The taxpayer withdrew funds from his employer's pension plan, $143,510 of which were paid to him directly, and $36,102 of which were transferred to an RRSP of which the taxpayer's spouse was an annuitant. Both withdrawals were taxable income, which the taxpayer failed to report in his return. After finding that s. 163(1) applied on its face to impose a penalty of 10% of the unreported amounts notwithstanding the harshness of the combined federal and provincial penalty of 20%, Woods J proceeded to consider due diligence: "Did Mr. Morgan take all reasonable measures to prevent the failure to report... ?" (Para. 30.)
This defence was unavailable in respect of the $143,510 payment, as the taxpayer had received a T4A for this amount, and a purported assurance from the taxpayer's bank that the taxpayer's tax "would be taken care of" was not a satisfactory explanation (paras. 32-33).
However, the defence was available in respect of the $36,102 transferred to the RRSP. Woods J stated (at paras. 35, 37):
In this case no source deductions were taken and it appears that a T4A may not have been issued. ...
[The funds] came from one tax-exempt vehicle to another and there was no indication that Mr. Morgan was advised that this amount would be taxable at the time of transfer. If this is a generous interpretation of the facts in Mr. Morgan's favour, the circumstances as a whole justify that result in my view.