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Gross Negligence Penalty

The most severe penalties assessed by the CRA are the gross negligence penalty under subsection 163(2) of the Act. This penalty may be assessed when 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 tax return.”

The penalty of 50% of the underreported tax (or 25% in the case of HST) is designed to ensure that taxpayers complete their returns correctly and resist the temptation to play games.

One of the big problems is that these penalties are often applied by auditors when they are not justified.  And whether justified or not, a taxpayer is best served by always challenge the gross negligence penalty.  Like a speeding ticket, if there is a defect in the “penalty recommendation report,” or of the report is absent, the penalty can be dismissed. Always ask to see the penalty recommendation report when you challenge a gross negligence penalty.

According to Canadian courts, gross negligence penalties should be applied cautiously and only where truly warranted.  They have been seen as akin to a criminal type of penalty because of their severity.  That is why the burden of proof is reversed in court with respect to the penalties: The CRA must prove that the penalty was justified.  In all other matters the burden of proof rests upon the taxpayer.

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