Section 163

In finding that a taxpayer was not duly diligent in failing to review her return and spot an income omission of over $70,000, D'Aurray J noted that the Tax Court had been divided in its approach to s. 163(1) penalties. She stated (at para. 37):

One approach is that the due diligence defence applies to either one or the other of the first or second failure to report, whereas the second approach is that the due diligence defence will only apply to the second failure. I agree with the second approach since it is the second failure that gives rise to the imposition of a penalty and not the first, and the penalty is calculated on the amount involved in the second failure.

The taxpayer failed to report $683 of investment income in his 2008 return (representing less than 0.1% of his taxable income and corresponding to a T3 slip which he had not received due to a change in address), and $436,890 of income in his 2009 return (representing a portion of payments out of his pension plans which had been transferred to his personal bank account rather than into his RRSP and LIRA). The Minister's reassessment of 2009 included a s. 163(1) penalty.

Graham J found that there was a due diligence defence for a s. 163(1) penalty if the taxpayer established due diligence in either of the two years, so that it was not necessary for the taxpayer to establish due diligence for the year in relation to whose income the penalty was assessed (here, 2009). The taxpayer's (ultimately misplaced) reliance on Canada Post's mail-forwarding system in preparing his 2008 return was reasonable in the circumstances, so that his appeal was allowed.

However, were this issue relevant, the taxpayer would not have established due diligence for 2009. Although he in fact believed that an employer could only issue one T4A slip for each employee (whereas here there was a misplaced second T4A for 70% of the amounts in question), it was not reasonable for him to rely on the completeness of the first T4A given the materiality of the total amount and given detailed documents he had previously received from his employer listing the appropriate amounts and their proper tax reporting.

The taxpayer failed to report some employment income in his 2008 to 2010 taxation years, and was assessed a penalty of $5,570 for his failure to report the bulk of his employment income for 2010. Bédard J upheld s. 163(1) penalties, finding that the taxpayer was not duly diligent. The taxpayer had failed to open the envelopes containing his T4 slips and had not reviewed the tax return prepared by his accountant.

The taxpayer withdrew funds from his employer's pension plan, $143,510 of which were paid to him directly, and $36,102 of which were transferred to an RRSP of which the taxpayer's spouse was an annuitant. Both withdrawals were taxable income, which the taxpayer failed to report in his return. After finding that s. 163(1) applied on its face to impose a penalty of 10% of the unreported amounts notwithstanding the harshness of the combined federal and provincial penalty of 20%, Woods J proceeded to consider due diligence: "Did Mr. Morgan take all reasonable measures to prevent the failure to report... ?" (Para. 30.)

This defence was unavailable in respect of the $143,510 payment, as the taxpayer had received a T4A for this amount, and a purported assurance from the taxpayer's bank that the taxpayer's tax "would be taken care of" was not a satisfactory explanation (paras. 32-33).

However, the defence was available in respect of the $36,102 transferred to the RRSP. Woods J stated (at paras. 35, 37):

In this case no source deductions were taken and it appears that a T4A may not have been issued. ...

[The funds] came from one tax-exempt vehicle to another and there was no indication that Mr. Morgan was advised that this amount would be taxable at the time of transfer. If this is a generous interpretation of the facts in Mr. Morgan's favour, the circumstances as a whole justify that result in my view.

Rip CJ supported the Minister's assessment of penalties for her failure to report the income from her employment at the University of Alberta. She could not make out a due diligence defence for relying on Money Mart to prepare her taxes. Rip CJ stated (at para. 18):

The failure to report income of $60,000 in 2009 is quite serious... . Ms. Jack relied wholly on Money Mart to prepare the tax returns. She did not make even a cursory review of the information on the return, notwithstanding her previous difficulties [i.e. reporting $101,446.79 of income in 2008 when it was in fact $126,000]. Whether she even verified that she gave Money Mart all necessary forms, including the T4 form from the University of Alberta, could not be confirmed.

The taxpayer reported $269,338 of income in his 2008 return, $169,420 of which was dividend income, and $184,537 in 2009, none of which was dividend income. He was assessed penalties under s. 163(1) for unreported dividend income of $31,250 in 2008 and $130,500 in 2009. The taxpayer argued that he had a due diligence defence because his returns were prepared by an accountant, who was a different accountant than the one for the two corporations that had paid the dividends, and who had failed to prepare the appropriate paperwork. Woods J. stated (at para. 15):

In my view, Mr. Tacilauskas did not take sufficient care in either the 2008 or 2009 tax returns to prevent the omissions from income. The dividends were large amounts, and Mr. Tacilauskas had a responsibility to take appropriate steps to ensure that they were reported. It was not enough to assume that an accountant would take care of it.

The taxpayer's lack of familiarity with Canada's tax system could not by itself support a due diligence defence against s. 163(1) penalties. The fact that he had received two T4s for the second year in question, and had included the full amount for the first T4 in his income, also was not the basis for a due diligence defence, given the materiality of income omitted from his reported income as reflected on the second T4.

Jorré J. found that the taxpayer, having no reasonable excuse for his failure to report over $40,000 in salary and severance pay, being nearly half his income for the year, was liable under s. 220(3.1) of the ITA for a penalty of 10% of the unreported income. Although technically outside the Court's jurisdiction, Jorré J. found it likely that the taxpayer was also liable for a further 10% penalty under British Columbia's Income Tax Act. The federal and provincial penalties totaled $8175. However, taxes had already been withheld from the taxpayer's unreported income. The federal and provincial treasury were, at the time of reassessment, out of pocket only $3,874, including interest.

