Choptiany et. al. v The King, 2022 TCC 112: The Tax Court of Canada Issues Scathing Rebuke of CRA’s “Outrageously Misleading and Inappropriate” Litigation Tactics in Tax Dispute Involving Gross-Negligence Penalties

Introduction: The Canada Revenue Agency’s Overzealous Use of Gross-Negligence Penalties

Gross-negligence penalties serve to reprimand taxpayers whose conduct “involves a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not” (see: Venne v R., 84 DTC 6247).  As such, the gross-negligence penalty can result in steep fines—up to 50% of the income tax that was underreported as a result of gross negligence, or 25% of the GST/HST that was underreported as a result of gross negligence.

Yet the Canada Revenue Agency’s tax auditors have historically applied gross-negligence penalties without warrant—invoking the penalty almost as a matter of course when concluding a tax audit. We see yet another egregious example of this practice in Choptiany et. al. v The King, 2022 TCC 112. But what’s more, in Choptiany, the CRA not only applied gross-negligence penalties with seemingly insufficient justification, but also employed stalling tactics during the tax litigation that compelled the Tax Court of Canada to allow the taxpayers’ appeals outright—thereby cancelling their $3 million in combined gross-negligence penalties without their having to go to trial.

After analyzing the legislation and jurisprudence concerning gross-negligence penalties, this article examines the Tax Court’s decision in Choptiany. We conclude the article by offering pro tax tips from our expert tax lawyers in Toronto on disputing gross-negligence penalties.

The Gross-Negligence Penalty: Subsection 163(2) of Canada’s Income Tax Act & Section 285 of Canada’s Excise Tax Act

Subsection 163(2) of Canada’s Income Tax Act and section 285 of Canada’s Excise Tax Act contain the provisions relating to gross-negligence penalties. These provisions allow the Canada Revenue Agency to levy the tax penalty upon any taxpayer “who, 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 in [an income-tax return or a GST/HST return that was] filed.”

Subsection 163(2) of Canada’s Income Tax Act relates to incorrect income-tax returns, and it permits the Canada Revenue Agency to invoke a gross-negligence penalty when a taxpayer knowingly files an incorrect income-tax return or when a taxpayer files an incorrect income-tax return while displaying gross negligence. Section 285 of Canada’s Excise Tax Act contains analogous provisions regarding GST/HST returns, thereby allowing the CRA to impose gross-negligence penalties on a taxpayer who knowingly files incorrect GST/HST returns or who files incorrect GST/HST returns while exhibiting gross negligence.

The Amount of the Gross-Negligence Penalty

GST gross-negligence penalties are designed to punish. Hence, when applied, gross-negligence penalties can result in a hefty tax bill.

• In the case of incorrect income-tax returns, the amount of the gross-negligence penalty equals 50% of the tax on the understated income (with a minimum penalty of $100).
• In the case of incorrect GST/HST returns, the amount of the gross-negligence penalty equals 25% of the understated net tax (with a minimum penalty of $250).

For example, say that, because of gross negligence, you filed an income-tax return that underreported your taxable income and thereby allowed you to evade $500,000 in income-tax liability. The resulting gross-negligence penalty equals $250,000 (i.e., 50% of the $500,000 in income tax otherwise payable but for the underreported taxable income).

Of course, the Canada Revenue Agency will assess the tax itself and interest, too. So, you’ll need to pay the $250,000 gross-negligence penalty in addition to both (1) the $500,000 in income tax that you evaded and (2) the interest accruing on the total of $750,000 in income tax plus penalty. (And this doesn’t even account for any additional exposure to tax-related criminal liability for tax evasion in Canada.)

The Burden of Proof is on the CRA: Reversed Onus

Gross-negligence penalties serve as a disciplinary mechanism for taxpayers who show exceptional disregard for tax rules. Hence, Canada’s tax legislation demands that the Canada Revenue Agency apply these penalties only in those clear cases warranting their use.

As a result, gross-negligence penalties reverse the onus that would otherwise apply when other tax issues are under dispute. A taxpayer generally bears the initial burden of disproving the CRA’s factual assumptions in a tax dispute. But this burden is flipped when it comes to gross-negligence penalties. Subsection 163(3) of the Income Tax Act and subsection 285.1(16) of the Excise Tax Act each expressly say that the CRA bears the “burden of establishing the facts justifying the assessment of [a gross-negligence penalty].”

