Repeated Failure to Report Income Penalty
Under subsection 163(1) of the Income Tax Act (ITA), a taxpayer is liable for a penalty in respect of fail to report at least $500 of income (slips) in the year and in any of the three preceding taxation years.
The federal and provincial penalties are each equal to the lesser of:
- 10% of the unreported income; and
- 50% of the difference between the understated tax payable (and certain overstated refundable tax credits) on the unreported income.
The penalty is assessed on the most current instance of unreported income.
For example:
A taxpayer failed to report T5 slip of $600 in 2014 and T4 slip of $9,000 in 2017. The taxpayer tax rate for 2017 is 30% and tax owed on unreported income of T4 slip is $2,700 ($9,000 * 30%). The tax withheld on unreported income of T4 slip is $1,200.
Canada Revenue Agency (CRA) assesses penalty equal to the lesser of:
- $1,800 (20% of $9,000, federal and provincial); and
- $750 (($2,700 – $1,200) * 50%)
The penalty is $750. Thus, the taxpayer will pay taxes on unreported income plus penalty plus interest ($2,700 + $750 + interest), in this example.
False Statements or Omissions Penalty (Gross Negligence Penalty)
Under subsection 163(2) of the ITA, a taxpayer is liable for a penalty in respect of knowingly or under circumstances amounting to gross negligence has made a false statement or an omission in a tax return.
The penalty is equal to the greater of:
- $100; and
- 50% of the understated tax payable (and certain overstated refundable tax credits) related to the unreported income.
For example:
A taxpayer failed to report $20,000 of business income in 2017. The taxpayer tax rate for 2017 is 30%.
CRA imposes knowingly omission penalty equal to the greater of:
- $100; and
- $3,000 (($20,000 * 30%) * 50%)
The penalty is $3,000. Thus, the taxpayer will pay taxes on unreported income plus penalty plus interest ($6,000 + $3,000 + interest), in this example.
Refer to the tax case (Chartrand v The Queen, 2015 TCC 298) on gross negligence penalty.