Jorré J. recommended that the taxpayer apply for discretionary relief of penalties, and that his application be treated leniently, given that the taxpayer's penalties were over 200% of the amount of omitted tax. In other words, the taxpayer's penalties would have been considerably lower if his conduct had been more blameworthy - 50% of the omitted amount if there had been gross negligence, and between 50% and 200% if the taxpayer were charged on summary conviction.

The taxpayer, a chef with a high school diploma, failed to include in his return the T4 slip from one of his four employment sources. Hogan J. found that the taxpayer had a due diligence defence, given his inexperience in the workplace, and given that H&R Block, who he hired to assist in his return, had not advised him to seek the missing T4 slip.

Hogan J. reviewed several s. 163(1) due diligence cases and noted (at para. 9) that the key distinguishing factor is the taxpayer's familiarity with the tax system; the less the taxpayer's experience, and the more complex the income scenario, the stronger the defence.

After being reassessed for unreported investment income of $868 in 2006, the taxpayer requested her advisor at TD Waterhouse to ensure that she received the relevant T5 slips for 2007. In April 2008 the advisor's assistant confirmed by email that the T5 slips that the taxpayer had received for 2007 matched up with the amounts for her account when, in fact, approximately $20,000 of investment income was not included. Although the investment income included by the taxpayer in her 2007 return was 13% lower than for 2006, she testified that she had assumed this decrease was because of market performance. Webb J. found at para. 12 that the taxpayer had been duly diligent: it was reasonable in the circumstances for the taxpayer to assume that she had received all the slips, and thus had reported all her investment income.

The taxpayer failed to report nearly $1,800 in income for 2006, but she had reason to believe her employer had made source deductions in respect of that income. Accordingly, she established a due diligence defence and was not liable under s. 163(1) for a 10% penalty in respect of roughly $38,000 of unreported income in 2007. In so finding, Little J. remarked at para. 13 that the equities of the case were in the taxpayer's favour because the 10% penalty for the 2007 amount, roughly $3800, was over twice the unreported amount in 2006 that gave rise to the penalty.

The taxpayer switched from one accounting firm to another, and ensured that the old one had faxed her information to the new one. Webb J. found that the taxpayer's mistaken belief that the new firm had included the faxed information in her tax return was reasonable. The taxpayer therefore established her due diligence defence as set out in Saunders, and thus avoided penalty under s. 163(1).

The taxpayer failed to report investment income of $278 in 2003, and dividend income received in 2006 of $32,055 from a private corporation. In finding that s. 163(1) did not apply to the 2006 dividend income, Hogan, J. concluded that the taxpayer had not "failed" to include the dividend income in 2006 as she had asked her father-in-law whether there were any tax forms required in order to report the transaction (with him responding negatively) and she had believed the amount received was a non-taxable capital receipt.

In the first taxation year, the taxpayer did not report income from part-time employment because he had not received a T4 slip (due to a change of address) and, in the second taxation year, he did not receive a T4 slip until around the time of the reassessment of that taxation year and, in his return for that year in the line for employment income, stated "T4 missing from Bulk Barn - will amend when received". In these circumstances and in light of statements in the 2006 Tax Guide of CRA, which did not instruct the taxpayer to include his estimate of employment income in circumstances where he did not have a T4, a due diligence defence was established.

After noting that the penalty in s. 163(1) was one of strict liability, so that it could be vacated if the taxpayer established due diligence, Woods J. went on to find that the taxpayer had not established due diligence in this case as she had not carefully reviewed the income tax return before she submitted it.

The taxpayer failed to include in his income the amount of withdrawals from his RRSP for which he had not received a T4RSP form at the time of filing his personal returns. Although it was "not his intention to evade the payment of income tax", s. 163(1) in its post-1988 form created an offence of "strict liability" (albeit, not absolute liability), with the result that the taxpayer was liable for the penalty given that he had failed to establish due diligence on his part.

The taxpayers' return was prepared by an individual whose last name they could not recall at the hearing. The return claimed meaningless deductions (e.g. deducting money one owes to oneself as "agent"), and Jorré J found the Minister's assessment of penalties to be well founded.

Jorré J noted that CRA owes no duty of care to a taxpayer to prevent them from receiving refunds based on obviously vacuous claims (para. 29) - although such duty would not be relevant to s. 163(2) in any event, because it is the grossly negligent underreporting that triggers liability, not the receipt of a refund (para. 30).

The taxpayer purportedly arranged to have most of the profits arising from sales of a product earned by a Barbados company. The Minister assessed s. 163(2) penalties. In the Minister's reply, the key allegation in support of penalties was that:

AgraCity 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 its income tax returns for the years 2007 and 2008 by underreporting income by $2,413,520 and $3,670,478, respectively.

The taxpayer moved to strike that paragraph on the basis that it was merely "parroting" s. 163(2). C Miller J found that an obiter dictum in O'Dwyer, dealing with a similar issue in connection with a s. 237.1(7.4) penalty, was apt (para. 27, citing O'Dwyer at para. 31):

[S]imply reiterating the multiple combinations of possibilities that could result in the imposition of the penalty does not tell a taxpayer what specific act (that would result in the imposition of the penalty) he or she is alleged to have committed.

