14 July 1989 Ruling 73973 F - Repeated Failure to Report Income

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.

Subject:  Repeated failure to report income Subsection 163(1) Penalty

This is in reply to your memorandum of May 31, 1989, wherein you requested our opinion as to whether the penalty pursuant to subsection 163(1) of The Income Tax Act (the "Act") should be calculated based upon the gross unreported income or on the income net of any deduction permitted under Division B of the Act that are directly attributable to the earning of the unreported income.

As stated in your memorandum, subsection 163(1) states, in part,

     "Every person who

     (a) fails to report an amount required to be included in computing his income...

     ...is liable to a penalty equal to 10% of the amount described in paragraph (a)...".

It is our view that one must look to section 3 of the Act as this used the source concept of income.  Section 3 requires a taxpayer to calculate his income form each source separately and aggregate the various amounts to compute his income for income tax purposes.  Paragraph 3(a) mention four main sources of income: (i)  business; (ii)  property;  (iii) office;  (iv)  employment, each of which is calculated in accordance with rules from various sections of the Act.

In dealing with a slightly different question, the Department received a  23.  It is our opinion that this treatment would also be applicable with respect to income from an office or employment.  In addition, paragraph 3(b) would be applicable with respect to capital gains.

We would also note that the Explanatory Notes to Legislation Relating to Income Tax issued by the Minister of Finance in June, 1988 states, in part, that "This penalty will typically apply to the suppression of amount that are included in determining net income, but will not normally apply to understatements of income attributable to errors in the characterization of income or in its computation if all amounts required to be included in computing income are reported".

Accordingly, we are of the opinion that the penalty calculated pursuant to subsection 163(1) of the Act should be determined based upon the unreported income net of any deductions permitted under Division B of the Act that a re directly attributable to the earning of such income.

In the situation where, for example, a subsection 163(1) penalty was being applied to unreported employment income (albeit not a common occurrence given employer reporting requirements) it is our view that those deductions which were applicable to the unreported income pursuant to section 8 of the Act would be taken into account in determining the net unreported income subject to the 163(1) penalty.

However, in a situation of unreported income where the expenses incurred which were directly attributable to the unreported income had already been deducted by the taxpayer on filing his tax return, the gross unreported income would also be the net unreported income for the purposes of calculating a 163(1) penalty.

We are also in agreement with your views that for purposes of the penalty calculation, the deductions permitted under Division C of the Act will be excluded as they constitute deductions to arrive at taxable income rather than income.

B.W. DathDirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch