24 June 2025 Internal T.I. 2022-0956161I7 - Criteria for application of subsection 163(2)

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 the penalty in subsection 163(2) may apply to a taxpayer who makes a false statement on a request to amend a return of income.

Position: Question of fact.

Reasons: Where it is established that a taxpayer "knowingly or under circumstances amounting to gross negligence" made a false statement or omission in a return, including in a request to amend a return of income and documents to support the request, the penalty could apply at the time the return is filed. Furthermore, a liability for tax and an understatement of income are not preconditions for subsection 163(2) to apply.

										June 24, 2025

Technical Support and Policy Section				HEADQUARTERS
SME Directorate, CPB							Income Tax Rulings
      									Directorate
Attention: Michael Patterson						Mei Ng

 										2022-095616

Re: Criteria for the application of subsection 163(2)

All statutory references in this document are to the Income Tax Act, R.S.C. 1985, (5th Suppl.) c.1, as amended (the Act), unless stated otherwise.

We are writing in reply to your inquiry of November 15, 2022 in which you requested clarification of the criteria for the application of the penalty provided by subsection 163(2). We apologize for the delay in our response.

You referred to technical interpretation 2010-0356511I7, which deals with whether the penalty provided by subsection 163(2) applies to a situation where a taxpayer provided a false invoice as supporting documentation for a request to deduct additional expenses in the return of income.

The 2010 document stated the following:

“As was held in Fortis v. M.N.R., [1986] 2 C.T.C. 2378 (T.C.C.), for subsection 163(2) to apply, there must be:

(a) a liability for tax;

(b) a false statement or omission in a return filed as required by or under the Act or a regulation;

(c) knowledge or gross negligence by the person in the making of a false statement or omission;

(d) an understatement of income for a year, as defined by subsection 163(2.1), that is reasonably attributable to the false statement or omission.

In light of the foregoing, the assessment of a penalty under subsection 163(2) of the Act is only available after the filing of a return. In the instant case, then, invoking subsection 163(2) is premature. However, the presentation of a false invoice in an attempt to claim additional expenses could, depending on the facts, constitute an offence under paragraphs 239(1)(c) or (d) of the Act.”

It is your view that criteria (a), (b) and (d) stated in Fortis v. M.N.R., [1986] 2 C.T.C. 2378 (T.C.C.) (“Fortis”) are no longer requirements for the application of subsection 163(2) due to the following subsequent amendments to the subsection:

- S.C. 1988 introduced a minimum penalty of $100, which has no reference to “liability for tax” or “understatement of income”; and

- S.C. 1998 replaced the reference “as required by or under the Act or under the Act or a regulation” with “for the purposes of the Act” to clarify that taxpayers who volunteer false information for the purposes of the Act are liable to a penalty.

In light of the above, you wish to confirm whether the comments in technical interpretation 2010-0356511I7 represent the CRA’s current views with respect to the criteria for the application of subsection 163(2).

Our comments

The preconditions necessary for the liability to a penalty in subsection 163(2) are set out in the preamble to the subsection, which states, in part:

“Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty…” [emphasis added]

Where the preconditions are met, the Minister may impose a penalty equal to the greater of $100 and in general terms, 50% of:

1. tax on “understatement of income” (defined in subsection 163(2.1)) that is reasonably attributable to the false statement or omission; and

2. amounts deducted from tax otherwise payable, as may reasonably be attributable to the false statement or omission.

In Fortis, the Court stated that the amount of the “understatement of income” must be known prior to the penalty being assessed and there must be, among other criteria, a liability for tax and an “understatement of income” that is reasonably attributable to the false statement or omission for subsection 163(2) to apply.

However, the concept of “understatement of income” and liability for tax on the understated income only enter the computation of the penalty once it is established that a person “knowingly or under circumstances amounting to gross negligence” made a false statement or omission in a return filed or made for the purposes of the Act.

This conclusion is consistent with Kerr v. R., [1989] 2 C.T.C. 112, 27 F.T.R. 118, 89 D.T.C. 5348, where the TCC findings in Fortis were effectively overturned by the Federal Court, Trial Division. Martin J. stated in his judgment:

“[47] The proposition that the Minister should establish the precise quantum of understated income before a penalty can be imposed is supported by Fortis et al. v. Minister of National Revenue, [1986] 2 C.T.C. 2378 at 2386, 86 D.T.C. 1795, where the Court found that because the unreported income as determined by a net worth assessment was at best an estimate no penalty could be imposed.

