2 February 2006 Internal T.I. 2005-0129131I7 F - Assessing 163(2) penalty
Principal Issues: In a given situation, where the CRA identifies an infraction described in 163(2) in a taxpayer requested adjustment to an assessed return for a taxation year before reassessing to allow the requested adjustments, whether the penalty under 163(2) can be assessed without reassessing the requested adjustments?
Position: Yes.
Reasons: The Act.
February 2, 2006
Mr. Roland Roy Legislative Policy and Regulatory Affairs Branch Audit Division Trois-Rivières Tax Services Office Income Tax Rulings Directorate 25, rue Des Forges, bureau 111 Marc LeBlond Trois-Rivières QC G9A 2G4 (613) 946-3261
2005-012913
This is in response to your email of May 6, 2005, requesting our comments on the application of subsection 163(2) in the situation described below. We have also taken into account the additional information you provided to us by telephone. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
The situation
- An individual (the "Taxpayer") filed the individual’s income tax returns for the 2001, 2002 and 2003 taxation years (the "Relevant Years") within the time limit provided for in section 150 and they were assessed as filed (the "Assessed T1s").
- At the end of 2004, the Taxpayer filed an amended income tax return for each of the Relevant Years (the "Amended T1s") requesting that the CRA adjust downward the tax payable for each of the Relevant Years to reflect the deduction of new expenses in the computation of the individual’s employment income and the deduction of a medical expense tax credit in respect of new medical expenses in the calculation of the tax payable (the "Requested Adjustments"). Attached to each amended T1 was a Form T2200 - Declaration of Conditions of Employment duly signed by the Taxpayer's employer.
- You have determined that the Taxpayer knowingly or under circumstances amounting to gross negligence made false statements in the amended T1s in respect of the new employment and medical expenses. As a result, you are considering assessing the penalty under subsection 163(2) and, at this time, intend to do so without reassessing the taxpayer's tax payable for each of the Relevant Years to make the requested Adjustments, as there was no entitlement to do so.
Your Question
You asked us to confirm that, in such a situation, the CRA could apply the penalty provided for in subsection 163(2) (the "Penalty").
In particular, you asked whether the Penalty can be applied and assessed without the CRA reassessing the tax payable by the Taxpayer for each of the Relevant Years to first grant the requested Adjustments and then reassessing the tax payable for each of the Relevant Years to deny the requested Adjustments and apply the Penalty.
Our Comments
In our view, in the situation you have submitted, the Penalty can be assessed without the need to reassess the tax payable by the Taxpayer for each of the Relevant Years in respect of the Adjustments claimed. Our conclusion is based on the following observations.
Section 152(4) reads as follows:
Assessment and reassessment
(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act,
[Emphasis added]
Subsection 152(4) provides that where a taxpayer requests the CRA, after the filing of the taxpayer's return of income for a particular taxation year, to reassess the tax payable for that year, the CRA has the discretion to accept or refuse to do so, given the use of the word "may" and not the word "shall" in that subsection. Furthermore, pursuant to subsection 152(4), the CRA may assess a penalty payable by a taxpayer in respect of a taxation year without reassessing the tax payable for that year.
The Penalty is payable by a taxpayer provided that the conditions for the application of subsection 163(2) are satisfied. The relevant extracts from subsection 163(2) applicable in this situation read as follows:
False statements or omissions
163(2) Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of $100 and 50% of the total 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,
[...]
(c.2) the amount, if any, by which
(i) the amount that would be deemed under subsection 122.51(2) to be paid on account of the person’s tax payable under this Part for the year if the amount were calculated by reference to the information provided in the return
exceeds
(ii) the amount that is deemed under subsection 122.51(2) to be paid on account of the person’s tax payable under this Part for the year,
[Emphasis added]
It follows from the preamble to subsection 163(2) that a person is liable to a penalty where the person has committed an offence under that subsection by reason only of completing, filing or submitting for the purposes of the Act any return, form, certificate, statement or answer (the "Document Subject to an Infraction") for a taxation year.
There is therefore nothing in the preamble to subsection 163(2) to suggest that the Minister must reassess a taxpayer's tax liability for a taxation year by taking into account the Document Subject to an Infraction before assessing the Penalty.
Furthermore, subparagraph 163(2)(a)(ii) and subparagraphs 163(2)(c.2)(i) and (ii) refer to the term "tax payable" which is defined in subsection 248(2) as follows:
In this Act, the tax payable by a taxpayer under any Part of this Act by or under which provision is made for the assessment of tax means the tax payable by the taxpayer as fixed by assessment or reassessment subject to variation on objection or on appeal, if any, in accordance with the provisions of that Part.
[Emphasis added]
Notwithstanding the use of the term "tax payable" in subparagraphs 163(2)(a)(ii), 163(2)(c.2)(i) and (ii), we believe that the Penalty may be applied without the need to recompute a taxpayer's tax payable for a taxation year to take account of the information in the Document subject to an Infraction.
In our view, in the context of the calculation of the Penalty, the expression "tax payable" in subparagraphs 163(2)(a)(ii) and 163(2)(c.2)(i) should be given the meaning of hypothetical tax payable because of the use of the conjunction "if", which introduces a condition, and the use of the conditional mode of the verbs "to have" and "to be", in those subparagraphs.
It is possible, in fact, that the amount of tax payable for a taxation year on which the Penalty is based may be different from the actual tax payable for the year. This is confirmed in the Audit Manual under the heading "understatement of income" in Section II "Technical Manual" in Chapter 28.0 "Penalties", as follows:
On the other hand, the tax subject to penalty is sometimes completely different from the tax amount in the notice of reassessment, because offsets are allowed for the purpose of computing taxable income but are not considered for the purpose of calculating the amounts subject to penalty. [TaxInterpretations translation]
In the situation you have submitted, we are of the view that the portion of the Penalty in respect of fictitious employment expenses and in respect of the non-refundable tax credit for false medical expenses claimed in the amended T1s can be assessed pursuant to paragraph 163(2)(a) without the need to reassess the Taxpayer's tax payable for each of the Relevant Years.
In addition, we are of the view that the portion of the Penalty in respect of the deemed payment on account of tax, if any, under subsection 122.51(2) may be assessed under paragraph 163(2)(c.2) without the need to reassess the Taxpayer's tax payable for each of the Relevant Years.
Other Considerations
We suggest that, in the situation you have presented to us, you consider the possibility of applying, depending on the circumstances, the third-party penalty provided for in section 163.2 to persons who have provided the taxpayer with the information on Form T2200 - Declaration of Conditions of Employment and the medical bills. In this regard, we refer you to Information Circular 01-1 "Third-Party Civil Penalties" and Communiqué AD-03-1 "Third-Party Civil Penalty Audits" issued by the Compliance Programs Branch.
Should you require any additional information regarding this document, please do not hesitate to contact us. We hope you find these comments of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch