Gross Negligence Penalties
If you, knowingly or under circumstances amounting to gross negligence, made a false statement or omission on your tax return, the Canada Revenue Agency (CRA) may charge you with gross negligence penalties.
The penalty is equal to the greater of:
- $100; and
- 50% of the understated tax and/or the overstated credits related to the false statement or omission.
So if you claimed a refund of $10,000 to which you were not entitled, the gross negligence penalty would be for $5,000.
However, if you come forward voluntarily through the Voluntary Disclosures Program, the CRA may waive the penalties charged. Additionally, an application for Taxpayer Relief may also assist with removing the penalties.
To impose a gross negligence under subsection 163(2) of the Income Tax Act, the CRA must demonstrate that the incorrect statements or omissions were made either:
- knowingly; or
- under circumstances amounting to gross negligence.
Knowingly means the act was done intentionally, or the act was done while being willfully blind. Willful blindness, according to the courts, is when the error was so blatant, that the only way a taxpayer could have missed it is because they closed their eyes to the error/omission and chose not to see it.
Willful blindness typically occurs with cases of fraudulent filing. An example of this is the recent Fiscal Arbitrators cases where taxpayers were defrauded into attempting to write off their living expenses as business expenses. This would have resulted in tens of thousands of dollars in refunds for each taxpayer. Instead, it resulted in tens of thousands of dollars in penalties for each taxpayer.
Canadians should be aware that trusting an accountant or tax preparer by no means stops the CRA from imposing gross negligence penalties.
“Under circumstances amounting to gross negligence” is defined in case law. Gross negligence must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence equivalent to intentional acting, and indifference as to whether the law is complied with or not.
Subsection 163(3) of the Income Tax Act states that this penalty is so harsh that the burden of proof switches from the taxpayer to the CRA. What this means is that it is the CRA who must justify its imposition of gross negligence penalties on the taxpayer.
Being assessed with gross negligence penalties can devastate families, and businesses. If you have been assessed with gross negligence penalties, or fear you might be, you should seek legal assistance immediately by giving us a call today.
Lacroix v. Canada, 2008 FCA 241 – Gross Negligence and Reassessment Periods (Statute Barred)
Therrien v. The Queen, 2002 CanLii 781 – Gross Negligence or Knowingly Making False Statements
Lauzon v. The Queen, 2016 TCC 71 – Willful Blindness
Detailed case law analysis may be found here.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.