Tax slips, whether they come in the form of T4s for employment income, T3s for trust distributions or T5s for investment income, to name just a few, are the Canada Revenue Agency’s way of ensuring that taxpayers don’t forget to report all their income under Canada’s self-assessment tax system.
Clients generally acknowledge the need to report all the income on their slips but what if a slip goes missing without the client even realizing it? Or what if the T-slip in question was simply never received?
Most clients may think that the risk of innocently non-reporting income is limited to the tax owing and perhaps some arrears interest. But, in some cases, the CRA may decide to also assess a penalty on the unreported income.
Under the Income Tax Act, a penalty can be imposed on a taxpayer who fails to report an amount of income that should have been included in his or her tax return for a particular if he or she also failed to report an amount in any of the three prior years’ tax returns.
A recent tax case decided earlier this year (Thompson v The Queen, 2010 TCC 381) deals with the imposition of such a penalty.
Christina Thompson failed to report $868 of income in her 2006 income tax return. For 2007, the CRA found she failed to report over $20,000 of dividends and investment income on her return and reassessed her imposing the non-reporting penalty.
The non-reported income was income that should have been on a T5 slip yet Ms. Thompson testified that she never received a T-slip for this income. The Judge accepted this testimony and was left to determine whether she could mount a “due diligence” defence to get the penalty reversed.
After Ms. Thompson was reassessed the first time for failure to report some investment income on her 2006 return, she wanted to ensure that the problem did not reoccur in future years.
She dealt with a financial advisor from TD Waterhouse who holds and manages her investments. When she met with him in November 2007, she expressed her concern that she never received a T3 slip for 2006 and thus was reassessed for non-reported investment income.
Explaining that she didn’t want to miss any tax slips going forward, her advisor suggested she contact his office in April 2008 to ensure that she had all of the information slips for 2007 before she filed her 2007 tax return.
Ms. Thompson did just that, sending an e-mail to her advisor in April 2008 in which provided a detailed schedule showing six T3 slips, two T4RIF slips and two T5 slips with the name of the issuer, the type of income and the amount of income on each. Her advisor confirmed by e-mail that the tax slips all matched up to the investment income she received and she proceeded to report the total amount on the slips on her tax return.
While Ms. Thompson noticed that her 2007 income was about 13% lower than it was in 2006, this did not trigger any alarms bells for her, stating that she “had assumed that this was because of a decrease in the market.”
When TD Waterhouse, which received all her investment income directly into their account, confirmed that she had all of the tax slips for 2007, it essentially confirmed that it was all her 2007 investment income and that she “she would be reporting all of her investment income if she reported the income on these tax slips.”
The problem was that the missing income was not included in the tax slips she had at hand.
Based on prior case law, to avoid the non-reporting penalty, a taxpayer needs to establish a “due diligence” defence. In other words, did Ms. Thompson make a reasonable factual mistake or alternatively, did she take all reasonable precautions to avoid the event leading up to the imposition of the penalty.
Fortunately, the Judge concluded the Ms. Thompson was indeed “duly diligent” in that she was mistaken with respect to the factual situation of whether or not she had received all of the tax slips for her investments with TD Waterhouse.
She thought she had all the slips and thus was reporting all her income. Having double-checked with TD Waterhouse, it was perfectly reasonable for her to assume that she had all of her slips and thus reported all her income. As the Judge wrote, “Her mistake in failing to report the income as disclosed in the missing T5 slip was innocent and a reasonable person in the same circumstances would have made the same mistake.”
The Judge ordered the penalty deleted and awarded Ms. Thompson, who was self-represented, $500 in costs.