Dean Blachford, Tax Litigation Lawyer
Alexander Krush, Articling Student

What are Gross Negligence Penalties?

When the CRA conducts an audit and believes that the taxpayer intentionally under-reported their taxes, they will assess the taxpayer a gross negligence penalty. The financial impact of these penalties can be staggering. For income tax, the gross negligence penalty equals 50% of the income tax the CRA reassesses. For GST/HST, the gross negligence penalty equals 25%. CRA charges interest on these penalties, and on the additional tax, dating back to the year that they believe the tax should have been reported and paid.

Many tax professionals believe that CRA auditors have become trigger-happy in assessing gross negligence penalties. Given this potential increased pervasiveness and the significant financial implications, taxpayers should be aware of how to avoid gross negligence penalties and, if necessary, successfully refute them. In this article, we describe what constitutes “gross negligence” and how to defend against these penalties.

What is the definition of “Gross Negligence”?

Before assessing a gross negligence penalty, subsection 163(2) of the Income Tax Act and section 285 of the Excise Tax Act require that the CRA establish that the taxpayer “knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission” on their tax return. [1]

The courts have said that gross negligence involves a greater neglect than simply failing to use reasonable care. It must come with a high level of negligence that is “tantamount to intentional acting, an indifference as to whether the law is complied with or not.” [2]

The CRA will also imply that the taxpayer knowingly made a false statement if they believe that the taxpayer was willfully blind. Wilful blindness is where a taxpayer knows they should ask further questions, but does not because they do not want to know the answers. [3]

There is no fixed set of criteria for determining whether there is gross negligence or wilful blindness.[4] However, jurisprudence and CRA Penalty Reports illuminate the factors considered [5], which include:

  •  the magnitude of the additional tax reassessed compared to the tax that the taxpayer initially reported
  • the taxpayer’s involvement in preparing the tax returns
  •  the opportunity the taxpayer had to detect the error
  • the taxpayer’s history of income, claims and reporting
  • the taxpayer’s education, familiarity with tax processes, or apparent intelligence
  • genuine efforts to comply

This list is not exhaustive and there is no one dominant factor, as the CRA assigns each element weight in the taxpayer’s context. [6]

How to refute a Gross Negligence Penalty

The first step in fighting a gross negligence penalty is often disputing the tax assessed. Since the quantum of the penalty is calculated based on the principal amount of tax assessed, every dollar that we reduce the tax assessed automatically reduces the penalty. Also, lowering the amount of tax assessed makes it easier to argue that the magnitude of any error is insignificant, one of the factors referenced above.

Once we have reduced the tax assessment as much as possible, we can refute the gross negligence by establishing that the CRA has not satisfied its burden of proof and by raising established defences.

Onus

In a typical tax dispute, the burden of proof is on the taxpayer to demonstrate that their tax return is correct. For gross negligence penalties however, the burden is on the CRA to prove the taxpayer was grossly negligent. The courts have said this onus is a “heavy burden” that is “closer to the criminal onus under the Criminal Code than it is to a balance of probabilities.” [7]

Even if the CRA has evidence to support their assertion of gross negligence, if it is not definitive, the courts have said the benefit of the doubt should go to the taxpayer: “if the evidence creates any doubt that a gross negligence penalty should be applied in the circumstances of the appeal, then the only fair conclusion is that the taxpayer must receive the benefit of that doubt in those circumstances.” [8]

Defences against Gross Negligence Penalties

Honest ignorance of the law is rarely a defence in typical tax disputes, but it may justify overturning a gross negligence penalty assessment. [9] Also, if the taxpayer has limited business acumen, language abilities, education, or managerial experience, this can counter an assertion by the CRA that the taxpayer acted knowingly. [10] On the other hand, if the taxpayer is well educated, familiar with tax processes or has managerial experience, the CRA may use this to justify levying the penalty. [11]

A taxpayer may also escape a gross negligence penalty if they relied on an accountant or another third-party to prepare their taxes. [12] Where a taxpayer relies on the advice of tax professionals in good faith, the court is reluctant to apply gross negligence penalties. [13]

Such reliance, however, does not eliminate the responsibility of a taxpayer for the accuracy of their own tax filing. A taxpayer who, for example, fails to correct flagrant errors in returns prepared by an accountant, when a chance to do so existed, can be grossly negligent. [14]

Concluding remarks

In order to protect you or your business from gross negligence penalties, maintain scrupulous book and records, hire a Chartered Professional Accountant, and remain vigilant towards errors or omissions in your tax statements.

If you have already been assessed gross negligence penalties, contact us immediately to discuss your options. Here at HazloLaw, we have extensive experience successfully resolving tax disputes and combatting gross negligence penalties and would be pleased to assist you.

[1] Corriveau v. R., [1999] 2 C.T.C. 2580 at para 26; Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) at 163(2); Excise Tax Act R.S.C., 1985, c. E-15 at 285.
[2] Venne v. the Queen, 84 DTC 6247 (FCTD), [1984] C.T.C. 223 at para 60.
[3] R. v. Briscoe, 2010 SCC 13 at paras 23-24; Sansregret v. The Queen, [1985] 1 S.C.R. 570 at 584; Wardlaw v The Queen 2019, TCC 199 at paras 45-50.
[4] Stone v. The Queen, 2019 TCC 253 at para 23.
[5] Torres v. The Queen, 2013 TCC 380 at para 62.
[6] Lauzon v R, [2016] F.C.J. No. 1308 at para 11.
[7] Lust v. R 2009 TCC 577 at para 23.
[8] Fourney v. the Queen (2011 TCC 520) at para 77.
[9] Supra note 2 at para 40.
[10] De Couto v. Canada, 2013 TCC 198, paras. 19-20.
[11] Melman v. Canada, 2017 FCA 83.
[12] Findlay v. Canada, [2000] 3 C.T.C. 152 (FCA).
[13] Mady v. The Queen (2017 DTC 1065) at para 147.
[14] DeCosta v. Canada, 2005 TCC 545.

This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dean Blachford today. 613-747-2459 ext.310, dblachford@hazlolaw.com