29 December 1997 Ministerial Letter 9727188 - 163(1) penalty when income underreported-no taxable

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 a 163(1) penalty is levied if the inclusion of the unreported income does not trigger any tax payable by the taxpayer. Whether 163(1) applies to a return voluntarily filed.

Position:

yes, and yes if filed under section 150 (excluding 150(4) and as opposed to a return filed under ss 70(2), 104(23), para 128(2)(e)).

Reasons:

The repeated failure to report (net) income amounts has serious implications on the Department's administration of credit programs. 163(1) applies to returns filed under section 150 not only those required to be filed under section 150.

MINISTER/DEPUTY MINISTER'S OFFICE 97-1445D
ADM'S OFFICE
RETURN TO 15TH FLOOR, ALBION TOWER

December 29, 1997

XXXXXXXXXX

Dear XXXXXXXXXX:

This is in reply to your correspondence of August 21, 1997, concerning the application of a penalty under subsection 163(1) of the Income Tax Act (the "Act"). Mr. Wright has asked that I respond to your query.

The confidentiality provisions of the Act prevent me from disclosing the details of any individual's income tax situation without written authorization from that individual. As authorization from XXXXXXXXXX was not attached to your correspondence, your questions and the Department's response have been generalized.

You initially asked whether it is the Department's intention to levy a penalty under subsection 163(1) of the Act when the addition of unreported income does not create any tax payable for a taxpayer. I understand that you have revised your question since discussing this issue with Mr. Murray Brake of the Income Tax Rulings and Interpretations Directorate. I am advised that you now wish to ask whether subsection 163(1) applies to a taxpayer who voluntarily files a tax return but who is not required to file under section 150 of the Act. A reply to both of your queries follows.

There is no statutory requirement or policy position to provide that a penalty under subsection 163(1) of the Act will only be levied if the addition of unreported income amounts creates or increases tax payable. Also, a penalty under subsection 163(1) can apply to any return filed under section 150 of the Act, not only to those returns statutorily required to be filed under that provision because an individual has tax payable, a taxable capital gain or disposition of capital property. In other words, a penalty under subsection 163(1) may apply to a return which is filed so that an individual may receive tax credits. It is true, however, that a subsection 163(1) penalty would not apply to a return filed or required to be filed under another provision of the Act. A more detailed explanation follows.

Section 150 of the Act stipulates the tax return requirements and filing dates for different categories of taxpayers. This provision does not, however, preclude an individual from choosing to file a return of income under this provision if there is no tax payable, no taxable capital gain or disposition of a capital property. An individual with no tax payable may choose to file under section 150 for a number of reasons, including for the purpose of receiving Child Tax Benefits and the Goods and Services Tax Credit, or to benefit from provincial programs such as British Columbia's Family Bonus program. Nearly half of all taxpayers who file tax returns each year receive benefits under the Child Tax Benefit and Goods and Services Tax Credit programs alone. It should be noted that an individual may not be entitled to these benefits on returns filed under another provision of the Act.

The success of these programs depends upon the correct assessment of net income. Family income is one of the key criteria to determine who is eligible and how much an individual is entitled to receive in these benefit programs. One of the Department's primary goals in the administration of benefit programs is to enhance its compliance and information strategies to ensure that payments are being received in the correct amount by those entitled. Accordingly, penalties are levied in situations where net income is repeatedly understated even if the individual has no tax payable. This interpretation reflects the intent of subsection 163(1) as the 1988 Technical Notes, prepared by the Department of Finance, provide that "...this penalty will typically apply to the suppression of amounts that are included in determining net income..." The penalty is 10% of the amount not reported and its application does not require a wilful failure by the taxpayer to report. These penalties apply only to second or further occurrences within a period of three years and only when the taxpayer is not liable to the more rigorous penalties found in subsection 163(2).

I hope that these comments are of assistance to you.

            Yours truly,

            Denis Lefebvre
            Assistant Deputy  Minister
            Policy and Legislation
              Branch

Sandra Short
November 14, 1997
957-2136