Introduction – GST/HST Gross Negligence Penalties
Businesses which provide goods and services in exchange for money or other valuable consideration are required to charge their customers GST/HST. When businesses collect GST/HST from their customers they must hold it in trust for the government of Canada. Taxpayers with more than $30,000 in annual revenues are required to register for a GST/HST number, collect GST/HST from their customers, file GST/HST returns with the Canada Revenue Agency on a regular basis, and remit the GST/HST they have held in trust to the CRA. These taxpayers are called GST/HST registrants. Taxpayers who do not file their GST/HST returns as and when required are subjected to a late filing penalty. If a registrant is audited by the CRA for GST/HST and the tax auditor’s analysis suggests that the registrant’s return was inaccurate, they will propose corrective adjustments and consider applying an additional penalty under section 285 of the Excise Tax Act. The penalties levied under this section are called gross negligence penalties.
Conditions for Application - GST/HST Gross Negligence Penalty
Section 285 of the Canadian Excise Tax Act requires the Canada Revenue Agency to apply a harsh penalty to every person who knowingly or under circumstances amounting to gross negligence makes or acquiesces to a false statement or omission in a return, application, or other GST/HST related document filed for a reporting period or transaction. Note that in order for gross negligence penalties to apply, it must be the case that both
- the return filed by the taxpayer was inaccurate in some way, and
- the taxpayer fell short of the proper standard of conduct at some point in the process preparing and filing the return.
Determining whether a) is the case is a matter of applying the ordinary rules of the Canadian Excise Tax Act and establishing the facts relevant to determining the taxpayer’s obligations under the Canadian Excise Tax Act. For the taxpayer to satisfy b), then they must have either have made the misrepresentation knowingly, or they must have been grossly negligent in the preparation of the return. The courts have interpreted the standard of what conduct constitutes gross negligence to be very high. For example, in Venne v the Queen, the court characterized gross negligence as “a high degree of negligence tantamount to intentional acting”. The courts have also denied the CRA’s attempts to levy gross negligence penalties in the following circumstances:
- the taxpayer sought professional-accounting assistance to complete tax returns
- the taxpayer made numerous errors on tax returns, indicating a lack of skill in accounting and tax matters
- the taxpayer disclosed all amounts at issue on his or her tax return
- the taxpayer found it difficult to operate accounting software
Burden of Proof – GST/HST Gross Negligence Penalty
To impose a gross-negligence penalty, the Canada Revenue Agency must discharge a heavy burden. In Findlay v Canada, the Federal Court of Appeal affirmed that the burden of proof lies with the CRA when it seeks to impose gross-negligence penalties. Moreover, the court held that the Canada Revenue Agency must carry this burden regardless of whether the taxpayer can provide a reasonable explanation for the act or omission underlying the CRA’s penalty assessment. In other words, the Canada Revenue Agency always carries the onus of proving, on a balance of probability, that a tax gross-negligence penalty is warranted.
Quantum – GST/HST Gross Negligence Penalty
If the CRA imposes gross negligence penalties with respect to a misrepresentation that is relevant to determining the amount of GST/HST to be remitted by a taxpayer for a reporting period, the amount of the gross negligence penalty is equal to 25% of the difference between how much GST/HST the taxpayer is actually required to remit versus how much the GST/HST the taxpayer would have to remit based on the information provided in the registrant’s return. Similarly, if the CRA imposes gross negligence penalties with respect to a misrepresentation that is relevant to determining the amount of a GST/HST rebate to be paid to the taxpayer, then the amount of the gross negligence penalty is equal to 25% of the difference between the amount of the rebate the taxpayer is entitled to versus the amount of the rebate the taxpayer would be entitled to on the basis of the information they provided in their rebate application.
Note that the amount to which the 25% penalty factor is applied is not limited to the difference between what the actually taxpayer owes (or is entitled to receive as a rebate) and the amount that the taxpayer would owe (or would be entitled to receive as a rebate) if the relevant calculations were made based on the taxpayer’s misrepresentation that was made knowingly or under circumstances amounting to gross negligence. It is possible that the taxpayer’s return is inaccurate and some of those inaccuracies are the result of gross negligence and others are not. The amount of the penalty is based solely on the difference between the inaccurate return and the taxpayer’s true obligations (or entitlements), not how impactful the grossly negligent misrepresentations were. So long as a taxpayer has made a grossly negligent misrepresentation for a reporting period, the gross negligence penalty will be applied to all of the adjustments for that reporting period, not just the ones attributable to gross negligence. If a gross negligence penalty would be below $250, it is increased to $250.
Tax Tips - GST/HST Gross Negligence Penalty
If you have been charged with gross negligence penalties regarding GST/HST or are in the process of being audited for GST/HST, strongly consider consulting with an experienced Toronto tax lawyer. The standards tax auditors use to apply gross negligence penalties are typically far more lax than those established by the courts. It is very common for gross negligence penalties applied by an auditor to be removed if the taxpayer hires an experienced Canadian tax lawyer to dispute the penalty through an objection filed with the CRA appeals division or through an appeal to the Tax Court of Canada.
If you are considering undertaking a transaction or taking a filing position of which you are uncertain, it is also highly advisable to retain one of our expert Toronto tax lawyers to provide advice or a tax planning memorandum. Not only will this increase the chance that you will structure the transaction properly or take the best possible filing position, it will considerably strengthen the case that gross negligence penalties should not be applied to you should you ever be audited later. Having evidence available that you relied on the advice of highly qualified tax advisors is one of the strongest defences possible against the imposition of gross negligence penalties.