GST/HST Gross Negligence Penalties

Posted on by Tax Partners
30
Dec

Introduction

Businesses providing goods and services in exchange for money or other valuable consideration are required to charge their customers GST/HST. When businesses collect 

GST/HST, they must hold it in trust for the government of Canada. Taxpayers with annual 

revenues exceeding $30,000 must register for a GST/HST number, collect GST/HST, file regular 

GST/HST returns with the Canada Revenue Agency (CRA), and remit the collected GST/HST. Non-compliance, such as filing inaccurate returns, can result in corrective adjustments and severe penalties under Section 285 of the Excise Tax Act, known as gross negligence penalties.

Conditions for Application

Under Section 285 of the Excise Tax Act, gross negligence penalties apply when:

  1. The taxpayer files an inaccurate GST/HST return or related document, and
  2. The inaccuracy arises from either:
    • Knowingly providing false information, or
    • Conduct that meets the legal threshold for gross negligence.

The courts have consistently emphasized that the standard for gross negligence is high. For instance, in Venne v. The Queen, gross negligence was characterized as "a high degree of negligence tantamount to intentional acting."

Instances where gross negligence penalties may not apply include:

  • Seeking professional accounting assistance for tax returns.
  • Errors on tax returns stemming from a lack of skill in accounting.
  • Disclosure of all relevant amounts in the return.
  • Difficulty in operating accounting software.

Burden of Proof

The CRA bears the responsibility to prove, on a balance of probabilities, that a taxpayer’s conduct justifies the imposition of gross negligence penalties. As affirmed in Findlay v. Canada, this burden lies entirely with the CRA, regardless of whether the taxpayer can provide a reasonable explanation for their actions.

Penalty Calculation

Gross negligence penalties under Section 285 are calculated as 25% of:

  • The difference between the GST/HST the taxpayer was obligated to remit and the amount remitted, or
  • The difference between the rebate the taxpayer was entitled to and the amount claimed.

Key considerations:

  • The penalty applies to all inaccuracies in a return for a given reporting period if gross negligence is identified, not just those directly caused by gross negligence.
  • A minimum penalty of $250 applies even when the calculated penalty is below this amount.

Tax Tips

  1. Disputing Penalties: If you face gross negligence penalties related to GST/HST, it is crucial to consult an experienced tax professional. CRA auditors often apply these penalties under more lenient standards than what courts require. Professional assistance can lead to penalties being reduced or removed through objections or appeals.
  2. Preventive Measures: When uncertain about a transaction or filing position, seek professional advice or a tax planning memorandum. This not only ensures compliance but strengthens the defense against potential gross negligence penalties during audits.
  3. Voluntary Disclosures: If errors are identified in past filings, consider using the CRA’s Voluntary Disclosure Program to proactively address issues and potentially avoid penalties.

Conclusion

Compliance with GST/HST obligations is essential to avoid severe penalties. Businesses should maintain accurate records, seek professional guidance, and promptly address any issues identified during CRA audits. Timely and informed actions can mitigate risks, reduce penalties, and safeguard business operations.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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