Statute-barred years and gross negligence penalties, a different burden of proof

Jan 18th, 2021

By Philippe Brunelle

In a recent case[1], the Federal Court of Appeal reminds the difference between the reassessment of statute-barred years and the assessment of gross negligence penalties:

“The right to reassess a statute-barred year and the right to assess a gross negligence penalty are both premised on a taxpayer having unreported income for a particular taxation year. Once it has been established that a taxpayer had unreported income, the circumstances related to the failure to report the income must be examined to determine if such failure was attributable to neglect, carelessness, wilful default or fraud (to reassess a statute-barred year) or gross negligence (to justify the assessment of the gross negligence penalty).”[2]

In other words, the demonstration of neglect, carelessness, wilful default of fraud is normally a lesser burden than gross negligence. Therefore, in some cases, the Tax authorities can be well-founded to reassess statute-barred years, but not necessarily gross negligence penalties.

This is exactly the case in Deyab v. Canada, in which a Taxpayer knew he was receiving money from his corporation but considered that the corporation was only repaying him for his earlier investments. Therefore, the Taxpayer failed to include these substantial sums to his income or to present a properly completed shareholder’s loan account reconciliation.

The CRA considered the Taxpayer’s conduct was sufficient to reassess statute-barred years and assess gross negligence penalties, assessments which were confirmed by the Tax Court.

However, the Taxpayer appealed the Tax Court’s judgment, alleging a failure of the Minister to establish a prima facie case that the Taxpayer had made a misrepresentation that was attributable to neglect or carelessness.

In appeal, the Federal Court of Appeal considered the Taxpayer’s failure to maintain proper records or consult an accountant to establish the actual shareholder benefit could constitute sufficient negligence for the assessment of statute-barred years but considered the Minister did not establish “a high degree of negligence tantamount to intentional acting” sufficient for the assessment of gross negligence penalties.

Therefore, the Federal Court of Appeal allowed the appeal in relation to the assessment of gross negligence penalties and referred the reassessments to the Minister.

[1] Deyab v. Canada, 2020 FCA 222

[2] Par. 66