Applying this principle, C Miller J stated (at para. 31):

I am not prepared to strike these provisions but am going to allow the Respondent time (two weeks) to straighten them out and clarify whether the penalty is due to knowingly underreporting or underreporting under circumstances amounting to gross negligence or, if both, plead in the alternative. If gross negligence is at issue, then the pleadings should be clear what the circumstances are ... .

Until 1995, a Quebec garbage collection company ("EBI") employed its garbage collectors and drivers. It then encouraged most of them to each become the sole shareholder and director of a newly incorporated Quebec company, so that EBI entered into contracts with each company for the provision of the services of the individuals which previously had been provided directly. CRA reassessed the 2004 to 2006 years of the individual companies (the taxpayers) on the basis that they were carrying on personal services businesses. Their Notices of Objection were not rejected until May 2010. CRA included gross negligence penalties in its reassessments before May 2010 of the companies for their 2007 and 2008 years. The structure was then terminated by EBI and the taxpayers.

In finding that the Minister had not established gross negligence, Favreau J noted that the taxpayers were represented by competent professionals and that the structure had not been challenged for the first nine years, and stated (at para. 97, TaxInterpretations translation):

The sole reason that the penalties were imposed appears to me to have been to force the parties to terminate the structure.

The taxpayer (and thousands of others) participated in a bogus tax scheme based around fake business losses, and was assessed for gross negligence penalties. The taxpayer appealed the penalties and moved to have the Minister disclose, among other things, all documents obtained as a result of the search warrants CRA obtained in investigating the scheme, the names of all CRA employees who have knowledge of the Scheme and similar schemes, and all documents CRA had about the scheme and similar schemes.

VA Miller dismissed the taxpayer's motion. After noting that the taxpayer's angle seemed to be that his fellow scheme participants constituted some kind of "reasonable person" sample, she stated (at para. 22):

The focus of the inquiry ... will be on facts specific to the Appellant's education, experience, knowledge and conduct. The documents sought by the Appellant are not relevant to these facts... .

The taxpayer ran a sales and marketing business. His clients were principally livestock breeders and producers, and he worked from a home office. He deducted home renovation expenses from his business income, including a three-bay garage (to serve as an office and inventory storage), landscaping, and a fence. He argued the landscaping was for projecting a professional environment to clients and the fence was to improve security for his home office. C Miller J found that these two expenses were too tenuously connected with business to be deductible, but reversed the penalties for gross negligence. He stated (at para. 30):

I accept that with many of [the taxpayer's corporation's] disallowed expenses (fencing around the house for example), Mr. Lavoie was pushing the envelope, but conclude he was not grossly negligent in doing so. Simply because he has not proven to me that, on balance, this was a legitimate business expense, does not mean that there is no arguable basis whatsoever on which to attempt to deduct it.

For other claimed expenses, such as his wedding, jewelery for his wife and video games for his children, penalties were clearly justified.

The taxpayer, who was a consultant, provided signed cheques to his accountant without filling in the recipient. The accountant misappropriated the funds, and apparently filed returns on behalf of the taxpayer which were different than the versions which he showed to the taxpayer. The taxpayer did not contact CRA after having received various demands from CRA and after having been told by the accountant that the accountant had lost his file yet again.

Tardif J found that penalties were not warranted, stating (at paras. 70, 74):

Although we cannot refer to mens rea, an essential element in criminal law, it seems important to me that to call for penalties in tax matters, the person in question must have shown, whether passively or actively, a minimal intention to hide certain data with a direct impact on his fiscal duty.

The taxpayer's confidence in his accountant, although reckless and lacking in vigilance, did not show such an intention (para. 74).

After having filed returns for 1998-2001 that were essentially correct, the taxpayer submitted fraudulent T1 Adjustment Requests. Bocock J found that the Minister was justified in assessing s. 163(2) penalties for the misrepresentations on the Requests, and for assessing such penalties beyond the normal reassessment period.

The taxpayer's principal argument was that a T1 Adjustment Request is not a "return, form, certificate statement or answer" under the Act, as all these words have specific meanings. Bocock J stated (at para. 22):

The use of this [T1 Adjustment Request] "form", although not officially prescribed under the Act, is a fast, convenient and accepted method by which taxpayers make application for a determination under subsection 152(4.2) of the Act. To suggest that [we] should not consider this "application" as a "form" containing "statements" ... is not legally supportable.

A firm ("Fiscal Arbitrators") promoted a tax refund scheme that relied on claiming fictitious business losses, with the result that the taxpayers claimed no tax owing for several consecutive years. C Miller J found that the taxpayers were liable for penalties under s. 163(2), notwithstanding that they trusted in, and were conned by, Fiscal Arbitrators. He stated (at para. 77):

I question how an individual, regardless of the level of education, who has worked in Canada, paid taxes and benefited from all the country has to offer, can without question enter an arrangement where he or she claims fictitious business losses and therefore simply does not have to pay his fair share, indeed does not have to pay any share of what it takes to make this country function.

VA Miller J found that the Minister's decision to use a net worth assessment, and impose penalties on the taxpayers based on the amount thus determined, was justified.

The documents were provided to CRA in an unorganized garbage bag, and in a box that was contaminated with mouse droppings and had many documents shredded by the mice. It was unreasonable to require the official handling the case to handle the records and risk her health (para. 19). Moreover, to the extent that documents could be recovered, they supported CRA's position that the taxpayers had concealed income.

