- The penalty in subsection 163(2) of the Income Tax Act applies to a false statement or omission made knowingly or in circumstances amounting to gross negligence, and it is the greater of $100 and 50% of the calculated amounts.
- In an appeal about a section 163 penalty, the Minister carries the burden of establishing the facts that justify it.
- A penalty can be challenged by objection and appeal, and separately through a taxpayer relief request, so deadlines matter.
A reassessment is stressful enough. When it arrives with a gross negligence penalty added, the amount can climb quickly, and many people assume the penalty is automatic once the CRA has found an error. It is not.
This article explains what the penalty is, who must prove what, and the main routes for disputing it. It is general information, not advice on your file, and a lawyer or accountant can look at your actual return and notice.
This article covers Canadian federal tax law, which applies in every province.
What the penalty is
Under subsection 163(2) of the Income Tax Act, a person who knowingly, or under circumstances amounting to gross negligence, makes or participates in a false statement or omission in a return is liable to a penalty. The penalty is the greater of $100 and 50% of the total of the amounts calculated under paragraphs (a) to (i) of that subsection.
A different rule applies to false renunciation statements. There, the penalty is 25% of the excess of the renounced amount over the amount the corporation was entitled to renounce.
In plain words, the penalty is aimed at more than a simple mistake. Whether your situation crosses the line depends on the facts, such as what you knew, what you did and what care you took, and that is worth reviewing with a professional.
Who has to prove it
In an appeal involving a section 163 penalty, the burden of establishing the facts that justify the penalty is on the Minister. That means the CRA cannot simply point to an understated amount and expect the penalty to stand.
Keep in mind that an assessment is deemed valid and binding despite any error, defect or omission, subject to being varied or vacated on objection or appeal. So a penalty you do not challenge in time generally stays in place.
Ways to challenge the penalty
- Notice of objection: the Minister must reconsider the assessment and then vacate, confirm or vary it, or reassess, and notify you in writing.
- Tax Court of Canada appeal: after an objection, you may appeal once the Minister confirms or reassesses, or 90 days pass with no decision.
- Taxpayer relief request: the CRA may cancel or waive penalties and interest.
Objecting to the penalty and objecting to the underlying tax adjustment are separate questions. You can dispute one, the other or both, and the strongest approach depends on your records and what actually happened.
Deadlines and collection while you dispute
| Step | Time limit |
|---|---|
| Notice of objection (individual other than a trust) | The later of one year after the filing-due date and 90 days after the notice of assessment was sent |
| Notice of objection (other taxpayers) | 90 days after the notice was sent |
| Tax Court appeal | Within 90 days of the notice of confirmation or reassessment |
| Penalty relief request | Generally within 10 years of the end of the calendar year of the tax year |
For most assessments, the CRA may not start court proceedings, certify the debt or take the listed collection steps until 90 days after the notice of assessment was sent. If you file an objection, collection of the disputed amount is barred until 90 days after notice of the Minister's confirmation or variation. Those limits do not apply to amounts required to be withheld and remitted, such as payroll source deductions.
Interest still accrues while an amount is disputed, and undisputed amounts must be paid.
Relief requests and what to do next
Relief is a separate path from objection. Circumstances that may justify it include extraordinary circumstances beyond your control, actions of the CRA such as undue delay in an audit, and inability to pay or financial hardship. The CRA also weighs compliance history, whether reasonable care was exercised and whether you acted quickly to fix the problem.
A relief decision has no right of objection or appeal, but you can ask for a second administrative review by a different official, or apply to the Federal Court for judicial review within 30 days of notice of the decision, although the Court may extend that period, and the Court can only refer the matter back to the Minister. Include every circumstance you rely on, with supporting documents, in your first request.
- Find the date on your notice of assessment and mark the objection deadline.
- Gather the return, working papers, receipts and any correspondence with the CRA or your preparer.
- Write down how the error happened and what steps you took to get it right.
- Decide with a professional whether to object, seek relief, or both.
- Consider paying in full if you can, since interest keeps accruing while a request is pending and is refunded if relief is granted.
Frequently asked questions
Is the gross negligence penalty automatic when the CRA finds unreported income?
No. The Act ties the penalty to a false statement or omission made knowingly or under circumstances amounting to gross negligence. In an appeal, the Minister must establish the facts that justify it.
How much is the penalty?
It is the greater of $100 and 50% of the total of the amounts calculated under paragraphs (a) to (i) of subsection 163(2). A different 25% rule applies to false renunciation statements.
Do I have to pay the penalty while I object?
Collection of the disputed amount is generally barred until 90 days after notice of the Minister's confirmation or variation. Interest still accrues, and undisputed amounts must be paid.
Can I ask the CRA to cancel the penalty without going to court?
Yes, you can make a taxpayer relief request using Form RC4288 or a letter. Penalty relief requests generally must be made within 10 years of the end of the calendar year of the tax year.
Sources
- Income Tax Act, s. 152(8) — Justice Laws (federal)
- CRA, Taxpayer Bill of Rights — canada.ca
- Income Tax Act, s. 163(2) — Justice Laws (federal)
- CRA IC07-1R1, Taxpayer Relief Provisions — canada.ca
- Income Tax Act, s. 165(1) — Justice Laws (federal)
- Income Tax Act, s. 169(1) — Justice Laws (federal)
- Income Tax Act, s. 225.1 — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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