Principal Issues: Whether the penalty for a false statement or omission pursuant to subsection 163(2) of the Act, in circumstances involving a charitable donation, is equal to 50% of the tax avoided by the non-refundable tax credit.
Position: Yes.
Reasons: The wording of subsection 163(2) provides for the penalty for a false statement or omission to be calculated as the greater of $100 and 50% of the increase in the tax that would be payable which is attributable to the false statement or omission.
January 4, 2012
Ottawa Tax Services Office HEADQUARTERS Tax Avoidance/Audit Division Income Tax Rulings Directorate Attention: Jason Beaulac, Team Leader Gillian Godson (613) 957-8981
2011-042378
Subsection 163(2) Gross Negligence Penalty Calculation
This is in reply to your recent inquiry regarding the calculation of the gross negligence penalty under subsection 163(2) of the Income Tax Act (the "Act"). Specifically, you have asked whether the penalty calculation in circumstances involving the overstatement of charitable donations is equal to 50% of the tax avoided by the overstatement of the non-refundable tax credit or is limited to $100 because the overstatement of charitable donations does not result in an overstatement of taxable income.
Paragraph 163(2)(a) states that the penalty for "gross negligence" is
"the greater of $100 and 50% of the greater of:
(a) the amount, if any, by which
(i) the amount, if any, by which
(A) the tax for the year that would be payable by the person under this Act
exceeds
(B) the amounts that would be deemed by subsections 120(2) and (2.2) to have been paid on account of the person's tax for the year if the person's taxable income for the year were computed by adding to the taxable income reported by the person in the person's return for the year that portion of the person's understatement of income for the year that is reasonably attributable to the false statement or omission and if the person's tax payable for the year were computed by subtracting from the deductions from the tax otherwise payable by the person for the year such portion of any such deduction as may reasonably be attributable to the false statement or omission
exceeds(ii) the amount, if any, by which
(A) the tax for the year that would have been payable by the person under this Act
exceeds
(B) the amounts that would be deemed by subsections 120(2) and (2.2) to have been paid on account of the person's tax for the year had the person's tax payable for the year been assessed on the basis of the information provided in the person's return for the year,"
had the person's tax payable for the year been assessed on the basis of the information provided in the person's return for the year (emphasis added)
Although paragraph 163(2)(a) provides that the penalty with respect to false statements or omissions is calculated with reference to an understatement of income or an overstatement of expense, as highlighted above, the penalty is also applicable to the overstatement of a deduction from tax, which includes a non-refundable tax credit.
In the example you provided, a taxpayer knowingly reported a false charitable donation in the amount of $10,000 on the taxpayer's tax return and deducted from tax payable a charitable donation tax credit of approximately $2,900. The gross negligence penalty under subsection 163(2) of the Act would be calculated as the greater of $100 and 50 per cent $2,900, which is $1,450.
Should you have any questions or require additional information, please do not hesitate to contact Gillian Godson at the number provided above.
Yours truly,
Terry Young, CA
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch