To date, the Canada Revenue Agency has received 27.8 million personal income tax returns for the 2019 tax year and has processed nearly 97 per cent of them. By now, assuming you filed by the June 1 deadline (June 15 for the self-employed), you should have received your tax refund. If you owe money, you have until Sept. 1 to pay.
But just because you’ve received a clean Notice of Assessment from the CRA doesn’t mean that the tax man can’t come back later and conduct an additional review. And, if you get caught claiming inappropriate expenses or deductions, not only can you end up owing additional tax and arrears interest, but you could get hit with a “gross negligence penalty” equal to 50 per cent of the tax you sought to avoid.
Many of these issues were raised in a tax case decided in late 2019 that involved a Toronto taxpayer who was denied various employment expenses and charitable donations she claimed on her 2012 through 2015 tax returns. The woman was reassessed beyond the normal reassessment period and hit with gross negligence penalties. Here’s a look at her case:
During the years under appeal, the taxpayer was employed by the City of Toronto as a case worker. She was required to supervise various outreach activities for the benefit of priority neighbourhoods and faith-based organizations. She also oversaw programs for the city. During the 2014 taxation year, she deducted $6,660 as employment expenses on account of gas, parking, car insurance and a home office.
She was unable to produce a signed CRA Form T2200 — Declaration of Conditions of Employment, as her employer “failed to complete the form when asked,” and the taxpayer “did not aggressively pursue this.” She was also unable to produce any travel log, voucher or expense receipts to validate her employment expenses. The judge denied these expenses outright.
The taxpayer, who was described by the judge as “a generous charitable giver” based on her history of significant charitable gifts, had some charitable donations that were allowed by the CRA while others were disallowed. The disallowances fell into four categories: mathematical errors (including addition errors and double-counting of some donations), faulty carry-forwards of donations previously claimed, the absence of charitable receipts, and no charitable intent or the existence of a “reciprocal benefit.”
The latter category was the largest, and related to the children’s private schooling. In certain years, the taxpayer felt that a portion of the tuition amounts she paid should be deductible as charitable donations. She believed that “certain amounts given to the schools exceeded the educational benefit derived from the paid tuition.” The judge disagreed and disallowed the amounts as “they were clearly tuition.”
In court, the taxpayer attempted to argue that, notwithstanding the errors she made in claiming donations and employment expenses, it was nevertheless too late for the CRA to reassess her 2012, 2013 and 2014 returns as they should be considered “statute barred.” The CRA is generally prohibited from reassessing an individual taxpayer more than three years after the original reassessment unless it can be shown that the taxpayer made “a false statement attributable to misrepresentation arising from carelessness, neglect or wilful default.”
In 2014, the taxpayer admitted there were no carry forward donations available to be claimed, yet she claimed some anyway. Furthermore, she had no receipts for the employment expenses which she claimed. The judge felt that “the degree of care in reviewing the returns, given the size of the donations claimed, should have revealed the double counting, mathematical errors and absence of carry forward amounts.” The taxpayer, “through her … errors and her own inattentive review, was careless in her inclusions, calculations and documentation review. On these bases, the first three appeal years (i.e. 2012 through 2014) are to be opened beyond the normal reassessment period.”
Gross negligence penalties
Finally, the judge turned to the appropriateness of the gross negligence penalties. The CRA felt that the taxpayer’s “lack of careful review of the return,” her failure to disclose unjustified carry forwards of donation expenses, the double counting of one large charitable receipt, and the inclusion of the employment expense deduction where no receipts existed and where no T2200 was obtained, amounted to her being “willfully blind.” Prior jurisprudence has found that being “willfully blind” amounts to gross negligence.
As the CRA asserted, “This is wilful blindness to a degree that rises to gross negligence or is a cavalier disregard to complying with obligations under the Act to verify the accuracy of the returns.”
With respect to the gross negligence penalties levied on the donations, the judge wrote that “while these sums were large, (the taxpayer) clearly believed, however naively, that an excess portion of the tuition amounts was deductible…. She was wrong as to the law, but unlike many taxpayers, she attempted to learn the law and comply. She was negligent and perhaps careless regarding the previous unclaimed charitable donations, but she was not insouciant or indifferent to complying. Moreover, she had been a sustained and deliberate charitable giver over the years. Accordingly, the Court is not of the view that her errors rose to a level of wilful blindness or a knowing misstatement.”
Similarly, with regards to the gross negligence penalties assessed by the CRA for the disallowed employment expenses, the judge also felt that the penalties levied were not justified. As he wrote, “(her) lack of receipts was “not sufficient in this case to elevate her omissions to wilful (blindness). She filed her returns believing she was entitled to deduct these expenses, even if estimated. The amounts were not extraordinary, they simply remained unprovable and therefore misstated. Such action did not rise to the level of wilful blindness supporting a finding of gross negligence.”
While the judge disallowed the taxpayer’s donations and employment expenses, he was willing to cancel the gross negligence penalties assessed by the CRA for the 2012, 2013 and 2014 tax years.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.