Section 285

Cases

Résidences Majeau Inc. v. Canada, 2010 FCA 28

components of due diligence defence

Majeau built an addition on one of its properties for a total cost of $1,295,688, but calculated its GST owing on the basis that the FMV of the addition was only $716,500, and thereby reduced the amount of GST collectible from an individual occupying the new addition. The Court upheld the trial judge's finding that the low FMV estimate was not credible. Létourneau JA stated (at paras. 8-10):

According to Corporation de l'école polytechnique v. Canada, 2004 FCA 127, a defendant may rely on a defence of due diligence if either of the following can be established: that the defendant made a reasonable mistake of fact, or that the defendant took reasonable precautions to avoid the event leading to imposition of the penalty.

A reasonable mistake of fact requires a twofold test: subjective and objective. The subjective test is met if the defendant establishes that he or she was mistaken as to a factual situation which, if it had existed, would have made his or her act or omission innocent. In addition, for this aspect of the defence to be effective, the mistake must be reasonable, i.e. a mistake a reasonable person in the same circumstances would have made. This is the objective test.

As already stated, the second aspect of the defence requires that all reasonable precautions or measures be taken to avoid the event leading to imposition of the penalty.

See Also

Mediclean Incorporated v. The Queen, 2022 TCC 37

a reasonable person could have concluded that professional advice was not required

After the Tax Court had ruled that the cleaning staff utilized by the taxpayer in its cleaning business were independent contractors rather than employees, the taxpayer commenced paying GST/HST to them and did not obtain GST/HST registration numbers from them in the mistaken belief (based on the president’s reading of a CRA webpage) that it was sufficient to obtain their business numbers - but, in fact, most of them were small suppliers who were not registrants.

After finding that the taxpayer was entitled to rebates for such tax, Owen J went on to find that the Crown had not established misrepresentation attributable to neglect or carelessness, stating (at paras. 175, 183):

Mr. Procopoudis’s conduct falls far short of the sort of intentional or indifferent conduct contemplated by section 285.

… A reasonable person in the same circumstances as Mr. Procopoudis may well have concluded that the position of the Appellant was clear-cut, that the position of the CRA auditor was incorrect and that professional advice was not required.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 261 - Subsection 261(1) ITCs denied to a registrant who paid HST to unregistered suppliers - but s. 261(1) rebate accorded under s. 296(2.1) 390
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(4) Systematix applied to deny ITCs where only BNs, not registration numbers, obtained 130
Tax Topics - Excise Tax Act - Section 296 - Subsection 296(2.1) Minister required to apply rebate for HST allegedly paid out of negligence 275
Tax Topics - Excise Tax Act - Section 298 - Subsection 298(4) - Paragraph 298(4)(a) no carelessness in being misled by literal statement on CRA website 177
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(5) CRA allowed ITCs for suppliers whose registration numbers were not obtained but which in fact were registrants 93
Tax Topics - Excise Tax Act - Section 225 - Subsection 225(1) - A - Paragraph A(a) unregistered independent-contractor staff who were mistakenly paid HST were required to file returns and remit such tax 193

Vocan Health Assessors Inc. v. The Queen, 2021 TCC 49

gross negligence to stop charging HST on customer complaint, without checking

The appellant supplied assessment reports to insurance companies or law firms regarding individuals injured in motor vehicle accidents. The reports were prepared by independent-contractors assessors, who examined and tested the injured individuals at the Vocan facility.

After finding that the supplies of the reports were not exempted, Lyons J stated (at para.162), in affirming the imposition of gross negligence penalties:

The overall picture that emerges from the evidence is that by its conduct, Vocan exhibited a cavalier attitude and was recklessly indifferent with respect to its HST obligations (charge HST on the supply of Reports in both Periods and then collect, report and remit same.) Although the magnitude of the HST Amounts that should have been charged and collected in both Periods are significant, no real effort was made by Vocan to determine if the supply of Reports was exempt nor did it look at the ETA. Of its own volition, Vocan decided to stop charging HST on the supply of Reports simply because insurance companies complained about HST. It was only in 2012 when Vocan started to supply assessment reports to Misir & Company, a personal injury law firm that informed Vocan that HST should be charged and collected on their reports, that Vocan then resumed charging insurance companies HST for assessment reports in the 2012 Period.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part II - Section 2 facility for assessing injured individuals in order to report to insurers was not a health care facility, and the individuals were not “patients” 291
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part II - Section 1 - Health Care Facility assessment facility for supplies to insurers of injury assessment reports was not a health care facility 172
Tax Topics - General Concepts - Agency injury assessors were not agents given lack of control over them 56

