Arguing Away Those ‘Automatic’ CRA Penalties

The Income Tax Act has grown throughout the years to be the size of a large phone book. A healthy chunk of it is dedicated to penalizing taxpayers for such things as:

• failure to file information returns;
• missed T4’s;
• failure to withhold tax;
• failure to remit taxes withheld;
• filing incomplete returns; and
• late-filed elections.

These penalties can often add up to significant amounts which grow with compound interest until paid, with the current rate at 7%.

The Law

These penalties look automatic when reading the Act. That facade does not change when reading the CRA literature or speaking with their staff. Despite this, there is always a defence that can be argued.

The Supreme Court of Canada has held that these penalties that appear automatic will not apply if the taxpayer was “duly diligent.” For due diligence to be satisfied, one must show that they exercised all reasonable care in respect of the circumstances that led to the penalty. In practicality, what the defence does is let you tell your story on why the penalty is unfair given the unique circumstances leading to your failure under the Act.

When You are Assessed an “Automatic” Penalty

There are three things you should do when you receive an assessment of an “Automatic Penalty”

• Take note of the date of the assessment, in most situations you will have only 90 days from that date to file a formal Notice of Objection.
• Consider whether you faced unique circumstances that may support that despite the failure leading to the penalties, you were personally “duly diligent.”
• Contact a tax professional to assist you with the formalities and substance of your objection.

Success Story

I was successful using this defence for a client who found himself in the following situation:

• January 2012 -starts a new job at an organization which treats all employees as probationary for the first two months.
• March 2012 – passes through the probationary period and became a valuable full-time employee.
• March 2013 – when preparing to file his 2012 tax return, he logs into the employer’s HR system, using the employee number from his most recent paycheque, downloads his T4 and files his tax return accordingly.

My client was surprised when he received his 2012 Notice of Assessment in the mail, and it included a penalty for missing a T4. As it turns out, his employer assigns new employee numbers after the end of the probationary period and issues separate T4’s for the period before the transition and after.

In March 2013, when my client logged in with the employee number from his most recent pay cheque, the T4 he downloaded only had the figures on it calculated in respect of March 2012 onwards.

I was able to convince an Appeals Officer that my client was reasonably prudent in logging in at the end of the year to download his T4 and it would be unfair to expect him to know that his employer had issued two different T4’s for the same year. The penalty was removed from his file.

What We Can Do

As part of our representation of client’s dealings with the Canada Revenue Agency, we discuss with them the reasons behind any penalties they have been assessed to see if the facts for a due diligence defence are present. Unfortunately, thousands of Canadians pay penalties each year assuming they are automatic, when they may have a valid defence to get those same penalties vacated.

This article and its example offer a useful reference, but it shouldn’t be considered legal advice. For more information or advice on tax dispute matters, please contact Jeff S Glasner of Boughton tax group.