In principle, the Canada Revenue Agency must prove its case on a balance of probabilities. Yet the jurisprudence suggests that the CRA must in fact discharge a heavier burden to impose a gross-negligence penalty. In Findlay v Canada, [2000] 3 CTC 152, for instance, the Federal Court of Appeal not only affirmed that the burden of proof lies with the CRA but also held that the CRA must bear this burden regardless of whether the taxpayer can—or cannot—give a reasonable explanation as to how the false statement or omission made its way into the tax return. Indeed, in Lust v the Queen, 2009 TCC 577, the Tax Court went so far as to say that the Canada Revenue Agency’s onus is in fact “greater than on a balance of probabilities and closer to the criminal onus under the Criminal Code.”

Moreover, any evidence raising doubt about the taxpayer’s culpability militates against applying a gross-negligence penalty. In Fourney v The Queen, 2011 TCC 520, the Tax Court of Canada explained that the benefit of any doubt must go to the taxpayer:

• Because [a gross-negligence penalty] is penal in nature, it calls for a higher degree of culpability and must be applied only where the evidence clearly justifies so doing. If the evidence creates any doubt that it 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.

In sum: the Canada Revenue Agency always bears the burden of proving that gross-negligence penalties apply—even if the taxpayer says nothing on the issue.

But what exactly is it that the CRA must prove?

The Elements of the Gross-Negligence Penalty: A False Statement or Omission Made “Knowingly or under Circumstances Amounting to Gross Negligence”

To successfully apply a gross-negligence penalty, the CRA must meet two criteria:

1. The Canada Revenue Agency must show that the taxpayer either made a false statement in a tax return or participated in, assented to, or acquiesced in the making of a false statement in a tax return.
2. The Canada Revenue Agency must establish that the taxpayer either did so knowingly or did so under circumstances amounting to gross negligence. (The CRA need not prove both knowledge and gross negligence; it only needs to show that the taxpayer displayed one of these two attributes.)

The following sections discuss the false-statement requirement, the knowledge requirement, and the gross-negligence requirement in further detail.

The False-Statement Requirement

The false-statement requirement is relatively easy for the Canada Revenue Agency to satisfy. The Canada Revenue Agency just needs to show that the tax return misrepresented a fact—e.g., purporting entitlement to a deduction that was in fact unavailable—or omitted something that should have been included—e.g., failing to report taxable income. In other words, the CRA can typically satisfy the false-statement requirement by demonstrating that a tax return purported something that was wrong or false. And this isn’t a very high bar.

Still, the false statement or omission must appear in a tax return that the taxpayer actually filed. Although the failure to file tax returns might in some circumstances constitute tax evasion, it doesn’t give rise to a gross-negligence penalty. For the gross-negligence penalty to apply, the legislation demands that the false statement or omission appear in a return that the taxpayer actually filed (see: Lee v The Queen, 2010 TCC 400; Calandra v The Queen, 2011 TCC 7; Khan v The Queen, 2011 TCC 481). So, gross-negligence penalties don’t apply if the taxpayer hasn’t filed a return.

Although the Canada Revenue Agency can typically prove the false-statement requirement, the CRA often faces problems while attempting to prove that the taxpayer met the knowledge standard or the gross-negligence standard. Our experienced Canadian tax-litigation lawyers have found that the Canada Revenue Agency’s tax auditors often ignore these requirements. Indeed, most of the jurisprudence concerning gross-negligence penalties hinges on whether a taxpayer knew that the tax return contained a false statement or whether the taxpayer exhibited gross negligence when filing a tax return containing a false statement.

The following two sections discuss the knowledge requirement and the gross-negligence requirement in turn.

The Knowledge Requirement

The Canada Revenue Agency can satisfy the knowledge requirement by proving that a taxpayer knowingly filed a tax return containing a false statement. The knowledge requirement imports a subjective test. That is, the inquiry is not whether the taxpayer ought to have known that a statement was false; it is whether the taxpayer subjectively knew about the false statement in the tax return: Fourney v The Queen, 2011 TCC 520, at paras 71-73, 78.

Wilful blindness entails knowledge. So, the CRA can satisfy the knowledge requirement by showing that the taxpayer wilfully turned a blind eye to false statements or omissions in the tax return. The Federal Court of Appeal has adopted the following definition: A “taxpayer is wilfully blind in circumstances where the taxpayer becomes aware of the need for inquiry but declines to make the inquiry because the taxpayer does not want to know, or studiously avoids, the truth. The concept is one of deliberate ignorance”: Wynter v The Queen, 2017 FCA 195.  In other words, wilful blindness basically covers those situations where you noticed something suspicious—i.e., something begging for further inquiry—yet opted to take the ignorance-is-bliss approach.

