Avoid hefty penalties for non-compliance

National Post

2010-05-22


To encourage compliance with our tax laws, the Income Tax Act contains a gross negligence penalty. If you “knowingly” or “under circumstances amounting to gross negligence” made a false statement or omission on your tax return, you can be hit with this penalty.

In addition, while the Canada Revenue Agency generally has three years from the date printed on your Notice of Assessment to come back and reassess you for a given tax year, the Act also contains a special rule that says if you’ve made “any misrepresentation that is attributable to neglect, carelessness or willful default, or … committed any fraud in filing,” the CRA has an unlimited amount of time to go back and reassess for tax owing.

A tax case decided this month shows just how far some taxpayers will go to avoid paying tax and penalties.

Cyril Barrett is a resident of Newfoundland and Labrador but has also worked in other provinces. Mr. Barrett was audited by the CRA after it was discovered that T5018 slips from three different B.C. contractors during 2003, 2004 and 2005 showed that payments made for services rendered to a “Cyril Barrett” were not reported on his tax returns.

The T5018, entitled “Statement of Contract Payments,” is an information return filed by construction companies to report all payments made to subcontractors for construction activities.

The CRA uses the T5018 slips to ensure that income received by subcontractors is properly reported on their tax returns.

Mr. Barrett argued in Court that “this is a case of mistaken identity and that the income was actually earned by his son who has the same name.” His son lives in British Columbia.

He further argued that the gross negligence penalty assessed by the CRA should not be applied and that, in any event, CRA couldn’t reassess him as the three-year reassessment period had passed.

Mr. Barrett was able to prove that in 2003, he was working outside of B.C. and therefore the 2003 income was indeed his son’s.

As for the 2005 income, at first Mr. Barrett denied having worked for that contractor but, after being told that someone from the company would testify, he acknowledged that the income was indeed his.

That left the payment received from a drywall company in 2004, which Mr. Barrett said was not earned by him. His son testified that he and his friends earned the income.

Not surprisingly, the judge found both Barretts’ testimony not credible and “quite evasive.” In fact, Mr. Barrett admitted to the CRA that he had “not been truthful” about the 2005 payment and when asked why he changed his position for 2005 and not 2004, he responded “that he had been caught.”

After comparing signatures on the back of the cheque with his tax returns, the judge ruled that the income was not properly reported for 2004, and that the CRA could assess beyond the normal reassessment period and the gross negligence penalty was appropriately assessed.