[48] If that is the case then it would follow that there could never be a penalty imposed where there has been a net worth assessment. In order to support a penalty under subsection 163(2) it is not necessary, in my view, to establish precisely the exact quantum of unreported income. It is sufficient that the Minister establishes that there has been gross negligence or circumstances amounting to gross negligence in making a false statement in an income tax return.” [emphasis added]

In that regard, we concur with your view that a liability for tax and an “understatement of income” as defined in subsection 163(2.1) are not requirements for the imposition of the penalty provided by subsection 163(2).

Furthermore, we agree with your view that the reference in Fortis that there must be “a false statement or omission in a return filed as required by or under the Act or a regulation” in order for the penalty provided by subsection 163(2) to apply is no longer valid. The portion of subsection 163(2) which initially referred to the requirement that a false statement or omission must be made in a return filed as required by the Act, was amended, applicable after June 20, 1996, to require the false statement or omission to be made in a return filed or made “for the purposes of this Act”.

The December 1997 Explanatory Notes released by the Department of Finance indicated that the intent of this amendment is “to clarify that taxpayers who volunteer false information for the purposes of the Act are liable to a penalty”. As a result, the amendment broadens the application of the penalty such that it not only applies to a false statement or omission made in a return of income, but also to a false statement or omission made “for the purposes of this Act”, including where the false information is made voluntarily in a return.

Turning to the situation described in technical interpretation 2010-0356511I7, a taxpayer provided a false invoice as supporting documentation for a request to amend a return of income. Our document concluded that in light of the criteria for the application of subsection 163(2) as held in Fortis, the assessment of penalty is only available after the filing of a return. As a result, it was concluded that the penalty provided by subsection 163(2) in the circumstances described is premature.

However, as noted above, not all the criteria identified in Fortis are relevant for the application of the penalty provided by subsection 163(2) given the subsequent amendment to the provision to require a false statement or omission to be made in a return filed or made “for the purposes of this Act”. In addition, jurisprudence since interpretation 2010-0356511I7 impact the comments and conclusion stated in the 2010 document.

For example, what is considered a “return” for the purposes of subsection 163(2) was addressed in Morton v. R. (2014 TCC 72). In this decision, the Court determined that the T1 Adjustment Request, although “not officially prescribed under the Act” constituted a form filed or made for the purpose of the Act. In doing so, the Court considered the purpose of the request, as well as the plain text, context and purpose of subsections 152(4.2) and 163(2), and the “self-filing and voluntary nature of the regime embedded in the Act” and concluded that the request “and the information certified within it by the taxpayer to be accurate, is a “return” within the meaning of the imbedded definition of subsection 163(2) of the Act.”. The Court also noted the very purpose of the T1 Adjustment Request, as being to, “initiate and cause a determination under subsection 152(4.2)”.

In light of the factors discussed in Morton, including the text, context and purpose of subsection 163(2) and the Act as a whole, it is our view that any written document, such as the T1 Adjustment Request and the invoices attached to the request for a reduction in tax payable of a taxpayer, i.e., “to initiate and cause a determination under subsection 152(4.2)”, would be included in the broad definition of “return” in subsection 163(2).

The decision in Morton is consistent with technical interpretation 2012-0452151I7, where we stated that the T1 Adjustment Request is considered a “return” for the purposes of subsection 163(2) and the penalty applies to a false statement made on the request, regardless of whether the Minister has processed the return and issued a reassessment. This is reiterated in technical interpretation 2013-0485161I7, which stated that the application of the penalty in subsection 163(2) is not dependent on the Minister assessing the taxpayer based on the false statement made.

Based on the foregoing, it is our view that our conclusion in interpretation 2010-0356511I7 that invoking subsection 163(2) is premature where a false invoice is provided as supporting documentation for a request to amend a return of income is no longer valid.

Accordingly, where it can be established that the taxpayer “knowingly or under circumstances amounting to gross negligence” made a false statement or omission in a return filed or made for the purposes of the Act, including a request to amend a return of income and documents to support the request, the subsection 163(2) penalty may be imposed at the time the return is filed. Furthermore, a liability for tax and an understatement of income are not preconditions for subsection 163(2) to apply.

However, pursuant to subsection 163(3), the onus is on the Minister to establish the facts justifying the assessment of the penalty. In that regard, the Minister must provide evidence and discharge its burden of proof with respect to the assessment of the penalty.

We trust these comments will be of assistance.

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. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

Gillian Godson
Section Manager
Specialty Tax Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch