Canada: Penalties For False Statements Or Omissions – Part III

Last Updated: September 8 2015
Article by Howard J. Alpert

This issue of the Legal Business Report provides current information to the clients of Alpert Law Firm on penalties under the Income Tax Act (Canada) and the possible challenges to such assessments. Alpert Law Firm is experienced in providing legal services to its clients in tax and estate planning matters, tax dispute resolution, tax litigation, corporate-commercial transactions and estate administration. Howard Alpert, C.S. is certified by the Law Society as a specialist in Corporate and Commercial Law and as a specialist in Estates and Trusts Law.


This memorandum deals with certain important developments in the assessment of penalties. Specifically, the Courts have dealt with the assessment of penalties as they relate to: (i) the reassessment limitation period; (ii) non-capital loss carry forwards; (iii) carry back of losses; and (iv) the capital gains exemption.


As a general rule, the Minister of National Revenue (the "Minister") may only assess or reassess a taxpayer within the "normal reassessment period." Pursuant to subsection 152(3.1) of the Income Tax Act (the "Act"), the normal reassessment period differs according to the taxpayer's category. For mutual fund trusts and corporations that are non-Canadian controlled private corporations, the limitation period for reassessments is four years from the earlier of: (i) the date of mailing of a notice of original assessment; and (ii) the date of mailing the original notification that no tax is payable for the taxation year. For all other taxpayers, the reassessment period is three years from the earlier of the two dates stated above.

However, pursuant to paragraph 152(4)(a) of the Act, this limitation period does not apply when the following two factors are present: (i) there is an assessment or reassessment based upon a misrepresentation by the taxpayer; and (ii) the taxpayer or the person filing the return has made a misrepresentation that is attributable to neglect, carelessness or willful default, or has committed any fraud in filing the return or in the supplying of information. Where the Minister has performed an assessment or reassessment beyond the normal limitation period, the Minister has the burden of proving, on a balance of probabilities, misrepresentation or fraud on the part of the taxpayer.

Although the requirements for justifying subsection 163(2) penalties and for disregarding the normal assessment period are very similar, the Minister nevertheless must prove more in order to impose penalties. To assess a taxpayer beyond the normal reassessment period, it is sufficient to prove a failure to use reasonable care, while penalties will only be justified if the Minister can prove gross negligence on the part of the taxpayer.


Penalties under subsection 163(2) of the Act are calculated, on a percentage basis, according to the amount of tax payable on the taxpayer's understatement of income. Specifically, the taxpayer will be liable for a penalty of the greater of $100 and 50% of the tax payable on the taxpayer's understatement of income. Case law has indicated that once penalties are imposed, taxpayers very often attempt to show the existence of legitimate previous non-capital losses or expenses that could be attributed to the tax period in question, in the hopes that such losses would reduce the amount of understatement of income that their penalties will be calculated on.

Until recently, the law has been vague as to whether such losses or expenses should be used in the calculation of income for the purposes of calculating penalties (and in effect reducing or obliterating the amount of penalties to be paid), or whether previous losses should be ignored in penalty calculation. Recent case law has illuminated this ambiguous area. The Courts have said that in calculating penalties, previous losses or expenses can be used only if such losses or expenses are wholly applicable to the unreported income (i.e. the non-capital expenses originate from the same source as the unreported income).

Recently the Court has found that by the combined operation of subparagraph 163(2)(a)(i) and paragraph 163(2.1)(a) of the Act, previous losses that not applicable to the unreported income should be ignored for the purposes of penalty calculation. As such, a penalty may arise even in a year when unreported income is offset by previous losses leaving no taxes to be paid by the taxpayer.


As previously set out in this issue of Legal Business Report, penalties under subsection 163(2) of the Act are calculated, on a percentage basis, according to the amount of tax payable on the taxpayer's understatement of income. Also, a taxpayer who entirely fails to file a tax return, or who files a tax return after the required time, can be subject to a penalty of 5% of the unpaid tax, pursuant to subsection 162(1) of the Act.

However, loss-carrybacks cannot be used in determining understatement of income for the purpose of penalty calculation. Subsection 162(11) of the Act clearly indicates that for the purpose of computing late-filing penalties under subsections 162(1) and 162(2), the person's tax payable shall be determined before taking into consideration items such as loss-carrybacks, foreign tax credits and investment tax credits from subsequent years.

Recent Court decisions have also been very clear in reiterating that while subsequent losses and expenses can be used in the calculation of taxable income, such loss-carrybacks cannot be used in determining income tax owing for the purpose of calculating penalties.


Capital gains arising on dispositions of qualifying shares of small business corporations, as well as dispositions of qualified farm property, are eligible for a lifetime capital gains exemption of $800,000.00 pursuant to section 110.6 of the Act. The capital gains exemption applies to Canadian resident individuals other than trusts.

In recent cases, taxpayers who have been assessed for penalties have claimed that they are entitled to the capital gains exemption, in the hopes that such a deduction would reduce the income upon which their taxes and penalties are calculated. However, the Courts, pursuant to subsection 110.6(6) of the Act, have denied such a claim, stating that if an individual fails to report a capital gain knowingly or under circumstances amounting to gross negligence, as proven by the Minister, then the individual will lose the right to claim the exemption for the gain in the year of disposition or any subsequent taxation year. As such, individuals are prevented from: (i) claiming that the exemption can work to reduce their understatement of income; and (ii) arguing that any applicable penalties should be based on a tax liability which has been reduced by the capital gains exemption.

As a result, the taxpayer will lose the benefit of the capital gains exemption, both in the calculation of income and as a deduction in the calculation of penalties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.