Tax Court affirms assessment of penalty under s. 163(1) of Income Tax Act
Upon finding insufficient evidence for a due diligence defence, Canada’s Tax Court dismissed a taxpayer’s appeal against the assessment of a penalty under s. 163(1) of the Income Tax Act, 1985, for a repeated failure to report total income.
For the 2022 and 2023 taxation years, the appellant in Kryski v. The King, 2026 TCC 145, earned income mostly from investments. When personally preparing her annual T1 returns, she included information from around 150 slips, most of which were T3 and T5 slips.
In 2022, the appellant earned $501 for working as a movie extra. In her 2022 tax filings, she failed to report this movie extra income. She later testified that she could not acquire her T4A slip stating the total amount paid because she found it difficult to communicate with the talent agency.
In her 2023 tax filings, the appellant failed to report $12,715 in income. She testified that she could not obtain all her investment information despite significant efforts.
The appellant appealed from the assessment of a s. 163(1) penalty based on a repeated failure to report total income.
Penalty for repeated failure to report income
The Tax Court noted that the $501 exceeded the $500 threshold of unreported income, which could trigger the application of s. 163(1) in a future year. This meant that she would be liable for s. 163(1) penalties if she underreported income for any of the next three years.
According to Greenstreet v. The Queen, 2008 TCC 159, the tax authority could assess s. 163 penalties if the case met certain conditions.
In the present matter, the Tax Court explained that the trial did not raise an issue regarding the first three conditions, with the parties clearly agreeing that the case satisfied the first and third conditions.
Thus, the only issue was whether the appellant exercised due diligence in her 2022 and 2023 tax filings, such that the court could absolve her of the s. 163(1) penalty.
Tax Court upholds s. 163(1) penalty assessment
The Tax Court found insufficient evidence to support a due diligence defence for either 2022 or 2023.
The court acknowledged that the appellant devoted some effort to obtaining all the necessary information in both 2022 and 2023 and provided minimal evidence of her difficulties in gathering such information.
However, the court pointed out that the appellant, a very knowledgeable taxpayer:
- knowingly reported the wrong amounts in her T1 returns for 2022 and 2023
- simply waited for the Canada Revenue Agency (CRA) to correct the error
- failed to make a continued effort in 2022 or 2023 to file her returns properly and ensure compliance with her obligations
The court added that the appellant failed to explain why:
- Her spouse or somebody else could not get the necessary filing information from her CRA account
- She could not obtain the information from her own bank statement
- She could not estimate an income amount for her movie extra work on her tax return
Previous Tax Court cases
Here are some other decisions from the Tax Court of Canada.
The Tax Court issued a July 22 ruling that an office assistant did not engage in pensionable or insurable employment with a chiropractor and a chiropractic and acupuncture clinic in Ontario under the Canada Pension Plan and the Employment Insurance Act within the relevant period.
The Tax Court made a July 14 decision denying a taxpayer’s appeal against the minister of national revenue’s reassessment based on a finding that the income should have included investment income of $10,529.20 from the return of life insurance premiums.
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