Following a net worth assessment, the Minister added a total of $41,441 to the income of the taxpayers for two successive years, an amount that more than doubled their taxable income in those years. The taxpayers were able to establish that approximately $28,000 should be eliminated from their reassessments. D'Auray J found that, because the gaps in reported income were not substantial after these adjustments, the taxpayers' s. 163(2) penalties should be vacated.

The taxpayer had limited English skills and no understanding of the Canadian tax system or appropriate record-keeping standards. Bocock J found that reassessment beyond the normal period was justified, but s. 163(2) penalties were not. Penalties under s. 163(2) entail a "deliberate act of conceit or omission" (para. 44), and in the "factually unique" circumstances involving a new immigrant (para. 38), there was no reason to infer any such deliberate omission.

Graham J found (citing Raposo) that the taxpayer's guilty plea under s. 239 for failing to report commission income from his real estate business was prima facie proof that he had also been grossly negligent for purposes of s. 163(2) (para. 25). It was not necessary to dispose of the taxpayer's argument that in the other action he had thought he was only pleading guilty to having been negligent, as in this action the Crown had established that the taxpayer had falsified statements of his commission income before providing them to his tax preparer. The taxpayer's appeal was denied in respect of the penalties.

The taxpayer had pleaded guilty to fraud in misappropriating funds from her former employer. She was sentenced to imprisonment of two years less a day to be served in the community, and to pay restitution of $40,000 to her employer. Paris J noted that, under s. 22.1 of the Ontario Evidence Act, a criminal conviction is prima facie proof of the underlying facts, although related jurisprudence states that the inference is even stronger where there was a full trial leading to a conviction (which was not the case here) (para. 14).

The taxpayer's conviction was therefore prima facie proof that she had misappropriated $40,000 (para. 37). Before upholding the penalty (based on underreported income of $37, 476 for the particular taxation year in question), Paris J stated (at para. 37):

I would adopt the position taken by Bowman C.J. in Biros v Canada, 2007 TCC 248, that where the respondent has proved that a taxpayer has received funds from a fraudulent scheme, the failure to report the income from the fraud is more likely part of the overall fraud than due to inadvertence by the taxpayer.

VA Miller J found that the taxpayers had been negligent in signing their tax returns, which had been prepared by a firm of "professional tax consultants" who apparently had no professional certifications. The returns reported artificial business losses. The taxpayers had been willfully blind to the misrepresentations on their returns, especially given that they had been preparing their own returns for 35 years.

Woods J found that the taxpayer was willfully blind in acquiescing to her tax preparers' plans to claim a fictitious business loss for her 2009 taxation year which was in excess of her employment income for that year, and therefore that the s. 163(2) penalties against her were well founded.

On the matter of costs, the taxpayer asked for sympathy, as the penalty would have been levied on lower underlying tax if (contrary to s. 163(2.1)) the penalty had been computed on the basis of the off-setting of income over four years. Woods J stated (at para. 31):

I am not persuaded by an argument based on sympathy. I accept that the penalty is higher in this case than it would be in others, but the participation of Ms. McLeod in this scheme is reprehensible.

Bocock J found that the taxpayer, having failed to maintain adequate records and having engaged in "inscrutable" tracking of expenses, shareholder advances and shareholder benefits, could be reassessed beyond the normal period. Regarding gross negligence penalties, Bocock J stated (at para. 20):

[T]he Court finds that the lack of records or accounts produced at the Hearing did not factually appear to be the result of advertent acts of deceit, deliberate omissions or culpable intention on the part of the Appellant. ... The Appellant is likely the primary and largest victim of his own negligence and carelessness.

The taxpayer's appeal of s. 163(2) penalties was therefore allowed.

The taxpayers ran a commercial fishing business. Because a substantial portion of that business was operated on a cash basis, a CRA auditor used a net worth assessment to determine that the taxpayers' income was under-reported. One of the three taxation years was beyond the normal assessment period, and the Minister assessed penalties under s. 163(2).

Tardif J agreed with the Minister's income adjustments (subject to small corrections) but not with the penalties or out-of-period reassessment. The net worth assessment was warranted in the circumstances, and it had been performed soundly. However, there was no evidence of dishonesty or negligence. Moreover, a disparity between the taxpayers' reported income and the amount determined under the net worth assessment did not in itself prove misrepresentation.

The Minister imputed additional income to the taxpayer based on deposits into his bank account that he had not included in his return, and on that basis reassessed the taxpayer beyond the normal limitations period and imposed penalties. Hogan J. accepted the taxpayer's explanation that the amounts represented loans from his brother, and the accommodation of deposits of cheques from his brother's business. Unlike in Lacroix, the explanation of a loan from a sibling was credible - the taxpayer's brother had a hold on his account and was unable to make immediate withdrawals, whereas the taxpayer could. The Minister's assumptions were thus demolished.

The Minister assessed the corporate taxpayer for gross negligence penalties for reporting income based on only $285,588 of gross revenue rather than the $458,558 actually received, based chiefly on the magnitude of the reporting failures. D'Arcy J. overturned the penalties based on his findings that:

• the negligence in this case was mainly attributable to the taxpayers' accountant;
• the magnitude of the failure to report income was considerably less than alleged, based on the accountant's further failure to report $88,856 of cash wages paid out;
• it was reasonable for the individual taxpayer to rely on the accountant - given his unfamiliarity with English and with Canadian tax, it was appropriate that he chose an accountant recommended by members of his community who could speak to him in his native language;
• the taxpayers replaced the accountant once CRA made them aware of the errors; and
• there was no evidence of dishonesty.