To establish wilful blindness, the CRA must prove the existence of suspicious circumstance indicating a need for the taxpayer to inquire about the tax return’s accuracy. In Torres v The Queen, 2013 TCC 380, the Tax Court of Canada listed a number of red flags indicating that a taxpayer had exhibited wilful blindness by ignoring the suspicious behaviour of an accountant or other tax preparer:

• the magnitude of the advantage or omission;
• the blatantness of the false statement and how readily detectable it is;
• the lack of acknowledgment by the tax preparer who prepared the return in the return itself;
• unusual requests made by the tax preparer;
• the tax preparer being previously unknown to the taxpayer;
• incomprehensible explanations by the tax preparer; and
• whether others engaged the tax preparer or warned against doing so, or the taxpayer himself or herself expresses concern about telling others.

This isn’t an exhaustive list, which means that a court is free to consider other relevant circumstances when determining whether a taxpayer exhibited wilful blindness.

The Gross-Negligence Requirement

The gross-negligence requirement is distinct from the knowledge requirement. While the legal standard of knowledge (and of its sister concept, wilful blindness) imports a subjective test, the gross-negligence standard imports an objective test: “Gross negligence is distinct from wilful blindness. It arises where the taxpayer’s conduct is found to fall markedly below what would be expected of a reasonable taxpayer. Simply put, if the wilfully blind taxpayer knew better, the grossly negligent taxpayer ought to have known better. […] While subjective considerations may play a role in either analysis, gross negligence is determined with reference to an objective test.” Wynter v The Queen, 2017 FCA 195.

The Canada Revenue Agency needn’t prove both knowledge and gross negligence; the CRA only needs to show that the taxpayer possessed one of these two attributes. Consequently, even if the Canada Revenue Agency cannot establish that a taxpayer knew about the false statement, the gross-negligence penalty may still apply if the taxpayer exhibited gross negligence when making or acquiescing to the false statement appearing in a tax return. And because gross negligence doesn’t require actual knowledge and permits the court to ask whether a taxpayer ought to have known better, it’s easier for the CRA to prove gross negligence than it is to prove knowledge.

That said, gross negligence isn’t merely the failure to act as a reasonable person would. Such conduct implies negligence, but not gross negligence. Gross negligence requires far more egregious behaviour. Carelessness doesn’t cut it.  Instead, the Canada Revenue Agency “must prove a high degree of negligence, one that is tantamount to intentional acting or an indifference as to whether the law is complied with or not. A taxpayer may avoid these penalty provisions where he or she has relied on the erroneous advice of a tax advisor and has not knowingly failed to report income or a capital gain”: Zsoldos v. Canada (Attorney General), 2004 FCA 338, at para 21.

Courts have thwarted the CRA’s attempts to levy gross-negligence penalties in the following circumstances:

• the taxpayer sought professional-accounting assistance to complete tax returns: Hine v R, 2012 TCC 295.
• the taxpayer made numerous errors on tax returns, indicating a lack of skill in accounting and tax matters: Fourney v the Queen, 2011 TCC 520.
• the taxpayer disclosed all amounts at issue on his or her tax return: Crown Cork & Seal Canada Inc v The Queen, [1990] 2 CTC 465.
• the taxpayer struggled to operate accounting software: Fourney v the Queen, supra.

So, even though “gross negligence” invokes an objective standard, courts regularly trounce the Canada Revenue Agency when its tax auditors apply gross-negligence penalties in cases involving ordinary negligence because “these penalties are meant to capture serious conduct”:  Wynter v The Queen, 2017 FCA 195, at para 21 (quoting the Supreme Court of Canada’s decision in Guindon v. Canada, 2015 SCC 41, at para 61).

The Context of Choptiany et. al. v The King, 2022 TCC 112: Taxpayers Fooled by Tax Schemes Influenced by the Tax-Protestor Movement

Choptiany et. al. v The King, 2022 TCC 112, involved three taxpayers facing over $3 million in gross-negligence penalties stemming from their involvement in tax schemes with roots in the tax-protestor movement. The decision itself concerns tax-litigation procedure. In particular, the taxpayers’ Canadian tax-litigation lawyer filed a motion requesting that the Tax Court of Canada allow the appeals because of the CRA’s and Department of Justice’s Canadian tax-litigation lawyer’s repeated breaches of the Tax Court’s procedural rules. Yet although the Tax Court disposed of the appeals on procedural grounds, the appeals originated from the CRA’s application of gross-negligence penalties and from the tax schemes that led to those penalties.

