In Guindon v R, 2012 TCC 287, Mr Justice Bedard wrote the following about the onus of proof when the Minister seeks to impose gross negligence penalties:
[100] The courts have been clear in ruling that leaving the appellant to bring forward a rational explanation for his or her conduct is tantamount to shifting the burden of proof onto the appellant. That is contrary to subsection 163(3) of the Act. As explained by the Federal Court of Appeal in Findlay v. The Queen:
[27] . . . Subsection 163(2) imposes that burden on the Minister; but the Tax Court Judge based his conclusion as to liability not on a proof by the respondent of gross negligence on a balance of probabilities, but on the absence of a reasonable explanation by the appellant or the tax preparer. This is, as I have already said, contrary to the provisions of subsection 163(2) of the Act.
[Citations in the original omitted here.]
See also Brown v R, 2014 FCA 301, which I discuss here.
CRA audit used to send proposal letters that required taxpayers to provide the facts and reasons for why the CRA should not impose gross negligence penalties. I suppose enough taxpayers and their advisers resisted the practice that it forced the CRA to change its ways, sort of. Now, one is more likely to read the following in a proposal letter:
A penalty may be imposed under subsection 163(2) of the Income Tax Act and subsection 121(2) of the Income Tax Act of Ontario. … After reviewing the information related to your return, we are considering imposing penalties for this adjustment marked with a “P” above.
We will delay the reassessment of the proposed adjustments until …
In cases where the taxpayer is unrepresented or represented by an inexperienced tax professional, the CRA is doing exactly what the courts have said it should not, which is to reverse the onus, in effect, by requiring the taxpayer to explain himself with respect to the penalty issue.
Where the taxpayer is represented by an experienced professional, this CRA practice is a stupid waste of time. In accordance with Guindon, the professional will respond to the foregoing by requiring the CRA to produce its evidence so that the taxpayer can respond.
Several times now, I have had the CRA purport to respond with its evidence for gross negligence penalties in a final adjustment letter. That is, rather than produce evidence and allow the taxpayer a chance to respond, the auditor has simply reassessed. In the final letter, the auditor has provided “evidence”, but the “evidence” really consisted of ill-informed speculation and allegations to the effect that, because the adjustments proposed were large and the auditor’s view of the matter was the only reasonable one, gross negligence penalties must have been appropriate.
Where auditors have behaved like this, I have been very successful in having the penalties removed as part of the objection process. The appeals officers understand that it is up to the CRA to justify the penalties. If the auditor’s file has almost nothing in it justifying the penalties (other than the fact of large adjustments), then maintaining the penalties is problematic at best.
Of course, the file should have something in it: it should have a penalty report. Unfortunately, I almost always see the report only after the penalties have been imposed, and it is often the case that the penalty report will have items in it that the auditor did not deign to share with the taxpayer, even in the final adjustment letter!
In any case, the penalty report does not help the appeals officer if it is based on an inadequate investigation. And that lack of investigation is the heart of the matter. In my experience, too often taxpayers are being forced to object to reassessments to require the CRA to remove penalties that should not have been imposed in the first place. If the CRA auditors had conducted a proper inquiry, the penalties might not have been imposed.
And nothing will stop the auditor conducting such an investigation. In fact, the taxpayer would be required to cooperate with it. The CRA has broad investigatory powers, and taxpayers do not have a right against self-incrimination when it comes to penalties. If the auditor thinks that penalties might be appropriate, why not conduct a proper investigation, arrive at conclusions about penalties and then, if the auditor still believes penalties should be imposed, share the findings with the taxpayer? Then the taxpayer can give a proper response that might get the auditor to change his or her mind and avoid the extra effort and costs involved in an objection.
