Is the Omissions Penalty Based on Gross Income or Net Income?

The subsection 163(1) omissions penalty applies where there has been a failure to report an amount included in computing a person’s income in the current taxation year and one of the preceding three taxation years. One of the elements of the calculation of this penalty is 10 percent of the unreported amount (which generally becomes 20 percent when the provincial penalty is added). But, for business and property income, is the unreported amount the gross income or the net income? Previous commentators and CRA published commentary opt for gross income, but the argument for net income on the basis of established jurisprudence is more persuasive.

Subsection 163(1) applies to an amount that a person “failed to report” and that was “required to be included in computing the person’s income.” On that basis, commentators have taken the view that subsection 163(1) seems to apply to gross income without any allowance for deductions (for example, Richard Yasny’s 2012 Canadian Tax Highlights article). Similarly, a letter from the Department of Finance to the CRA dated October 23, 1989 stated: “The Act contemplates that the computation of the income from a source is done by including some amounts . . . and by deducting other amounts. . . . One should not confuse amounts included in the computation with the amount of the net income resulting from the computation” (emphasis in original). The CRA’s published views (such as CRA document no. 3M05251, January 12, 1993) agree with the gross-income interpretation.

Notwithstanding the above, we are not aware of any jurisprudence on this point. To interpret the meaning of an amount that is “required to be included in computing the person’s income,” the logical place to turn to is section 3. That section provides that the income of a taxpayer is computed by adding amounts from different sources, and one of those sources is income from business or property. This is a net concept, as affirmed by the SCC in Symes ([1993] 4 SCR 695) and Canderel ([1998] 1 SCR 147). It is true that in Ludco (2001 SCC 62, at paragraphs 59 and 60) the SCC stated that “income” is not the equivalent of “profit” or “net income,” but that case was decided in the context of whether borrowed money had been used for the “purpose” of earning income, not whether income is otherwise gross or net under the Act.

Admittedly, income from business or property is computed using gross income as one of the elements. However, it is net income from business or property that is included as income under section 3, as required by subsection 9(1). Subsection 9(1) identifies a taxpayer’s income from a business or property as being that person’s “profit” (a net concept) from that business or property in the year.

Also, when it is based on gross income, the omissions penalty can be many times the amount of the unpaid federal tax. Thus, one could argue that, in such circumstances, its application may breach section 11 of the Charter, raising the standard of proof required of the Crown. In Guindon (2015 SCC 41), the SCC found that an administrative penalty can be considered penal where it is “out of proportion” to the amount required to achieve its regulatory purpose.

Andrew Froh and Cody Kessler
Legacy Tax + Trust Lawyers, Vancouver

Canadian Tax Focus
Volume 11, Number 1, February 2021
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