11 March 2010 Internal T.I. 2010-0356511I7 - Gross Negligence Penalty

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 s. 163(2) can be invoked at the audit stage of a reassessment process.

Position: No; it will be premature to do so at this time.

Reasons: For subsection 163(2) to apply, a return of income must be filed, among other conditions.

								March 11, 2010

	Winnipeg Tax Services Office			HEADQUARTERS
	Audit Division					Income Tax Rulings
		  						Directorate
	Attention: Steve Sanderson			Lindsay Frank
	                 Team Leader			(613) 948-2227

								2010-035651

Gross Negligence Penalty

This is in reply to an email from Dawn Highfield. At issue is whether subsection 163(2) of the Income Tax Act (the "Act") applies to the facts below.

During an audit, a taxpayer made a false statement to an auditor. After receiving the proposed assessment figures, the taxpayer requested an allowance for additional expenses. The auditor conducted a third party review to validate the additional expenses. It was determined that the taxpayer did not purchase the goods in question and had presented a false invoice. Your research of various internal documents suggests that the false statement has to occur at the time of filing. As explained below, we concur.

Subsection 163(2) of the Act imposes a penalty where a taxpayer knowingly, or in circumstances amounting to gross negligence, participates in, or makes a false statement or omission in a tax return. The penalty is determined with reference to the understatement of tax or the overstatement of various amounts deemed to be paid on account of tax.

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.

Should you need clarification or further information, please do not hesitate to contact Lindsay Frank at the number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate

c.c. Dawn Highfield

Audit Division
Winnipeg Tax Services Office