Favreau J. affirmed the Minister's net worth assessment of the taxpayer for $61,874 of unreported income in three years arising from a marijuana-growing operation, for which she had been convicted. Favreau J. noted that, as a "method of last resort," a net worth assessment is inherently "arbitrary and imprecise" (para. 17). Nevertheless, on the basis of the unreported income thus determined, he found that the magnitude of the failure to report income supported the Minister's assessment of gross negligence penalties.

The taxpayer was a certified contractor who started a business of buying homes, renovating them, and selling them. He sold one home for $319,000, but did not receive the funds - instead, they were deposited into his lawyer's trust account. The lawyer applied those funds against the purchase of another property, so that the lawyer's trust account ledger statement showed the proceeds of sale as $161,035.12 rather than $319,000. This lower amount was the one used to calculate the taxpayer's profits on his income tax return, with the result that he claimed a business loss rather than a healthy profit. The Minister assessed the taxpayer for gross negligence penalties.

Hershfield J. found that the penalties were inappropriate, and the taxpayer meant to be diligent and accurate in reporting income. The taxpayer relied on his wife ("Prevost"), who was skilled in financial accounting, to prepare the return. Her explanation for the error was that, despite her hounding the lawyer for accounting records, she received them only days before the filing deadline. Wanting to avoid late-filing penalties, she did not have enough time to notice the discrepancy in the proceeds of disposition on the property, and surmised that the reported business loss related to a legitimate tax-planning strategy. While acknowledging that the amount of the discrepancy in income reporting was suspiciously large on its own, Hershfield J. accepted that there had been an innocent mistake. The taxpayer's and Prevost's conduct did not at any time suggest any intention to conceal income. Hershfield J. also noted that the Minister was required to prove that the taxpayers were indifferent as to whether income was accurately reported - "a mere probability is not sufficient" (para. 33).

In light of the finding that neither the taxpayer nor Prevost were negligent, it was unnecessary to decide whether it mattered that the allegedly negligent return was prepared by Prevost rather than the Taxpayer. Hershfield J. reasoned that, if such a determination did matter, "the attribution question must be applied no differently in a case [involving spouses] than it does when the taxpayer and the tax preparer are not so closely tied" (para. 43).

The taxpayer claimed personal expenses as business expenses but in fact never carried on a business. Bédard found that the taxpayer was grossly negligent in claiming such losses, notwithstanding that he had poor English skills and relied on a firm of tax experts to construct his tax strategy (also written in English). The magnitude of the failures to accurately report income were such that no degree of ignorance of English or Canada's tax system could have excused them. Besides being totally unsubstantiated, the claimed business losses represented more than 80% of the taxpayer's income for each of the seven years in question. The taxpayer could not reasonably have concluded that he was entitled to the deductions claimed, and his failure to consult people other than the ones preparing his tax plan amounted to wilful blindness.

The taxpayer's use of her corporation's line of credit to pay down her personal debt resulted in a clear shareholder benefit, and her failure to report this benefit on her return was grossly negligent and warranted penalties under s. 163(2). Margeson J. noted that the amount of the benefit ($41,765.58) was large compared to the taxpayer's reported income ($12,925).

The taxpayer was able to make out a due diligence defence for failure to report investment income, which only amounted to 1.06% of her income for 2007. She held the investments through TD Waterhouse, and it was reasonable to assume that she had received from TD Waterhouse all the resulting tax slips (T3 & T5).

A similar failure in the following (2008) taxation year (in which she had no notice of her failure to report amounts in 2007) could not support a finding of due diligence, because the unreported amounts were higher - although only 4.87% of her total income, the missed interest was 15% of her interest income, and the missed dividends were over 41% of her dividend income for 2008. Moreover, as TD Waterhouse had been late in sending the information slips in the previous year, a reasonable person would have taken further steps to ensure that the amounts were accurately reported (para. 27). Nevertheless, she incurred no penalties under s. 163(1) because her failure for 2007 (the first of the two years) had been reasonable.

The taxpayer was reassessed in respect of income from stock options exercised in 1997, 1999, and in 2001. He argued that he was not a Canadian resident in those years. V.A. Miller J. agreed that the taxpayer was not resident in Canada in 1997, when he was employed and customarily living in China, but dismissed the 1997 appeal on other grounds.

V.A. Miller J. found that the taxpayer was a Canadian resident in 1999 and 2001, and V.A. Miller J. found that his assertions to the contrary amounted to wilful default, for which he should be reassessed under s. 152(4)(a)(i) outside the normal period and pay penalties under s. 163(2). The taxpayer's severing of his ties to Canada was largely superficial - he ostensibly sold the Belleville estate to his children in exchange for a mortgage, but never actually requested payment from them. The core of his social and family life, as well as his finances, remained in Canada, and his personal investment in China, and subsequently Thailand, was only enough to maintain a particular lifestyle during his periodic sojourns there. Moreover, there was evidence to indicate that the taxpayer had spent more time in Canada than he claimed.

The taxpayer had over-reported expenses and under-reported revenue connected with his moving business. Although previously warned to keep adequate business records, he had failed to do so, and the records he did have, which he collected in a box, included receipts for personal expenses (including expenses for a jacuzzi package, tickets to an unspecified event, and a canopy on his house) and failed to include various client invoices. Webb J. stated (at para. 22):

It seems clear to me that the Appellant was indifferent with respect to whether he complied with the ITA and the ETA and that the mens rea of recklessness has been established in this case.