The three taxpayers—a B.C. Air Canada pilot, an Ontario nurse, and a Manitoba psychiatrist—each employed the services of either DeMara Consulting Inc. or Fiscal Arbitrators. DeMara Consulting and Fiscal Arbitrators promised their clients huge tax refunds. They purported that their services consisted of reviewing a person’s income-tax return and determining whether that person was entitled to additional expenses that could lead to a tax refund, and they would typically tell potential clients that their tax preparers possessed specialized knowledge and expertise in Canadian taxation because they had worked for the Canada Revenue Agency.

Unbeknownst to most of their customers, DeMara Consulting and Fiscal Arbitrators had dragged them into a tax scam. The two individuals behind DeMara Consulting, Donna Marie Stancer and Deanna Lynn LaValley, defrauded hundreds of Canadians under the pretense of a legitimate tax loophole that they marketed as “The Remedy.” The Remedy was neither a loophole nor legitimate. It was blatant, unsophisticated tax fraud. The tax scam called for filing amended income-tax returns that attempted to generate bogus tax refunds by claiming fraudulent expenses. Stancer and LaValley obtained a business number under a client’s name, regardless of whether the client operated a business. Stancer and LaValley would then tally all the client’s personal expenses and debts—including mortgage payments, the mortgage principal, payments and amounts owing on personal lines of credit, grocery and household bills, car bills, insurance and repair bills, amounts owing to the Canada Revenue Agency, and utility bills.

Afterwards, the tax scammers prepared T5 slips showing the sum of their client’s personal debt and expenses as interest that the client had paid during the year. The tax scammers also prepared T5008 slips showing the same amount as capital losses that their client had incurred from disposing of investments during the year. The tax scammers would then file amended income-tax returns for their clients. The returns claimed the fraudulent interest payments as business expenses, and they claimed capital losses for the amounts reported on the fraudulent T5008 slips. By claiming these fraudulent expenses on their clients’ amended income-tax returns, the tax scammers attempted to reduce each client’s taxable income to zero, thereby claiming refunds for taxes already paid. For their services, DeMara Consulting and Fiscal Arbitrators charged their clients a percentage of the alleged tax refund.

This sort of tax scam is often used by proponents of the tax-protestor movement—or “de-taxers,” as they’re often called. Tax protestors characteristically cite several pseudo-legal arguments purporting to render them immune from paying income tax. To be clear: These tax-protestor arguments have no basis in actual law, and the Canada Revenue Agency’s Criminal Investigations Division aggressively pursues tax protestors for tax evasion. Indeed, this was the ultimate fate of the two individuals behind DeMara Consulting. Donna Marie Stancer and Deanna Lynn LaValley were found guilty of tax evasion in 2015.

But these tax scam had not yet become public when the Choptiany taxpayers retained the services of DeMara Consulting and Fiscal Arbitrators. It was not until several years later that the Canada Revenue Agency’s Criminal Investigations Division executed a search warrant at DeMara’s office and laid criminal charges against Donna Marie Stancer and Deanna Lynn LaValley for initiating the tax scam.

Around this time, the CRA also reassessed the Choptiany taxpayers, thereby disallowing any business losses, capital losses, and carry-back losses claimed on the tax returns that had been prepared and filed by DeMara Consulting or Fiscal Arbitrators. When reassessing the Choptiany taxpayers, the Canada Revenue Agency also imposed gross-negligence penalties totaling about $3 million.

The Choptiany taxpayers appealed their reassessments, solely disputing the CRA’s decision to apply gross-negligence penalties. Yet after finding numerous procedural abuses by the CRA and Department of Justice during the litigation process, the Tax Court of Canada would ultimately allow the appeals and vacate the gross-negligence penalties without requiring the parties to go to trial.

The Tax Court of Canada Chastises the CRA’s “Outrageously Misleading and Inappropriate” Pre-Trial Conduct: Choptiany et. al. v The King, 2022 TCC 112

The Choptiany decision itself concerned tax-litigation procedure. After the CRA’s and Department of Justice’s repeated breaches of the Tax Court’s procedural rules, the taxpayers’ Canadian tax-litigation lawyer filed a motion requesting that the Tax Court of Canada allow the appeals outright.

