Fighting the Imposition of Gross Negligence Penalties
The Canada Revenue Agency can impose gross negligence penalties in addition to the assessment of tax. Gross negligence penalties are imposed under subsection 163(2) of the Income Tax Act.
Under the Income Tax Act gross negligence penalties are determined with reference to the amount of tax owing: gross negligence penalties are 50% of the amount of the tax owing.
Accordingly, the amount of the penalty can be very significant.
It seems that CRA auditors often assess gross negligence penalties in inappropriate circumstances. It is often worth fighting the imposition of these penalties (even where you accept that the assessment of tax is correct).
Unlike most issues in tax disputes the CRA bears the burden of proving that gross negligence penalties should be imposed. Gross negligence penalties should only be imposed where 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.
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.
So what is gross negligence? It is a difficult concept to articulate but Canadian courts have attempted to describe what is meant by gross negligence:
- "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 the circumstances in which gross negligence penalties should and should not be applied and what is really meant by gross negligence.
We hope this is helpful in deciding whether or not you should contest the imposition of gross negligence penalties in your circumstances.