How to Avoid and Refute CRA Gross Negligence Penalties
By: Dean Blachford, Tax Litigation Lawyer and Alexander Krush, Articling Student
What are Gross Negligence Penalties?
When the CRA conducts an audit and believes that the taxpayer intentionally under-reported their
taxes, they will assess the taxpayer a gross negligence penalty. The financial impact of these
penalties can be staggering. For income tax, the gross negligence penalty equals 50% of the income
tax the CRA reassesses. For GST/HST, the gross negligence penalty equals 25%. CRA charges
interest on these penalties, and on the additional tax, dating back to the year that they believe the
tax should have been reported and paid.
Many tax professionals believe that CRA auditors have become trigger-happy in assessing gross
negligence penalties. Given this potential increased pervasiveness and the significant financial
implications, taxpayers should be aware of how to avoid gross negligence penalties and, if
necessary, successfully refute them. In this article, we describe what constitutes “gross negligence”
and how to defend against these penalties.
What is the definition of “Gross Negligence”?
Before assessing a gross negligence penalty, subsection 163(2) of the Income Tax Act and section
285 of the Excise Tax Act require that the CRA establish 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” on their tax return. 1
The courts have said that gross negligence involves a greater neglect than simply failing to use
reasonable care. It must come with a high level of negligence that is “tantamount to intentional
acting, an indifference as to whether the law is complied with or not.” 2
The CRA will also imply that the taxpayer knowingly made a false statement if they believe that
the taxpayer was willfully blind. Wilful blindness is where a taxpayer knows they should ask
further questions, but does not because they do not want to know the answers. 3
There is no fixed set of criteria for determining whether there is gross negligence or wilful
blindness. 4 However, jurisprudence and CRA Penalty Reports illuminate the factors considered,
which include: 5
Corriveau v. R., [1999] 2 C.T.C. 2580 at para 26; Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) at 163(2); Excise
Tax Act R.S.C., 1985, c. E-15 at 285.
2
Venne v. the Queen, 84 DTC 6247 (FCTD), [1984] C.T.C. 223 at para 60.
3
R. v. Briscoe, 2010 SCC 13 at paras 23-24; Sansregret v. The Queen, [1985] 1 S.C.R. 570 at 584; Wardlaw v The
Queen 2019, TCC 199 at paras 45-50.
4
Stone v. The Queen, 2019 TCC 253 at para 23.
5
Torres v. The Queen, 2013 TCC 380 at para 62.
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the magnitude of the additional tax reassessed compared to the tax that the taxpayer
initially reported
the taxpayer’s involvement in preparing the tax returns
the opportunity the taxpayer had to detect the error
the taxpayer’s history of income, claims and reporting
the taxpayer's education, familiarity with tax processes, or apparent intelligence
genuine efforts to comply
This list is not exhaustive and there is no one dominant factor, as the CRA assigns each element
weight in the taxpayer’s context. 6
How to refute a Gross Negligence Penalty
The first step in fighting a gross negligence penalty is often disputing the tax assessed. Since the
quantum of the penalty is calculated based on the principal amount of tax assessed, every dollar
that we reduce the tax assessed automatically reduces the penalty. Also, lowering the amount of
tax assessed makes it easier to argue that the magnitude of any error is insignificant, one of the
factors referenced above.
Once we have reduced the tax assessment as much as possible, we can refute the gross negligence
by establishing that the CRA has not satisfied its burden of proof and by raising established
defences.
Onus
In a typical tax dispute, the burden of proof is on the taxpayer to demonstrate that their tax return
is correct. For gross negligence penalties however, the burden is on the CRA to prove the taxpayer
was grossly negligent. The courts have said this onus is a “heavy burden” that is “closer to the
criminal onus under the Criminal Code than it is to a balance of probabilities.” 7
Even if the CRA has evidence to support their assertion of gross negligence, if it is not definitive,
the courts have said the benefit of the doubt should go to the taxpayer: “if the evidence creates any
doubt that a gross negligence penalty should be applied in the circumstances of the appeal, then
the only fair conclusion is that the taxpayer must receive the benefit of that doubt in those
circumstances.” 8
Defences against Gross Negligence Penalties
Honest ignorance of the law is rarely a defence in typical tax disputes, but it may justify
overturning a gross negligence penalty assessment. 9 Also, if the taxpayer has limited business
Lauzon v R, [2016] F.C.J. No. 1308 at para 11.
Lust v. R 2009 TCC 577 at para 23.
8
Fourney v. the Queen (2011 TCC 520) at para 77.
9
Supra note 2 at para 40.
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acumen, language abilities, education, or managerial experience, this can counter an assertion by
the CRA that the taxpayer acted knowingly. 10 On the other hand, if the taxpayer is well educated,
familiar with tax processes or has managerial experience, the CRA may use this to justify levying
the penalty. 11
A taxpayer may also escape a gross negligence penalty if they relied on an accountant or another
third-party to prepare their taxes. 12 Where a taxpayer relies on the advice of tax professionals in
good faith, the court is reluctant to apply gross negligence penalties. 13
Such reliance, however, does not eliminate the responsibility of a taxpayer for the accuracy of their
own tax filing. A taxpayer who, for example, fails to correct flagrant errors in returns prepared by
an accountant, when a chance to do so existed, can be grossly negligent. 14
Concluding remarks
In order to protect you or your business from gross negligence penalties, maintain scrupulous book
and records, hire a Chartered Professional Accountant, and remain vigilant towards errors or
omissions in your tax statements.
If you have already been assessed gross negligence penalties, contact us immediately to discuss
your options. Here at HazloLaw, we have extensive experience successfully resolving tax disputes
and combatting gross negligence penalties and would be pleased to assist you.
De Couto v. Canada, 2013 TCC 198, paras. 19-20.
Melman v. Canada, 2017 FCA 83.
12
Findlay v. Canada, [2000] 3 C.T.C. 152 (FCA).
13
Mady v. The Queen (2017 DTC 1065) at para 147.
14
DeCosta v. Canada, 2005 TCC 545.
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