In Morton v. The Queen (2014 TCC 72),
the Tax Court of Canada upheld penalties imposed by the Minister of
National Revenue (the "Minister") under subsection 163(2)
of the Income Tax Act (Canada) (the "Act"")
despite novel arguments by the taxpayer to the contrary.
In this case, the taxpayer originally filed his income tax
returns for the relevant years and paid taxes on the reported
income. After the normal reassessment periods expired,
utilizing the taxpayer "fairness" provisions in
subsection 152(4.2) of the Act, the taxpayer filed T1 Adjustment
Requests containing false information in the form of additional
income and expenses that would place the taxpayer in a tax loss
position in each year. If the Minister had accepted the
adjustments, the taxpayer would have received refunds in excess of
However, the taxpayer's plan did not work out as expected.
The Minister not only denied the T1 Adjustment Requests, but also
levied penalties in excess of $75,000 pursuant to subsection 163(2)
of the Act. These penalties were the subject of the appeal to
the Tax Court.
During testimony, the taxpayer admitted to supplying false
information in the T1 Adjustment Requests intentionally, knowingly
and without reliance on another person. In defense of his actions
the taxpayer claimed that he was under stress due to financial
difficulties, a marriage breakdown and loss of access to his
business books and records. At trial, the Tax Court found as a
matter of fact that the misrepresentations were made fraudulently
and rejected the taxpayer's defense since no documentary
evidence could be supplied in respect of the alleged stress.
The remainder of Justice Bocock's decision contained a
thorough analysis of the provisions of subsection 152(4.2) of the
Act in the context of levying a penalty pursuant to subsection
163(2) of the Act. Justice Bocock provided the following
Even where information is supplied to the Minister outside of
the context of filing a return for a particular taxation year, if
the taxpayer makes fraudulent misrepresentations sufficient to
assess under subparagraph 152(4)(a)(i) of the Act, for instance in
requesting that the Minister reopen the taxation year under
subsection 152(4.2) of the Act, the Minister may assess penalties
for a statute barred year.
The penalty provisions in subsection 163(2) of the Act apply
even in the absence of the Minister issuing a refund or
reassessment that relies upon the incorrect information. The Tax
Court found it would be absurd to require the Minister to rely on
the fraudulent misrepresentations before levying a penalty;
The meaning of the words "return", "form",
"certificate", "statement" and
"answer" in subsection 163(2) of the Act should be
defined broadly to include documents such as the T1 Adjustment
Request. Limiting the application of penalties to prescribed
returns and forms ignores the plain text, context and purpose of
the Act and would lead to illogical results.
It should come as no surprise that the Tax Court upheld the
penalties. Nevertheless, the decision provides an enjoyable and
thought provoking analysis of the provisions contained in
subsections 152(4.2) and 163(2) of the Act.
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