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Overview – A Landmark Warning to CRA on Tax Litigation Conduct
In Choptiany et al. v. The King (2022 TCC 112), the Tax Court of Canada delivered one of the most striking procedural rebukes against the Canada Revenue Agency (CRA) and the Department of Justice. The case involved three taxpayers who had been assessed over $3 million in combined gross-negligence penalties under subsection 163(2) of the Income Tax Act for their involvement in tax schemes promoted by DeMara Consulting Inc. and Fiscal Arbitrators. However, what makes this case remarkable is not the underlying tax scheme but the CRA's conduct during the litigation process.
As recognized in numerous tax cases, the disclosure process ensures that both parties—especially taxpayers facing the vast institutional power of the CRA—have equal access to the information necessary to understand, test, and respond to the government's position.
Without disclosure, the court's ability to determine the truth and apply the law fairly is undermined. The CRA's failure to provide complete information not only prejudices taxpayers but also impairs judicial oversight, eroding public confidence in the fairness of the tax system. In this sense, disclosure is not merely a procedural formality; it is a constitutional safeguard that protects the integrity of Canada's tax dispute resolution framework.
The Choptiany decision serves as a vivid example of why disclosure obligations are indispensable in tax litigation. When the CRA and its counsel failed to respect those duties, the procedural imbalance became so severe that the Court could not meaningfully evaluate the merits of the case. As a result, the Tax Court of Canada allowed the appeals outright—without a trial—after finding repeated non-compliance with discovery orders, misleading communications, and selective document disclosure.
The decision underscores two key principles: first, that the CRA bears a heightened burden when imposing gross-negligence penalties, and second, that procedural fairness is not optional.
Even in cases involving aggressive tax schemes, the Tax Court made clear that the government must respect the same procedural safeguards it demands from taxpayers. For individuals or corporations facing similar disputes, this case serves as a reminder of why retaining an expert Canadian tax lawyer is essential—both to ensure that the CRA meets its disclosure obligations and to preserve the fairness of the judicial process.
Gross-Negligence Penalties under the Income Tax Act
Subsection 163(2) of the Income Tax Act authorizes the Canada Revenue Agency (CRA) to impose a gross-negligence penalty when a taxpayer has made, participated in, assented to, or acquiesced in the making of a false statement or omission in a tax return—either knowingly or under circumstances amounting to gross negligence. The provision reflects Parliament's intent to punish deliberate or extremely careless non-compliance, rather than honest mistakes or ordinary negligence.
Unlike ordinary reassessments, where the taxpayer must first disprove the CRA's assumptions, subsection 163(3) reverses the onus: the CRA bears the burden of establishing the facts justifying the penalty. Canadian courts have interpreted this onus as requiring a higher threshold of proof, given the punitive nature of the provision.
The CRA must demonstrate, on a balance of probabilities—but with compelling evidence—that the taxpayer's conduct showed a level of indifference or disregard for the law that approaches intentional wrongdoing.
The same principle applies under section 285 of the Excise Tax Act, which governs GST/HST returns. Both provisions are designed to ensure that gross-negligence penalties are reserved for cases involving egregious misconduct, such as fabricated deductions, fictitious invoices, or deliberate misrepresentations. Courts have consistently held that carelessness or misunderstanding of complex tax rules is insufficient to justify the penalty.
In practice, the CRA often invokes subsection 163(2) as a matter of course at the conclusion of a CRA audit, particularly where large adjustments or unreported income are identified. However, as the Tax Court reiterated in Choptiany et al., the application of such penalties must remain exceptional. Where the CRA fails to discharge its evidentiary burden—or, as in Choptiany, engages in procedural misconduct—the Court may vacate the penalties entirely to preserve the integrity of the judicial process.
Procedural Breakdown and Judicial Response
Meaningful disclosure lies at the heart of procedural fairness in tax litigation. It is through full and open exchange of information that both parties—particularly taxpayers confronting the vast machinery of the CRA—can properly evaluate, challenge, and respond to the government's case.
When the CRA limits or delays disclosure, it does more than inconvenience the opposing side; it distorts the evidentiary balance and weakens the Court's ability to uncover the truth. The fairness of Canada's tax system depends on transparency and accountability at every stage of the dispute process. In that sense, disclosure operates not as a technical requirement but as a cornerstone of justice—one that safeguards confidence in both the process and the institutions that administer it.
The Choptiany et al. v. The King decision exemplifies what can occur when these disclosure obligations are ignored. In that case, the taxpayers brought a motion to have their appeals allowed outright after the CRA repeatedly failed to comply with discovery obligations and two separate court orders requiring disclosure. The breaches included presenting unprepared witnesses, refusing to produce relevant documents, and failing to correct incomplete answers—each a violation of the Tax Court's procedural framework.
The matter originated from the CRA's reassessment of three taxpayers—Dr. Choptiany, Ms. McPherson, and Mr. Richter—each of whom had been assessed gross-negligence penalties under subsection 163(2) of the Income Tax Act following their participation in tax schemes promoted by Fiscal Arbitrators and DeMara Consulting Inc.