The Tax Court’s decision recounted several instances of troubling conduct by the Canada Revenue Agency and the Department of Justice. The problems revolved around the CRA’s and the Department of Justice’s conduct during pre-trial discovery (which is the process during which a litigant may obtain evidence from the other party). The taxpayers and their tax-litigation lawyer requested that the Canada Revenue Agency disclose information about the CRA’s criminal investigations into DeMara Consulting and Fiscal Arbitrators, and they also requested information about whether these criminal investigations had ever included any of the appellants personally. Moreover, the taxpayers’ Canadian tax-litigation lawyer sought to examine a CRA representative who was knowledgeable about the taxpayers’ cases.

Yet the Canada Revenue Agency responded by pursuing seemingly every avenue that would frustrate the taxpayers’ right to pre-trial discovery. First, during examination for discovery (also known as a deposition), the CRA initially put forward a CRA appeals officer who was “unaware of any criminal investigation and had not informed himself” about any aspect of the CRA’s criminal investigation. Then, a few weeks before the originally scheduled trial, the CRA’s Canadian tax-litigation lawyer informed the taxpayer’s Canadian tax lawyer that the CRA intended to call a different witness at the trial itself.

This maneuver caused the Tax Court to delay the originally scheduled trial so that the taxpayers and their Canadian tax-litigation lawyer could examine the CRA’s witness, the CRA’s lead criminal investigator. Yet during his examination for discovery, the CRA investigator demonstrated that he had “not even inform[ed] himself [about] whether any investigation was undertaken of any of these three appellants.” According to the Tax Court, the investigator’s statements at the examination revealed that “he was thoroughly unprepared, uncooperative, or untruthful.” Moreover, at the investigator’s examination, the Department of Justice tax lawyer representing the CRA refused an undertaking to produce documents concerning the CRA’s decision to criminally investigate those who participated in the DeMara tax scam or Fiscal Arbitrators tax scam.

In addition, the Tax Court uncovered that the CRA and its tax lawyers at the Department of Justice “chose to read restrictive wording into [the court’s previous order] that [the judge] did not say or write.” In particular, the court ordered that the CRA release “any documents relating to the investigation involving any of the Appellants.” Yet when writing to the taxpayer’s tax lawyer, the CRA’s tax counsel cited the Tax Court’s order and explained that the Crown need only release “documents relating to the investigation of LaValley and Stancer involving any of the Appellants.”  According to the Tax Court, the Department of Justice’s interpretation “had the effect of excluding from compliance with [the order] any investigations of persons other than the two DeMara promotors, or of any of the Appellants themselves.” The court variously described the Department of Justice’s word-twisting “outrageously misleading and inappropriate,” “contemptuous,” “playing advocate with what should just be a clarification, not an arguable position,” “deeply, deeply disturbed,” and “highly inappropriate.”

To top it off, the Canada Revenue Agency and Department of Justice failed to notify the taxpayers’ counsel that the second page of a three-page investigation report had gone missing. The report disclosed the reasons that the CRA had abandoned a criminal investigation against one of the three taxpayers. Without saying a word about the missing page, the Canada Revenue Agency turned over the incomplete report, burying it amongst hundreds of pages of other documents. The court found it “shocking” when the Crown attempted to justify the conduct by arguing that “there is no specific obligation to point out missing pages.”

The Tax Court granted the taxpayers’ motion and allowed their appeals, reasoning that the Crown’s repeated abuses made no other solution tenable:

• The Respondent has, without excuse or reason, continued to not comply with my repeated orders for the same disclosure. No party in such a position, appellant or respondent, should expect to simply be ordered again to comply with the Court’s discovery rules and orders already made. To make such an order would conjure up memories of the Pythonesque skit of the British bobby of another era yelling at a scofflaw: “Stop! Stop!-Stop, or I’ll yell stop again!”
• The Respondent’s egregious history of defaults and non-compliance in these appeals, that there is no alternative available that could reasonably be expected to cause the Respondent to now comply, and that this has caused prejudice to the Appellants, are reason enough to allow these appeals. This disposition is also necessary to protect the integrity of the judicial process and the rules of law that apply to all parties.

By allowing the taxpayers’ appeals, the Tax Court of Canada thereby vacated the over $3 million in gross-negligence penalties that had been levied against them.

Pro Tax Tips & Expert Canadian Tax-Litigation Lawyer Tax Guidance – Disputing Gross-Negligence Penalties

If a Canada Revenue Agency tax auditor has reassessed you for gross-negligence penalties, you may dispute the gross-negligence penalty by filing a notice of objection. A notice of objection triggers the CRA’s administrative dispute-resolution process, and the Canada Revenue Agency’s Appeals Division will assign an appeals officer to review the merits of your objection. If the CRA’s appeals officers renders an unfavourable decision, you may continue the dispute by filing a notice of appeal to the Tax Court of Canada. (In the alternative, you may effectively bypass the CRA’s Appeals Division and appeal directly to Tax Court if the Appeals Division hasn’t rendered a decision within 90 days from the date that you filed your objection.)

