The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

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Pursuant to section 285 of the Excise Tax Act (Canada), the Canada Revenue Agency (CRA) may impose a gross negligence penalty when assessing intentional failures. That is, the taxpayer is perceived to have lied (a lie or an omission) by the CRA auditor and must be punished.  Section 285 provides in part:

Every person who knowingly, or under circumstances amounting to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return, application, form, certification, statement, invoice or answer ... made in respect of a reporting period or transaction is liable to a penalty of ... " [up to 25%].

What the exact penalty will be determined to be depends on the CRA auditor and a calculation.  The formula is set out in section 285.  What you might expect is the assessment plus interest plus another 25% of the assessed amount.

Justice D'Arcy of the Tax Court of Canada recently considered whether the gross negligence penalty applied in Thill v. The Queen (an income tax appeal).  The Income Tax Act (Canada) provision is similar to section 285 of the Excise Tax Act.  Justice D'Arcy confirmed the assessment of a gross negligence penalty.  He wrote:

[32] As Justice Strayer stated in Venne v. the Queen, 84 DTC 6247 (FCTD), [1984] C.T.C. 223:

. . . “Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. . .

[33] On the basis of the evidence before me, it is clear that the Appellant either intentionally failed to report the income at issue, or was completely indifferent as to whether the income should be reported. As a result, she knowingly, or under circumstances amounting to gross negligence, either made, or acquiesced in the making of, a false statement or omission on her tax returns for the 2005 and 2006 taxation years.

The decision is linked to an agreed statement of facts in this case.  I was not there in the courtroom.  Justice D'Arcy stated in his decision that he did not find the appellant to be credible --- this must have influenced his decision.  That being said, I cannot say that I agree that the appellant deserved the application of the gross negligence penalty (my view is based solely on my review of Justice D'Arcy's decision).  However, it is important to note that whether the gross negligence penalty should be applied is determined on a case-by-case basis.  The facts and the issues of the particular case are important in making the determination.

There is other case law that look at a higher level of wrongdoing.  It is beyond the scope of this post to summarize those cases in detail.

The purpose of this post in to warn that this 25% penalty exists and can hurt when applied.  I do not like seeing gross negligence penalties on assessments.  You will likely have to file a notice of objection and later a notice of appeal and appear before the Tax Court of Canada if an auditor assesses a gross negligence penalty.  In other words, the CRA are unlikely to reverse their gross negligence penalty without being told by a judge to reverse the penalty.  You will have to pay the assessment, including the gross negligence penalty, before you have your day in court.  The CRA, Collections, will be knocking on your door soon after the assessment.  In most cases where a gross negligence penalty has been assessed, the CRA, Collections officer has less sympathy and requires payment more quickly and is more likely to take collection actions (e.g. garnishment) because the gross negligence penalty says the assessed person was intentionally bad.  When you get to court, the judge may not agree with your version of the events and may confirm the assessment of the gross negligence penalty.

In the end, your intentional failures or omissions may cost you a lot of money (more than the GST/HST that was the underlying amount owed). When you take a gamble in the GST/HST arena, think about the potential cost of the risk.  If you have been assessed a gross negligence penalty, know that the fight with the CRA will continue to cost you money.