Repeat Omission Penalties for Unreported Income under the Income Tax Act
In a recent Tax Court of Canada case, an Ontario taxpayer appealed an assessment that found he had under-reported his income by $24,000 and was hit with repeat omission penalties as a result.
The Minister of National Revenue (the “Minister”) reviewed the T3 and T5 slips issued to the taxpayer for his 2016 tax year and concluded that he had under-reported his investment income by approximately $24,000. The amounts that were under-reported fell under two categories: income from the Sun Life Assurance Company of Canada (“Sun Life”) and income from other investments.
The Minister reassessed the taxpayer to include that amount in his income. In addition, the Minister assessed repeat omission penalties under subsection 163(1) of the Income Tax Act (the “Act”). The taxpayer had previously been reassessed for under-reporting his income for 2014 and 2015.
The taxpayer disputed both the inclusion of the income and the imposition of the penalties.
Tax Court of Canada Decision
The court began by reviewing the income from Sun Life. The taxpayer had taken out an insurance policy with Sun Life in 1965. The policy involved both an insurance component and an investment component, which allowed him to share profits with the insurance company.
In 2016, the taxpayer cashed in the policy and received $27,090 from Sun Life. Sun Life issued a T5 indicating that the taxpayer had $22,337 in other income from Canadian sources in 2016.
The taxpayer believed that the funds he received from Sun Life were not taxable. However, the court explained that he bore the burden of proving that they were not taxable and found that he was unable to meet that burden. He did not have a copy of the policy, nor could he explain why the funds he received were not taxable nor why Sun Life would think that they were.
As a result, the court found that the $22,337 shown on the T5 from Sun Life should be included in the taxpayer’s income.
The court then looked at the taxpayer’s income from other investments. The Minister argued that the taxpayer had failed to report $545 in interest income, $6 in foreign non-business income, $9 in taxable capital gains, $1,144 in dividend income and $138 in other income in 2016. T3 and T5 slips evidencing this income were presented to the court. Although the taxpayer argued that the vast majority of those amounts should not have been included in his income, the court rejected his arguments and found that the income in question should be included in the taxpayer’s income.
Having found that the investment income should have been included in the taxpayer’s income, the court turned to the Minister’s imposition of repeat omission penalties.
The court explained that s. 163(1) of the Act provides for a strict liability penalty where a taxpayer repeatedly fails to report income. The subsection reads:
“Repeated failure to report income
163 (1) Every person is liable to a penalty who
(a) fails to report an amount, equal to or greater than $500, required to be included in computing the person’s income in a return filed under section 150 for a taxation year (in this subsection and subsection (1.1) referred to as the unreported amount);
(b) had failed to report an amount, equal to or greater than $500, required to be included in computing the person’s income in any return filed under section 150 for any of the three preceding taxation years; and
(c) is not liable to a penalty under subsection (2) in respect of the unreported amount.”
Additionally, the court stated that repeat omission penalties can be applied if the following conditions are met:
1. the Minister proves that there was unreported income of at least $500 in the year for which the penalties are to be applied;
2. the taxpayer has not been assessed a gross negligence penalty under subsection 163(2) in respect of that unreported income;
3. the Minister proves that there was unreported income of at least $500 in one of the taxpayer’s three preceding taxation years;
5. the taxpayer does not prove that he or she exercised due diligence in filing his or her tax return for each preceding year for which the Minister proves there was unreported income.
In this case, the court found that all the criteria had been met and the taxpayer was liable for repeat omission penalties. As a result, the court dismissed the taxpayer’s appeal.
Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.
Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.
With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.
If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.