http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/126630/index.do
Chaloux v. The Queen (November 13, 2015 – 2015 TCC 284, Lyons J.).
Précis: This decision combines income tax appeals of Mr. and Mrs. Chaloux for 2005 and 2006 as well as a GST appeal of Mr. Chaloux for the period from February 1, 2005 to December 31, 2006. The subject matter was under-reported income (roughly $88,000) from a partnership operated by the taxpayers (60% Mr. Chaloux, 40% Mrs. Chaloux). There was also considerable discussion of allowable expenses. The main issue however dealt with the opening of the 2005 taxation year (which was otherwise statute-barred) and the imposition of penalties for that year. The Court took a middle road and allowed the 2005 taxation year to be opened on the basis of negligence on the part of the taxpayers but concluded that there was insufficient evidence of gross negligence to justify the imposition of penalties for 2005. The Court also allowed some additional expenses. Thus the income tax appeals were allowed in part. The GST appeal was also allowed in part (reflecting a concession by the Crown on penalties and some additional expenses). No costs were awarded.
Decision: On the central issues of opening up the 2005 taxation year and the imposition of penalties, the Court was quite succinct:
[44] No credible explanation has been provided by the appellants for the sizeable discrepancy especially since the income reported by the appellants, collectively $11,090, would not even pay the annual amount of rent at the Muskoka property. I find that the appellants have failed to discharge their onus of proof.
[45] I conclude that the Minister properly reassessed the appellants for the unreported business income in 2005 in the Amounts allocable to their Partnership interest.
…
[52] As such, the imposition of gross negligence penalties is to be applied in the clearest cases with the respondent being required to prove intent or reckless misconduct, otherwise taxpayers should be given the benefit of the doubt.
[53] The method the appellants used, the ambiguity in the evidence surrounding the invoicing and payment relating to Gravenhurst and payments made in 2006 for 2005 invoices, which were reported in income in 2006 and accepting that the appellants made an assumption that there was a bad debt even though it was not claimed in their returns nor were collection steps taken, leaves me with some doubt and could point to a conclusion in either direction. However, on balance, if they were trying to conceal income in 2005, it is unlikely that they would have also over‑reported or double reported sales income in the following year detrimental to their interests and there appeared to be no unreported income in 2006. This factor accords with their position that their accounting knowledge was minimal.
[54] Based on all the evidence and giving the appellants the benefit of the doubt, on balance I find that their conduct does not amount to gross negligence or recklessness. I find and conclude that the respondent has failed to discharge the onus and has not proved the imposition of the Penalties in 2005 under subsection 163(2) of the ITA and should be deleted.
[Footnote omitted]
As a result the income tax appeals were permitted in part deleting the gross negligence penalties for 2005 and permitting some additional expenses. The GST appeal was also allowed in part (reflecting a concession by the Crown on penalties and some additional expenses). There was no order as to costs.