How to Combat Gross Negligence Penalties

Scenario: CRA has gathered information, through a tax audit or any other proper process, and issues you an assessment. The tax and interest (compounded daily) is bad enough, but then you really get the punch in the gut when you see they have assessed a gross negligence penalty. Now what?

Gross negligence is defined in the Income Tax Act in section 163 (2) as:

“Every person who, 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, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of $100 and 50% of the total of the additional tax debt incurred because of the gross negligence.”

You can read the full section at the following link: http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-163.html.

This 50% penalty hit (which also carries daily compounded interest) can be objected to and in many cases should. It is our experience that, when properly challenged, it is not easy for CRA to prove gross negligence. CRA carries the onus of proving your gross negligence – you do not have to prove you were not.

As just one example, in the Tax Court of Canada ruling Hine v. The Queen (2012 TCC 295), the court ruled that CRA had failed to prove there was no deliberate attempt to hide income, that the accused had kept detailed records and had cooperated with CRA. This is a common occurrence.

The conditions under which your objection (and subsequent appeal if necessary) to the gross negligence penalty can succeed are wider under these objection rules than if you delay and miss the deadlines for objecting.  Where the deadline to object (in most cases, 90 days after CRA sent the Notice of Assessment) has expired you can apply to CRA to extend this deadline (no guarantee of success) for up to one year. If the objection route is shut off then you can seek relief under a fairness application, but as noted, there are restrictions with these applications and they need to be approached carefully.

In summary, as soon as you see a Notice of Assessment you disagree with, you need to retain an expert immediately so they can advise you on how to proceed before your timelines expire. If the objection reflects on judgment by the tax preparer you may be better off seeking advice from an independent company that specializes in tax solutions.

For more about dealing with an assessment, especially one that has determined you may be guilty of gross negligence, please contact Tax Solutions Canada right away: 1-888-868-1400.