That said, you have only a limited amount of time to object to an assessment or reassessment for gross-negligence penalties. Generally, you must object within 90 days from the date on the assessment or reassessment, and you must appeal to the Tax Court of Canada within 90 days from the date of a notice of confirmation from the CRA’s Appeals Division. (You may, however, qualify for a deadline extension, given that you apply for the extension within one year and 90 days from the date on the assessment or confirmation.) If you fail to object within the statutory deadlines in Canada’s Income Tax Act and Excise Tax Act, you’ll remain liable for the gross-negligence penalty—even if the Canada Revenue Agency failed to discharge its burden of proving the facts justifying the gross-negligence penalty.

The Choptiany decision illustrates the importance of seeking an experienced Canadian tax-litigation lawyer. The Canada Revenue Agency often applies gross-negligence penalties without sufficient evidence. But in Choptiany, the CRA’s Department of Justice tax counsel went one step further by employing tactics during pre-trial discovery that aimed to mislead the other side and undermine the discovery process. Without competent Canadian tax-litigation counsel, the average Canadian taxpayer will have little recourse if faced with such tactics. So, if you have been assessed for gross-negligence penalties under subsection 163(2) of Canada’s Income Tax Act or under section 285 of Canada’s Excise Tax Act, speak with one of our expert Canadian tax-litigation lawyers today. We thoroughly understand this area of law, and we can ensure that you deliver a forceful, thorough, and cogent objection to the Canada Revenue Agency or appeal to the Tax Court of Canada.

Frequently Asked Questions

Question: I’m currently under a CRA tax audit. How much will it cost me if the Canada Revenue Agency tax auditor hits me with a gross-negligence penalty?

Answer: The amount of the gross-negligence penalty depends on whether the tax audit involves income tax or GST/HST. If the tax auditor alleges that you filed incorrect income-tax returns, the amount of the gross-negligence penalty equals 50% of the tax on the understated income (with a minimum penalty of $100). If the tax auditor alleges that you filed incorrect GST/HST returns, the amount of the gross-negligence penalty equals 25% of the understated net tax (with a minimum penalty of $250).

Question: How do I disprove the CRA’s allegation that I knowingly filed incorrect GST/HST returns or income-tax returns? How do I disprove the CRA’s allegation that I filed incorrect GST/HST returns or income-tax returns while exhibiting gross negligence?

Answer: The Canada Revenue Agency always bears the initial burden of proving that gross-negligence penalties apply—even if you say nothing in your own defence. In a tax dispute, you normally bear the initial burden of disproving the tax auditor’s factual assumptions, but this burden is flipped when it comes to gross-negligence penalties. Subsection 163(3) of the Income Tax Act and subsection 285.1(16) of the Excise Tax Act each expressly say that the Canada Revenue Agency bears the “burden of establishing the facts justifying the assessment of [a gross-negligence penalty].” That said, if the Canada Revenue Agency satisfies the initial burden of establishing gross negligence, you must rebut the CRA’s case by producing legal arguments in your favour. You should understand that the concepts of “gross negligence” and “wilful blindness” are legal concepts—not accounting concepts—and courts have developed these concepts over years of judicial decisions. For assistance on developing a case in your favour, contact one of our top Canadian tax-litigation lawyers today.

Question: I recently received a notice of reassessment for gross-negligence penalties. I want to dispute these penalties in the Tax Court of Canada. What should I do now?

Answer: Even if you want to take the dispute to Tax Court, you must still file a notice of objection with the Canada Revenue Agency’s Chief of Appeals. The objection itself must be filed within 90 days of the date on the reassessment. After filing your objection, you must then allow at least 90 days to elapse. After that period elapses, you may file a notice of appeal with the Tax Court of Canada. As with other forms of litigation, tax litigation is subject to numerous procedural rules governing almost every aspect of lawsuit, including specific deadlines, acceptable evidence, settlement negotiations, and the contents of pleadings. Consult one of our skilled Canadian tax-litigation lawyers who can simplify the tax-litigation process, prepare your case for Tax Court, and represent you before the Tax Court during the hearing or settle your appeal with the Crown and the CRA before a hearing.