Cra Penalized Taxpayer For Failure To Report Income. The Twist: She Is An Accountant

If you forget to report some of your income on your tax return, you’ll be able to avoid a penalty the first time around. But, if you get caught a second time, you could be hit with a “repeated failure to report income” penalty, even if the omission was due to a purely innocent mistake.

That’s what happened to one taxpayer who appeared before the Tax Court in Vancouver in late June asking the court to cancel a penalty the Canada Revenue Agency assessed for failing to report all her income on her 2023 return. Before jumping into this recent case, let’s review the rules for omitting income.

Under the Income Tax Act , if you fail to report at least $500 of income in a tax year, and in any of the three preceding taxation years, you can be hit with a “repeated failure to report income” federal penalty. For example, if you forgot to report more than $500 of income you received in 2025, and also forgot to report more than $500 in income in any of your 2022, 2023 or 2024 returns, you can be hit with this failure-to-report penalty.

The penalty is calculated as the lesser of 10 per cent of the unreported income, and 50 per cent of the difference between the understatement of tax (or the overstatement of tax credits) related to the omission, and the amount of any tax paid in respect of the unreported amount, for example, by an employer through source deductions withheld. A corresponding provincial 10 per cent penalty is also often assessed.

A taxpayer will not be penalized, however, if they can demonstrate that they exercised a requisite degree of due diligence.

In this case, the taxpayer had substantial knowledge and experience of Canadian income tax rules, as she held a chartered accounting designation. Her income for the 2022 and 2023 years came from numerous investments. To prepare her annual tax return, which she did herself, she had to include the information from about 150 tax slips (mostly T3s and T5s) which reported her investment income.

In 2022, the taxpayer also earned $501 working as a movie extra. She was paid through a talent agency. The taxpayer testified that the talent agency was difficult to communicate with, so she could not obtain her T4A slip setting out the total amount she was paid. The result was that she failed to report the $501 amount as income in her 2022 filings.

At trial, the judge questioned why the taxpayer didn’t simply obtain this information from her own bank statement or attempt to estimate an income amount for her movie extra work on her tax return. She did not provide a clear answer.

This unreported $501 of income in 2022 was just over the threshold of $500 to bring the omission penalty into play in a future year. As a result, if she were to underreport income for any of the following three years, she would be liable for the penalties. And, this is what ultimately happened as the taxpayer failed to report $12,715 in income on her 2023 return.

She testified that she made great efforts in 2023 to obtain all her investment information, but was unsuccessful in doing so, “through no fault of her own.” Indeed, each year the taxpayer struggled to obtain all her T3 slips in a timely manner to meet the April 30 annual tax filing deadline. She testified that obtaining the necessary slips from her investment broker was a consistent problem.

In cross-examination by the CRA, it was suggested to the taxpayer that she could have relied upon her CRA My Account online portal to obtain all the necessary information to file her taxes in 2022 and 2023.

In response, the taxpayer stated that she found the CRA My Account system “overwhelming … especially given that she suffers from ADHD.” She also was not sure if she could trust that the information on it was complete. She summed up her approach to filing complete returns as: “I just wait for CRA to assess me.”

The question before the Tax Court was whether the taxpayer was duly diligent in her tax filings for the 2022 and 2023 taxation years.

Based on prior jurisprudence, there are two ways that a taxpayer can satisfy the due diligence test. First, the taxpayer can show that they took reasonable precautions to avoid the event leading to the imposition of the penalty. Alternatively, the taxpayer can show that they were mistaken as to a factual situation which, if it had existed, would have made their mistake innocent, in which case the taxpayer must also show that it was a mistake that a reasonable person would have made in the same circumstances.

While the judge was willing to accept that the taxpayer made some efforts to gather all the necessary information in both 2022 and 2023, she also simply accepted that she was filing the wrong amount on her returns in each of those years, as she testified that she “simply waited for CRA to correct the problem.”

The judge noted that to show due diligence, there must be a continued effort to properly file, even after the initial filing, to ensure a taxpayer meets their obligations. The taxpayer did not do this in either 2022 or 2023. Furthermore, the taxpayer provided no explanation as to why her spouse or another party could not obtain the necessary filing information from her CRA My Account if she was uncomfortable logging in herself.

The bottom line, according to the judge, was that “a very knowledgeable taxpayer, knowingly filed incorrect tax returns, in both 2022 and 2023, and waited for CRA to correct the error.” This approach did not support a due diligence defense for either 2022 or 2023, and thus the judge denied the taxpayer’s appeal, and the income omission penalty was upheld.

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Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com .

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