Taxpayers who are reassessed by the Canada Revenue Agency are often shocked when they see the amount of the penalties that they have been hit with. There are a number of different types of penalties that can be assessed by the CRA. Gross negligence penalties are one type of penalty that is commonly assessed by the CRA.
Gross negligence penalties are imposed under subsection 163(2) of the Income Tax Act or under section 285 of the Excise Tax Act.
The amount of the gross negligence penalties can be very significant. Even if you agree with the assessment of the tax, the penalties may be significant enough to warrant disputing.
Gross negligence penalties are determined with reference to the amount of tax owing: under the Income Tax Act gross negligence penalties are 50% of the amount of the tax owing.
CRA auditors can sometimes be aggressive in their assessment of gross negligence penalties. In certain circumstances we consider the auditor’s imposition of gross negligence penalties to be inappropriate.
The general rule for tax disputes is that the taxpayer bears the burden of proof. However, there is an exception to that general rule where the CRA has imposed gross negligence penalties. The CRA bears the burden of proving that gross negligence penalties should be imposed. It is often worth fighting the imposition of these penalties (even where you accept that the assessment of tax is correct).
The test for imposing gross negligence penalties under the Income Tax Act is whether the CRA can demonstrate 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 in a return.
The threshold for meeting that test is relatively high. Canadian courts have stated that the CRA should not be imposing gross negligence penalties unless the evidence clearly justifies it:
- The onus is greater than on a balance of probabilities, and closer to the criminal onus under the Criminal Code than it is to a balance of probabilities.
- Because subsection 163(2) is penal in nature, the provision merits a higher degree of culpability and must be imposed only where the evidence clearly justifies it. If the evidence creates any doubt, that it should be applied in the circumstances of the appeal, then the only fair conclusion is that the taxpayer must receive the benefit of the doubt in those circumstances.
Gross negligence can be a difficult concept to articulate. Canadian courts have attempted to describe what is meant by gross negligence in a tax context:
- "very great negligence";
- "flagrant or glaring negligence,";
- "negligence of conspicuous magnitude";
- "negligence in a pronounced, striking or aggravated form";
- "a relatively odious act of negligence, which is difficult to explain and socially inadmissible";
- "a much greater degree of negligence amounting to reprehensible recklessness"; and
- "a punishment for reprehensible behaviour".
These descriptions offered by Canadian courts help to illustrate what is really meant by gross negligence. The decisions quoted offer further insight into which circumstances are appropriate circumstances for the imposition of gross negligence.
We would be happy to discuss with you further whether your situation warrants contesting imposition of gross negligence penalties.