At issue
There is an inherent danger in a self-reporting tax system that an individual may fail to report income. Checks and balances in the system expose such gaps and/or influence taxpayers to diligently report their income, for example the requirement for employers to report employee income directly to the Canada Revenue Agency.
In situations where income has been unreported, it may be possible for a taxpayer to rectify the situation and request that penalties be waived. While courts may get involved, such a waiver remains in the discretion of the Minister of Revenue as represented by CRA.
Dunlop v. The Queen, 2009 TCC 177
Where there has been unreported income in any of the three preceding years, a penalty of 10% applies to any current year’s unreported amount.
Dunlop was a university student employed on a part-time basis with a supermarket franchise. For 2005 tax reporting, he did not receive a T4 slip and did not report the income. CRA received its copy of the T4 and reassessed Dunlop, and the tax was eventually paid.
For 2006, he again had not received his T4 by April 2007, and attended at the employer’s location to obtain it. The franchisor lived in another city and did not deliver the T4 prior to April 30, so Dunlop estimated $5,250 as the income in filing his return. He was reassessed in October 2007, about the same time as the T4 arrived in the mail. The actual income was $5,526, and the penalty on the reassessment was $646.
The court allowed the taxpayer’s appeal based on his diligence in reporting the source and nature of his income, though obviously not the exact figure. The penalty was reversed.
CRA 2010-0356361I7 (E) – Due Diligence Defence to a S. 163 Penalty
The taxpayer was reassessed for failure to report some interest income for the 2004 taxation year. With respect to the 2005 taxation year, the taxpayer discovered an error late in 2006 and requested an adjustment to dividend income due to attribution from property transferred to his minor child. On reassessment, a 10% penalty was added.
The taxpayer sent an email to CRA requesting that the penalty be vacated. The request was granted, with the official citing that it would not be reasonable to assess such a penalty when it was the taxpayer who initiated the steps to rectify the omission.
Spence v. Canada Revenue Agency, 2012 FCA 58
Spence had a small amount of unreported income in 2004. A tax preparation firm prepared his 2006 return but failed to include a T4 slip, resulting in reporting income of $21,696 when it should have been $57,915. Once source deductions had been accounted for, the reassessment reduced his tax refund by $123.98 to $2,419.10, but also assessed penalties and interest related to the unreported income in the amount of $7,623.85.
With the support of the tax preparation firm, the taxpayer made a request to the CRA fairness committee, but it was denied. The taxpayer then applied for judicial review by the Federal Court, and an order was made in 2010 setting aside the committee’s decision and referring the matter to a different ministerial representative for redetermination.
On reconsideration, CRA again refused to exercise discretion to cancel the penalty. An appeal to the Federal Court was dismissed, and this was upheld on appeal to the Federal Court of Appeal. A factor in determining the reasonableness of the decision was the substantial discrepancy in the reported amount that Mr. Spence “ought to have noticed” before being detected by CRA.
Practice points
- Be sure that all T4 slips are in hand well prior to the tax filing deadline, so as not to be in the position of having to file an incomplete return.
- If unsatisfied, appeal may be made through CRA channels, and if unsuccessful then on to the court system.
- A court may only order the Minister of Revenue to reconsider exercising discretion to waive the penalty, so a clear record of one’s due diligence is important.