The taxpayers' appeals from gross negligence penalties were dismissed. Their income was roughly 2.5 times and 3 times what they reported, respectively, and their only explanation was an error arising from removing a column in an accounting spreadsheet. Jorré J. emphasized that "there is a world of difference" between living on the $86,000 reported by them on a combined basis and the $240,000 earned (para. 63).

Seeking to protect herself from being sued by her brother, the taxpayer transferred title to all her real properties for no consideration to corporations under her majority control. She reported rental and business income and expenses from these properties while her accountant did the same in the corporations' returns. The Minister's reassessment included the inclusion in her income of a taxable capital gain on a disposition of the properties to the corporations, and gross negligence penalties.

Hogan J. found that the taxpayer had retained beneficial ownership of the properties and that the corporations had acted as mere agents, so no capital gain was realized and the income and expenses on the properties were hers and not the corporations'. He also found that the taxpayer had not been negligent. She was unsophisticated in matters of tax and accounting, and her accountant (Mr. Chambers) had failed to advise her properly about the tax issues involved (having not even inquired how the corporations had acquired the new properties). Hogan J. stated (at para. 56):

The evidence shows that there was an absence of effective communication between the Appellant and Mr. Chambers. For example, he admitted that the Appellant was presented with copies of the corporations' 2003 and 2004 tax returns much later, after they had been electronically filed. Those returns are not comprehensible to anyone other than a person who has memorized the line codes opposite which the tax information appears. ... A taxpayer, or a tax lawyer for that matter, cannot determine what the codes mean unless they have access to a detailed coding manual which explains their meaning. ... On reviewing the returns at issue, the Appellant had no way of knowing that Mr. Chambers claimed the same losses as she had claimed on her personal tax return.

Hogan J. confirmed s. 163(2) penalties against the taxpayers in respect of business expenses, given that the taxpayers' only proof that the expenses were genuine was an invoice that the taxpayers themselves had fabricated.

The Minister had also sought penalties in respect of an alleged shareholder benefit, which Hogan J. denied in accordance with his having already found that the taxpayers' conduct had not transgressed the lesser threshold in s. 152(4)(a)(i).

The taxpayers were shareholders and directors of a corporation, which they caused to purchase insurance policies on their lives. The agent who arranged the policies then returned a substantial portion of the premiums directly to the taxpayers in cash. Favreau J. upheld the Minister's decision to reassess beyond the normal period and impose penalties under s. 163(2). The taxpayer's contention that the amounts were a gift was not credible, given the amount of the gifts and their regularity (the taxpayers had done the same thing before). The court also drew an adverse inference from the taxpayers' decision not to have the insurance agent testify.

Payments received by the taxpayer from a corporation of which he was a shareholder and over which he had operational control clearly were payments for services rendered rather than loan repayments (and, in fact, were called "salary" by the taxpayer in giving his evidence.) In these circumstances and given that the taxpayer was a capable and educated professional with work-related experience, the "high degree of blameworthiness involving reckless conduct" (para. 33) sufficient to establish the applicability of the gross negligence penalty had been made out by the Minister.

As the Minister had established a large gap between the business income of the taxpayer calculated by him and the business income reported by the taxpayer, the Minister had satisfied the burden of proof on him under s. 163(2) in the absence of a credible explanation from the taxpayer.

In finding that the portion of penalties assessed against the taxpayer that were based on related company expenses should be reversed, Woods, J. stated (at para. 42) that:

It is quite possible that these errors were a matter of sloppy bookkeeping. If so, it would constitute negligence but it would not elevate to the level of knowledge or gross negligence as required by s. 163(2).

However, the claiming of personal expenditures as "repairs and maintenance" and "travel" was admittedly falsely made, and gave rise to the penalty.

The taxpayer had a marijuana-growing operation at her house. The Minister reassessed her for over $300,000 of income from the operation, and imposed s. 163(2) penalties for false statements on her returns. The taxpayer alleged that she had nothing to do with the growing operation, that the amounts added to her income represented loans from family and friends, and that the Minister's methods of assessing her personal expenses were flawed. Campbell J. dismissed the taxpayer's appeal in the main, citing a lack of credible evidence.

While considering Lacroix, Campell J. remarked that that decision appeared to conflate the tests in 152(4)(a)(i) and 163(2), which would eliminate the mens rea element of s. 163(2). He stated at paras. 44-45:

Where a taxpayer is accused of reckless and reprehensible conduct bordering on criminal behaviour for which he may be slammed with the punishment of gross negligence penalties, the Minister under subsection 163(2) has a duty to justify its decision which will not be satisfied merely, as Lacroix suggests, by showing that the taxpayer has unreported income but could not provide a credible explanation.

In the present appeals, the magnitude of the omissions in relation to the income declared is significant and occurred over a number of years.

Penalties were applicable to a doctor who, rather than providing to his accountant financial statements prepared by his medical clinic, prepared his own statements that significantly understated revenues and overstated expenses. Although he had a difficult and troubled personality, "there was no credible evidence of a material, physical or mental health illness, condition or treatment that interfered with [his] ability to comprehend or reason ..." (para. 26).