The Court described these schemes as resembling "de-taxation practices of sovereign citizens, though with less of the non-fiscal cultish aspects." While the underlying penalties were substantial, the Court's focus was not on the merits of the reassessments but on the CRA's repeated procedural failures during litigation.
Over several years, the CRA repeatedly failed to comply with discovery orders, withheld relevant materials, and made inconsistent representations regarding prior investigations involving the appellants. Justice Boyle found that this conduct—ranging from evasive discovery answers to misleading statements about earlier court orders—had irreparably compromised the fairness of the proceedings. In his reasons, he described the CRA's behaviour as "outrageously misleading and inappropriate" and observed that further orders compelling compliance would be futile.
Ultimately, the Tax Court granted the taxpayers' motion, allowed the appeals in full, and vacated all penalties. The Court's decision effectively ended the dispute without a trial, serving as a reminder that procedural fairness is a foundational requirement in Canadian tax litigation.
Even in cases where taxpayers' positions may seem unsympathetic, the CRA must respect disclosure orders and litigation rules designed to ensure equality before the court.
No Tolerance for Procedural Misconduct
In Choptiany et al. v. The King (2022 TCC 112), the Tax Court made it clear that procedural fairness is not negotiable. While the CRA has broad authority to enforce Canada's tax laws, that authority is bounded by the same procedural safeguards that protect taxpayers.
Justice Boyle's decision reflects the principle that the CRA must "play by the rules" — particularly when pursuing severe penalties such as those under subsection 163(2) of the Income Tax Act.
The Court's ruling demonstrates that repeated non-compliance with disclosure obligations will not be met with patience. The CRA and the Department of Justice were given multiple opportunities to comply with court orders and failed to do so.
As a result, the Court determined that no lesser remedy would suffice and allowed the appeals outright. The message is clear: the Tax Court will not grant second chances to litigants—government or otherwise—who undermine the integrity of the judicial process.
This outcome reinforces two critical lessons for both taxpayers and the CRA. First, gross-negligence penalties demand procedural discipline. The CRA must meet its evidentiary and disclosure obligations fully, especially when the stakes involve penalties designed to punish intentional or reckless behaviour.
Second, taxpayers must ensure that their representation is handled by experienced counsel who can identify procedural abuses and hold the CRA accountable when fairness is compromised.
Ultimately, Choptiany stands as a reminder that the administration of Canada's tax system depends not only on the enforcement of substantive law, but also on respect for the process by which that law is applied. When that process breaks down, the Court will intervene decisively to restore balance.
Pro Tax Tips – Practical Guidance for CRA Litigation and Gross-Negligence Penalties
- Demand Full Disclosure: During a tax dispute, taxpayers are entitled to all relevant information in the CRA's possession that may affect their case. If the CRA resists disclosure or produces incomplete records, your representative should promptly raise the issue before the Tax Court. The Choptiany decision demonstrates that when the CRA repeatedly disregards its disclosure obligations, the Court may view such conduct as a fundamental breach of fairness—one serious enough to justify setting aside the assessment altogether.
- Maintain Procedural Records: Every exchange with the CRA or Department of Justice should be carefully documented—particularly discovery requests, undertakings, and correspondence regarding document production. A clear record of procedural conduct can be decisive if the CRA fails to meet its litigation obligations.
- Retain Experienced Counsel Early: Cases involving gross-negligence penalties or procedural disputes require specialized expertise. An expert Canadian tax lawyer can identify early procedural errors, ensure that the CRA complies with disclosure orders, and protect your rights throughout the litigation process. Early intervention can make the difference between a negotiated resolution and a costly, protracted dispute.
FAQs – Gross-Negligence Penalties, Defence, and CRA Conduct
Can the CRA impose gross-negligence penalties in every case involving a false statement or omission?
No. The CRA must first prove that the taxpayer either knowingly made a false statement or acted with gross negligence—that is, conduct showing a serious disregard for the law. Ordinary errors, carelessness, or reliance on professional advice generally do not meet this high threshold. The burden of proof lies entirely with the CRA under subsection 163(3) of the Income Tax Act.
What should taxpayers do if CRA or Department of Justice counsel fail to disclose documents during litigation?
Taxpayers or their representatives should promptly request compliance in writing and, if necessary, bring a motion before the Tax Court. The Choptiany decision confirms that repeated non-compliance or misleading conduct by the CRA can lead the Court to allow the appeal outright to protect procedural fairness.
Does procedural misconduct by CRA automatically cancel a penalty?
Not automatically. Each case turns on its facts. However, where the CRA's misconduct is extensive—such as repeated breaches of discovery obligations or disregard of court orders—the Tax Court may consider dismissal of the CRA's case the only suitable remedy. Choptiany illustrates that the Court will not hesitate to take decisive action to preserve the integrity of the judicial process.
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.
