain circumstances.
Reasons: 1. The penalty provided by subsection 163(1) is applicable in situations where the taxpayer has failed to report an amount in a return filed under section 150, and the taxpayer failed to report an amount in any return filed under section 150 for any of the three preceding years. Where the taxpayer has not filed a return required to be filed under section 150, the penalties provided by subsection 163(1) are not applicable. The penalty provided by 162(1) and/or 162(2) may be applicable for the failure to file a return of income under section 150 of the Act. 2. The CRA cannot comment on the perceived unfairness of a provision of the Act. Legislative changes are the responsibility of the Department of Finance. 3. The CRA accepts that a taxpayer can avoid a penalty provided by 163(1) if the taxpayer can show that he or she was duly diligent. 4. Taxpayer relief provisions of the Act.
Ontario CTF Conference October 30, 2012
Assume that Mr. X received a dividend which he failed to report in his return of income which he filed for the year. Two years later, Mr. X received employment income from which withholding is made and for which a T4 slip is issued. Assume Mr. X will not have a balance owing if he files a return for the year, and so he decides not to file a return. Will CRA impose a penalty on Mr. X under subsection 163(1) for failing to report the employment income received in the year?
The penalty in subsection 163(1) is applicable to every person who fails to report an amount in a return which has been filed as required by subsection 150, and who has also failed to report an amount in a return filed under section 150 for any of the three proceeding taxation years. The penalty is not applicable if the person is liable to a penalty under subsection 163(2) for the unreported amount.
As the subsection 163(1) penalty only applies where a taxpayer has failed to include an amount in income in a return that has been filed, it will not apply if the taxpayer has not filed a return. However, in this example the taxpayer would be subject to a penalty under subsection 162(1) of the Act for the failure to file a return; although if the taxpayer is correct that no tax is owing, the penalty would be nil.
We note that income amounts included on a taxpayer's return are used for a number of purposes (for example, Canada Child Tax Benefits, GST credit, RRSP contribution room). In order to receive these benefits, a taxpayer must file a tax return. As well, if the taxpayer has no balance owing, he likely would be entitled to a refund that he will not receive if he does not file a return.
In Knight v R, 2012 TCC 118, Mr. Justice Jorré pointed out that the amount of a penalty imposed under subsection 163(1) and its provincial equivalent will often be greater than the amount of the gross negligence penalty that would have been exigible for the same omission, especially if the taxpayer's income for the year is less than about $100,000. The impact of the penalties seems to be particularly harsh on lower-income taxpayers, and it seems incongruous that a mere omission should lead to a higher penalty than would apply to conduct that is grossly negligent. Can the CRA comment on the apparent unfairness of the omission penalties, especially for lower-income Canadians who have made mistakes that are negligent but not grossly negligent? Has the CRA discussed the matter with the Department of Finance? If so, what were the results of the discussion?
Questions about the appropriate application of the repeated failure to report income penalty in certain circumstances have arisen on prior occasions and have been brought to the attention of the Department of Finance. Making legislative changes to the penalty structure falls under the responsibility of that department.
(Provided by Kees Rystenbil, LPD, September 27, 2012)
In Knight, Mr. Justice Jorré addressed the taxpayer's due diligence defence. Does the CRA accept that a taxpayer can avoid a penalty under subsection 163(1) if the taxpayer can show that he or she was duly diligent? Can a taxpayer avoid the 163(1) penalty by showing that he or she was duly diligent in any year in a four-year period in which omissions occurred? What criteria does the CRA use in determining whether a taxpayer was duly diligent? Does the CRA routinely afford taxpayers the opportunity to make submissions on due diligence before a 163(1) penalty is assessed?
The CRA does not routinely afford taxpayers the opportunity to make submissions on due diligence before a subsection 163(1) penalty is assessed.
The CRA accepts that a taxpayer will not be subject to the penalty under subsection 163(1) if the taxpayer can show that he or she was duly diligent. A taxpayer who has been assessed a subsection 163(1) penalty for having two failures within a four-year period may not be subject to the subsection 163(1) penalty, if the taxpayer can show that he or she was duly diligent in either one of the two years in which the failures occurred.
At the objection stage, CRA Appeals will consider all of the facts and circumstances related to a taxpayer's due diligence representation.
(Response provided by TCAD, October 5, 2012)
In Knight, Mr Justice Jorré ultimately concluded that the taxpayer had not been duly diligent, and so he upheld the penalties that had been imposed. (For another case to the same effect, see Tacilauskas v R, 2012 TCC 288.) Justice Jorré, however, suggested that the taxpayer should apply for relief under the taxpayer relief provisions. Does the CRA accept that relief might be available to a taxpayer who has been assessed a penalty under subsection 163(1) but who was not duly diligent in respect of the omission giving rise to the penalty?
The CRA accepts that relief of a penalty assessed under subsection 163(1) may be available in situations where a taxpayer's circumstances have prevented him or her from complying with the reporting obligations imposed by the Act.
Subsection 220(3.1) of the Act provides the Minister with the discretion to waive or cancel all or any portion of any penalty otherwise payable under the Act. All the relevant facts and circumstances of a taxpayer's situation will be reviewed and each request will be decided on its individual merits.
For more information on the taxpayer relief provisions, including the administrative guidelines that the CRA will apply when considering requests for relief and the types of circumstances that may qualify, please consult the Information Circular, IC 07-1, Taxpayer Relief Provisions available on the CRA website.
(Response provided by TRSCD, October 5, 2012)
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