After finding that the debt forgiveness rules applied to the taxpayer contrary to the taxpayer's reporting of a transaction in which a claim against him was settled, Jorré, J. noted that the taxpayer was convinced in his own mind that he could not owe anything to the party in question other than what he paid on the settlement of the claim (so that there was no forgiveness in the taxpayer's mind) and that "failing to apply the debt forgiveness provisions is rather different in nature from failing to include, say, gross rents in the computation of rental income") (footnote 64). Accordingly, the taxpayer was not grossly negligent.

Before finding that a penalty imposed on the taxpayer in respect of his deliberate overvaluation by $402,225 of losses from securities transactions in the taxpayer's 2002 taxation year was entirely warranted, Tardif, J. noted (at para. 52) that the taxpayer deliberately and knowingly decided to report losses that were greatly overstated owing to circumstances he considered favourable in that the vast majority of the investors in the stock market, if not all, had sustained considerable losses.

The penalty was applicable, given that, at the time the corporate return of the recipient of a deemed dividend was signed, it was known that in fact the two corporations were not connected.

In deleting a penalty for gross negligence assessed on the taxpayer in connection with a net worth assessment, Webb, J. stated (at para. 53) that:

"While [the taxpayer] was careless or neglectful, I am not satisfied that the Respondent has established that he had the requisite mens rea to justify the imposition of the penalty under subsection 163(2) of the Act. He believed that he could withdraw funds from his company as payment on the amount that the company owed to him, although he was obviously careless about keeping track of whether the funds he was withdrawing exceeded the amount that the company owed to him."

The two principals of a limited partnership tax shelter were assessed gross negligence penalties. In vacating the assessments, Campbell, J. stated (at para. 113) that "although their suspicions should have been raised based on their business background, the conduct does not meet the requisite threshold of reprehensible recklessness".

After noting that unreported income of the taxpayer was 4% (for one year) and 14% (for another) of his total revenues indicating that the subsection required evidence of mens rea, Webb, J. went on to find that the Minister had failed to establish gross negligence of the taxpayer in failing to report the amounts.

The failure of the taxpayer, who was an accounting secretary, to report taxable capital gains of approximately $168,000 realized by her in both her 2000 and 2001 taxation years from the disposition of shares of BCE Emergis Inc. represented gross negligence.

Gross negligence penalties were confirmed given that when the taxpayer "signed his income tax returns for the taxation years in question, he knew very well that there was a very significant difference in the net rental income when compared with the 1999 and 2000 taxation years, yet he did not try to ascertain why there was such a difference." (para. 14)

The imposition of penalties on the taxpayer was justified given that he claimed charitable credits knowing that he had received false receipts.

Proof in a previous criminal proceeding that the taxpayer had evaded income tax on an amount that he failed to include in his income satisfied the onus of the Crown in a subsequent civil proceeding that the s. 163(2) gross negligence penalty applied.

The taxpayer, who in his 2000 year had $2 million of employment income and interest income of $276,420 (representing a high interest rate on a large deposit that he had specially negotiated with the bank) showed indifference with respect to compliance with the Act and, therefore, gross negligence, in signing a return which showed only $985 of interest income.

The taxpayer's failure to report capital gains from transactions in an on-line account for which she received no T5008s was not demonstrated by the Minister to be gross negligence. Although she had "a lackadaisical approach to her obligations under the Act ... Ms Harris lacked the fiscal sophistication and organization finesse to hatch and employ a deliberate strategy to avoid reporting taxable capital gains" (p. 1182).

The taxpayer was subject to the penalty for failure to report over $1 million of employee stock option benefits realized by him over a four-year period notwithstanding that no T4 slips were issued to him. He made no effort to inform himself of the tax treatment of the benefits, the omission of the benefits was not an error an average taxpayer would make, his lack of disclosure was not merely a failure to use reasonable care but reflected indifference as to whether the law was complied with, the amounts were in excess of his annual employment income, and the applicable standard of care was greater than that for a taxpayer of marginal intelligence.

The taxpayer paid an individual $8,000 in cash for making a claim on his behalf for a tax refund of $12,364 in respect of deductions for fictitious dependants.

In finding that the taxpayer was not subject to a penalty for gross negligence, Lamarre Proulx T.C.J. noted the lack of sophistication of the taxpayer and characterized (p. 2262) his action as resulting more from an "ambush" than "a deliberate decision on his part to contravene the Act".

Carelessness of the taxpayer in verifying the value of prints that he donated at an appraised value that was well in excess of his purchase price did not give rise to the penalty for gross negligence.

The balance sheet for a Bahamian partnership in which the taxpayer invested recorded bonds at their maturity value rather than the much lower purchase price, supposedly in accordance with Bahamian generally accepted accounting principles. When the partnership disposed of the bonds at a selling price higher than its purchase price, the taxpayer recorded losses based on the selling price being lower than the maturity value.

Miller T.C.J. found that the taxpayer knowingly acquiesced in the making of an omission, i.e., filing the financial statements in his return knowing that they did not state that the cost of the bonds was recorded at maturity value rather than purchase price. However, the taxpayer's penalty was the minimal amount of $100 per annum given that the understatement of the taxpayer's income flowed from the accounting principle which had been utilized when preparing the financial statements, rather than from the taxpayer's omission.

