Mr. X was reassessed in December 2005 to add unreported income for his 2004 year and then, six month later, following an audit, was reassessed for failure to report income in his 2002 return together with a s. 163(2) penalty. Can a s. 163(1) penalty now be assessed for his 2004 year (assuming no statute-barring issues)? The Directorate responded:
[Y]ou had already established in December 2005 that Mr. X had not declared an amount in his 2004 return (the "first criterion at issue "). You also established in June 2006 that Mr. X failed to report an amount in 2002, one of the three taxation years preceding 2004 (the "second criterion at issue"). The fact that the first criterion at issue was satisfied before the second criterion at issue does not preclude the application of subsection 163(1) in your situation. Accordingly, Mr. X would be subject to a penalty pursuant to subsection 163(1) for his 2004 taxation year … .