Frank-Fort Construction Inc. v. The Queen, 2020 CCI 6

gross negligence penalty where failure of new home builder to report two sales

The taxpayer was a corporation with no employees which, through its principal, built new homes through third-party contractors and sold them. Between May 2008 and March 2014, it sold 86 homes. For the period August 1, 2011 to May 31, 2014, it was assessed gross negligence penalties for failure to report and remit tax on two of the sales. Before concluding that the Crown had not succeeded in establishing that the penalties should be sustained, D’Auray J found that:

  • all the necessary information for preparing the tax returns and financial statements had been provided to the taxpayer’s CPA firm
  • due to an inexplicable error on the part of the accounting firm, the receipts from the two sales had been recorded as proceeds of mortgage loans received by the taxpayer
  • the GST returns were prepared and signed by an accountant at the CPA firm, which did not constitute gross negligence on the part of a taxpayer whose principal had no accounting background and a modest education
  • although sales had not been reported in previous periods as well for which the taxpayer had been assessed penalties for unreported and unremitted QST (which should have been a red flag to the taxpayer), the taxpayer had been assured by a different accountant at the CPA firm that he would now personally attend to the file to avoid similar problems
  • the taxpayer had no motive to not transmit the information on the two sales as they were publicly registered transactions
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) taxpayer not subject to penalty where its CPA firm made inexplicable errors 207

Kion v. The Queen, 2009 TCC 447

false deregistration and no return gave rise to penalty

The Kions, who carried on business in partnership, notified the Minister in March 2000 that as natural persons they were relieved of any liability for tax. The Minister promptly responded by letter advising them of their obligations under the law. In upholding gross negligence penalties under ETA s. 285 and ITA s. 163(2), Sheridan J stated (at paras. 12-13):

They steadfastly pursued that [natural person] path notwithstanding the Minister’s timely explanation of… their obligations under the legislation. … They reported “zero” income in both taxation years; they provided false information to the Minister to cause the partnership to be deregistered for GST and made no returns. They deliberately kept no records of their income-generating activities and modified existing bank records to conform to ‘natural person’ theory….

In these circumstances, I am persuaded… that the Kions knowingly made false statements and omissions in their income tax returns filed under the Income Tax Act and in their returns under the Excise Tax Act.

Tchebotar v. The Queen, [2013] GSTC 43, 2013 TCC 32 (Informal Procedure)

sales records shredded

The appellants shredded all their sales records but "were fastidious in recording and categorizing their business expenses" (para. 25). Campbell J found that the Minister was justified in using a net worth assessment to determine the appellants' income, and to impose gross negligence penalties based on the amounts thus determined.

Canpar Developments Inc. v. The Queen, 2011 GSTC 118, 2011 TCC 353 (Informal Procedure)

As a prospective lender was unwilling to refinance debt owing by the appellant, the appellant transferred real property to its two individual shareholders (who were not registered) in order to secure a loan to them from the lender. It failed to charge or collect GST on this transfer. The appellant was unsuccessful in arguing that it retained beneficial ownership of the property because, inter alia, there had been no certainty of intention to create a trust. Likewise, the appellant could not avoid GST obligations under s. 134 because the property had not been transferred to secure a debt or the performance of an obligation to the shareholders.

Paris J. found, however, that the appellant' conduct was not grossly negligent. He stated (at para. 21):

I accept that Mr. Parmar and Mr. Canning [the shareholders] believed that GST would not become payable until the property was disposed of to an arm's length party. I also accept that they believed that the Appellant maintained some interest in the property given that it continued to pay the expenses related to it. Although that belief was incorrect in law, it appears to me that Mr. Parmar maintained that subjective belief and I infer Mr. Canning did as well. I believe they were negligent in not seeking legal advice.

Administrative Policy

May 2019 CPA Alberta CRA Roundtable, GST Session – Q.7

a gross negligence penalty generally should not apply to a genuine misinterpretation of the ETA or where no false statement has been made

Where GST/HST returns are unfiled due to administrative bookkeeping or accounting oversight, is the penalty applicable? CRA noted that given that “a false statement be made in a return, application, form, certificate, statement, invoice, or answer,” not filing a return is insufficient grounds for the penalty, but then stated:

Kion … suggests that even where no return has been filed, a gross negligence penalty under section 285 is permissible. In this case, the registrants provided false information to cause a partnership to be deregistered for GST/HST purposes.

Similarly, CRA noted that “the fact that a registrant solely fails to respond to an audit contact letter or fails to provide records on time is generally insufficient grounds to apply gross negligence penalties” – and that the s. 284 penalty instead could be applied where there was failure “to provide any information or document when and as required.”

Does the penalty apply where there was a failure to collect and remit GST/HST on a new one-time revenue stream due to administrative oversight? CRA responded:

Usually, gross negligence penalties are not assessed where it is considered that there was a genuine misinterpretation of the ETA on the part of the registrant and it is reasonable to assume that the registrant did not know whether a particular supply was a taxable supply.

Generally speaking, no penalty will be assessed where it appears that the registrant was confused about the reporting of an amount and it is the first time a penalty is being considered. However, gross negligence penalties may be considered based on the materiality of the error or where the registrant was previously advised of penalty consideration for similar conduct.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) generally no ETA s. 285 gross negligence penalty for interpretive errors 0

31 October 2016 Interpretation 164696

penalty can be levied on amounts not attributed to gross negligence

In response to a question on how the gross negligence penalty is calculated, CRA referred to the A-B formula in s. 285(a), and stated:

[T]he amount for A is the actual amount of net tax of the person for the reporting period. This is generally determined by audit during a review of the person’s books and records. The amount for B is generally the amount of net tax of the person that is determined based on the amounts entered on the lines for the net tax calculation on the person’s return for the reporting period.

CRA then noted that, in contrast to ITA s. 163(2):

paragraph 285(a) does not refer to the portion of the understated net tax amount that is attributable to the false statement or omission for the reporting period for calculating the penalty. Rather, it provides that if there has been a false statement or omission relevant to the determination of the net tax of the person, then the amount of the difference between the actual net tax and the amount that would be the net tax for the reporting period (no apportionment) based on the information provided in the return will be subject to the 25% calculation.

Respecting s. 285(b) it stated:

For instance, a person may have tax payable under Division II, IV or IV.1 to remit and report on line 205 and/or line 405 of a return…. Where the person has, due to gross negligence, understated an amount of tax payable on such a line (or reported no tax payable at all), the amount under paragraph 285(b), corresponds to the difference between the actual amount of tax payable by the person and the amount that would be the tax payable of the person based on the information provided in the return.

CRA then provided a detailed example:

A registrant with cash flow problems, deliberately overstates its input tax credits (on line 108) as $40,000, which represents a deliberate overstatement of $20,000, except that due to an accounting error, the $40,000 included only $50 of the $500 of GST/HST payable on a business purchase. It also purposely chose to report (on line 405) only half of the $10,000 Division IV amount payable by it, and claimed a fictitious $1,500 rebate claim. The amounts determined under paras. (a), (b) and (c) are ($10,000-$450, or) $19,550, $5,000 and $1,500, respectively. Accordingly, the penalty is 25% of the sum of these three amounts.

25 February 2016 CBA Roundtable, Q. 9

gross negligence penalty can be imposed even where no return is filed

Does CRA agree (consistently with Last, 2012 TCC 352, at para. 127 and Khan, 2011 TCC 481, paras. 15-16) that gross negligence penalties cannot be imposed under s. 285 where a person neglects to file a GST/HST return? CRA responded:

[W]hen a person knowingly, or under circumstances amounting to gross negligence, makes or participates in, or assents to or acquiesces in the making of a false statement or omission in a return, application, form, certificate, statement, invoice or answer (each… a “return”), then the gross negligence penalty is potentially applicable even where no GST/HST return has been filed. This is supported by… Kion2009 TCC 447.

In other words, the fact that a registrant has not filed a return for a particular reporting period does not automatically preclude the potential application of the gross negligence penalty. The key factor to establish is whether the contravention of the ETA is the making of a false statement or omission in a return or whether it is the simple failure to file the return within the required time.

In general, a gross negligence penalty under section 285 of the ETA will not apply if a person has simply failed to file a Form GST60, GST/HST Return for Acquisition of Real Property….

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 296 - Subsection 296(2.1) using VDP assessment to access rebate claim 114
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) penalty where no return filed 86

May 2016 Alberta CPA Roundtable, GST Q.5

penalty can be collected on understated net tax resulting from reasonable mistake

What is current policy in applying s. 285 penalties, e.g., respecting different kinds of mistake on the same return? CRA responded:

Below are some examples of factors that may be considered…:

  • First occurrence vs multiple instances of similar errors;
  • Voluntary disclosure vs adjustment detected via audit work;
  • Adjustments made due to errors vs adjustments due to unreported/misreported transactions;
  • Materiality of the false statement or omission;
  • Whether the registrant was contacted by CRA in the past regarding the issue at hand;
  • Expected level of registrant's knowledge of GST/HST matters;
  • Degree of registrant's involvement in preparing the GST/HST return;
  • Whether the registrant attempted to correctly apply the ETA and inadvertently misinterpreted it;
  • Whether sufficient books and records were maintained; and
  • Compliance history of the registrant.

Auditors who have identified adjustments during an audit that are subject to gross negligence penalties must prepare a gross negligence penalty report which… must be… approved by the auditor’s team leader and subsequently by the manager of the audit section or another independent CRA authority. …

[E]lement A would be determined after taking into account all adjustments to net tax for the period. These adjustments would include increases to net tax that are assessed due to gross negligence, increases assessed that are not due to gross negligence, as well as any decreases to net tax such as allowances for unclaimed ITCs or unclaimed deductions to net tax.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) factors taken into account/report approved 162