16 May 1994 External T.I. 9401865 - MEANING OF PRESCRIBED AND AUTHORIZED FOR PENALTY PURPOSE

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.

Please note that the following document, although believed
to be correct at the time of issue, may not represent the
current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether the repeated failure penalty is "ultra vires"
because the T2S(1) form is an authorized form Whether the
repeated failure penalty is based on gross or net amounts

Position TAKEN:

Repeated failure penalty is not ultra vires and is based on
gross unreported amounts

Reasons FOR POSITION TAKEN:

248(1) definition of prescribed includes information
contained on authorized and prescribed forms

A. Humenuk
XXXXXXXXXX 940186

Attention: XXXXXXXXXX

May 16, 1994

Dear Sirs:

Re: Penalty for Repeated Failures

We are replying to your letter of January 4, 1994 concerning the validity of an assessment of a penalty under subsection 163(1) of the Income Tax Act (the Act).

It is your view that any penalty assessed for a repeated failure to report income is invalid under the law on the basis that subsection 163(1) of the Act does not adequately describe the amount upon which the penalty is to be based.

Your example is based primarily on schedule T2S(1) which is filed with the T2 Corporation Income Tax Return (T2 Return).

While our commentary has general application to the forms and information required of all taxpayers, we have restricted our comments to the forms and information described in your letter which pertain solely to corporate taxpayers.

If we understand your position correctly, it is your view that the financial statements and schedules (and in particular, schedule T2S(1)) which are filed with a T2 Return cannot be considered prescribed forms and thus do not form part of the return of income required under paragraph 150(1)(a) of the Act. We disagree.

Subsection 248(1) defines "prescribed" in the case of a form, to be the information given on a form or the manner of
filing a form as authorized by the Minister. Thus both the information contained on a form and the form itself can be
considered "prescribed" even though the actual format of the form may not be prescribed by the Minister. The main difference between a prescribed form and an authorized form is that the former must comply with all the printing and
format specifications set out by the Minister whereas there is more flexibility in the format of the latter.

Consequently, the information required to be filed with a return, such as the T2S(1), is prescribed information regardless of whether the format of the form is prescribed or authorized. Please note as well that subsection 244(16) of the Act deems any form purporting to be authorized or prescribed by the Minister to be a form authorized by the Minister unless called into question by the Minister or some person acting for the Minister. Consequently a return, form or schedule will be accepted as being in prescribed form unless specifically challenged by the Minister or his duly authorized representative.

You also ask whether the penalty is based on the gross or net amount of unreported income and whether a penalty can be
applied to an adjustment or recharacterization of an amount shown on the financial statements. It is your view that a penalty cannot be assessed on the gross amount of unreported income since the T2 return does not require the disclosure
of the gross amount and a taxpayer cannot fail to report an amount which was not required to be disclosed on the prescribed form. For similar reasons, it is your view that the failure to adjust net income as determined in accordance
with generally accepted accounting principles to reflect net income as determined under the Act would not be subject to a penalty under subsection 163(1) of the Act.

It is our view that the penalty under subsection 163(1) of the Act is based on the gross amount of unreported income
before the application of any expenses. As stated above, it is our view the financial statements and schedules form part
of the return of income to be filed by the corporation and thus a repeated failure within the relevant time frame to
include any portion of the gross amount of income earned in computing the net income for tax purposes will be subject to a penalty under subsection 163(1) of the Act.

It is our view that a penalty under subsection 163(1) of the Act will not be assessed in respect of an overstatement of
expenses or an incorrect characterization of an amount for income tax purposes. Note, however, that where such failure
or false characterization is committed knowingly or in circumstances amounting to gross negligence, a penalty may be assessed under subsection 163(2) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch