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Galachiuk: TCC clarifies due diligence defence under 163(1)

By Shaira Nanji

Subsection 163(1) of the Income Tax Act imposes a penalty of 10 per cent on an amount that a taxpayer fails to report in his/her return where there has been a previous failure to report income in any of the three preceding taxation years.

The penalty under subsection 163(1) has been described as ‘harsh’ due to the 10 per cent federal penalty, a potential 10 per cent provincial penalty and the fact that the penalty may apply even where minimal or no additional tax is owing by the taxpayer (i.e. the tax relating to the unreported amount was withheld at source and remitted to the Canadia Revenue Agency).

In several cases, the courts have held that a taxpayer that is the subject of a penalty under subsection 163(1) has a due diligence defence. A taxpayer can satisfy the due diligence test in one of two ways: (i) by establishing that he/she made a reasonable mistake of fact (i.e. the taxpayer was mistaken as to a factual situation and the mistake was reasonable); or (ii) by establishing that he/she took reasonable precautions to avoid the event leading to the imposition of the penalty (see Les Résidences Majeau Inc v The Queen [2010 FCA 28])…

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