After denying all expenses claimed by the taxpayer in respect of an alleged business of selling herbal products in chains (on the basis that they did not qualify as a business) and partially disallowing expenses claimed in respect of a fishing business, Margeson T.C.J. went on to find (at paras. 290-291) that no gross negligence penalty was payable:

"This is a penal section. It has extreme consequences for the taxpayer and should only be resorted to on evidence which makes it clear that the taxpayer has knowingly, or under circumstances amounting to gross negligence, made an omission or false statement in his returns of income which resulted in him reporting less tax than he would otherwise have had to pay. The actions of the Appellant in this case do amount to carelessness, lack of proper knowledge with respect to recordkeeping matters and to some extent, his own mistake and belief that he would not have owed any income tax in some of the years in question. However, these factors do not amount to gross negligence as alleged by the Minister. The burden in that respect is on the Minister ... ."

No penalty was payable under s. 163(2) by the taxpayer for failure to report significant income over a six-year period as he suffered from paranoid schizophrenia and lacked the requisite mental state to justify the penalty.

The taxpayer was liable for penalties for failure to report interest income from numerous residential mortgage loans made by him, notwithstanding that he had been acquitted of charges under s. 239(1)(d), on the basis of an absence of mens rea. The taxpayer (p. 732) "was no neophyte and he had been a professional mortgage lender for years".

Penalties imposed on the taxpayer were directed to be deleted given that there was no evidence that the overstated V-day values reported by him were determined in bad faith or recklessly. In addition, there was no requirement that independent appraisers be retained.

In finding that the taxpayers had not been grossly negligent in representing that customer lists had belonged to them rather than their company, McArthur TCJ. took into account (at p. 490) "their casual and broad stroke approach to their business affairs [and] their lack of attention to detail".

In finding that even if (contrary to her actual finding) that amounts received for non-compete covenants by the taxpayer were taxable, penalties would not have been applicable, Lamarre TCJ. stated (at p. 72):

"... considering all the different positions taken by the Minister to try to justify his own assessments, I do not see how we can attribute to the appellants a degree of negligence ... when especially they have obtained professional advice that the NCA payments were not taxable."

Following testimony of the taxpayer that he did not declare interest income on the deferred purchase price payable to him following the sale of a California property because he did not receive any information slip showing the exact amount of interest and because he thought the interest was part of the selling price for the property, Lamarre TCJ. concluded that the taxpayer's lack of care in this regard was not gross negligence.

In finding that the taxpayer, who purchased a painting and then immediately donated it to a gallery for an appraised value that was five times his purchase price, was subject to the penalty, Dussault, T.J.C. stated (at pp. 287-288):

"I do not think a reasonably intelligent and prudent person could seriously claim to have made an honest gain through a charitable donation ... . If the appellant did not know the exact amount of the valuation and the receipt until after he had agreed to his colleague's proposal, as he claimed, and despite the fact that his cheque was dated after both the valuation and the receipt, the value set in those documents at five times the amount spent should have alerted him. I do not accept the argument that in his former line of work, securities, it was ordinary that securities, for no apparent reason, quintuple in value in three days ..."

As a result of the negligence of the chartered accountant who was preparing the taxpayer's return, a dividend of $181,211 received by the taxpayer was not reported. Given that the taxpayer relied completely on his accountant to report his tax affairs and had no reason not to place such reliance on him, the negligence of the taxpayer in not reviewing his return did not amount to gross negligence.

The taxpayer purchased a farm property for consideration comprising $166,824 plus his commitment to build a residence for the vendor with an agreed value of $76,649. The failure of the taxpayer to include this latter sum in his income (notwithstanding the deduction of associated costs) did not give rise to a penalty given that he had given all relevant returns to his accountant one month before the April 30 filing deadline, the error was attributable to an assistant not understanding the information given to him and not asking the appropriate questions, and the taxpayer's failure to detect this error was attributable to his not being an astute businessman.

The failure of the taxpayer, a medical practitioner, to report a gain on the sale of a condominium unit in his return was not subject to penalty given that he had believed that the transaction was reported in his return (which had been prepared by his accountant). His brief review of the return had focused on the taxes payable amount, which was consistent with his view that the condominium unit was capital property and that no taxes were payable by him with respect to the transaction.

The taxpayer purchased works of art, through an individual said to be associated with a gallery, for 25% of the value ascribed to the works of art and, in his tax return, wilfully falsified the year in which the works had been purchased as being the preceding year. In finding the taxpayer liable for the penalty, Dussault J. stated (pp. 509-510):

"... The appellant at least closed his eyes to the true nature of the transactions and circumstances which, given the situation, should doubly have alerted him. The fact that he conducted no more thorough check during the years in issue also goes beyond simple neglect."

The taxpayer disputed, inter alia, the amount of revenue from various business activities. Woods J ruled against the taxpayer on the disputed revenues, largely because the his testimony was frequently vague, evasive, or implausible. She then stated (at para. 133):

As for the gross negligence penalties, the problem that I have with the imposition of the penalties is that the evidence as a whole does not provide a very complete picture and the Crown has the burden. The income tax appeal turned to a great extent on the appellant not providing sufficient reliable evidence. With respect to GST penalties, the Crown has not presented sufficient evidence to warrant the penalties.

Webb J. quashed the Minister's motion to dismiss the taxpayer's appeal from assessments under the Income Tax Act and Excise Tax Act, even though the taxpayer had failed to prosecute the appeals with due dispatch (he did not even appear at the hearing for this motion). Because the Minister was seeking to impose penalties under s. 163(2) of the ITA and s. 285 of the ETA, the burden remained with the Minister to prove that penalties were warranted. The taxpayer's inaction was not enough to support an inference that penalties were no longer in issue.

In an appeal from a penalty imposed by the Minister pursuant to s. 163(2), the Crown was ordered to proceed with its case first.