GETTING OUT OF THE PENALTY BOX

It seemed to me today as I read another Tax Court decision on penalties that there have been a lot of them this year. A quick search of one of the case law data bases for “penalty” and “due diligence” in 2012 confirmed my impression: it produced 15 hits. The penalties imposed by the CRA in some of the recent cases seem excessive to me, and I wonder whether they are indicative of a trend. Here are three examples.

In Douglas, 2012 TCC 73, the penalty was imposed for failure to file form T1133 (s.162 (7)), which reports on the ownership of specified foreign property. Judge Woods vacated the penalty saying, in effect, that a penalty was unfair in the circumstances of the case. (The taxpayer filed electronically and the program did not contemplate the filing of the form.) Of particular interest here is the judge’s finding that a due diligence defense was available to the taxpayer even though none was provided for in the Act in respect of this penalty.

In Knight, 2012 TCC 118, the penalties were imposed for repeated failures to report income (s. 163(1)). This can be particularly onerous in some circumstances, as the judge Jorré pointed out. Here, the penalties amounted to some 211% of the tax otherwise payable. The court upheld the penalties in the circumstances (the taxpayer was unable to make out a due diligence defense), but expressly encouraged the taxpayer to apply for relief from the severity of them under the fairness provisions.

In the third and most recent case, Friedlander, 2012 TCC 163, the taxpayer ran afoul of the penalties for over contributing to an RRSP (s.204.1). The taxpayer was misled by an investment counselor at his bank into setting up an RRSP instead of an unregistered account. Technically, the taxpayer was liable for tax on the over contributions, and associated penalties. Judge Paris vacated the penalties on the basis that the taxpayer had acted reasonably in the circumstances, but held that he had no jurisdiction to waive the tax. He made a point of encouraging the taxpayer to reapply for relief from the tax under the fairness provisions. (The Minister had denied an initial request.)

In each of these cases the court said that the imposition of a penalty was unfair in the circumstances. In two of them, it encouraged the taxpayer to apply for fairness relief. Reading the cases together, I’m left with a sense that at some stage in the Appeals process someone should have recognized what each of the judges did, and settled the cases on an administrative basis. I hope these cases do not indicate that CRA (and Justice) are mindlessly applying the penalty provisions without due regard for the circumstances of each case. The integrity of our self-assessing system (not to mention the time of the Tax Court) is better served if taxpayers believe that a technical breach of the Act will be waived by the CRA in appropriate circumstances and not require an appeal to the court.