Tax Court ruling may limit disproportionate penalties

A recent Tax Court of Canada decision will hopefully persuade the Minister of National Revenue to reconsider the routine imposition of harsh penalties for failing to report income, Toronto tax litigation lawyer Peter Aprile tells The Bottom Line. 

The Income Tax Act, says the article, allows the Canada Revenue Agency (CRA) to “impose a penalty on taxpayers who fail to report their full income in any two out of four years.”

In Galachiuk v. Canada, the taxpayer failed to report income in his 2008 and 2009 taxation years and the CRA imposed a harsh repeat late filing penalty.

The Tax Court “held that, in preparing his 2008 tax return, the taxpayer took reasonable precautions to avoid the failure and, therefore, established that he was duly diligent with respect to the 2008 taxation years,” said Aprile, principal of Counter Tax Lawyers. However, in failing to accurately report his 2009 income, “[t]he court commented that the taxpayer’s mistake of fact was not reasonable and, therefore, the taxpayer was not duly diligent in preparing his 2009 tax return,” Aprile says in the article.

In a potentially precedent-setting move, the Tax Court clarified that the due diligence defence is available to taxpayers facing repeated failures to report income penalties and establishing “due diligence in one year was sufficient to negate the imposition of a penalty” says the article.

Following the decision, Aprile commented that he hopes that his case will cause the CRA to reconsider the “dogged prosecution of a penalty that, in many cases, is disproportionate to the failure and exceeds other types of penalties that are designed to punish the most egregious conduct under the [tax] act.”

In addition, Aprile recommends accountants take action, including reviewing the T-slips listed on the CRA’s “my account” online database prior to filing to avoid failures to report, the filing of voluntary disclosures in appropriate cases to avoid the penalty before the second failure, or the filing of a notice of objection on the basis that the taxpayer was duly diligent filing either one of the subject tax returns.

Although the deadline to appeal in Galachiuk expired in July, the deadline to late-file a notice of appeal expires this fall.

“It would be ironic if the government late-files a notice of appeal in a case in which the government argued that missed deadlines warrant a harsh penalty,” Aprile tells The Bottom Line.